Generate Fund Performance - March 2023
World equity markets rose +3.2% during March (+2.1% in NZD), despite marked volatility in the banking sector, especially among US regional banks. In addition, failing Swiss wealth management and investment banking giant, Credit Suisse, was forced by the Swiss government to be taken over by its long-time rival, UBS. The stock market largely shrugged off the potential economic headwinds that will likely result from this banking crisis, as reduced deposit levels and tighter risk controls lead to reduced credit availability in the months ahead.
The strongest area of the market was the large US tech companies, whose returns were buoyed by falling interest rates, especially in the US. Meta Platforms was again our top performer – the third month in a row it has been mentioned here – as a further +21% gain lifted its year-to-date returns to +76%. Our investments in Microsoft (+15.6%) and Alphabet (+15.2%) also did well, as did our holding in gold and silver royalty company Wheaton Precious Metals (+16.0%).
Pleasingly we did not directly own the two US regional banks that went under in March – those being Silicon Valley Bank and Signature Bank (we did have a microscopic exposure (eg < 0.002% of the Focused Growth Fund) to Silicon Valley Bank via one of our underlying funds). However, our funds were not immune to the regional banks' crisis, as portfolio stock, Western Alliance, saw its stock price fall -52% during March. Western Alliance is a very well-run bank that has neither the industry and geographic concentration that Silicon Valley Bank had, nor the exposure to long-dated fixed income investments that caused losses for that lender. It does rely on depositors' funds like all banks do, however, and therefore was caught up in concerns about deposit flight after Silicon Valley Bank lost $42bn of deposits (25% of its total) within 24 hours. While data releases from Western Alliance and the Federal Reserve have ameliorated concerns about such deposit flight in recent weeks, we reduced our investment in Western Alliance during March because we believe there are better risk-adjusted returns available with other stocks.
Despite seeing these challenges with Western Alliance, overall March was a good month for our global investments, with our direct global equities portfolio rising +0.25% more than our benchmark index (MSCI World, 50% hedged into NZD). At the time of writing, our direct global equities portfolio is +1.7% ahead of benchmark for the period year-to-date.
New Zealand & Australian equities
Notwithstanding the volatility experienced during the month as the world came to grips with stress in certain parts of the global financial sector, the New Zealand market finished only slightly negative at -0.1%. Questions of financial stability in the financial sector soon moved into a “who’s next” exercise, and commercial property seemed to have the finger pointed at it. This could be seen in New Zealand as the Real Estate Investment Trust (REIT) sector as measured by the S&P/NZX All Real Estate index fell -1.2%.
Our REIT holdings were broadly lower in March and unsurprisingly were a feature among the portfolio’s worst performers. HomeCo Daily Needs REIT (HDN), which is a landlord of a portfolio of “daily needs” and large format retail fell -10.6% in the month. While nothing specifically newsworthy was out on HDN during the month, given its tenant profile is predominantly exposed to the Australian consumer it often gets caught up in the sentiment crossfire as interest rates and house prices continue to have a soft outlook. However, HDN’s tenants are generally secured on long-term leases and the rents their tenants pay are typically a materially lower percentage of their sales than those paid by the tenants of large metro shopping centers. As a result, HDN is well equipped to ride the cycle.
On the positive side of the ledger, two key contributors were Spark (SPK) and Infratil (IFT) which gained +6.2% and +4.5% respectively. SPK had been a notable poor performer back in February as they informed the market that full year earnings would be more weighted towards the second half of the year than is usually the case. It was a case of shoot first, ask later as the market sold the stock sharply down in February. The market continued to digest the result in March, albeit more sanguinely, and the fundamentals of the company ultimately won over as they point to a strong dividend yield alongside defensive earnings growth.
In IFT’s case, the company held an investor day late in the month during which they delivered presentations from key management teams across the core growth pillars of the business. These included Canberra Data Centres and Longroad Energy. Of particular note, Longroad took the opportunity to highlight a very strong pipeline of solar and wind energy developments in the United States. This pipeline coincides with a material amount of investment required over a multi-year period to reach mandated Federal renewable energy targets, which alongside the introduction of the Inflation Reduction Act, uniquely positions Longroad in a highly attractive growth sector.