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All three funds chalked up a positive month in January with the Focused Growth, Growth and Conservative Funds returning 4.46%, 2.97% and 1.00% respectively.
Facebook shares surged higher in January making it the strongest performing international equities holding. Nearing the end of the month the company delivered a strong fourth quarter earnings report. The stock was up 12% in after-hours trading and ended January up 27.2%! The highlight of the result was robust revenue growth, which was up 30% on 4Q 2017, comfortably outpacing the most optimistic sell side analysts. This strength and the growth in users reinforced the strength of Facebook’s platforms: the much publicised privacy issues are not causing users to shift away. In the December newsletter we mentioned that we thought Facebook was an attractive investment despite all the negative developments in 2018. It was nice to see our faith rewarded so soon.
The strong performance of the international holdings is probably best summed up by the weakest performer, Berkshire Hathaway, which was up 0.7% during the month. Berkshire’s largest listed investment, Apple, wrote to investors in early January warning that they would not meet previously issued guidance. The key driver of the downgrade was iPhone sales, which were weak in both developed markets and China. Speculation had been rife that sales of the recently introduced models had failed to meet the market’s and company’s expectations, fuelled by news from suppliers that Apple had cut order volumes, but on the day this letter was published Apple’s share price declined 10% and Berkshire’s share price was off 5%. When Apple reported its results, the market was encouraged by the strong services revenues and margins and as a result the stock rebounded, but Berkshire’s share price reaction was muted.
Z Energy was the strongest performing property and infrastructure holding generating a 9.3% return over the month. The market seems to be slowly coming to terms with the impact of the oil price on earnings. A high oil price acts as a headwind for the company because it takes them time to pass on the increase to commercial customers and as the petrol price rises customers reduce demand and at the margin shift away from Z Energy’s premium offering. It is worth noting that the bulk of this impact is transitory because commercial pricing catches up with the increased oil price.
In early January the company took the opportunity to upgrade earnings guidance when it released its third quarter volumes. The upgrade should not have been a surprise as oil prices have weakened considerably since the last set of guidance provided by the company at the time of its first half results. In our view, this implied that the headwind the company had incorporated into guidance had reversed into a tailwind. For a lower risk holding, Z Energy has a relatively volatile share price. The funds have taken the opportunity of this volatility: adding to our investment on weakness and then trimming the holding into strength.
The aged care sector stocks again featured as the weakest performing property and infrastructure holdings. This time Metlifecare and Summerset both achieved the dubious honour of the largest performance detractor with share price declines of 4.1%. The market has become increasingly concerned with the Auckland housing market and the headwind this could create for the retirement operators.
The funds’ holdings in this sector are currently concentrated in two companies: Arvida, because of its higher proportion of aged care bed earnings (that are not exposed to fluctuations in the housing market), and; Metlifecare, because in our view the 25% discount to its net asset value that it currently trades at is compelling. At worst it should limit further downside.
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