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Welcome to the December Edition of the Generate KiwiSaver Scheme Newsletter. Geopolitical developments were again at the fore in November. Hope for an easing in the trade war between the US and China and some more accommodative language from the Fed saw a reprieve from the losses sustained in October. More on that later.

November saw a significant milestone for Generate - that being funds under management exceeding $1 billion. We would like to thank you for your support, for taking the time get advice on your KiwiSaver and for believing in a NZ owned KiwiSaver specialist. We are working very hard to try to provide the long-term returns and service you deserve.

Performance of Our Funds

Returns to 30 November 2018 (after fees* and before tax).

	One Year	Three Year (p.a.)	Since inception (p.a.)**
Focused Growth	1.91%	7.95%	9.69%
Growth	3.50%	7.75%	9.02%
Conservative	4.58%	5.32%	5.69%

*except the $3 per member per month fee.
**the funds opened on 16 April 2013
Note: Past performance is not necessarily an indicator of future performance.

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All three funds chalked up a positive month in November with the Focused Growth, Growth and Conservative Funds returning 1.10%, 1.11% and 0.71% respectively. The positive returns for our two growth funds were particularly pleasing given the strong run up in the NZ dollar over the month. For example, the NZD/USD was up 5.6% over the month – which detracted from the value of our US domiciled investments.

After being the weakest performing international equities holding in October, Tencent turned the tables in November delivering the strongest performance (+11.1%). Mid-way through the month the company delivered its third quarter earnings report. The temporary halt on the publication of new online games imposed by the Chinese Government had made the market nervous leading into the earnings report. But Tencent delivered solid earnings for the third quarter suggesting the underlying fundamental story remains strong. In particular ad revenues gained 47% year on year (YoY) confirming that the company has under-monetised media assets. In addition, its cloud business grew by more than 100% YoY.

Facebook was the weakest performing international equities holding in November declining -12.1%. At the end of October, the company reported third quarter earnings which – as expected – showed a further moderation in sales growth and a more pronounced deceleration in operating profit. On a brighter note the company confirmed the continuing popularity of Facebook’s suite of apps with 2 billion people using at least one of the company’s apps on a daily basis.

Facebook has endured substantial negative news-flow in recent months. Despite this, we still believe it to be an attractive investment and as a result have been adding to our positions. We think the company will get its house in order regarding user privacy and policing of the platform’s content. We see substantial growth coming from its messaging platforms (WhatsApp and Facebook Messenger) not to mention Facebook Stories and Instagram. Further, we are encouraged by the $9 billion share buy-back the company has recently launched, which follows closely on the heels of the $9.4 billion of its own stock that Facebook has purchased year to date. We see this as a strong endorsement from management and the board that they see value in Facebook’s shares at these levels.

Infratil was the strongest performing property and infrastructure holding generating an 8.5% return over the month. During the month the company delivered a strong first half earnings report which confirmed Canberra Data Centres and Longroad Energy as stand-out investments.

Infratil and joint-venture partner Mercury Energy continued their takeover attempt of Tilt Renewables in November. Although Infratil managed to increase its holding in Tilt, ultimately the takeover attempt failed. We didn’t sell our funds’ Tilt shares as we believe there is substantial upside given Tilt’s compelling development pipeline.

The weakest performing property and infrastructure holding was Metlifecare with a fall of -4.6%. The fall was not due to company specific news but more to do with sentiment towards the retirement village/aged care sector. The concerns revolve around the Auckland housing market and whether it will follow Sydney’s and Melbourne’s housing market correction. For approximately 2 years the Auckland housing market has been plateauing. We see this as an ideal situation as prior to this it was running very hot. In our opinion, the longer it stays in this mode the less likely there will be a correction.

The sector heavyweights – Ryman and Summerset were down -4.2% and -1.2% respectively in November. The difference between these two and Metlifecare, however, is that Metlifecare didn't enjoy a significant run up in its share price over the first 3 quarters of 2018. In fact, now the company is trading at a 22% discount to NTA whereas RYM is trading 2.7x its NTA. Ryman does deserve a valuation premium – given its remarkable track record and solid future growth prospects – but we think the disparity in valuation is too great and as a result have been adding to Metlifecare and taking some profit in Ryman.

Sentiment was again swung around by geopolitical developments and central bank comments in the month of November. Whether it was the US/China trade war, ongoing Brexit negotiations, Italy at loggerheads with the wider EU over its budget plans or the Fed appearing to be more dovish there was “something for everyone.” Fundamentals such as the US and European earnings seasons felt like a mere sideshow. The net result was positive share market movements for our two key markets - those being the New Zealand and the US share markets.

Recap of market movements in November

Global equities (share markets) continued to be volatile in November. However, positive developments and investor optimism towards the end of the month led to a positive performance with the MSCI All Country World Index returning 1.2% (in local currencies).

The combination of more accommodative language from the Fed and hope that a truce in the trade war between the US and China might be reached at the G20 meeting in Buenos Aires pushed US equities into the green in November with the S&P 500 returning 1.8%. This monthly return belies the fact that it was another volatile month for the US share market. Early in the month it was up 3.8%, only to give up all those gains but managed a late spurt to notch up its positive return. We expect these sorts of gyrations to continue until investors can gain a clearer view on geopolitical and economic developments.

