The November Edition of the Generate Member Newsletter.

Welcome to the November edition of the Generate Member Newsletter. The recently released Morningstar performance tables confirmed that our KiwiSaver funds have continued their very strong run relative to peers up to 30 September 2019. Our Focused Growth Fund was the top-performing multi-sector aggressive fund out of eight funds over one year and second out of six funds over five years. The Growth Fund was the second-best performing multi-sector growth fund out of 29 funds over one year and third out of 22 funds over five years. Finally, the Conservative Fund was the top-performing multi-sector moderate fund over one year out of 20 funds and second out of 15 funds over five years. This is the 4th quarter in a row whereby all 3 of our funds have “podiumed” in both the 1 year and 5 year returns
*For further detail click here.

The table below shows that the Funds have enjoyed an exceptional year in absolute terms. Focused Growth is up almost 17% over the last 12 months, Growth is up more than 16% and the Conservative fund was up 11%.

In other news we have recently made our first investments for the Focused Growth Trust – the non-KiwiSaver sister fund of the Focused Growth Fund. If you would like to know more about this fund please email us at or call us on 0800 855 322

Performance of Our Funds

Returns to 31 October 2019 (after fees* and before tax)

  1 Year  3 Year (p.a.) 5 Year (p.a.) Since Inception**(p.a.)
Focused Growth      16.85%  14.50% 11.29% 10.70%
Growth 16.36% 12.75% 10.86% 10.04%
Conservative 10.98% 6.97% 7.32% 6.44%

*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.





The pattern of the last few months reversed with global equities being the star performers for the funds during October (rather than property and infrastructure). The strengthening global equities in October (MSCI World +1.9%) was driven by optimism over a China-US Trade deal and the increased likelihood of an orderly Brexit. The property and infrastructure investments dragged down returns driven by a back-up in interest rates and the announcement that Rio Tinto was undertaking a review of its aluminium smelter (NZSE50 Index -1.3%).

The Focused Growth Fund was up (+0.56%), boosted by its larger allocation to global equities. The Growth Fund was down slightly (-0.09%) as a result of its larger allocation to property and infrastructure and the Conservative Fund was down (-0.18%) reflecting its modest allocation to global equities.

The strongest global equity investment in October was Facebook (+7.6%). Facebook reported another set of strong quarterly results during the month. More specifically, its third-quarter revenues were comfortably ahead of the average analysts’ expectation ($17.65b vs $17.37b) reflecting stronger than expected advertising revenue growth. At the bottom line this outperformance was compounded by a significantly stronger than expected operating margin (+41% vs +37%). These results shifted the market’s attention back to company fundamentals and away from the political and regulatory risks faced by the company. It is worth remembering that Facebook is currently trading on a forward price-earnings multiple of 21x, which is less than the NZ market average of 24x, and is at odds with Facebook’s significantly stronger growth track.

Jupiter European Opportunities Trust continued its recent pattern of large inter-month moves, this time on the downside (-8.2%). Almost half of the Trust’s drawdown can be explained by a 23% decline in the Trust’s largest investment, Wirecard. The Financial Times continued their long running accusatory stance of the company with fresh allegations. This time the paper produced emails and data that they argued supported their allegations of fraud. The company strenuously denied these allegations and this time took the additional step of bringing in KPMG to carry out an independent investigation. The other key performance detractor for the Trust was ironically a sharp rally in the value of the British pound as markets factored in a significantly lower risk of a disorderly Brexit. We estimate that this reduced returns by -2.7%.

In a reversal of the year to date, Metlifecare was a standout performer in October amongst the property and infrastructure investments. Metlifecare returned +8.1% for the month, almost 10% above the local market index (NZSE 50 Index). This strong share price performance was catalysed by the announcement of a $30 million stock buyback at the company’s AGM. Arguably, part of this strong performance can also be put down to Metlifecare playing catch up to its peers. Summerset was the strongest performing property and infrastructure investment last month on the back of solid property market statistics.
Contact Energy was the weakest performing property and infrastructure investment in October. Rio Tinto announced a strategic review of the Tiwai Point Smelter during the month. This announcement significantly increased the probability that Rio would close the Smelter, which in turn would depress electricity prices in the short-to-medium term, particularly in the South Island where a significant proportion of Contact Energy’s generation is located. This development is discussed at length in the Market Update section of the newsletter. Contact Energy came under stronger selling pressure than its peers because a number of hedge funds had brought its shares ahead of a possible MSCI index inclusion announcement in early November. As Contact’s share price sagged on the news that Rio was conducting a review of Tiwai the likelihood that Contact would be added to this influential index reduced, which catalysed further selling from these funds.

In this month’s market update, we will focus on a developing issue closer to home and skip another update on the on-off US-China trade deal and the Brexit shambles. More specifically, we’ll discuss Rio’s strategic review of the Tiwai Point Aluminium Smelter. In our view the outcome of this review could have wide-ranging implications for NZ.

The outcome of this review is not only important for the 1,000 people employed by the Smelter in the deep south, but also the NZ electricity industry. The Smelter consumes a staggering 13% of NZ’s electricity production and so closure would have significant implications for this market. The supply-demand balance would tilt towards excess supply, which would likely see prices decline until the generators reduce production and/or demand increased to absorb the excess supply.

