Share markets struggled in April and this was reflected in the performance of the funds. The Focused Growth Fund declined -4.05%, the Focused Growth Trust -4.04%, the Growth Fund -2.78%, and the Conservative Fund -1.50% in April, lowering the 1 year returns to -6.11%, -6.19%, -3.42%, and -2.64% respectively.
Global equity markets gave back some of the gains they made in March, with the MSCI World equity index retreating 8.3% (in USD) during the month. This decline was cushioned to -1.6% in NZD terms due to the US dollar’s strength relative to the NZ dollar (as well as almost all other currencies).
We view April’s stock moves as a continuation of the risk off / risk on gyrations that started in November last year when the US Federal Reserve shifted to a more hawkish tone, which signaled material increases in interest rates throughout 2022. We are maintaining our relatively defensive positioning in this more difficult investing environment.
Our strongest performers during April were all our defensive stocks. Our investments in pharmaceutical companies all performed well, with Merck gaining 8.1%, Novartis 6.5%, and AstraZeneca 5.5% (all in local FX) for the month. In a similar tone, our relatively new investments in consumer staples companies Procter & Gamble (+5.7%) and Walmart (+2.7%) also performed well. All these performances were driven by an attractive combination of strong operating results from the companies themselves as well as other market participants adding these defensive businesses to their holdings.
Our weakest performer during April was our investment in Netflix, which fell 49% in USD terms in a violent reaction to quarterly results that were materially worse than expected. In these results, Netflix’s management highlighted that up to 100mn people are accessing the service without a subscription. Unless Netflix can convert most of these viewers in to paying subscribers, then the company’s subscriber growth is likely to slow materially since most potential customers are already using the service.
This new information changed our thesis and that of most investors, leading to the substantial decline in the stock. Our initial view is that this stock price reaction has gone too far and that there is significant upside at the current price. We are undertaking significant further research to refine this view before deciding whether or not we continue holding the stock.
New Zealand & Australian equities
The local market was weaker over the month with the S&P/NZX50 decreasing -1.9%. Interestingly if we removed Fisher & Paykel Healthcare’s performance, which declined -11.7%, then the index would have declined by only -0.60%. This highlights how important Fisher & Paykel is to overall market performance, given its size in the index.
We were happy with the performance of our Australasian equity portfolio, which returned -0.1% despite the market’s -1.9% decline. Vector was our strongest performer for the second month in a row, rallying 9.4% on top of last month’s 8.8% increase. Early in the month, Vector announced that it received unsolicited interest from external parties interested in partnering with, and investing in, Vector’s Australasian smart electricity metering business. Vector currently operates approximately 1.5 million smart meters in New Zealand and 400,000 in Australia and earns close to one-third of their total operating earnings from this smart metering business.
Vector’s CEO announced that the company has appointed a strategic advisor to recommend a path forward and it will likely take a few months before a final decision is reached. It is unclear at this point whether the interest is in the New Zealand or Australian metering business. The Australian metering business has a much larger growth pipeline than its New Zealand equivalent, and some analysts estimate that the Australian business alone could be valued at up to $1.5bn based on a recent market transaction.
Another pleasing performer was our core holding in Spark, which gained 7.4%. Albeit news that didn’t surprise the market, Spark confirmed during the month that they were officially investigating introducing third-party capital into their currently 100% owned subsidiary, Spark TowerCo. Spark TowerCo owns the physical towers that supports Spark’s mobile and fibre network. While a new investor may potentially be introduced, Spark will continue to maintain a majority shareholding and will be a key long-term anchor tenant of the towers. If the sale proceeds, it will free up capital that could be reinvested into other parts of the business, or potentially used for increased capital returns to shareholders.
The largest share price decline in the portfolio came from what is now a very small position in A2 Milk. While there was no company-specific news in the month, investors became increasingly uneasy about the resurgence of COVID-19 infections across China. China has maintained its “zero tolerance” policy towards the virus, which meant Shanghai endured a citywide lockdown during the month. This was followed by localised lockdowns in Beijing towards the end of the month.
The ongoing pandemic has already contributed to a deceleration in birth rates in China, weighing on A2’s growth prospects. Restricted access to physical stores in two of the country’s largest cities may potentially prolong A2’s road to recovery.