Global equities were on a rollercoaster ride in March, with early losses offset by an extended rally in the second half of the month. As a result, the Growth Fund increased 1.08%, the Focused Growth Fund 1.03%, the Focused Growth Trust 1.00% in March, whilst the Conservative Fund fell -0.12% due to rising interest rates.
Global equity markets recovered some lost ground during March, with the MSCI World Index rising 2.5% (in local currency) and the more tech-heavy Nasdaq index rising 4.3%. Both markets remain down on the year, however, with the MSCI World -5.5% and the Nasdaq -8.9%.
Markets remain volatile under the surface, as global investors continue to wrestle with the implications of tightening monetary policy in most major markets, rapidly rising commodity prices, and war in Ukraine. In this environment we’ve continued our positioning strategy of remaining diversified and mildly defensive, while adding to those investments that offer the most compelling opportunities.
One such opportunity was in Horizon Therapeutics, a biotech company offering novel treatments for idiosyncratic conditions such as Tepezza for thyroid eye disease and Krystexxa for gout. Both treatments are delivering excellent outcomes for patients and strong commercial returns for the company, and yet we believe Horizon’s stock had sold off unnecessarily in January of this year. We added to our investment in the company then and have been rewarded with strong returns since, including 15.4% in March as Horizon was our second-strongest performer on the month.
Our strongest performer during the month was copper miner First Quantum, which rose 16.4%, helped by continued strength in the copper price.
On the other side of the ledger, US homebuilders Pulte Homes (-15.3%) and NVR (-9.9%) were the weakest performers in our portfolio as surging interest and mortgages rates increased market fears of another housing crash like in 2007/08. We strongly believe we’re not headed into another U.S. housing crash because demand/supply dynamics and financing conditions are materially better than they were 15 years ago, and therefore we remain very confident in the prospects of our homebuilder investments.
New Zealand & Australian equities
The local share market took increasing interest rate expectations and Russia’s invasion of Ukraine in its stride, appreciating 1.1% over the month (measured using the S&P/NZX50G).
National Australia Bank was the strongest performer in the domestic shares allocation, returning an impressive 12.6%. All four of the large Australian banks enjoyed a strong month as Australian interest rates traded higher over the period. More specifically, the interest rate on the 10-year Australian Government bond increased 0.7% to 2.85% during the month. Higher interest rates should allow the banks to restore their net interest margins and expand profitability as mortgages are repriced. National Australia Bank was a standout performer over the month after it announced another stock buyback, which will boost earnings per share growth.
Vector was also a strong performer in March, appreciating 8.8%. One of the less well-understood attributes of the regulatory regime within which it operates is that the regulated entities take on the risk that actual inflation will be lower than expected. The reverse is also true if inflation is above expectations; and so increasing concerns that NZ inflation rates will remain elevated for the next year have been attracting buying in Vector.
The weakest holding in the domestic share allocation was one of our most recent additions to the portfolio, F&P Healthcare. Its share price declined -11.5%. We began to cautiously add this company to the portfolio in late January after a period of sustained share price declines. F&P Healthcare is one of NZ’s premier growth stories, having developed world-leading humidification technologies for use when patients receive respiratory assistance. Covid-19 acted as an extraordinary boost for the company, but as hospitalisation rates decline, it is difficult to accurately forecast the company’s near-term profitability. During the month, the company confirmed that sales will be softer in the final quarter of the year, which saw the company’s share price tumble further. In the longer term, Covid-19 allowed the company to sell significant volumes of humidification equipment, which positions them well to sell increasing levels of the consumables required to use the equipment. We are happy to look through some near-term uncertainty if we can buy a great company at an attractive price, and as a result, have been using the share price weakness as an opportunity to cautiously add to the Fund’s holdings.