Generate Newsletters

Welcome to the September edition of the Generate Member Newsletter.

 August was another great month for Generate. First, the funds delivered strong returns for members. More on this below. Second, Generate was named as a finalist in the Sustainable Business Awards for “Best Collaboration”. The nomination is for our involvement in the Aotearoa Pledge which aims to increase investment into community housing projects in order to tackle NZ’s chronic housing shortage.

On a more sombre note we would like to acknowledge the passing of Sir Michael Cullen. Although here at Generate we are staunchly politically neutral, we admire the foresight Sir Michael showed in being the architect behind both KiwiSaver and the New Zealand Super Fund. Judith Collins had this to say about him:

“He will be remembered as one of our most effective ministers of finance, with a long-term view of what needed to be done to enhance New Zealand’s economic and social prosperity and stability. His passion was to make New Zealand a better place for everyone.”

We think he achieved his goal. R.I.P. Sir Michael.

Performance of the Generate Funds

Returns to 31 August 2021 (after fees* and before tax).

* Except the $3 per member per month administration expense that is charged to KiwiSaver members.
** 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 funds delivered solid performance during August, with the Conservative fund returning +0.78%, the Growth Fund +2.36%, while the Focused Growth Fund and Trust returned +2.24% and +2.34% respectively.

In a strong month for our Property & Infrastructure portfolio, Z Energy (ZEL) was the standout performer, returning 19.0% for the month, after Australian oil company Ampol announced a non-binding indicative proposal to buy the business for $3.78 per share. This was 28% above the $2.95 price at the end of July. Z Energy’s board gave Ampol a four-week exclusivity period to carry out detailed due diligence, after which, presuming they do not discover any significant issues, Ampol will then be able to make a formal takeover offer. For the offer to be successful it will have to pass three hurdles, the most significant of which is Commerce Commission approval. Ampol currently owns Gull and has indicated that, if it proceeds with the offer for Z Energy, it will sell Gull, leading to a few in the market to question who the most likely acquirer of Gull is. Ampol will also need Overseas Investment Office approval and shareholder approval, both of which seem likely.

Two more Property & Infrastructure holdings also delivered strong performance in August after reporting excellent financial results. Real estate funds manager Centuria Capital rose 17.5% for the month, and aged care operator Summerset gained 17.1%. Summerset released a strong set of half-year 2021 financial results and upgraded development guidance. The modest upgrade to development guidance reassured the market that despite Covid-19 headwinds the company would be able to construct a record number of units. The upgrade to development guidance also forced the market to upgrade forecasts for future financial performance.

Our weakest performer within Australasian equities was A2 milk, which slipped 3.0% during the month after publishing earnings in late August that were at the bottom end of the market’s expectations. While the company met its own guidance, this guidance had been downgraded four times in the past year and A2’s results still came in at the bottom end of this lowered guidance. In previous newsletters, we have detailed the woes of this modest holding and highlighted a few possible signs of recovery. This result confirmed the turnaround would take time and is far from certain, but the new management team are making improvements.

Netflix (NFLX), which we added to our portfolio during Q2, was the strongest performer within our international equities’ portfolio in August, rising 10.0% during the month. There was no distinct catalyst for this move, but we believe it is a sign that the market is recognizing the potential for this business to continue adding subscribers and growing profits even after the world emerges from Covid lockdowns.

Last month’s strongest performers, Alphabet (GOOGL) and Horizon Therapeutics (HZNP) also continued to perform well in August, rising 7.4% and 8.1% respectively for the month.

Unfortunately, last month’s weak performance of the Chinese investments in our portfolio has also continued. We own three Chinese companies in our international equities’ portfolio. e-commerce and cloud computing giant Alibaba’s stock price fell 14.4% for the month and Ping An Insurance’s stock fell 11.4%, while gaming and social media company Tencent’s stock was stable, ending the month up 0.5%. While these investments have performed poorly in recent months, we believe performance will improve soon, with all three companies offering compelling valuations which are at or near the lowest they’ve been in 10 years.

Most global stock markets delivered good performance in August, led by the NZX50’s 5.0% monthly return. This was a surprise given Covid’s re-appearance and ensuing Level 4 lockdown in our country. The US benchmark S&P 500 rose 3.0% for the month, Japan’s TOPIX index rose 3.1% and the only major equity markets to fall in the month were Hong Kong’s Hang Seng Index and Hang Seng China Enterprises Index, that both fell less than 1.0%.

One reason for these good returns was the distinct lack of news out of the US’ Federal Reserve. This was in contrast to the market’s expectations at the start of the month that the world’s most important central bank would announce a plan to reduce (“taper”) monetary policy support in late August during their annual symposium from Jackson Hole. US economic data typically came in weaker than expected during August, and as we approached the August 26-28 dates of the meeting the language of the Fed Governors regarding their appetite for withdrawing monetary policy support moderated, causing the US markets to move higher. Most global markets then followed the US’ lead.

In New Zealand, the Reserve Bank surprised markets by leaving New Zealand’s official cash rate unchanged, when they announced their decision on August 18th. It appears highly likely, however, that this was a (justifiably) cautious reaction to the previous day’s news that the Covid Delta variant had been discovered to be circulating within the Auckland community and that the country was going into level 4 lockdown that day. Interest rate markets now expect a total of 50bps of hikes by the end of the year, with the hikes beginning in October.

Top Holdings as of 31 August 2021

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Knowledge Builder - The Benefits of a Long-term Mindset

In Q2 we added investments in Amazon and Netflix to our international holdings, and in studying their historical performance we uncovered an excellent lesson in the power of long-term investing.

Both stocks have excellent long-term track records. Over the last 15 years, Amazon stock has grown at compounded growth rate of 37% p.a., and Netflix’s has grown even faster, at 42% p.a, with both far outstripping that of the S&P 500 index, which grew 8.6% p.a. over the time since August 31st, 2006.

The insight here comes in their performance over shorter, 12 month time periods. It’s natural to look back at this strong performance and assume that it was fairly consistent, with Amazon and Netflix beating the market every year, or almost every year. But that’s not what happened. If we compare performance from August to August each year, Amazon and Netflix each only beat the market 2/3rds of the time – that is, in 5 of the 15 periods, they under-performed the market.

Our lesson here, and in many other instances, is that stock markets can be volatile, and that short-term performance isn’t always a good indicator of long-term potential. Even the best investments will be weaker than the market for months at a time, from time to time, and we shouldn’t be overly concerned so long as the performance of the underlying business remains robust.

This lesson also reminds us of one of our favourite quotes from Charlie Munger, Warren Buffett’s 97-year old sidekick:

“The big money is not in the buying and the selling, but in the waiting”.