Global markets ended the year with a late month, “Santa Claus” rally. Like November, December begun with volatility caused by concerns over the omicron variant and central bank monetary policy tightening. However, news suggesting the Omicron coronavirus variant was less severe and a more optimistic economic outlook helped drive risk sentiment and share market gains in the final two weeks of the year.
All funds performed well during the month, with growth-oriented funds outperforming the Conservative Fund. The Focused Growth Fund returned 2.80%, the Focused Growth Trust 2.78%, the Growth Fund 2.61%, and the Conservative Fund 1.45% for December, bringing their returns for 2021 to 11.17%, 11.55%, 8.91%, and 3.09% respectively.
World equity markets finished the year strongly, rising 4.1% in December. The MSCI World index rose 25.5% over the course of 2021, which was an excellent result to follow 2020’s +14.9% return. Many of the themes we mentioned in last month’s newsletter continued, with defensive and value-oriented stocks showing stronger performance over the month than their higher risk and/or growth-oriented peers.
Our investments in US homebuilder stocks continued to lead within our portfolio of direct investments. Pulte Homes and NVR were up 14.6% and 13.1% over the month respectively, as housing demand continued to beat the market’s expectations. Mastercard (+14.1%) and Visa (+11.8%) also performed very well as the market’s fears over the competitive threat from Buy-Now-Pay-Later services such as AfterPay and Affirm subsided, in line with our internal view. Berkshire Hathaway, which is our largest holding within global stocks, delivered a noteworthy performance by rising 8.1% during the month as Berkshire’s value and defensive qualities gained favour among shorter-term traders.
We had two stocks that performed poorly over the month. Alibaba continued its volatile run, falling 6.9% in December before rebounding 8.3% in the first 5 trading days of 2022. And streaming giant Netflix gave up some of its recent gains – it had risen 35% over 3 months from mid-August to mid-November - falling 6.1% during the markets pivot away from growth stocks in December.
New Zealand & Australian equities
The local share market enjoyed a bounce back in December appreciating 2.5%. Unfortunately, this was not enough to push the index into positive territory for the year and maintain the decade long streak of positive annual returns.
The strongest performing stock in Property and Infrastructure was EBOS Group, which rose 13% over the month. In what was a busy month for EBOS, they announced the acquisition of LifeHealthcare and 51% of LifeHealthcare’s Asian subsidiary, Transmedicat, at a valuation of approximately NZ$1.35bn. To fund this acquisition, EBOS raised approximately NZ$790m of new equity (which Generate participated in) and NZ$575m of debt via new term loan facilities. The acquisition of Lifehealthcare will result in EBOS becoming one of the largest distributors of medical devices and consumables in the Asia Pacific region. The acquisition provides EBOS with a beachhead into Asian markets with immediate scale, which they did not have beforehand, and a platform for future “bolt-on” acquisitions. Lifehealthcare is currently growing earnings at a rate of approximately 10% per annum and has profit margins in the order of 30%, and the deal is immediately earnings accretive to EBOS shareholders.
Finally, alongside the announcement of the transactions, EBOS provided a market update to earnings guidance that highlighted the business was achieving revenue and net profit growth of 11% and 14% respectively, versus the previous corresponding period. This growth is underpinned by robust pharmacy volumes and a very strong Animal Care segment.
Centuria Capital was up an impressive 12.8% in December making it the second strongest performing domestic holding. Centuria is a real estate company that not only invests in real estate but also acts as an external manager to both listed and unlisted funds. In total Centuria manages A$18 billion in funds. In December Centuria announced the acquisition of A$466 million of healthcare properties on behalf of its existing unlisted Australian healthcare fund and a new unlisted NZ healthcare fund.
Finally, after making the strongest gains in November driven by a stronger than expected first half result, My Food Bag was back at the bottom of the domestic holdings in December, declining 3.4%. There was no material company specific news over the month and so we suspect that this was due to negative sentiment toward consumer stocks.