Generate Newsletters

Welcome to the December edition of the Generate Member Newsletter. Those of you who follow business news will have heard that AustralianSuper has made an unbinding takeover bid for New Zealand infrastructure and utility investor - Infratil. As a result, Infratil’s share price has gained 21% (as at the time of writing) in the month of December. This is an early Christmas present for Generate members as Infratil is the funds’ largest Property and Infrastructure investment by some margin.

Generate is a proud supporter of Live Ocean – which is Peter Burling’s and Blair Tuke’s ocean conservation charity. Check out one of the worthy projects that they are in behind here.

Global shares had their strongest month since January 1975, driven by a Goldilocks result for the US election and very encouraging results from three large-scale COVID-19 vaccine trails. As is often the case when global equities rally, the NZ dollar also had a strong month which acted as a dampener on the returns received by NZ based investors. This often works in-reverse, weak share markets are offset by a weak NZ dollar reducing the impact of large drawdowns effectively smoothing returns from global shares.

This month we have included a special responsible investment section in the Newsletter, highlighting the strong contribution to the funds’ performance from our responsible investment efforts. This confirms that we can all do our bit to minimise harm, and help those in need, without sacrificing returns.

We would like to take the opportunity to say thank you for choosing Generate as your KiwiSaver and/or unit trust provider. After a difficult start to the year, the funds have all enjoyed strong absolute returns in the second half which has pushed their returns back towards their healthy long-term averages. Relative to the competition the funds continue to perform very well. From the team at Generate, we wish you a happy and safe holiday season!

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

*except the $3 per member per month administration expense.
**The Generate KiwiSaver Scheme funds opened on 16 April 2013. The Generate Focused Growth Trust opened on 1 November 2019

Note: Past performance is not necessarily an indicator of future performance. Generate’s fund updates can be found here

Generate’s early focus on responsible investment has not only been good for the environment but has also provided a helpful boost to performance. The top-performing stock in November was the renewable electricity company Meridian. Chatter around the local investment community centred around the strong buying coming from large offshore passive green energy funds.

We mentioned earlier that Infratil has received an unbinding takeover offer. One of Infratil’s key themes is renewable energy which is expressed through their majority ownership of Tilt Renewables (a wind-farm developer and operator), Trustpower and Longroad Energy (a US based wind and solar farm developer and operator). Infratil’s low carbon portfolio is clearly attractive to prospective buyers such as AustralianSuper.

Staying with Infratil and the company has recently announced a strategic review of its Tilt Renewables holding on the back of strong interest from other investors. This announcement already has Tilt as one of the strongest contributors to performance this month. Tilt’s longer-term contribution has been equally impressive returning over 200% since mid-2018 (four times the market return!) when it was added to Generate’s KiwiSaver funds.

It is also worth noting that the companies that have been dropped from the portfolio, or that we have avoided, on the back of ESG concerns have lagged. For instance, NZ Refining was removed from the KiwiSaver funds on the back of environmental and governance concerns in September 2018 and since then the stock has declined by -75%.

Our responsible investment activities have not been limited to the ‘E’ (environmental) or ‘G’ (governance). We rounded out ‘S’ (social) with an investment in The Salvation Army bonds. The investment stacked up well financially: the yield paid on the bonds is attractive, and in our view, the credit risk is lower than bond issues with similar yields. The investment allows the Army to continue to expand its community housing offering to those in need. During our due diligence, we were blown away by the quality of the build and the way in which the communities were managed and supported once complete.

Given the very strong share market returns mentioned above, it is hardly surprising that the fund with the largest allocation to share markets, the Focused Growth Fund, was the strongest KiwiSaver offering up 3.7%. This was followed closely by the Growth Fund with 3.3%, and the Conservative Fund coming in third place with a 0.8% return in November.

There were two Property and Infrastructure holdings that returned greater than 20% return in November: Mirvac Group and Meridian Energy.

Mirvac Group is a diversified property company listed on the Australian Stock exchange. It has exposure to the Office, Industrial, Retail and Residential sectors of the property market. We like the strong management team, which has positioned Mirvac well. For instance, they have avoided department store exposure in their retail property investments and have a high-quality portfolio of office assets with long average lease terms (6.5 years). Reductions in social distancing requirements in Victoria, improved sentiment to mid/high-density residential developments, and several recommendation upgrades by share brokers drove a 20.5% return in November.

Meridian was also up 21% in November. New news from the company was limited and so Meridian’s strong performance is best explained by indiscriminate buying from large offshore passive funds. While we are big fans of the company’s high-quality portfolio of renewable electricity generation, it makes little sense that the stock should be trading on a 2.5% dividend yield, particularly when there is still a risk the Tiwai Point Aluminium Smelter will close (New Zealand’s largest user of electricity). We have been switching out of Meridian and into Mercury, which has a slightly better yield, better growth prospects, and is likely to better weather a smelter exit. While the likelihood is certainly not large, we prefer Mercury’s North Island generation. Finally, Mercury has a lower proportion of earnings that are paid as dividends, which provides more confidence that they can at least maintain their dividend.