Rio has a track record for hard-nosed negotiations, using the threat of closure as leverage. In 2013 it secured significant reductions in the price it paid for electricity and a $30 million hand out from the then National Government. However, it seems that this time may be different. This is the first time Rio has opted to carry out a strategic review. In the past it only used this as a threat.

This suggests that there is a non-trivial probability of a significant change. Specifically, a change of ownership or closure. While Rio does not provide accurate financials for the Smelter it looks like it is at worst at cashflow breakeven. Add to that the significant cost of remediating the site, should they choose to close the Smelter, and closure does seem unlikely.

Notwithstanding this, the impact of the Smelter's closure is large enough to make it worth reviewing. If Rio were to close the Smelter at the end of its 12 month notice period there would not be sufficient transmission capacity to export all of this surplus electricity up to the North Island. Consequently, we would expect the impact would initially be concentrated in the South Island. More specifically, South Island electricity prices would tumble, and the large hydro generators would have to spill water. The two large South Island generators, Contact Energy and Meridian, would bear a disproportionate amount of the headwind. North Island spot electricity prices would likely also be lower, which would probably see some early closures of inefficient thermal (think gas and/or coal) plants.

It would take between three and eight years for Transpower to increase transmission capacity of the network and cost upwards of $600 million, and so the South Island generators are likely to have to spill water for at least a portion of that time. This seems almost indefensible in a world where global warming is becoming a key concern.

The other option is to find other uses of the electricity. At this early stage, one leading option is to bring forward the electrification of dairy processing plants. There is a strong argument that this is one of the key changes necessary for NZ to meet its Paris commitments. More specifically, to reduce our carbon emissions by 30% by 2030 on a 2005 baseline.

Again, this is not an overnight solution. It seems unlikely that an alternative use for all the electricity currently consumed by the Smelter could be developed in 12 months, which suggests that the electricity generators have strong incentives to negotiate a staged exit (i.e. a lower price is better than a zero price for the electricity in question).

On balance, our analysis indicates that the Smelter will not close. If Rio is indeed focused on only owning the world’s lowest-cost smelters another owner will be found that is more pragmatic. If Rio closes the Smelter, we would expect a period of lower electricity prices, which will be beneficial for all energy users at the expense of the gentailers. Longer-term the market equilibrium will be restored through a combination of a reduction in supply and demand growth.

Warren Buffett wisdoms

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

"An investor should act as though he had a lifetime decision card with just twenty punches on it.”

Here Buffett stresses the importance of new investment decisions. If you could only invest in 20 companies over your lifetime you’d certainly do the work to make sure each investment really does stack up. And if it does, once you have made the investment, be prepared to wait it out. Sometimes it can take years for the market to value an asset appropriately.

No-one, not even Buffett, gets it right all the time. But if you research the opportunity thoroughly and are a long-term holder of the stock your chances of getting it wrong are significantly reduced.

Investing 101

Knowledge Builder – Understanding Alpha and Beta

Fund returns can be split into two components. The first two letters of the Greek alphabet: Alpha and Beta.

Alpha is the value added (or detracted) by the manager less fees. Or put another way it is the incremental return created through active management versus a relevant benchmark after the deduction of fund fees.

Beta analyses the volatility of a portfolio in relation to a relevant benchmark, to assist investors in assessing how much risk they are prepared to take on. A high Beta portfolio will typically outperform its benchmark when markets are going up and will underperform when markets weaken.

Top Holdings as of 31 October 2019

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

Conservative Fund Growth Fund Focused Growth Fund
International Equities
Berkshire Hathaway Berkshire Hathaway Berkshire Hathaway
Alphabet Magellan Global Fund Magellan Global Fund
Microsoft T Rowe Price Global Equity Fund T Rowe Price Global Equity Fund
Ping An Insurance Platinum International Fund Platinum International Fund
Facebook Alphabet Alphabet
Property and Infrastructure
Infratil Infratil Infratil
Contact Energy Contact Energy Contact Energy
Mercury  NZ Mercury NZ Mercury  NZ
Arvida Group Arvida Group Arvida Group
Summerset Summerset Metlifecare
Fixed Income and Cash
Term Deposits Cash & Cash Equivalents Cash & Cash Equivalents
Cash & Cash Equivalents Term Deposits Infratil Bonds
Argosy Green Bonds Argosy Green Bonds Term Deposits
Vector Bonds Vector Bonds Z Energy Bonds
Trustpower Bonds Trustpower Bonds Metlifecare Bonds


Stock Spotlight

Mirvac Group

Mirvac Group (MGR) is a large cap diversified Australian A-REIT operating across the office, retail, industrial and development segments. MGR’s properties are predominantly located in New South Wales and Victoria.

Although MGR has retail focused assets and developments, they have no exposure to department stores such as Myers & David Jones, nor discount department stores.  MGR sold their exposure to regional and sub-regional retail some years before this category came under heavy valuation pressures, demonstrating MGR’s active portfolio management approach. MGR’s retail exposure is well located with respect to residential catchments and has a focus on service-based offerings such as food, beverage and “everyday services”.

In recent years, MGR has added significant value through actively investing capital in development projects principally across the office and residential sectors. In MGR’s most recent annual report the company had approximately $11.5bn of capital invested in rental producing assets. This provides a stable cash flow stream, which in our view underpins the ability for MGR to maintain a growing dividend profile.

Next month:

A2 Milk

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