Generate KiwiSaver Newsletter - July 2017Welcome to the July edition of the Generate KiwiSaver Scheme Newsletter. The month of June saw the funds largely tread water as a stronger New Zealand dollar held our growth funds back. More on this later.
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Performance of Our FundsReturns to 30 June 2017 (after fees* and before tax).
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One Month
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One Year
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Two Year (p.a.)
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Three Year (p.a.)
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Focused Growth
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-0.18%
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13.40%
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5.49%
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11.21%
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Growth
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0.07%
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9.08%
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5.98%
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10.33%
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Conservative
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0.27%
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1.86%
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5.28%
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6.68%
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*except the $3 per member per month fee.
Note: Past performance is not necessarily an indicator of future performance.
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What's new at Generate?Material Changes to our Statement of Investment Policy & Objectives (SIPO)
We are in the process of making some changes to our SIPO. The changes that we view as material are:
- We are broadening our definition of infrastructure assets to include telecoms, transport and logistics companies. This gives us a larger universe to invest in to and find value from.
- We will have the ability to invest into a limited number of large cap international stocks that are typically held by at least one of our IEMs.
- We are increasing the maximum percentage of an IEM that the Scheme can have invested from 5% to 7.5%
Further information will be available in our updated SIPO which we plan to have up on our website and on the Disclose Register in a few weeks time. If you have any questions in the meantime please do not hesitate to ask.
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The Focused Growth, Growth and Conservative Funds returned -0.18%, 0.07% and 0.27% respectively over the month of June; and as of 30 June are up 9.86%, 7.72% and 3.13% respectively year to date (all returns after fees and before tax).
The returns of our growth funds were held back by a rising New Zealand dollar with the Kiwi (or NZD/USD) gaining 3.5% over the month. Although we were 60% hedged against the USD over the month this strong move still hurt the contribution from our International Equities Managers (IEMs) that own USD denominated assets.
The top performing property and infrastructure stock was Z Energy with a 5.3% gain over the month. Z has been out of favour with investors in recent times due to concerns about electric vehicles gaining momentum and also because of the ‘Collins inquiry’ into fuel margins. Increasing investor confidence that the result of the inquiry wouldn’t be materially damaging to Z seemed to buoy the stock in June.
Notwithstanding the stronger Kiwi the top performing IEM over the month was the Worldwide Healthcare Trust (WWH) with a 3.7% return (in NZD). The healthcare sector gained strongly in June with investors appearing to rotate out of technology and into healthcare shares.
On the other side of the ledger Stockland Group (SGP) had a tough month falling 7.2%. SGP owns a number of regional shopping malls in Australia and with Amazon recently announcing its official entry into Australia, there is concern about Amazon’s impact on SGP’s future earnings. Compounding this were rising bond yields which increase property companies’ financing costs and make their dividend relatively less attractive compared with fixed interest securities. Fortunately, we downsized our SGP position substantially back in April at higher levels than where the stock is currently trading.
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We were not surprised to see global share markets take a breather in June given the strong run up year to date. Nevertheless, we remain constructive on global equities given growth is robust and inflation remains well contained (and in fact lower than where most developed nation central banks would like to see it). Recently released US payroll figures certainly provided further evidence of this strong growth and low inflation mix with a healthy 222,000 jobs added whilst wage growth remained tepid coming in at 2.5% higher than one year ago levels.
Should inflation remain well contained then central bank largesse can afford to be withdrawn gradually which will be another pillar of support for global equities.
Although cautiously optimistic about returns for the balance of 2017 we are more circumspect about 2018. After all this bull market has now been running for over 8 years and we see increased risks of interest rates spiking higher next year due to central bank policy normalisation potentially moving into a higher gear.
Following is a recap of market movements in June
Global equities were flat in June with the MSCI All Country World Index returning 0.0% (in local currency).
A number of major central banks struck a more hawkish tone during the month which pushed interest rates higher and tempered gains in global equities.
In the US the S&P500 managed a 0.5% gain in June largely shrugging off the second rate hike of the year which took place during the month. The hike brought the federal funds rate up to a range of 1.0% to 1.25% - the highest it has been since 2008. The Fed signalled that it is planning one more hike this year and three more in 2018. The market is sceptical of this level of intent perhaps believing the US economy is not strong enough or is too leveraged to withstand four more hikes in the next 18 months.
After leading the market higher in 2017 tech stocks in the US were sold off in June on valuation concerns and commentary that being overweight tech stocks was a “crowded trade.”
Europe’s strong run year to date came to a fairly abrupt halt in June with the Bloomberg European 500 Index closing the month down 2.8%. The European Central Bank (ECB) dropped its guidance that interest rates might fall further, saying that it now expects borrowing costs to stay at current levels for an extended period. In addition, the ECB indicated that risks are now broadly balanced given the pick-up in growth whereas previously it had stated that risks were to the downside. Nevertheless, the ECB stated that inflation levels remain becalmed, requiring further easing in monetary policy.
