Generate Newsletters

Welcome to the November edition of the Generate Member Newsletter.

Amazingly we are now into the final months of the year and there will be no shortage of events for us to write about. As this newsletter is typed, many countries in Europe are facing a morale destroying second wave of the omnipresent coronavirus and new lockdown measures are being put in place. Meanwhile, the race to become the 46th US President is drawing to a close after an exhausting campaign for all those involved.

Here in New Zealand life looks and feels decidedly different. The Labour Party was resoundingly re-elected to Government winning an incontestable majority of in Parliament. The very next day, 47,000 Kiwis packed into Eden Park to attend the Bledisloe test match to enjoy a further return to normality as the All Blacks comfortably dismantled the Wallabies.

Despite markets experiencing increased volatility towards the end of the month, we were pleased with the funds’ performance in October, which we will cover off in more detail below.

Finally, the Financial Services Council recently took a look into how Kiwis think about money, and how it affects their wellbeing. One of their findings was that those who receive professional financial advice have higher KiwiSaver balances and save a higher proportion of their earnings. In this context we are delighted that over 95% of our members join through an adviser.

Performance of the Generate KiwiSaver Scheme Funds

Returns to 31 October 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.

In what was a month of two halves for share markets around the world, we were again pleased with our funds’ performances. The Growth fund led the charge returning 1.6%, followed by the Conservative fund at 1.17%. Following closely behind were the Focused Growth Trust and Fund, returning 1.14% and 1.05% respectively. For context, these returns were delivered against the back drop of the MSCI World Accumulation Index returning a disappointing -3.1% (in local currencies).

Looking at local contributors to performance, there were plenty to choose from as Kiwi Property, Oceania Healthcare and Contact Energy all recorded very strong gains of 16.0%, 18.4% and 11.0% respectively. In Oceania’s case, the share price rallied after two local broker houses issued very positive research reports suggesting the stock had been materially undervalued relative to peers. Not to be left behind, sector peer Summerset also gained 15.7% as strength in the New Zealand housing market continues to underpin retirement village valuations.

Kiwi Property has been a laggard relative to listed property peers, in part due to its exposure to the retail sector which has fallen out of favour with investors. During the month, Kiwi hosted a group of investors to showcase the opening of Galleria, a new shopping development created at its flagship asset, Sylvia Park, in Auckland. Kiwi has demonstrated an ability to ride the COVID-disrupted retail environment which has reassured investors and led to an increase in the valuation the market is willing to apply to their assets.

Contact’s share price rallied in kind with the broader electricity generator/retailer sector. The afore-mentioned Labour Party election win was somewhat ironically viewed as a positive for the sector. This was owing to Jacinda Ardern, who on the campaign trail expressed a desire to increase efforts to keep the Tiwai Point aluminium smelter operational beyond the signalled closing date of August next year. The Government is currently in negotiations with Rio Tinto to orchestrate a managed and orderly exit over a longer period of time. As we have discussed at length in prior newsletters, forecasting the actions of Rio Tinto is fraught with uncertainty. Meanwhile, Contact continues to display attractive relative value within the sector and has access to generation development opportunities which help to underpin a dividend yield currently sitting at 5.2%.

Local detractors from performance were driven by Spark and a2 Milk, returning a disappointing -4.5% and -4.6% respectively. As we discussed in last month’s newsletter, a2 had delivered earnings guidance which negatively surprised the market. The share price weakness which continued over the month is a reflection of the now poor sentiment towards the stock. All eyes now turn to China’s Singles Day event, otherwise known as “11/11”. This has traditionally been a positive sales event for a2, which the market will be closely following this year to assess whether that trend continues.

Turning to our international holdings, pleasingly there were two stocks returning double-digits over the month. Tencent returned a very strong 15.5%, while Alphabet (parent owner of Google) returned 10.3%. Tencent hit all time share price highs over the month, benefitting from the proposed IPO of Alibaba’s Ant Group. The significance of Ant Group is that Tencent’s payments business, WeChat Pay, exhibits many business similarities to Ant. Ant Group’s valuation at IPO suggests significant upside to the valuation the market had been placing on WeChat Pay. Tencent continues to rapidly grow is digital payments business, with some market estimates now valuing it at close to US$350bn, which is approximately half of Tencent’s total market capitalisation.

Late in the month Alphabet reported third quarter results which highlighted a growth rate for Google that far surpassed analyst expectations. The rate of recovery in digital advertising drove revenue growth of 14%. YouTube advertising revenue grew to US$5bn for the quarter, which was up 32% on the prior corresponding quarter. Meanwhile, Alphabet’s cloud computing business grew revenues 45% to US$3.4bn, with management expecting to provide more details on the business at the next quarter. This will give market analysts more information to accurately value the business.

The local bourse was a standout in comparison to global markets with the S&P/NZX50G returning a positive 2.9% alongside another notable performer in Hong Kong’s Hang Seng (+2.8%). The US S&P500 had a tougher month with volatility increasing as the US elections moved ever closer, closing -2.7% lower. Meanwhile the MSCI World Accumulation index was down -3.1%.

Locally, we had the New Zealand General Election, where the Labour Party claimed 49% of the vote to send it resoundingly into a second term. The result gives the Labour Party a path to implement policy without the traditional challenges of an MMP coalition government. While Labour’s election campaign was light on policy detail, the party did outline intent to fund a $40bn infrastructure investment pipeline, commit to 100% renewable energy generation and of course, bestow Matariki with public holiday status. The New Zealand equity market responded favourably to the election outcome, which had become increasingly predictable and provided a comfortable flavour of “more-of-the-same”.

As we noted last month, markets appear to have developed a more sanguine attitude to either presidential candidate sitting in the world’s most powerful seat. The key election risk now resides around the possibility for any contention of the result. The chance of a contended result at this election is elevated relative to history. This is because mail-in votes are expected to represent a much larger portion of voter turnout as social distancing practices and fear of the coronavirus affects voter behaviour. With such a large proportion of mail-in votes expected, there is the potential for the timeliness of the vote count to be impacted. In the State of Pennsylvania for example, it is expected to take up three days for mail-in votes to be counted. Uncertainty and financial markets, of course, can be a very poor mix so we will be hoping for a swift conclusion to what has been a very long running campaign.

The fall in the MSCI World Accumulation Index (-3.1%) captures ongoing fears in Europe surrounding the economic impacts of a second coronavirus wave. With the United Kingdom heading back into various forms of lock down alongside France and Germany, their markets dropped -4.7%, -4.4% & -9.4% respectively. Given this back-drop, a vaccine response cannot come soon enough. On this front, BioNTech/Pfizer and Moderna are expecting to head into US-based phase 3 trials in November. Depending on the trials’ progress the vaccine makers may file for authorisation to have the drug available for emergency use in late November. The Centre for Disease Control and Prevention in the US (CDC) has stated that at least one or possibly two COVID-19 vaccines may be available by the end of this year and they are aiming to complete a vaccination schedule for most of the population by July 2021. Meanwhile, the UK Health Secretary also expressed expectations for the bulk of a vaccine roll out to occur in the first half of 2021. This follows on from the University of Oxford suggesting the AstraZeneca developed vaccine could be available for emergency use by the end of this year in the UK.

Warren Buffett wisdoms

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

“In the 54 years (Charlie Munger and I) have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions”

Here Buffett surmises that investments need to be made on their own merits. Economic growth will peak and trough but when you are looking to hold an investment for the long term it is better not to get caught up in what the economy is doing at any point in time, but rather to focus on the fundamentals of the investment opportunity including the sustainability of forecast cashflows.

Top Holdings as of 31 October 2020

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