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Unit Prices as at 30 November 2017 ($)

Focused Growth 1.6265
Growth 1.5438
Conservative 1.2876

Funds under Management as at 30 November 2017:

$631.1 million

In other news

Our Portfolio Manager looks back on 20 years in the industry
FundSource KiwiSaver Performance Tables

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The Generate KiwiSaver Scheme Member Newsletter has been prepared by Generate Investment Management Limited. It is based on information believed to be accurate and reliable although no guarantee can be given that this is the case. Clients, directors or employees of Generate Investment Management Limited may have an interest or holding in companies and securities mentioned in the newsletter. No part of the newsletter is intended as financial advice. For more information about the Scheme please refer to the Generate KiwiSaver Scheme Product Disclosure Statement.

Generate KiwiSaver Newsletter - December 2017

Welcome to the December edition of the Generate KiwiSaver Scheme Newsletter. After a very strong month of returns (as was the case in October) it is quite common to see the funds give back some of the gains the following month. However, this was not the case with all 3 funds delivering solid returns in the month of November. More on this later…

The Newsletter will be taking a break in January. We would like to take the opportunity to say thank you for choosing Generate as your KiwiSaver provider. The funds have had a great year to date and we’ll be working hard to deliver industry-leading returns again in 2018. From the team at Generate, we wish you a happy and safe holiday season!

Performance of Our Funds

Returns to 30 November 2017 (after fees* and before tax).

	One Month	One Year	Three Year (p.a.)
Focused Growth	2.17%	25.46%	11.76%
Growth	2.15%	19.32%	10.71%
Conservative	1.27%	6.67%	6.52%

*except the $3 per member per month fee.

Note: Past performance is not necessarily an indicator of future performance.

The Focused Growth, Growth and Conservative Funds returned 2.17%, 2.15% and 1.27% respectively over the month of November (all returns after fees and before tax).

The top performing Australasian stock for the funds in November was retirement village and aged care operator Ryman Healthcare (RYM) with a return of 14.0%. Both RYM and its smaller contemporary Arvida delivered solid earnings results in November and importantly said that demand for their units and prices were holding up very well in the face of a slowing housing market. A number of local fund managers were either underweight RYM versus the index or outright short the stock and when they were forced to cover this sent the RYM share price soaring (known as a short squeeze). Summerset also partook in the sector re-rating and leapt 8.9% higher over the month.

On the other side of the ledger was Contact Energy (CEN) with a -6.3% return. During the month it was announced that CEN would come out of a global MSCI index. This caused considerable selling in CEN and in fact the volume in CEN shares traded in November was approximately 5 times greater than the average volume from the preceding 6 months.

The IEM or large cap international stock with the highest return was again Ping An Insurance (PAI) which returned 9.9% (in NZD) in November hot on the heels of delivering 20.7% in the previous month. In our last newsletter we discussed how we believed PAI’s Corporate Day on the 20th of November could be a catalyst for the share price to move higher as the company updated investors on how the company’s massive investment in technology is evolving. This turned out to be the case with the shares gaining 8.9% on the day.

The IEM or large cap international stock with the lowest return for the month was Alibaba with a return of -4.4% (in NZD). Alibaba got caught up in a global rotation out of tech stocks that was triggered by the US tax bill making progress in Congress. The US tech sector is not likely to benefit as much as most other sectors in the economy from the tax bill passing into law. This caused a rotation out of US tech stocks, which spread to China’s internet darlings - Tencent and Alibaba.

Cryptocurrency Craziness?

There has been a lot of talk about cryptocurrencies this year but in recent weeks this has reached somewhat of a fervour. The views of prominent investors and the daily price movements of bitcoin (the most well known cryptocurrency) have been splashed all over the financial media.

Many observers (including ourselves) remain firmly in the camp that this is a bubble. The chart below shows that only the ‘plain bonkers’ Tulip bubble way back in the 1600’s has exceeded bitcoin’s meteoric price rise.

The tulip bubble got so inflated that by the time it burst some tulip bulbs were fetching a price that could have bought the proud bulb owner one of the grandest houses on the most sought after canal in Amsterdam! What were they smoking...

On the other side of the fence you have bitcoin believers such as the Winklevoss twins - of Facebook fame - who were bitcoin pioneers and have already amassed a fortune from it. One of the twins is quoted as saying that he believes bitcoin could easily increase 20 times from here…

We are happy to eat humble pie by admitting we turned bearish on bitcoin too early, although we are in good company given Warren Buffett called it “basically a mirage” back in 2014. We don’t know when the music stops but when it does we are of the view that it won’t be pretty.

Moving on from the bitcoin sideshow and November did nothing to deter our belief that equities are the place to be. Encouraging global manufacturing data and an upturn in capital expenditure (led by the US) were some of the highlights during the month. In addition a number of investment houses forecast the global economy to sustain a second straight year of strong synchronized growth in 2018.

We thought this illustration from Credit Suisse was interesting as whilst the current recovery in the U.S. is one of the longest in history, it is also the slowest. This should naturally extend the cycle.

Although we remain positive on equities we certainly are not expecting 2018 to enjoy the same extraordinary returns of 2017. But if equities can deliver high single digit returns next year then they are likely to remain the place to be.

Following is a recap of market movements in November

Global share markets (or equities) made further gains in November as synchronised global growth, solid corporate earnings and progress on the tax reform proposal in the US provided a tailwind for risk assets. The MSCI All Country World Index returned 1.1% over the month (in local currencies).

U.S. equities had yet another positive month with the S&P500 rising 2.8% during November bringing it close to record highs. This marked the 8th positive month in a row and brought year to date returns up to 18.3%.