Emerging equity markets had yet another postive month with the MSCI Emerging Markets Index returning 1.2% in June (in local currency). The Index is now up 13.7% year to date handily outperforming its developed markets counterpart. Improving economic data and some positive earnings results provided support in June.
During the month MSCI decided it will include some of China’s domestic shares in its global indices. The market reaction to the announcement was subdued given the small China weighting (which won’t come into effect until mid-way through next year).
Still it is a step in the right direction for China’s ambition to further integrate into global financial markets.
In company news, Alibaba significantly raised its revenue growth forecast for the March 2018 fiscal year which sent the stock soaring higher.
In Australia the ASX200 edged lower returning -0.1% over the month. The price of oil fell nearly 5% in June which weighed on energy companies, and rising bond yields led to a sell off in Australian real estate investment trusts.
Back home and the NZ50 Gross Index enjoyed its 6th consecutive monthly gain with a healthy return of 2.6%. This was a particularly impressive effort given New Zealand is a high yielding share market and the 10 year Government bond rose 21 bps over the month (dampening the relative attraction of high yielding stocks). Given the strong run and where valuations are at we are taking a more cautious stance on New Zealand equities at present.
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Warren Buffett wisdomsAfter 50 years at the helm of Berkshire Hathaway (which is currently the largest investment 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:
“The financial calculus that Charlie and I employ would never permit our trading a good night’s sleep for a shot at a few extra percentage points of return. I’ve never believed in risking what my family and friends have and need in order to pursue what they don’t have and don’t need.”
Here Buffett opines that it is important not to get too greedy and take on unnecessary levels of risk. He is averse to “hero or zero” trades and is a proponent of ‘slow and steady wins the race!’
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Investing 101Dollar Cost Averaging
One of the benefits of making regular contributions into your KiwiSaver account is that you get to take advantage of dollar cost averaging (DCA). DCA involves buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. As a result, more shares or units are purchased when prices are low, and fewer are bought when prices are high.
DCA can minimise the risks associated with market psychology – including market-timing and panic buying or selling. For example, all KiwiSaver members that made regular contributions into their accounts throughout the GFC were buying shares at great prices that have increased in value dramatically (as a whole) since. It is unlikely many of these members would have made equity investments outside of KiwiSaver at the time given the fear in the market and alarmist headlines that were prevalent at the time.
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Top Holdings as of 30 June 2017Please log in to your account to see your full portfolio breakdown.
Conservative Fund
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Growth Fund
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Focused Growth Fund
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International Equities Managers
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N/A
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Berkshire Hathaway
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Berkshire Hathaway
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N/A
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Magellan Global Fund
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T Rowe Price Global Equity Fund
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N/A
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T Rowe Price Global Equity Fund
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Magellan Global Fund
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N/A
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Platinum International Fund
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Platinum International Fund
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N/A
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Jupiter European Opportunities Trust
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Jupiter European Opportunities Trust
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Property and Infrastructure
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Infratil
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Infratil
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Infratil
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Arvida Group
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Ryman Healthcare
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Contact Energy
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Contact Energy
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Contact Energy
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Arvida Group
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Ryman Healthcare
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Arvida Group
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Ryman Healthcare
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Metlifecare
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Z Energy
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Z Energy
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Fixed Income and Cash
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Term Deposits
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Cash & Cash Equivalents
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Cash & Cash Equivalents
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Cash & Cash Equivalents
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Term Deposits
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N/A
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Kiwi Income Property Aug 2021 Bonds
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Rabobank Nederland Perpetual
Securities
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N/A
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Rabobank Nederland Perpetual
Securities
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Fonterra Oct 2021 Bonds
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N/A
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Z Energy Nov 2021 Bonds
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Kiwi Income Property Aug 2021 Bonds
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N/A
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International Equities Manager SpotlightMagellan Global Fund
Magellan Asset Management (‘Magellan’) is a specialist funds management business based in Sydney, Australia.
Magellan manages global equities and global listed infrastructure strategies for high net worth, retail and institutional investors. The principals, Hamish Douglass and Chris Mackay, are two of Australia’s leading investment professionals. Their long involvement in M&A activity and corporate advisory work has resulted in invaluable experience and expertise in valuing companies, as well as assessing the macro environment and risk management.
The Magellan Global Fund is a quality-focused, long-only unit trust that invests in a concentrated portfolio of global equities. The investment objectives of the Global Fund are to achieve attractive risk-adjusted returns over the medium to long term while reducing the risk of permanent capital loss.
As of 31 May 2017, the Magellan Global Fund had AUD$9.5 billion in funds under management and a 5-year return of 18.8% p.a. Some of its largest holdings were in Facebook Inc, Visa Inc, and Apple Inc.
Next month: Berkshire Hathaway Inc.
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