Generate KiwiSaver Newsletter - August 2017Welcome to the August edition of the Generate KiwiSaver Scheme Newsletter. The month of July saw the funds post further healthy gains. More on this later.
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Performance of Our FundsReturns to 31 July 2017 (after fees* and before tax).
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One Month
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One Year
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Three Year (p.a.)
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Focused Growth
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1.61%
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10.35%
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11.70%
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Growth
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1.49%
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6.86%
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10.78%
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Conservative
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0.82%
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1.19%
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6.87%
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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?Changes to our Statement of Investment Policy & Objectives (SIPO).
We are pleased to say that the material changes to our SIPO that we outlined in our last newsletter are now in effect. Thus far these changes have enabled the following:
- The growth funds now own direct holdings in Facebook and (Google’s parent) Alphabet; whereas previously our investments in these companies were via investments in other funds; and
- We were able to increase our investment in one of the smaller funds we invest in due to an easing of the liquidity restraint.
We are also excited to announce that we have re-branded our life cycle products. Formerly called Life Stages and Life Stages Growth we have used a bit more imagination and re-named them Stepping Stones and Stepping Stones Growth. The structure of the two Stepping Stones products as outlined in our PDS remains exactly the same.
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The Focused Growth, Growth and Conservative Funds returned 1.61%, 1.49% and 0.82% respectively over the month of July; and as of 31 July are up 11.63%, 9.32% and 3.97% respectively year to date (all returns after fees and before tax).
The top performing property and infrastructure stock was Oceania Healthcare (OCA) with a return of 12.8%. OCA reported earnings during July which appears to have driven the market to focus on the value that lies within this company if it can execute well on its development pipeline. OCA has been a terrific investment for the funds. Since the IPO in May (which all the funds participated in) OCA is up 36.7% as at the time of writing.
On the other side of the ledger Stride Property (SPG) had a tough month falling 4.6%. During the month some broker reports discussed the likely future impacts of Amazon upscaling in New Zealand. As a large proportion of SPG’s assets are in bricks and mortar retail, sentiment towards the stock soured in July.
The top performing IEM over the month was Polar Capital Technology Trust (PCT) with a 6.3% return (in NZD). The tech sector was one of the top performing sectors in the U.S. in July with a number of big tech companies reporting earnings. Facebook’s Q2 earnings beat expectations on all fronts driving the stock to a record high.
The IEM with the lowest return in July was the Magellan Global Fund with a return of -2.1% (in NZD). The rising NZD/USD outweighed the local currency performance of the fund during the month.
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There has been a lot of commentary of late about equity market valuations being in ‘nosebleed’ territory. Looking at some metrics (for example price/earnings ratios) it is hard to argue that valuations are not expensive in a historical context. However, when compared to the relative value of investing in other asset classes such as fixed interest and property we think global equities remain an attractive proposition. Put simply would you rather own a 10 year US Treasury that would pay you interest of ~ 2.2% p.a. with the risk of significant capital loss should interest rates rise materially; or buy an infrastructure stock with defensive earnings that will pay you ~ 7.5% in the first year with the likelihood of higher dividends in the immediate years ahead. Sure, there is a risk of capital loss with the infrastructure investment as well; and if interest rates rose significantly we would re-examine our thesis for holding the stock. However, given the way we see the world currently the choice between the two investments is an easy one.
At the end of the day it is earnings that is the key driver of equity market performance. Therefore, we will be watching the August reporting season more closely than ever.
Following is a recap of market movements in July
Global equities sprang back into life in July after a flat month in June. The MSCI All Country World Index returned a healthy 1.7% over the month (in local currency).
In the US, equities traded close to all time highs throughout the month and closed out with a robust return of 1.9%. Economic growth gathered pace in the second quarter, with data showing the economy grew at annualised rate of 2.6%, versus a more tepid 1.2% in the first quarter. During the month, Fed chair Janet Yellen signalled that the central bank wouldn’t rush to increase interest rates, as the near-term risks to the economy appeared evenly balanced. This gave US equities a boost.
The Goldilocks scenario (“not too cold; not too hot”) has been a feature of this economic expansion in the US and indeed data released during the month should continue to have baby bear on edge. First, the number of jobs created in the US beat expectations in June pointing to a robust economy. However, this was partly negated by the release of some tepid wage growth data which helped intensify the debate as to whether the Fed should hike rates again this year.