Shares in consumer companies saw the strongest gains in November, as the holiday selling season got under way. Preliminary data showed that Black Friday online spending increased significantly from the previous year.

European equity markets reversed their gains of the previous month with the Bloomberg European 500 Index falling 2.4%. A stronger euro (which dampens the profitably of Europe’s exporters) and general profit taking were largely to blame for the move lower.

On the economic front the backdrop for the Eurozone remains bright. A number of forward-looking economic indicators suggest the Eurozone economy will be entering 2018 in good shape.

In China, the Shanghai Stock Exchange Composite Index fell 2.2% over the month. China’s economic activity data for the month of October was fairly disappointing. In addition a meaningful pull back in the global technology sector over the second half of the month impacted Chinese counterparts.

Japan’s equity market added to October’s strong gains with the Topix returning 1.5% in November. The supportive global growth backdrop and a solid set of quarterly corporate earnings buoyed the market.

Emerging equity markets posted their first negative month of returns in 2017 with the MSCI Emerging Markets Index falling 0.9% over the month (in local currencies). Still, emerging markets have had a stellar year with the Index up 24.8% as at the end of November.

In Australia, equities tracked higher with the ASX200 Accumulation Index returning 1.6%. The market was led higher by the ‘consumer durable and apparel’ sector which was up 14.1%.

Back home and the NZ50 Gross Index nudged 0.5% higher over the month. The retirement village/aged care sector performed particularly well during the month, as investors took comfort from Ryman Healthcare’s and Arvida’s solid earnings results. Also, after underperforming the wider market for the majority of 2017, Listed Property Vehicles pulled back some underperformance, with the sector returning +3.6% in November.

Warren Buffett wisdoms

After 50 years at the helm of Berkshire Hathaway (which is currently one of the largest investments for both of our growth funds) Warren Buffett has become widely regarded as one of the world’s greatest investors. In his annual letters to shareholders, and in various interviews he has given, he has shared many of the lessons he has learned during his career. This month:

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons. And that we will do...”

Buffett has made a career of buying quality businesses when their share prices get “beaten up” as they often do in a recession or some sort of geopolitical crisis. In these times doomsayers come out in force generating headlines that a financial apocalypse is nigh. This is the time to stand aside from the “herd mentality” and think rationally about the situation. Buffett has always had the strength of his convictions and has never been swayed by panicky headlines or by what the masses are doing. This has enabled Buffett to fill up his “washtubs” at the right time whilst many of those around him heed the headlines – not the fundamentals.

Investing 101

Geared investments can increase gains AND losses

A ‘geared’ investment is another way of saying that the amount invested has been ratcheted up by getting a loan. The word 'gearing' can be understood in a similar way to how gears work on a bike — whereby a small effort on the pedal turns into a bigger physical force on the wheel.

Borrowing money will increase the amount you can have invested, and naturally amplifies potential gains as there is more of a capital base on which to earn returns. The flip side of this, of course, is that it can also magnify losses.

Importantly, geared investors can become forced sellers in a declining market when the level of equity in their investment falls below a pre-agreed precentage. Unless they can inject fresh equity they have to sell their investment and crystallise the loss.

Top Holdings as of 30 November 2017

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Conservative Fund	Growth Fund	Focused Growth Fund
International Equities Managers
N/A	Berkshire Hathaway	Berkshire Hathaway
N/A	Platinum International Fund	Platinum International Fund
N/A	Magellan Global Fund	Magellan Global Fund
N/A	T Rowe Price Global Equity Fund	T Rowe Price Global Equity Fund
N/A	Polar Capital Technology Trust	Polar Capital Technology Trust
Property and Infrastructure
Infratil	Infratil	Infratil
Metlifecare	Metlifecare	Arvida Group
Arvida Group	Contact Energy	Metlifecare
Contact Energy	Arvida Group	Contact Energy
Z Energy	Z Energy	Summerset Group
Fixed Income and Cash
Term Deposits	Term Deposits	Cash & Cash Equivalents
Cash & Cash Equivalents	Cash & Cash Equivalents	N/A
Kiwi Income Property Aug 2021 Bonds	Fonterra Oct 2021 Bonds	N/A
Z Energy Nov 2021 Bonds	Powerco September 2022 Bonds	N/A
Goodman Property Trust May 2024 Bonds	Kiwi Income Property Aug 2021 Bonds	N/A

Large Cap International Stock Spotlight

Alibaba

With the changes to our investment mandate that we have written about in recent newsletters we have now made 6 direct investments into large cap international stocks. They are Alphabet, Alibaba, Apple, Facebook, Ping An Insurance and Tencent.

This month we want to focus on Alibaba - the Chinese ecommerce giant. Alibaba was established in 1999 by 18 people led by the inspirational Jack Ma, a former English teacher from Hangzhou. From the outset, the company’s founders shared a belief that the internet would level the playing field by enabling small enterprises to leverage innovation and technology to grow and compete more effectively in the domestic and global economies. Since launching its first website helping small Chinese exporters, manufacturers and entrepreneurs to sell internationally, Alibaba has grown into a global leader in online and mobile commerce. Today the company and its related companies operate leading wholesale and retail online marketplaces as well as businesses in cloud computing, digital media and entertainment, and innovation initiatives.

The company is one of the world’s most valuable retailers and as of last month had over 550 million monthly active users. Alibaba also orchestrated China's Singles' Day into the world's biggest online and offline shopping day, with its own sales reaching over US$25.4 billion on 11 November 2017. During the festival, Alibaba set a world record for payment transactions, with its mobile wallet app Alipay processing 256,000 payment transactions per second.

Next month: Tencent

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