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MEMBER NEWSLETTER FEBRUARY 2017

Welcome to the February edition of the Generate KiwiSaver Scheme Newsletter. We hope you had a great holiday season!

Performance of Our Funds

Returns to 31 January 2017 (after fees* and before tax).

	One Year	Two Year (p.a.)	Three Year (p.a.)
Conservative	4.74%	5.29%	7.30%
Growth	6.02%	5.37%	9.65%
Focused Growth	5.42%	4.44%	9.56%

*except the $3 per member per month fee.
Note: Past performance is not necessarily an indicator of future performance.

Global equities off to a solid start in 2017

Following on from a strong November and December global equities (or share markets) have enjoyed a solid start to the year. The MSCI All Country World Index gained 1.5% (in local currency terms) in January.

We thought it worthwhile sharing the following chart which demonstrates the strength of economic data globally versus expectations. When the Index is above zero the data is better than expected and vice versa. As you can see the data has been coming in much stronger than expectation, and at a rate that has not been seen for 6 years. This has undoubtedly added to the ‘animal spirits’ that have driven equities higher in recent months.

The global Economic Surprise Index is at six year highs

Source: Deutche Bank

We remain cautiously optimistic that 2017 will deliver solid returns to global share market investors due to:

Valuations remain undemanding in a global sense, particularly in the context of a still low interest rate environment.
Earnings growth troughed in early 2016 and appears to be gathering momentum.
Positioning shows investors remain underweight equities.

We also believe it is going to be a stock picker’s market as central bank largesse – which has ‘floated all boats’ – is slowly withdrawn from the market. This would suit us very well.

Following is a recap of market movements in January

The local share market put in a strong performance in January with the NZ50G gaining 2.5%. Gains were broad based with investors seemingly deciding that the sell off during the previous 4 months had gone too far. Aged care companies performed particularly well (more on this in the Generate Funds’ Performance section).

Over the ditch and the Australian share market gave up some of the strong gains from the previous 2 months as financials and property stocks weakened. The ASX200 finished the month down 0.8%.

In the US, share markets reached new all-time highs on the back of President Trump’s busy first week in office. Proposals to lower taxes and eliminate “red tape” were warmly received by investors. However, the market gave up some of its gains towards the end of the month as concern about increased tariffs and tougher immigration policy weighed. Companies in the materials and consumer discretionary sectors led the way whilst oil and gas companies lagged due to disappointing earnings results.

The corporate earnings season is currently in full swing in the US. As of last week 71% of S&P 500 companies had reported earningswith 67% having beaten analyst expectations for average Earnings Per Share (EPS).

On the economic data front the US economy continued to grow with GDP coming in at a 1.9% annual rate. There was a host of other data released over the month, which pointed to the economy being in good shape.

The S&P 500 index closed the month 1.8% higher.

After a very strong month in December European equity markets were more subdued in January taking a “wait and see” approach to the policies of the new administration in the US.
Companies in the industrials sector were the top performers amid improving growth and inflation forecasts. Meanwhile oil and gas companies were among the laggards.

A raft of positive data was released in January. For exampleeuro area manufacturing expanded at its strongest rate in almost 6 years. The improving economy will have some European central bankers wondering when they need to start reining in their aggressive monetary policy accommodation.

The Bloomberg European 500 Index finished the month down 0.4%.

Global emerging equity markets started the year with a roar with the MSCI Emerging Markets Index gaining 4.0% (in local currencies) in January. The release of economic indicators suggesting upcoming gains in growth supported markets along with the view held by many that fiscal stimulus in the US is likely to be some time off (and therefore so will be any material moves higher in interest rates).

Brazil was the top performing share market in this space. A bigger-than-expected interest rate cut boosted sentiment as the central bank cut its benchmark rate by 75 basis points to 13% due to sluggish economic activity and disinflation.

In China, GDP came in slightly ahead of expectations and importantly signalled the economy is rebalancing away from a debt financedinvestment led economy towards more of a consumer led economy. The Shanghai Stock Exchange Composite Index closed the month 1.8% higher.

For the month of January the Conservative, Growth and Focused Growth Funds gained 0.90%, 1.10% and 0.89% respectively (after fees and before tax). The funds have gained further momentum in February and as of the time of writing had returned 1.32%, 3.12% and 3.84% respectively year to date (after fees and before tax).

Our decision to increase our exposure to the U.S. after the election was a good one and the fact that the market has managed to head higher despite no further details to date on tax cuts nor infrastructure spending bodes well.

Of note we decided to hedge our bond holdings in order to protect them from further interest rate rises. Obviously it means our bondholdings will not participate in any downward movement in interest rates but we consider the risks to be geared towards higher rates in the medium term.

January was notable for the strong performance from the aged care sector. The share prices of Ryman Healthcare, Arvida Group and Summerset Group gained 7.4%, 6.4% and 5.8% respectively. Early in the month Summerset released its fourth quarter metrics. The company built over 400 retirement units over 2016 versus 300 in 2015. In addition new sales were up 24% on the previous year. This coupled with the release of an upbeat broker research report on the sector helped drive these substantial gains.

