The Focused Growth Fund declined -3.05%, the Focused Growth Managed Fund -3.06%, the Growth Fund -3.03%, and the Moderate Fund fell -1.16% in May.
Global equity markets remained volatile during May yet finished the month broadly flat overall, with the MSCI World Index rising 0.1% (in USD) and falling -0.7% in NZD after a slight recovery in the NZ Dollar during the month. This global index has fallen -12.8% in USD terms this year, and slightly less (-8.3%) in NZD after the equity index losses were offset by a rising US Dollar relative to the NZ Dollar.
During the month, our best performers were our holdings in industries that are typically classified as more cyclical: truck manufacturers Daimler Truck (+12.5%) and Volvo AB (+8.0%) rose after reporting strong results and improving supply chain dynamics; JP Morgan rose 10.8% after presenting a confident tone during their investor day; and homebuilder Pulte Homes gained 8.4%, reversing much of April’s weakness, as US bond yields (and mortgage rates) stopped rising. While we appreciate the returns this price strength in cyclical industries generated, we remain cautious on the economic outlook for the rest of this year, and therefore have taken advantage of recent price strength to reduce our holdings in both Daimler Truck and Volvo AB.
Our portfolio saw two notable points of weakness during May. Uber fell -26% despite reporting results that were ahead of consensus estimates and consistent with our long-term thesis of strong revenue growth and improving profitability in both their ridesharing and eats/delivery businesses. We believe at least some of this weakness was a spill-over from Lyft’s weak results in which Uber’s smaller competitor missed consensus estimates for Q1’22 and led to Lyft’s shares falling -46% over the month. Separately, Walmart’s stock also underperformed during the month, falling -15%, after supply chain challenges and increased fuel costs ate into Walmart Q1 earnings. We believe this is a temporary issue and that Walmart, which has an excellent record of cost control stretching back decades, is well-placed to manage the challenges in the quarters to come.
New Zealand & Australian equities
Compared to international markets, the New Zealand equity market, as measured by the S&P/NZX50 Index, experienced another difficult month, declining by -4.8%. This performance was broad across sectors as evidenced by 41 of the 50 stocks that constitute the index delivering negative returns.
Turning to Property & Infrastructure, the worst performing stock was Centuria Capital, which declined -20.7%. Readers may recall that Centuria is a commercial real estate fund manager which manages a number of REIT portfolios on behalf of its investors. Fund managers such as Centuria tend to experience slower growth in rising interest rate environments, and while that has not yet been the case with Centuria, investors are concerned that this may be the eventuality. Centuria’s fund manager peers, Charter Hall and Goodman Group, although not held by the fund, experienced similar declines in the month at -15.2% and -14.3%, respectively.
On the positive side of the ledger was My Food Bag, which rose a solid 2.8% against the difficult market outlined above. My Food Bag released their results for FY22, which were well received by a market that had heavily discounted the company’s ability to deliver against their forecast numbers set out at the time of the IPO. Notwithstanding an increasing cost environment (e.g. labour and ingredients) and consumer purchasing power which is being impacted by inflation, My Food Bag delivered both revenue and earnings growth. It is likely to be a challenging environment for My Food Bag for some time yet, and the company will provide an update on their earnings outlook at the upcoming annual general meeting in August.
A second notable performer was one of our two holdings in Australian banks, Westpac, which gained 3.7%. Westpac also released financial results in the period within which they reiterated plans to reduce their cost base by A$8bn, even though management expects cost inflation to increase ahead of their base case assumptions. While new mortgage growth slowed, the previously experienced net interest margin decline has troughed. In the near term, banks are likely to have an earnings tailwind as mortgages reprice at a faster rate than term deposits and call accounts.