Two of the strongest performers from October gave up a little of their gains in November making them the weakest performing Property and Infrastructure holdings. Specifically, Kiwi Property was down -3.3% (after rising 16% in October) and Oceania Healthcare was down 3.7% (following an 18% gain last month). Neither stock had any news flow of significance.

The vaccine news in November drove a rotation back into unloved companies that have faced significant headwinds as a result of the pandemic. This rotation is best evidenced by the strong returns generated by our value exposures: Berkshire Hathaway, Novartis, Ping An, Siemens, and our global value manager Platinum. These holdings all generated double-digit returns in the month.

Alibaba was the worst-performing international equities investment, declining -13.6% in US dollars. A speech by Alibaba’s founder, Jack Ma, questioning financial market regulation in China looks to have catalysed a coordinated campaign to reduce his influence. The China banking and insurance regulator signalled plans to cut off bank financing for Ant Financial (of which Alibaba is a major shareholder) and its IPO was pulled a few days before listing. Further significant changes to the rules governing the fintech industry make another attempt at listing Ant Financial in 2021 unlikely. Alibaba faced its own regulatory headaches in November, with China’s antitrust watchdog looking to put in place regulations to open up the country’s internet sector to competition. If that was not enough, Alibaba was also hit by news the US Senate was likely to pass legislation forcing Chinese companies to get US audits or eventually face delisting from US exchanges. While the increase in regulatory pressure is undeniably bad news for Alibaba, in our view the market has overreacted to this negative news. Therefore, we took the opportunity to add to the position at what we believe to be attractive prices.

November was dominated by two significant news events. Results of the US election and early evidence from large-scale tests that three Covid-19 vaccines were safe and effective. Share markets put aside concerns about the inevitable Northern Hemisphere spike in COVID-19 cases. This allowed the MSCI to have its strongest month return since January 1975. However, for New Zealand investors a strong NZD acted as a headwind, dragging returns back to 6% in NZD.

The US election was tight, as expected, and so it took a few days after the polls closed on the evening of the 3rd November before it became clear that Biden would likely become the next president. Some would argue that it’s a little early to call the Senate, but it looks probable that the Republicans will retain control. If this is the case, then Biden’s ability to make meaningful policy changes will be limited by his capacity to find common ground with the Republicans.

The markets viewed this as a Goldilocks situation – stronger fiscal stimulus providing a much-needed boost to the economy. But not so strong that investors need to worry about it causing inflation which would force interest rates higher and see a rotation out of shares and into bonds. It will also likely mean that the Trump tax cuts are not rolled back, which added 10% earnings growth when they were introduced.

It is worth noting that the two Senate seats from Georgia are still up for grabs because no candidate achieved a simple majority of votes cast. Under the State’s laws they must now conduct a run-off election in early January. If the two seats go to the Democrats, then they will hold 50 seats of the 100 seats in the Senate. The vice president has the deciding vote, which will mean the Democrats have control of the Senate. While this would allow Biden to make changes more freely, given the slim majority he will struggle to get through any controversial legislation.

One of the Republican candidates held a 2% lead over the Democrat he was up against and so the central case is that the Democrats do not gain control. But the odds websites are suggesting that this is not a foregone conclusion they only give the Republicans a 70% probability of winning the US Senate.

Sharemarkets received an additional boost when Pfizer announced that the early results from its large-scale COVID-19 vaccine trial indicated that it was both safe and 90% effective. The really encouraging news is that early results suggest that its efficacy is significantly better than was expected for the first version.

One week later Moderna also confirmed that early results indicated that its vaccine was also safe and effective. This was important news because Pfizer only expects to produce circa 1 billion doses in 2021. The vaccine requires two doses and so this is enough to vaccinate 500 million people. Having two safe and effective vaccines dramatically increases the number of people that can be vaccinated.

The other advantage of Moderna’s vaccine is that it does not need to be stored and transported at -70C, which is clearly logistically challenging. Instead, it needs to be stored at -20C, which is achievable with normal freezers.

Later in the month, there were also very encouraging results from the AstraZeneca vaccine trial, but the results raised some eyebrows. They found that a lower dose had better effectiveness. Further testing was suggested to better understand why this was the case.

If the AstraZeneca vaccine is effective it will be able to be produced in large quantities which could see social distancing restrictions redundant before the end of the next calendar year. Without the AstraZeneca vaccine, progress will be significantly slower. There are roughly 7.8 billion people on the planet, and it seems that approximately one billion could be vaccinated in 2021 with the Pfizer and Moderna vaccines. The good news is that NZ has pre-ordered the Pfizer vaccine and so with any luck, we will receive 1.5m doses before next winter. This could be used to vaccinate the elderly, healthcare workers, and those with pre-existing medical conditions.

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