Welcome to the October edition of the Generate Member  Newsletter.

It was a busy month for the team at Generate as we prepared for the launch of our first non-KiwiSaver fund - the Focused Growth Trust. This new fund is based on our market leading KiwiSaver Focused Growth Fund. Click here for more details. 

We have also launched a new website that will accommodate both KiwiSaver and unit trusts www.generatewealth.co.nz.
Please note:

• Your member login details and password will not change.
• You can still access the website from www.generatekiwisaver.co.nz and all links will redirect.

If you have any questions please email us at info@generatewealth.co.nz or call us on 0800 855 322.

We were also out and about in September and had numerous meetings with companies in both New Zealand and Australia. These meetings confirmed some investment ideas and as a result two new stocks have been added to the funds.

Returns to 30 September 2019 (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 a month that generated plenty of talking points in markets, the Generate Growth Fund led the way with performance of +1.19%, followed closely by the Focused Growth Fund at 1.14%. The Conservative Fund performed well in volatile markets, returning +0.80%.

The performance of our Property and Infrastructure investments across Australasia was bolstered by our sizeable position in Infratil, which returned +8.1% for the month. There was little new news released by Infratil outside of Infratil and the co-owner of the recently acquired Vodafone reiterating plans to accelerate reducing costs within the business.

The standout performer over the month was an impressive +11.7% delivered by Arvida Group (ARV). The company owns, operates and develops retirement villages and care facilities for the elderly in New Zealand. ARV hosted an asset tour in September, taking investors to recently purchased assets in Tauranga and Queenstown. We attended this tour, which demonstrated the high-quality nature of the acquired assets, strong demographic catchment areas within which they sit, and the strength of the management’s growth strategy.

Not to be left behind in the retirement sector, our investment in Summerset Holdings (SUM) advanced +9.6% for the month. Summerset made its long-awaited, but well anticipated debut in the Australian retirement village sector through the acquisition of a parcel of land earmarked for future development. The acquired land is an 8-hectare site situated some 40kms South East of Melbourne, Victoria. Given Melbourne has a similar population to the whole of New Zealand this beach-head could prove valuable for SUM’s growth strategy.

Unfortunately, not everything went our way over the month as Z-Energy (ZEL) provided another profit downgrade to the market. This came just five weeks after holding an investor day in Auckland where investors were given no reason to believe a downgrade was coming. ZEL’s profit downgrade cited “unprecedented” levels of retail competition as the source of its problems which happened to coincide with the launch of their loyalty programme. Topping it off, refining margins came under pressure which resulted in lower earnings expectations at their part-owned Marsden Point Refinery. Having now produced a number of downgrades over the last two years, it will take time for management to win back the confidence of the market. In the meantime at least, ZEL continues to have the ability to pay an attractive gross dividend yield of greater than 10%.

Turning attention to international holdings, Siemens (SIE) produced a stand-out performance returning +8.2% over the month. As one European analyst succinctly commented; SIE has become “too cheap to ignore”, and it seemed his assessment was met with agreement by investors. Siemens has struggled to gain momentum this year as a high fixed cost base constrained profits and historical capital allocation decisions delivered sub-optimal returns. Investors reacted warmly to a decision from the company to divest its Gas & Power business which has been a drag on Group cash flows, while SIE’s price also benefitted from a rotation shift from momentum & growth stocks into perceived value stocks, which SIE very much is.

On the other side of the coin Alibaba Holdings (BABA) fell -4.6% last month. BABA continues to be the meat in the sandwich between China and the USA as the two superpowers’ trade squabble persists, and flares seemingly at random. BABA has been somewhat of a bellwether for China/US relations and while much of the month resembled calm, late in the piece the market became unsettled on reports that the Trump Administration was discussing the merits of restricting Chinese companies access to US capital markets. The White House has since denied this report, stating there is no such intention.

During September BABA held an Investor Day in Hangzhou, China. This two-day event was well received by the investment community with excitement generated by the role that BABA could play in China’s transformation into a digital economy. BABA is a multi-faceted business with highly capable business divisions exposed to the internet of things, artificial intelligence, big data, and of course has a leading e-commerce platform.

As has become customary in an era of elevated geopolitical tensions, intra-month share market moves can be significant, and September was no different. Notwithstanding a military-style drone attack on Saudi Arabian oil processing facilities, Boris Johnson shutting down the UK parliament in a press for Brexit and US tariff impacts on China, global markets still managed to rally over the month. Around the grounds, the DJ Euro Stoxx 50 index gained +4.3%, the S&P 500 index +1.9%, and Australia’s ASX200 +1.8%. New Zealand wasn’t left out of the action as the S&P/NZX 50G added +1.6%.

