Unit Prices as at 31 March 2021 ($)
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Focused Growth Trust:
Funds under Management as at 31 March 2021:
In other news
Jeff Bezos' last shareholder newsletter as CEO of Amazon
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The Generate Member Newsletter has been prepared by Generate Investment Management Limited. It is based on information believed to be accurate and reliable although no guarantee can be given that this is the case. Clients, directors or employees of Generate Investment Management Limited may have an interest or holding in companies and securities mentioned in the newsletter. No part of the newsletter is intended as financial advice. To see our Financial Advice Disclosure Statement, please see Generate FAP Disclosure Statement . For more information about the Generate KiwiSaver Scheme please refer to the Generate KiwiSaver Scheme Product Disclosure Statement. For more information about the Generate Focused Growth Trust please refer to the Generate Unit Trust Scheme Product Disclosure Statement or the fund updates. The issuer of both schemes is Generate Investment Management Limited and the Product Disclosure Statements are available at generatewealth.co.nz
Welcome to the April edition of the Generate Member Newsletter.
As we started writing the monthly newsletter Jeff Bezos' last shareholder newsletter as CEO of Amazon† landed in our inboxes. Bezos is without question one of the most extraordinary entrepreneurs of all time, so when he talks, we listen. The key message this year is that companies and people should never let themselves be 'normalised'. Being distinctive is hard work, but it is worth it.
We have been doing some thinking about what makes Generate different. So this was a timely missive from Bezos. When we asked our leadership team what they thought made Generate distinctive – one of the key things that came up time again was that "we really care". Generate cares about the returns our members get, we care about the impact the businesses we invest in make on the world, and we care about the standard of service we deliver. It would be much easier to care less about these things but that has never been Generate's approach. We'll keep taking the harder road because it is what our members, staff and planet deserve!
Turning to markets and the month of March delivered strong returns for our members. More on this below.
†All of Generate’s funds are invested in Amazon shares
Performance of the Generate Funds
Returns to 31 March 2021 (after fees* and before tax).
*except the $3 per member per month administration expense that is charged to KiwiSaver members.
March was a strong month for the funds with the Focused Growth, Growth and Conservative funds returning 2.93%, 2.24% and 0.79% respectively. Our (non-KiwiSaver) Focused Growth Trust – which closely mirrors the Focused Growth Fund - returned 3.02%.
The strongest performing Australasian investment was Tilt Renewables with a stellar gain of 22.9%. This stock has nearly doubled since December when Infratil announced it was considering offloading its majority stake in Tilt. In mid-March it was announced that an offer had been made by an Australian consortium for Tilt's Australian assets and by Mercury Energy for the company's New Zealand assets. The consortium offered a price of $7.80 to Tilt shareholders and with Infratil supporting the offer the stock raced higher. But the remarkable rally did not stop there, with a competing offer to buy Tilt for $8 by a Canadian pension fund lobbed in to the Tilt board room. Not to be out-done Mercury and the Australian Consortium then improved their offer to $8.10. In return for this improved offer Tilt has said they will not entertain any further bids.
The Australasian holding with the largest share price decline during the month was My Food Bag (MFB) with a fall of – 13.5%. MFB made its debut on the NZX in early March and unfortunately to date it has been a disappointing performance. We put this down to 3 main reasons. First – from the time the shares priced at $1.85 in February to its first day of trading on the NZX, sentiment soured towards food delivery companies due to the rapid vaccination roll-out progress in countries like the US and UK. This was negative for food delivery companies as they have enjoyed large surges in demand during lockdowns. Second – the NZ50G index was weak over this time period. Third – MFB pays an attractive dividend yield and when yields rise – like they did between the pricing date and Initial Public Offering date – dividend yield stocks become less relatively attractive. When the shares fell into the low $1.50's we decided to top up our investment as at this level we think the valuation is attractive.
