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Unit Prices as at 30 April ($)

Focused Growth 1.6245

Growth 1.5457

Conservative 1.2986

Funds under Management as at 30 April 2018:

$741.9 million

In other news

Generate’s Focused Growth Fund the best performing KiwiSaver diversified growth fund for year to 31 March 2018

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Disclaimer

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 Scheme Newsletter – May 2018

Welcome to the May edition of the Generate KiwiSaver Scheme Newsletter. Share markets enjoyed a rebound in April. More on this later.

All three funds generated positive returns over the month. As one might expect given the strength in global share markets, Focused Growth, the fund with the highest share market allocation, had the strongest return delivering 1.75% in April. The Growth Fund delivered 1.43% whilst the more cautiously positioned Conservative Fund returned 0.63%.

Pleasingly the funds are enjoying even stronger gains in May. The earnings season has continued to exceed expectations whilst inflation data has tended to be underwhelming meaning central bank stimulus will be around for some time to come yet.

Performance of Our Funds

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

	1 Month	1 Year	3 Year (p.a)	5 Year (p.a)
Focused Growth	1.75%	13.72%	9.77%	10.53%
Growth	1.43%	11.50%	8.98%	9.48%
Conservative	0.63%	5.62%	5.74%	5.65%

*except the $3 per member per month fee.

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

As a whole companies released better than expected financial results in the second half of April, which led to a rebound in global share markets. Performance of the Growth and Focused Growth funds were further assisted by a decline in the New Zealand dollar, as it increased the value of their offshore holdings.

In April, the best performing International Equity Manager or large-cap international stock was Facebook, which was up an impressive 10.9% after reporting stronger than expected results. This reversed the significant losses generated in March after the Cambridge Analytica data scandal hit the headlines. The strong bounce back in the company’s share price is in part a reflection of stronger than expected growth, with revenue up 50% (which exceeded market expectations) and also due to reassuringforward looking commentary from management.

The lowest returning International Equity Manager or large-cap international stock was Tencent, which was down 2.2% in April. The news out over the month was largely positive (for instance, Tencent is planning on listing its Music division separately). We attribute the modest share price fall to negative sentiment following Naspers US$10 billion sale of Tencent shares, which reduced their holding by 2% to 31% and also a broadly weaker Chinese share market. Tencent reports its first quarter results in mid-May, which should refocus investors on its strong position and excellent growth prospects.

The top-performing Australasian stock for the funds in April was Z Energy, which was up 3.6% over the month. In our view, the key piece of news released during the month, volume data, was not entirely positive. More specifically, volume data for the first quarter of 2018 showed the industry had enjoyed good growth, but Z Energy had lost some market share. It seems that some investors have set aside their electric vehicle concerns for the time being and refocused on the significant growth in dividends this company is expected to generate over the medium term.

Metlifecare was the worst performing Property and Infrastructure stock in April declining 1.2%. The most likely explanation is that weak nationwide housing sales volumes data for March (which was released mid-April) led to some selling in the name. We note that Easter was at the end of March and so while a 9.9% volume decline is not a great headline, this needs to be put in context.

Positive environment for equities remains

Investors put aside concerns over rising interest rates and trade wars in April following the release of stronger than expected first quarter results in the second half of the month.

These results provide a raft of information about how companies are performing and what management expects to occur in the future. Some would argue that the results season refocuses investors’ attention on what matters: company fundamentals.

Going into the first quarter reporting season, analysts had forecast a robust 17% growth rate in earnings for companies in the key US share market barometer, the S&P 500 index.

At the time of writing, just over 91% of the companies in the S&P 500 have reported their results. These companies had generated an impressive 25% growth in earnings – yes, a full 8 percentage points above analysts’ expectations! If this rate of growth is maintained over the entire reporting season, then companies are growing at their most rapid pace since the data was first collected a decade ago.

The breadth of the positive surprises is also encouraging: 78% of S&P 500 companies that have reported had better than expected results. A further 6% were in line with expectations and so only 17% produced disappointing results (note: does not add to 100% due to rounding).

When the market is broken down by industry sector, it is encouraging to see that the worst performing sector, Real Estate, still had 61% of companies releasing better than expected results.

Finally, it is worth noting that companies have not achieved these positive surprises solely through tight cost control: 77% of S&P 500 companies that have reported their results generated revenues above analyst forecasts.

Strong corporate earnings combined with robust (albeit moderating) global growth provides fertile ground for share markets. We expect the year’s highs set back in January to be tested before the year is out

A recap of market movements in April

In this recap we provide the total returns (i.e. return with dividends reinvested) in NZ dollars.

After two weak months, the US share market rebounded with the S&P 500 gaining 2.8%. This gain pushed year-to-date performance into positive territory, albeit modestly at 0.2%.

Eurozone equities continued their run of outperforming their North American peers. More specifically, European share markets were up an impressive 5.2% in NZ dollars. It is worth noting that the yields on bonds issued by strong credit quality countries in the Eurozone still trade well below 1%. For instance, at the time of writing, the 10-year German Bond was trading at just 0.5%, which is well below the United States 10-year Treasury at 3.0% and NZ and Australian 10-year government bonds that trade at 2.8%. The low rates of returns offered by Eurozone bonds make shares relatively more attractive for Eurozone investors.