Bond yields rose sharply in the first half of the month as a bond sell off took hold, but ultimately this wasn’t sustained. US 10yr yields ended the month 18 basis points higher at 1.68% after having reached as high as 1.90% earlier. This move was interesting in the context of a major global investment bank having lowered their US 10yr yield forecast to just 1% in 2019 and 1.25% in 2020. September witnessed a strong reversal of the global momentum trade, with high momentum stocks underperforming “value” stocks. Coupled with the aforementioned move in bond yields, utility stocks - which are often considered to be “bond proxies” - underperformed in a reversal to the experience one month prior in August.

As mentioned above, there was plenty to keep the market spectator busy over September. US markets rallied strongly at the beginning of the month as President Trump delayed the imposition of tariffs on $250bn of China imports by two weeks, a small but well received action by the President. With the S&P500 happily trading up +3% heading into the middle of the month, the world woke to the news that 5% of the global oil supply had been taken offline via drone strikes that targeted key Saudi Arabian oil processing facilities. In the ensuing days, the price of Brent Oil for November delivery jumped more than +15%. This weighed significantly on market sentiment for two reasons; 1) a higher oil price translates into higher retail petrol prices, which in turn places pressure on consumer discretionary spending, and 2) it was speculated that Iran was behind the attacks on the Saudis which dramatically increased the already high political tensions in the region. A swift global response saw the release of oil reserves into the market, and measured comments politically negated a potentially more severe outcome. Subsequently oil prices returned to a lower level.

The US market generally weakened into the second half of the month, and more steeply into month end. Rumours that Chinese companies may face a restriction on access to US capital markets swirled and were later rebuffed, alongside the persistent Democratic party’s efforts to formalise an impeachment of President Trump. In the latest impeachment episode, the Democrat’s allege President Trump sought external influence in US elections by way of bribing the Ukrainian president. It is worth highlighting that an impeachment of the President requires a two-thirds vote in favour from the US Senate, which is currently controlled by a Republican majority.

Focus now turns back to the Federal Reserve, who after cutting the Fed Funds Rate by a further 0.25% in September, also highlighted that balance sheet expansion via the purchase of US Treasuries is back on the cards for later this year. This messaging was music to the ears of global markets as Fed balance sheet expansion has a close historical relationship with equity market rallies.

In the UK, the collapse of Thomas Cook under a pile of unserviceable debt spooked markets issuing a timely reminder of the perils of high leverage. Meanwhile the clock continues to count down to the current Brexit deadline. The UK and their steadfast Brexiteer leader’s actions will be closely watched. As it stands, if the UK and EU have not reached a deal by October 19 Boris Johnson will be legally obliged to request a delay to the deadline date of October 31. This contrasts with Boris’s hard-line stance to ensure an exit on the date. Nevertheless, and despite all the political noise, the UK’s FTSE 100 index was up strongly for the month returning 3.2%.

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:

"Predicting rain doesn't count, building the ark does."

Buffett doesn’t give any points to pundits who correctly predict market down-turns as these are inevitable. What matters to him is having a portfolio that will not only withstand market panics but benefit from them in the long run. He does this by having ample cash waiting on the side-lines - ready to be put to use on a “rainy day.”

Knowledge Builder - Never invest money you cannot afford to lose.

One of the golden rules of investing – if not the golden rule – is “never invest money you cannot afford to lose.”

It is a natural human tendency to want to overreach, by putting more money in than one can afford to lose, and go for the big ‘pay day’. This trait tends to be magnified if one’s financial situation deteriorates because of the hope that hitting the jackpot will make all the problems go away.

The first goal in investing should always be to avoid major losses. Give potential investments the ‘sniff’ test – if it seems too good to be true then it probably is! Also be patient, and seek the advice of qualified, well regarded investment professionals. Finally, ensure the costs of making the investment are reasonable. This recipe may not sound overly exciting, but it is a tried and true formula.

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

Centuria Capital

Centuria Capital is a specialist real estate investment manager with A$6 billion of assets under management.

Centuria was established over twenty years ago and originally focused on the management of unlisted property funds. Five years ago, Centuria listed a commercial office real estate trust (Centuria Metro REIT) and then in 2017 it listed an industrial real estate trust (Centuria Industrial). These listed property funds have been a significant growth driver for Centuria over the last 5 years and now make up almost half of Centuria’s assets under management.

The listed trusts continue to increase their assets under management and the addition of a new specialist healthcare manager (Centuria Heathley) will allow Centuria to continue to grow its assets under management, which should drive earnings growth.

Centuria holds significant cornerstone positions in the two listed trusts, which aligns Centuria’s interests with the unit holders and also acts as a blocking stake protecting AUM from being a takeover target. More specifically, Centuria owns 21% of the office trust and 22% of the industrial trust. These stable high yielding investments also make up a little under half of Centuria’s current enterprise value.

Consequently, Centuria provides an attractive combination of income and growth. More specifically, the company is forecast to pay a dividend yield of 4.6% at current prices and has grown its assets under management by 50%+ over the last three years.

Next month:

Mirvac Group

How likely would you be to recommend Generate KiwiSaver to others?

1​        2          3         4         5         6         7         8         9          10  

(Not At All Likely)                                               (Extremely Likely)