The August Edition of the Generate Member Newsletter.

Welcome to the August edition of the Generate Member Newsletter.

The newsletter was written ahead of the Prime Minister’s announcement last night that Auckland and the rest of New Zealand are to head into Level 3 and Level 2 lockdowns as of midday today. To date financial markets have reacted calmly to the news with the local share market and NZD softening slightly at the time of writing. We will update members with our thoughts regarding this move in our next newsletter. Also keep an eye on our blog on our website homepage where we publish timely investment market updates.

In the context of events we have witnessed this year, July was a relatively calm month. That said, it still produced plenty of talking points which we will share with you below.

In the United States we had the June quarter earnings season showed how companies are operating in the “new normal”, and highlighted the impact on profitability. Geopolitical tensions continued to bubble away with many nations including New Zealand taking exception to China increasing its influence upon Hong Kong and eroding the current level of democracy. Across the ditch Victoria grappled with another outbreak of coronavirus, while in New Zealand, the National party had its third leader in as many months.

Also in the month, Generate achieved a milestone by crossing $2 billion of funds under management. We work tirelessly to deliver you high performance and responsible investments and thank you for putting your trust in us.

Performance of the Generate KiwiSaver Scheme Funds

Returns to 31 July 2020 (after fees** and before tax)

  1 Year  3 Year (p.a.) 5 Year (p.a.) Since Inception***(p.a.)
Focused Growth      5.39%  10.38% 8.01% 9.99%
Growth 3.96% 9.50% 7.75% 9.19%
Conservative 4.35% 6.71% 5.92% 6.09%

**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.





Generate’s three KiwiSaver funds and unit trust fund delivered strong returns over the month of July. The Generate Growth and Conservative Funds returned +3.04% and 1.73% respectively, while the Focused Growth Fund and Focused Growth unit trust returned +3.34% and 3.46% respectively. This was against the backdrop of the S&P/NZ50G advancing +2.4% and S&P 500 Index returning a very strong +5.4%.

Turning to key contributors to the performance, and starting with local equities, Spark was a standout performer returning +8.1%. While this was not the largest absolute return over the month, the size of the position across the funds meant that it was one of the largest contributors to the fund’s positive performance. With a robust balance sheet and defensive operating model in a rational and  competitive market, we believe the current dividend yield of 5% is sustainable and attractive.

Over the month, the retirement village sector was very strong as investors gained comfort in the current strength of the housing market, and New Zealand’s strong record to date of keeping coronavirus cases isolated to the border. While Summerset was the standout in terms of share price appreciation (+22.7%), we were also very pleased with our largest holding in the sector, Arvida, which climbed +10.3%. Arvida released a sales update for the first financial quarter of the year which showed encouraging sales results since May against the significant disruptions that coronavirus posed. Arvida noted that demand for their retirement villages had remained strong and enquiry levels had been steadily increasing. A contributing factor to this is potential residents becoming more aware of the health and safety benefits that a well-run facility can provide. Metlifecare’s share price continued to appreciate (+15%) towards the $6 per share takeover price offered by EQT as discussed in last month’s newsletter. Meanwhile, Oceania Care was not far off the pace, returning +13.6%.

Conversely to the retirement stocks, the electricity sector was shocked during the month as Rio Tinto announced their long-held threat of closing their Tiwai Point aluminium smelter, and in turn terminating their large electricity contract with Meridian Energy. We will cover this issue in more detail below, but at a high-level Contact Energy bore the brunt of this bad news which sent the share price tumbling close to -20% at its lows, before recovering over the latter stages of the month to finish down -6.7%. Somewhat curiously, the market has taken a notably more sanguine view of the potential valuation impact to Contact’s peers with Meridian, arguably the most impacted from a cash flow perspective, finishing the month in positive territory +1%, while Mercury finished down -0.6%.

Turning now to International Equities, and there are plenty of worthy mentions. We start with Alibaba which returned a roaring +16.4%. The company announced an intention to list Ant Financial, an affiliate FinTech company with a valuation upwards of US$150bn. This was received well by shareholders as Alibaba stands poised to earn a material return on its investment in the company. This aside, the stock was buoyed by broader positive sentiment expressed in the Shanghai SE Composite index which surged +12% in July. Alibaba continues to be well placed to benefit from being the largest e-commerce platform in China, while having secondary divisions in areas such as cloud-computing which are experiencing strong degrees of growth.

