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July saw the funds deliver solid returns with the Focused Growth, Growth and Conservative Funds returning 1.48%, 1.10% and 0.25% respectively. We continue to hold elevated levels of cash with some markets being close to the year’s highs and we believe the volatility we have experienced year to date is likely to continue.
The best performing international investment was Google’s parent, Alphabet, with a return of 8.0%. Alphabet reported stronger than expected revenue and earnings late in the month. The stock had already had a strong month leading to its earnings and subsequently gained further momentum. We continue to like Alphabet’s prospects, whether it be its core digital advertising business or other facets of the business such as artificial intelligence and cloud storage. We recently read with interest that Hamish Douglass – the high profile Lead Portfolio Manager of the Magellan Global Fund – believes Alphabet is “at least 50% undervalued.”
The lowest returning international investment was Facebook, which was down 11.8% in July. Facebook has been a strong performer for the growth funds in previous months but gave up some of those gains in July after it reported earnings late in the month. Facebook actually reported second quarter earnings that were higher than the consensus expectation. What turned investors off was when the company projected a material reduction in longer term margins as well as slowing revenues in the second half of FY18. We note that Facebook has a strong history of beating its estimates and believe that is likely to continue in the years ahead.
The top-performing Property and Infrastructure stock in July was Vital Healthcare Property, which was up 5.2% over the month. Sentiment towards Vital has been weak in recent months. This was possibly exacerbated by the announcement that Vital entered into a derivative to acquire a material stake in Australia’s second largest private hospital operator-Healthscope. However, the market seemed to gain comfort with the deal given the stock rebounded strongly in July.
Z Energy was the lowest returning Property and Infrastructure stock in July declining 5.1%. During the month the company revised down its earnings guidance by $30 million due to two key headwinds. First, there were delays in restarting Refining NZ’s Marsden Point refinery after a planned maintenance shut down. Second, high oil prices have translated to high prices at the pump, which is dampening demand. Both of these factors are one off in nature and so are not of great concern to us. The company also published its quarterly operating statistics, which showed a loss of market share. This is something we will be monitoring closely moving forward.
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