International Equities

World equity markets had another strong month in November, rising 7.0% in local currencies, in response to economic data that suggested the Federal Reserve may be close to winning the war against inflation. Our global stock investments performed very well this past month, benefitting from both the supportive market conditions and stock specific events.

Our investment in Horizon Pharmaceuticals gained 60.9% in November, mainly due to the company disclosing that it had held preliminary discussions with three large pharmaceutical companies about a potential takeover. Taiwan Semiconductor also had a strong month, rising 34.8% after Warren Buffett’s Berkshire Hathaway disclosed it had made a $4.1bn investment in the company during Q3. Our third strongest performer in the month was Meta, which gained 26.8% after it was reported that Mark Zuckerberg is moderating his metaverse ambitions and demanding better cost control across the wider business.

Our weakest performer in the month was in Roche Pharmaceuticals, which fell 7.4% after the results of a clinical trial showed that their potential Alzheimer’s treatment was less effective at clearing a toxic protein from the brain than the company had hoped.

We remain cautious on global markets as we head into 2023, yet confident in the quality and defensiveness of the companies in our portfolio to navigate what we expect will be a challenging economic environment.

New Zealand & Australian equities

The NZ share market had a solid month, appreciating 1.9% in November when measured by the S&P/NZX 50 Index. However, this headline return hides a significant dispersion in returns.

Fisher & Paykel Healthcare was up a staggering 21% in November. This is a company we have discussed in a number of past newsletters. It was a major beneficiary of the Covid pandemic because its products were used in hospitals to treat Covid patients. But as hospitalisations from Covid started to wane, it became apparent that hospitals had built up significant inventories of the company's products. As a result, it was expected that the company would face severe near-term headwinds as these inventories were used up. The market's reaction to this news was all too predictable. We took advantage of the weakness in the company's share price and added the company's shares to the funds on the basis that on a 3-5 year view this uncertainty would be resolved, and the market would shift back to focusing on the long-term growth opportunity of the company. In November, Fisher & Paykel made encouraging comments about customers working through their excess inventories, which was enough to see the share price bounce strongly.

The worst performing stock in the index was Ryman Healthcare, which plunged 21% in November. Ryman released a weak set of first half financials during the month. The markets have increasingly focused on Ryman’s balance sheet, particularly the high level of debt. A slowing housing market, which makes it more difficult for incoming residents to sell their home and shift into a retirement village, subdued cash collections. This factor, combined with a significant development spend, caused net debt to increase by $500 million over the last six months to $3 billion. The Generate funds didn't own Ryman shares before this result, but after the company's share price plunged down through its asset backing level, we took the opportunity to buy a small position.

Returns to the 30th of September 2023 

(after fees* and before tax) 

Generate KiwiSaver Funds:

Generate Managed Funds:

Except the $3 per member per month administration expense that is charged to KiwiSaver members.

** The Generate KiwiSaver Scheme funds opened on 16 April 2013. The Generate Focused Growth Trust opened on 1 November 2019.

***Following the launch of our new funds, the Conservative Fund has been renamed as the Moderate Fund and the Focused Growth Trust has been renamed as the Focused Growth Managed Fund.

^ these funds were established on 16 May 2022

^^ these funds were established on 3 July 2023

Past performance is not necessarily an indicator of future performance. Generate’s fund updates can be found here.

International Equities

Global equity markets fell by more than -4% in September as sticky inflation data, higher oil prices and a hawkish US Fed led to a risk-off investment environment. The US market was one of the worst performers, shedding -4.9% (or -5.7% in NZD), as rising 10 year yields pressured valuations and large cap technology stocks fell victim to profit taking. The only sector that finished in the green was Energy, which has been a significant outperformer over the past three months in line with rising oil prices.

In Generate’s global portfolio, our best performers were mostly defensive names such as health care stocks United Health and McKesson, which have business models that are relatively immune to higher interest rates, as well as energy stocks like BP and Cheniere Energy. Worst performers tended to be more sensitive to the economic cycle, such as luxury goods giant LVMH, homebuilder Pulte Group, and a raft of semiconductor companies like Nvidia, ASML and LAM Research. It is worth noting that all these stocks have had very strong returns in the year-to-date. 

While September returns were disappointing, markets are prone to undergo short term corrections during upswings, and we are not disheartened by the recent dip. The companies we invest in are built for the long term, and in several cases, we have used the price weakness to top up on some of our favourite stocks like Nvidia, LVMH and Visa. 

Higher interest rates are a difficult tide to swim against, but with increasing signs that inflation is beginning to cool around the world, we are cautiously optimistic that the rate outlook will begin to temper over coming months, which should provide a welcome tailwind to stocks as we approach year end. 

New Zealand & Australian equities

The S&P/NZX50 fell in September, retreating -2.2%. This was a better performance than the likes of the S&P500 in the US, largely because the New Zealand market is less dominated by high growth companies that are more sensitive to higher interest rates. Pleasingly, our Australasian equity exposure fared better than the broader market return, in part due to having low or no exposure to some of the worst performing companies. 

During September, we travelled to the United States and Mexico to visit two of our large portfolio holdings in Infratil and Fisher and Paykel Healthcare. One of Infratil’s most exciting and fastest growing portfolio assets is Longroad, which is a large-scale solar generation developer and operator. Longroad’s largest development assets are based in Phoenix, Arizona. Once completed they will generate enough energy to power over 200,000 homes while supporting 1,000 construction jobs in the process. The economics of these projects have become increasingly attractive as the US Inflation Reduction Act targets deploying $400bn into clean energy initiatives. Longroad is well placed to capture these benefits as they have a large development pipeline ready to be executed over the rest of this decade, and beyond. The market reacted well to the new information provided by Infratil and Longroad, with the share price going against the trend of the broader market and rising +1.2%.