The Chinese share market had the dubious honour of being the only share market (that we follow in this newsletter) to produce a negative return over the month of April. Chinese companies release their results later than the United States and so there was less news to shift investors attention away from trade tensions with the United States. The Shanghai Stock Exchange Composite ended the month down 1.3%.

Emerging markets (EM) equities as a whole produced modestly positive returns when measured in NZ dollars (up 1.1%). Interestingly, EM currencies declined at the same rate as the NZ dollar and so currency did not provide a tail wind for these markets. Emerging markets had a stellar year in 2017 but rising interest rates and a higher USD (which can be a challenge for some emerging market countries) has seen EM’s relative performance take a breather.

Over the ditch, the Australian Stock Exchange 200 Index posted a very solid 4.6%, in NZ dollars. This was the result of strongly performing resource stocks (i.e. companies in the mining and materials sectors) which generated double-digit returns. News emerging from the Royal Commission Enquiry into financial services in Australia continued to shock and amaze in April, but these companies managed to eke out a modestly positive return after a very difficult March.

Back home the local market continued its pattern of producing smoother returns. The NZX50 Gross Index nudged up 1.5% in April after producing modestly negative returns in March. News of the recapitalisation of Fletcher Building in April provided a welcome respite for the stock and contributed to the modestly positive performance of the index.

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:

You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

Here Buffett opines that having an exceptional IQ is not the most important facet to being a successful investor. Hard work, common sense and having the conviction of your own independent thinking are far greater determinants of an investor’s success.

Investment Knowledge Builder - The trade-off between risk and return

One of the fundamental principles of Finance is that investors prefer certainty to uncertainty. Consequently, they require additional compensation, in the form of higher returns, to invest in an investment with greater risk.

If an investment has a very predictable, stable return (for example, a term deposit) then it is also likely to produce modest returns. In contrast, investments whose returns are less predictable (for example share market investments) should typically generate higher levels of returns over long periods of time.

The key lesson is that contrary to popular opinion: risk is not necessarily a bad thing - as long as the degree of risk is well understood and suits the investor’s requirements.

Willingness and ability are two key factors to consider when determining the level of risk an investor should accept:

Personal tolerance (willingness): awareness of your personal risk tolerance when making investments is important as well as fully understanding the inherent riskiness of a particular investment.
Time horizon (a key determinant of ability): all things being equal the longer an investor’s time horizon the greater their ability to take on risk. This is because a longer investment horizon gives the investor the ability to "ride out" a downturn in markets. Consequently, investors that are using KiwiSaver to save for retirement and have a number of years of work ahead have the ability to take on risk. However, those saving for their first house will not typically have the same ability regarding risk.

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!

Top Holdings as of 30 April 2018

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

Conservative Fund	Growth Fund	Focused Growth Fund
International Equities Managers
-	Platinum International Fund	Platinum International Fund
-	T Rowe Price Global Equity Fund	T Rowe Price Global Equity Fund
-	Berkshire Hathaway	Berkshire Hathaway
-	Magellan Global Fund	Magellan Global Fund
-	Jupiter European Opportunities Trust	Jupiter European Opportunities Trust
Property and Infrastructure
Infratil	Infratil	Infratil
Arvida Group	Arvida Group	Arvida Group
Z Energy	Z Energy	Z Energy
Metlifecare	Metlifecare	Metlifecare
Summerset Group Holdings	Summerset Group Holdings	Summerset Group Holdings
Fixed Income and Cash
Term Deposits	Term Deposits	Cash & Cash Equivalents
Cash & Cash Equivalents	Cash & Cash Equivalents	-
Z Energy Nov 2021 Bonds	Investore Property Apr 2024 bonds	-
Kiwi Property Aug 2021 Bonds	Fonterra Oct 2021 bonds	-
Goodman Property May 2024 bonds	Kiwi Property Aug 2021 Bonds	-

Stock Spotlight

Infratil

Infratil is a listed infrastructure investor that has had a presence on the local stock exchange for close to 25 years and has been one of the fund’s largest direct investments over the last few years. Initially, Infratil focused on opportunities that arose from the deregulation of the electricity sector. Subsequently, the company shifted its focus to other areas within the infrastructure space where they can generate strong returns.

Infratil’s definition of infrastructure is quite broad. It currently has investments in electricity generators/retailers, an airport, a bus company, student accommodation, a data centre company and a retirement village operator.

Infratil’s largest investment is Trustpower. Trustpower is primarily an integrated electricity generation and retailing business that holds significant market share in the Bay of Plenty and a number of other provincial markets. Until relatively recently, Trustpower dominated Infratil’s portfolio but following the spin out (separation and individual listing) of Trustpower’s wind generation assets it now makes up a little less than a third of its value.

One of Infratil’s more interesting investments is Canberra’s Data Centres (CDC). As the name suggests, CDC provides the Australian Government with secure data storage services. It estimates that over the next 10 years the data storage market will expand 100x. Given CDC’s current strong contract win rate this would certainly suggest strong future growth in this business.

Next month:

Siemens