The strongest performing international equities holding was Facebook with a 14.3% gain. Investors have been concerned about the impact on Facebook of the upcoming iOS14 privacy changes, which will affect apps that collect user data. However, mid-way through the month Facebook CEO Mark Zuckerberg said that he feels confident that his company will handle the changes. He added that it is possible that Facebook may even be in a stronger position if Apple's changes encourage businesses to conduct more commerce on Facebook's platforms, because it may be harder for these companies to use their data from platforms outside of Facebook in order to find customers. Also, investors appear enthused about Facebook's ecommerce potential which the company is only just beginning to tap.
The weakest performing international stock was Tencent. Chinese big tech companies have been under the microscope from the regulators in recent months. As we wrote last month Alibaba has been under investigation for alleged monopolistic behaviour in China. That case has now settled with Alibaba ordered to pay a record USD2.8 billion fine. That is obviously no chump change but to put it in perspective it represents only 4% of Alibaba's 2019 domestic sales. The fear is that now this investigation has concluded the regulatory lens may turn to Tencent. Our take is that Tencent is less likely to face a fine as punitive as Alibaba's – if any. What seems more likely is that it faces new rules and regulations around data privacy.
Share markets were largely higher in March with the MSCI World Index gaining 3.4% (in local currencies). Abundant monetary and fiscal accommodation, coupled with vaccine rollout progress provided a strong tailwind.
In the US, equities made robust gains with the S&P500 up 4.4% over the month. Economic data signalled that the recovery in the US is gaining momentum. For example, the unemployment rate fell to 6% as employers felt confident enough to take on more staff. Assuming the vaccination rollout continues at pace we would expect to see these positive trends continue throughout 2021.
There was good news coming out of Washington with the USD1.9 trillion relief package bill finally being signed into law by President Biden. Not satisfied with this, Biden promptly unveiled a USD2 trillion plan aimed at upgrading the nation's ageing infrastructure and hastening the shift to a new, clean energy economy.
In Europe, share markets made strong gains in the face of rising COVID-19 infection rates and the announcement of fresh lockdowns. The Bloomberg European 500 was up 6.2%. Economic data across the region showed positive signs. For example, a key leading economic indicator, flipped from a negative reading the prior month to a positive one in March suggesting the economy is likely to expand in coming months.
A slower than anticipated vaccine roll-out coupled with a surge in new COVID-19 cases has forced several European countries to extend or introduce new lockdowns. In Italy, all regions were put back in the 'red zone' – the highest tier of restrictions. Whilst in France, President Macron introduced a one-month nationwide lock-down.
Chinese share markets underperformed in the month of March with the Shanghai SE Composite down 1.9%. The aforementioned regulatory pressures along with a winding down of credit growth in the Chinese economy dampened sentiment.
Australian equities had a solid month with the ASX 200 index gaining 2.7%. The banking sector continued its strong recovery, which began in earnest in November last year, when the positive vaccine news was first announced. It was also pleasing to see the Australian Real Estate Investment Trust (A-REIT) sector rally strongly as Generate's funds currently hold three A-REIT investments.
Back home and the NZ50G index also gained 2.7%. For the second month in a row, cyclical stocks were the strongest performers as investors were enthused about the prospects for the global economy. As in February Defensive Yield stocks performed the worst as more elevated yields made yield stocks less relatively attractive.
Top Holdings as of 31 March 2021
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Knowledge Builder - The trade-off between risk and return
One of the fundamental principles of finance is that investors prefer certainty to uncertainty. Consequently, they require additional compensation, in the form of higher returns, to invest in an opportunity with greater risk.
If an investment has a very predictable, stable return (for example, a term deposit) then it is also likely to produce modest returns. In contrast, investments whose returns are less predictable (for example share market investments) should typically generate higher levels of returns over long periods of time.
The key lesson is that contrary to popular opinion: risk is not necessarily a bad thing - if the degree of risk is well understood and suits the investor's requirements.
Willingness and ability are two key factors to consider when determining the level of risk an investor should accept:
The goal is to find an appropriate balance - one that generates a satisfactory return and still allows you to sleep at night!