Telecoms and IT were the top returning sectors in July. The healthcare sector was a laggard, weighed by the uncertainty, and in the end, failure of President Trump’s health-care reform bill.
European equity markets were broadly flat in July with the Bloomberg European 500 Index easing just -0.2%. The European Central Bank left interest rates unchanged in July and gave very little away with regard to the timing of any scaling back of its quantitative easing programme. Economic data signalled that the euro-area economy continued its steady and broad-based expansion. As a result GDP growth forecasts for 2017 were pushed higher in July with one survey’s consensus now anticipating growth of 2%.
Emerging equity markets put in yet another strong month in July on the back of improving fundamentals and positive corporate earnings. The MSCI Emerging Markets Index returned 4.4% for the month (in local currency) and is now up a remarkable 18.7% year to date. Some consolidation, at least, surely cannot be far off. A favourable blend of higher commodity prices, lower interest rates and a weakening US dollar helped Latin America to be the top performing region. Equity markets in Asia also pushed higher. In China, second quarter GDP grew by 6.9% year-on-year which, despite being slower than the break-neck pace of recent years, was above the market expectation. This lent support to equities.
In Australia the ASX200 Accumulation Index was essentially flat over the month. A weaker industrials sector was countered by stronger banks and resources. Banks rose on the back of lighter than feared capital requirements being imposed by the Australian Prudential Regulation Authority and resource stocks owed their gain to higher commodity prices.
Back home and the NZ50 Gross Index kept its impressive run going by posting its 7th consecutive monthly gain with a return of 1.1% in July. Perhaps the August earnings season will finally be the catalyst that causes the market to pause for breath or even post a negative return. We will have to wait and see.
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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:
“Some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor. When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious. But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”
Here Buffett urges caution when it comes to borrowing money in order to make investments. Buffett much prefers to have a “war chest” of cash so that when a down-turn comes (as they inevitably do) and credit dries up he is one of the few in the market with the financial position to snap up some bargains.
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Investing 101Risk versus Return – the Trade Off
The link between risk and return is the most fundamental rule of investing. Low levels of uncertainty (low risk) are associated with stable and low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential – albeit far less predictable - returns.
Because of the risk-return trade off, you should be aware of your personal risk tolerance when making investments and fully understand the inherent riskiness of a particular investment.
Risk can have a negative meaning for some people. But it is not necessarily a bad thing - as long as the degree of risk is well understood.
If an investor has a long term investment horizon (which is usually the case with KiwiSaver) the risk tolerance will typically be higher as a longer time period gives the investor the ability to “ride out” a down-turn in markets.
The goal is to find an appropriate balance - one that generates a satisfactory return in the medium to long term, but still allows you to sleep at night!
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Top Holdings as of 31 July 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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Magellan Global Fund
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N/A
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T Rowe Price Global Equity Fund
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T Rowe Price Global Equity 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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Polar Capital Technology Trust
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Polar Capital Technology 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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Contact Energy
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Ryman Healthcare
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Contact Energy
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Arvida Group
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Contact Energy
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Arvida Group
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Ryman Healthcare
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Metlifecare
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Ryman Healthcare
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Metlifecare
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Arvida Group
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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 SpotlightBerkshire Hathaway Inc
Led by famed value investor Warren Buffet, Berkshire Hathaway's success has been built on the firm's record of acquiring and managing a portfolio of businesses with enduring competitive advantages.
Whether through direct ownership of individual companies or via significant shareholdings, Buffett has typically looked to acquire firms that have consistent earnings power, generate above average returns on capital, have little to no debt, and have solid management teams. Once purchased, these businesses tend to remain in Berkshire's portfolio, with sales seldom occurring.
In the early part of his career at Berkshire, Buffett focused on long-term investments in publicly quoted stocks, but more recently he has turned to buying whole companies. Berkshire now owns a diverse range of businesses including insurance, confectionery, retail, railroad, home furnishings, jewellery, newspaper publishing, and several regional electric and gas utilities. Some of the companies that Berkshire has investments in include Kraft Heinz, American Express and BNSF Railway.
Berkshire Hathaway averaged annual growth in market value of 20.8% for its shareholders from 1965 to 2016 (compared to 9.7% for the S&P 500 with dividends included for the same period).
According to the 2017 Forbes Global List, Berkshire Hathaway is the third largest public company in the world.
Next month: Worldwide Healthcare Trust.
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