Technology stocks have been particularly volatile of late – with Apple leading the charge in November. The company disappointed investors with its outlook for the all-important holiday shopping season and raised concerns about transparency when it advised that it will no longer report unit sales of its devices. Ongoing trade war flare ups and earnings downgrades from some of Apple’s suppliers also led to investors fretting over potentially lower demand for Apple products.

A very strong US earnings season seemed to go largely unnoticed. Earnings per share grew in excess of 25% YoY. This sort of growth would usually provide a strong tail-wind for markets but with all the geopolitical distractions going on the earnings season seemed to be pushed to the side-line.

Eurozone equities ended the month lower with the Bloomberg European 500 Index down -1.1%. Europe has more than its fair share of political challenges currently with the potential of a “hard” Brexit rising the closer we get to March 2019. Disputes between the Italian Government and EU officials over what is an acceptable budget deficit, wider trade tensions, an uninspiring earnings season and a plummeting oil price all weighed on Eurozone markets.

Emerging Markets (EM) equities overcame a poor start to finish the month in style with the MSCI EM Index returning 2.9% in November (in local currencies). The rise gathered momentum towards the end of the month after US Federal Reserve Chairman Jerome Powell changed tack stating that US interest rates were “just below” neutral. This made the market reassess how many more hikes the Fed has left to do this cycle. Lower US interest rates are particularly beneficial to a number of EM countries who borrow in USD.

Chinese equities had another topsy-turvy month with the net result being a modest -0.6% decline for the Shanghai Composite. Chinese investors didn’t seem to buy into the optimism that the G20 would provide a trade war truce.

Over the ditch in Australia was the worst performing share market that we follow during the month with the ASX 200 Accumulation Index falling -2.2%. Australian resource stocks make up a significant component of the Australian share market and with the prices of oil and iron ore having dramatic falls in November it was no surprise to see Aussie equities underperform.

Back home and the NZ50G Index notched up a 0.8% gain. This was a solid effort in the face of market heavyweight – Fletcher Building – selling off 21.2% after downgrading earnings guidance at its annual meeting. Gentailers (electricity generators and retailers) and listed property stocks performed strongly during the month and the icing on the cake was a takeover offer for TradeMe which saw its shares gain 26.4% as a result.

Warren Buffett wisdoms

We are going to take a break from Warren this month and instead quote Charlie Munger – Buffet’s long-time friend and lieutenant at Berkshire Hathaway:

“If you were an observer, you’d see that Warren did most of it sitting on his ass and reading. If you want to be an outlier in achievement, just sit on your ass and read most of your life.”

It is well known that Buffett is a prodigious reader. Wall Street Journals, annual reports and trade journals all get devoured at a rate of knots as Buffett stays up to date with his existing investment portfolio and looks for new opportunities. He still regards reading Benjamin Graham’s “The Intelligent Investor” as one of the luckiest moments in his life as it gave him the intellectual framework for investing.

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 percentage. Unless they can inject fresh equity they have to sell their investment and crystallise the loss.

Top Holdings as of 30 November 2018

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

Conservative Fund	Growth Fund	Focused Growth Fund
International Equities
Berkshire Hathaway	Platinum International Fund	Platinum International Fund
Alphabet	Berkshire Hathaway	Berkshire Hathaway
Ping An Insurance	T Rowe Price Global Equity Fund	Magellan Global Fund
Alibaba	Magellan Global Fund	T Rowe Price Global Equity Fund
Tencent	Worldwide Healthcare Trust	Worldwide Healthcare Trust
Property and Infrastructure
Infratil	Infratil	Infratil
Z Energy	Mercury	Contact Energy
Arvida Group	Contact Energy	Mercury
Metlifecare	Arvida Group	Arvida Group
Mercury	Z Energy	Z Energy
Fixed Income and Cash
Term Deposits	Term Deposits	Cash & Cash Equivalents
Cash & Cash Equivalents	Cash & Cash Equivalents	Westpac Bank Term Deposits
Kiwi Property bonds	Vector bonds	Z Energy bonds
Z Energy bonds	Z Energy bonds	Contact Energy bonds
Trustpower bonds	Kiwi Property bonds	-

Stock Spotlight

Contact Energy

Contact Energy is a diversified energy company focused on the generation of electricity and the sale of electricity and gas in New Zealand.

The company started out in 1996 as a State-Owned Enterprise but was privatised 3 years later.

Today Contact Energy is the second largest electricity generator in the country and also has the second largest market share of electricity retailing. Its generation fleet is made up of 5 geothermal power stations (clustered around the Taupo area), 4 thermal power stations (scattered throughout the central North Island) and 2 hydroelectric power stations (both in the lower South Island). In the last financial year 80% of the electricity the company produced was from renewable sources. The electricity produced by Contact’s thermal power stations supports New Zealand’s electricity market during periods of high demand and/or low supply.

As you can see in the table above Contact Energy is one of our largest property and infrastructure investments. We like its diversified and defensive earnings streams and the fact it has growth options up its sleeve should increasing demand justify investing for growth.

In volatile times the certainty that companies like Contact Energy provides tends to be highly valued by investors.

Next edition:
Summerset Group Holdings

Happy Holidays
The newsletter will be taking a break in January. We wish all of our members (and non-member readers!) a happy and safe holiday season.