Fisher and Paykel Healthcare (FPH)’s site visit included visiting their manufacturing facilities in Tijuana, Mexico, where they have recently completed the third stage of their campus, which at operational capacity will employ up to an additional 1,000 workers. The site has spare land capacity to add another two replica manufacturing sites, demonstrating FPH’s long held strategy of planning for future growth. Mexico currently represents approximately 39% of total manufacturing for the company. Alongside this we had the opportunity to meet with FPH’s North American sales team in California and a collective of hospital physicians who detailed medical use cases for FPH’s hardware and consumable products. While the two days spent with the company were encouraging and demonstrated its high quality, the share price retreated -5% over the month. In part this was due to the aforementioned global sentiment towards growth stocks, and also due to emerging concerns that new weight loss drugs may have a dampening effect on the growth outlook of FPH’s Homecare business growth. We like the long-term growth of FPH’s hospital business but its high valuation means we continue to hold a smaller position in FPH than that of our benchmark index. 

In other areas, underperformance came from the Real Estate Investment Trust (REIT) sector. REIT companies are exposed to interest rates as they generally carry higher amounts of debt which bear the burden of interest costs and have lower-growth long term stable cash flows. The prices of REITs typically behave similarly to those of bonds, which have an inverse relationship to bond yields. Two of our REITs that suffered the largest declines were Mirvac Group and Stride Property Group, falling -13.2% and -8.6% respectively. Mirvac has diversified exposure to the office, industrial and residential sectors in Australia, while Stride has exposure in New Zealand to retail, industrial and office. 

Top Holdings as of the 30th of September 2023

Generate total Funds Under Management (FUM) as of 30th of September 2023: $4,293,422,685

Returns to the 31st of October 2023 

(after fees* and before tax) 

Generate KiwiSaver Funds:

Generate Managed Funds:

Except the $3 per member per month administration expense that is charged to KiwiSaver members.

** The Generate KiwiSaver Scheme funds opened on 16 April 2013. The Generate Focused Growth Trust opened on 1 November 2019.

***Following the launch of our new funds, the Conservative Fund has been renamed as the Moderate Fund and the Focused Growth Trust has been renamed as the Focused Growth Managed Fund.

^ these funds were established on 16 May 2022

^^ these funds were established on 3 July 2023

Past performance is not necessarily an indicator of future performance. Generate’s fund updates can be found here.

International Equities

World markets fell in October with the MSCI World index declining -2.9% in USD terms but rising 0.2% in NZD terms due to a weakening NZ dollar.

Global interest rates rose during the month, adding pressure to stock prices because higher interest rates reduce the attractiveness of stocks compared to other investments. As an example, the US 10-year Treasury yield (the rate you can earn by lending money to the US government for 10 years) rose from 4.57% to 4.93%, which is the highest level it’s been since 2007.

In October, we saw resilient third quarter results from many companies that led to strong contributions to our portfolios, including datacentre networking business Arista Networks (+8.9%), waste companies Waste Management (+7.8%) and Republic Services (+4.2%), Microsoft (+7.1%), United Health (+6.2%), GLP-1 drug makers Novo Nordisk (+6.2%) and Eli Lilly (+3.2%), and Amazon (+4.1%).

Our weakest performer was medical device maker InMode, which fell -37% during the month after facing two challenges. First, the company revised its full-year revenue guidance lower early in October after higher interest rates led InMode’s customers to reduce their orders for the company’s devices.

Second, InMode is based in Israel and the company’s stock sold off after the October 7th attacks as the prospect of full-scale war between Israel and Hamas intensified. InMode has since confirmed that its staff were safe, and that the company does not believe its operations would be directly impacted by the war.

InMode recovered some of this lost ground in early November, rising 14% on November 2nd after reporting their third quarter results that allayed the market’s worst fears regarding the company’s growth prospects. We remain confident in our analysis of InMode’s prospects, and we are happy to keep holding the stock. 

New Zealand & Australian equities

The NZ share market followed offshore markets by declining -4.8% in October as measured using the S&P NZX50 Index. The decline was relatively broad-based with only three holdings achieving a positive return over the month.

Several companies with a June year-end host their annual shareholder meeting in October, which provide management the opportunity to update the market on how their companies are progressing.

Both Freightways (a parcel delivery and information management company) and Port of Tauranga (NZ’s largest port) provided updates that were weaker than the outlooks they had supplied in August when they released their financial results. At this stage, it is very difficult to know if this is just a little wobble caused by the election or if it is a sign of the economy slowing down. We continue to be cautious and hold a minimal proportion of the portfolios in companies that have significant exposure to cyclical domestic growth. However, we took advantage of some attractive prices and added to our holdings in Mainfreight and Freightways during the month.

The three companies generating positive returns over October were Stride (+7.7%), Spark (+3.3%) and EBOS (+2.3%). Stride enjoyed a recovery in its share price after falling heavily in September. Spark and EBOS are both considered reliable, albeit modest, growers and thus a safe place to hide during a tough month.

The largest decline in our Australasian equity holdings during the month was Mirvac (-14.6%), which fell due to higher interest rates and concerns about the Australian residential property market’s health. We continue to believe in their management team, and we are optimistic about several of their assets. We therefore took the opportunity to add to our holding.

Top Holdings as of the 30th of September 2023

Generate total Funds Under Management (FUM) as of 30th of September 2023: $4,274,735,798