The funds’ largest property and infrastructure investment – Infratil – also had a good month with its shares gaining 4.4%. The stock has been lacking a positive catalyst of late, which has seen the shares move lower over the preceding four months. However, with Infratil announcing that they had bought back one million of its own shares in January the shares started to head higher. Clearly Infratil believe its shares were sold off too heavily and many in the market (including ourselves) agree.

The weakest performing property and infrastructure stock was Australian property company Stockland with a 5.0% fall. Due to higher interest rates and concerns they may head higher the whole Australian property sector was out of favour in January and Stockland was no exception.

The top performing International Equities Manager (IEM) was Polar Capital Technology Trust Plc (PCT), with a 3.3% return in January (in GBP). Shares of several of PCT’s top holdings, including Facebook, Microsoft and (Google parent) Alphabet performed strongly during the month.

The weakest IEM performance was from the Magellan Global Fund (MGF) with a 2.6% fall (in AUD). During the month the AUD rose 4.9% against the USD and given the majority of companies held in MGF are denominated in USD’s this fall is attributable to the currency movement.

Warren Buffett wisdoms

After 50 years at the helm of Berkshire Hathaway (which is typically one of our largest investments for both of our growth funds) Warren Buffett has become widely regarded as the world’s greatest investor. 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:

“It is not that we don’t understand a technology business or it’s product. The reason we don’t invest is because we can’t understand the predictability of the economics ten years hence.”

During the tech bubble of the late 1990’s Buffett was under intense pressure to “join the party” and start investing in tech or internet companies. Despite missing out on soaring share prices he held fast in the face of accusations that he had “lost his touch”. Tech market darlings did not meet his investment criteria and their outlandish valuations kept him at bay. When the tech bubble finally burst the Oracle of Omaha was left sitting pretty whilst tech investors licked their wounds.

What's New in KiwiSaver

If you haven’t already tried the new Generate online member area we would encourage you to give it a go. We are getting very positive feedback from new members who log in and experience all the functionality - especially compared to what they were used to seeing on their internet banking apps. Our functionality allows you to see your balance, the breakdown of contributions and performance, your transactions history and to switch between our funds with the click of a button. Importantly we also provide a full breakdown of all your direct investments so you can see exactly what your KiwiSaver account is invested in, or more importantly for some - what it is not invested in!

Investing 101

Short selling

Short selling (also known as shorting or going short) is the practice of selling an asset that you don’t actually own, in the hope that the price will decline and you can buy it back in the future at a lower level. You can then keep the difference between the price at which you sold the assets and the lower price you paid to buy them back.

When taking a short position in shares, for example, the shares are borrowed from a third party – usually a broker – and then sold. The short seller may have to pay a fee to borrow the securities and have to reimburse the lender for cash returns the lender would have received had the securities not been loaned out. When the securities are repurchased they are then returned to the lender.

Some of the underlying International Equities Managers we invest intohave the ability to short stocks. This can be helpful as, if executed wisely, it can limit or even reverse negative returns in falling markets.

Top Holdings as of 31 January 2017

Please log in to your account to see your full portfolio breakdown.

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
Arvida Group	Ryman Healthcare	Arvida Group
Contact Energy	Arvida Group	Contact Energy
Z Energy	Contact Energy	Z Energy
Ryman Healthcare	Z Energy	Ryman Healthcare
Fixed Income and Cash
Term Deposits	Cash & Cash Equivalents	Cash & Cash Equivalents
Cash & Cash Equivalents	Term Deposits	N/A
Kiwi Income Property Aug 2021 Bonds	Rabobank Nederland Perpetual Securities	N/A
ANZ Perpetuals	Kiwi Income Property Aug 2021 Bonds	N/A
Chorus May 2021 Bonds	Fonterra Oct 2021 Bonds	N/A

International Equities Manager Spotlight

Jupiter European Opportunities Trust Plc

Founded in 1985 as a specialist boutique, Jupiter has become one of the UK’s most respected and successful fund management groups.

Jupiter European Opportunities Trust Plc's objective is to invest in securities of European companies and in sectors or geographical areas that are considered by the Investment Manager to offer good prospects for capital growth. The company adopts a stock picking approach in the belief that a thorough analysis and understanding of a company is the best way to identify long-term superior growth prospects. This understanding begins with identifying those companies with the right ownership structure and incumbent management.

As of 31 January 2017 the company had total assets of GBP 654 million and had returned 17.8% p.a over the last 5 years versus 12.5% p.a. for its benchmark (FTSE World Europe ex UK) in local currency. A recent fund data sheet can be found here .

Next month: Berkshire Hathaway Inc.

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Welcome to the February edition of the Generate KiwiSaver Scheme Newsletter.

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