Generate Newsletters

Welcome to the October edition of the Generate Member Newsletter.

Last month saw a big milestone for your KiwiSaver scheme in that we became the first KiwiSaver provider to invest into a community housing project. This was a win-win for all parties concerned. For Generate - because a competitive rate of return for the investment was achieved, whilst helping some Kiwi families and individuals who cannot afford their own accommodation into a place they can call home. This was only possible due to your membership, so we hope you take some satisfaction out of this landmark investment as well! It was a win for the community housing provider – The Salvation Army – because they achieved funding at a competitive rate. And it was also a win for Community Finance - who intermediated the deal.

In other news we were interested to see the findings from some recent research conducted by the Financial Services Council. They found that Kiwis who have received professional financial advice have approximately 50% more in their KiwiSaver account, save 3.7% more of their income and travel 6 times more per decade than those who don’t receive advice. We’re happy to say that we lead the market in this regard with over 95% of members having joined Generate via one of our advisers.

Turning to markets - and all of the share markets that we actively monitor saw their winning streak come to an end in the month of September after strong runs of consecutive monthly gains. More on this later.

Returns to 30 September 2020 (after fees** and before tax)
 

**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.

Share markets were weaker in September with the MSCI World Index down -2.8% (in local currencies). In this context we were pleased with the relative performance of our funds as the Focused Growth, Growth and Conservative funds returned -0.89%, -0.29% and 0.15% respectively. The Focused Growth Trust (our non-KiwiSaver fund that is managed in a similar manner to the Focused Growth Fund) returned -0.96%. As we would expect in a down month for share markets the Conservative Fund took line honours in September due to its lower share market exposure.

Turning to key contributors to performance and the Worldwide Healthcare Trust (WWH) was the top performing global equity investment returning 3.5% in September (in GBP). The primary reason for this gain was due to currency movements. WWH is priced in British pounds, but the majority of its assets are U.S. domiciled. The pound’s value against the USD slipped 3.3% over the month which benefits WWH’s underlying net asset value.

The weakest performer in September was Facebook with a -10.7% fall. Despite this fall the stock has performed well this year and at the time of writing was up 32% year to date (in USD terms). There was no key headline that led to the sell-off in September. It was probably more of a result of profit taking amidst a number of continuing issues that the company faces. For example: user privacy, content moderation, accusations of political bias, and the threat of a regulatory backlash due to anti-trust concerns.

The strongest Australasian holding last month was local retirement village and aged care operator Oceania Healthcare with a 9.6% return. Oceania held its AGM in the latter part of the month and delivered an upbeat presentation. The CEO re-iterated their aged care strategy which is to redevelop their portfolio of well-located sites into new aged care centres that generate higher, resident-funded, premium revenue. Of note Oceania’s strong run in September has continued in October with broker upgrades providing additional momentum for the stock.

The weakest performing Australasian holding was A2 Milk, which was down -17.5% in September. In a trading update, A2 provided FY21 revenue and earnings estimates that were negatively impacted by COVID restrictions, and which the company said had disrupted its key sales channels. This was particularly disappointing given A2 provided upbeat commentary on its outlook for the year ahead when it released its FY20 earnings in mid-August. To top it off, a number of staff sold meaningful amounts of shares in the company between the FY20 result and FY21 trading update. While these share sales took place in an open window for insider selling, the optics are poor from an external shareholder’s perspective.

The U.S. share market broke its 5-month winning streak in September, falling -3.8%. Whilst economic data was generally positive, a number of factors weighed on the market. First – concerns about a resurgence of coronavirus cases and the economic impact of (albeit) more targeted government efforts to contain the virus. Second – Republicans and Democrats failed to agree on what a new fiscal package should look like. With the election in the U.S. fast approaching, hopes are fading that much needed fiscal relief will be enacted prior to the election. Third – confidence was further shaken by President Trump taking aim at the Chinese tech sector.

Unsurprisingly, Chinese share markets performed poorly in September with the Shanghai SE Composite Index falling -5.2%. Trump’s attempt to ban WeChat in the U.S. increased concerns over a potential broadening of sanctions against Chinese tech companies as the US election approaches. In addition, the U.S. Commerce Department told American computer-chip companies that they must obtain licenses before exporting certain technology to China’s largest manufacturer of semiconductors.

Back home and the NZ50G fell -1.6% in September. It was a tough month for the local share market’s 2 largest companies with a2 Milk down -17.5% and Fisher & Paykel Healthcare down -9.7%. Excluding these two stocks, the market was actually up +2.8% for the month, highlighting the concentration in the index among the top few companies.

Looking ahead and investors the world over seem to be getting more comfortable with the idea of a Biden presidency. Previously many commentators suggested that a Biden victory would be negative for the U.S. share market. But in recent weeks his lead in the polls has continued to grow which has coincided with some solid gains in share markets. Some are even saying now that Biden will be good for markets because the Democrats want to introduce a larger fiscal package than the Republicans. This would give the American consumer a decent shot in the arm and add momentum to the wider economic recovery.

After 50 years at the helm of Berkshire Hathaway (which is currently one of the largest growth investments for all three of our 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:

“Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.”

Here Buffett opines that it’s advisable to only invest in assets you are comfortable holding for the long-term. This is less risky than constantly tinkering in response to predictions of short- term changes in value and all the noise around investment markets. A good example of this is our investments in Chinese tech companies Alibaba and Tencent. There is a lot of noise around the potential impact that Trump’s policies will have on these companies. As a result, some short-term traders have taken profits and sold out of these companies. We prefer to analyse the facts. The U.S. only makes up a tiny part of Alibaba’s and Tencent’s revenues. So even if Trump does have his way with them the impact is unlikely to be substantial. Instead of being swayed by short term sentiment we remain focused on the compelling long-term growth stories these companies offer.

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