Facebook reported its quarterly results late in the month which were a resounding beat versus market expectations. Notwithstanding the impact of coronavirus on small businesses and an advertising boycott from some of Facebook’s larger customers, the company still managed to deliver revenues of US$18.3bn. This was 11% greater than the corresponding period last year and in the context of a pandemic was a great result. The result highlighted that with a customer base exceeding 9 million advertisers, Facebook is not heavily reliant on a small group of large advertisers as some in the market feared. Further, it highlights that Facebook is continuing to take market share from more traditional advertising marketplaces such as print and billboards.

Another notable mention was Tencent, which backed up its 21.5% gain in June with 7.5% in July after catching a similar sentiment wave to the Shanghai Composite as mentioned for Alibaba.

The two key laggards from international equities are both exposures to the healthcare sector. There wasn’t a lot of new news delivered during the month, however comments from the White House late in the month that President Trump intended to sign executive orders to reign in drug pricing spooked investors. At this stage we are unclear of the likely impacts of the proposed executive orders and await further clarification. Our investments in Worldwide Healthcare Trust and Novartis declined -6.4% and -5.9% respectively.

In a month that saw rising US coronavirus cases reported and increased geopolitical tension with China, US equities continued their rally, buoyed by increasing optimism around vaccine outcomes and an ongoing expectation that the Fed will “do whatever it takes”.  Additionally, it could be argued that the US reporting season was more sanguine than expected, especially in the tech sector.

Quarterly reporting by some of the largest companies contributed to gains after Amazon, Facebook, Alphabet and Apple all recorded significant beats compared to analyst expectations. Unsurprisingly, companies that reported disappointing results were those with more direct exposure to the consumer economy including Boeing, McDonalds, and Harley Davidson.

The Shanghai SE Composite was the strongest bourse gaining +11.9%, while the S&P 500 returned +5.6%. New Zealand’s S&P/NZ50G, while off the pace relative to global indices, was still a solid performer at +2.4%.  However, the S&P/ASX 200 index lagged at +0.6% after being tempered by a strong surge in Victorian coronavirus case numbers that threaten to slow the nation’s economic recovery.

In vaccine news, the FDA provided Pfizer and BioNtech a “fast track” for their respective vaccine campaigns. Early in the month Pfizer reported that its vaccine trial had been successful in producing antibodies in trial patients. Whilst in the therapeutics space, Gilead Sciences, who have been in the headlines with their treatment drug Remdesivir, reported new data suggesting the drug reduced mortality risk by up to 62%. These two developments in part helped allay investor concerns about the ongoing rapid increase in daily new cases.

The US Federal Reserve maintained their stimulatory stance with commentary coming late in the month from Jerome Powell that on top of the more than US$6 trillion liquidity already in place, they remain committed to stimulus for as long as it takes to provide relief and stability. Meanwhile the Republicans and Democrats negotiated over an extension to the $600 per week enhanced unemployment benefit which was set to expire at the end of July. The Democrats are currently arguing for a full extension of the relief costing upwards of US$3 trillion, while the Republicans are arguing for a reduced package of $200 per week reducing the stimulus injection to US$1 trillion. Not to be left out, the European Union came to the stimulus party unveiling a €750 billion programme targeted at rescuing economies within the Eurozone.

In our local market, a key talking point was the news delivered by Rio Tinto that after completing a strategic review of their New Zealand Aluminium Smelter (NZAS) they would look to cease production by August 2021. While this had been a known risk and potential outcome of the review, the market was caught off guard and reacted by sending the sector’s respective share prices tumbling on an intra-day basis. The smelter currently represents approximately 13% of total New Zealand electricity demand, with the majority of the supply coming from the purpose built dam at Lake Manapouri, Fiordland.

Assuming that the decision to close down the plant remains in place, there are many moving parts which will determine what happens next in the sector. We simplify this down to three identifiable stages which can correspond as the short, medium and long term.

The first stage is the requirement for Transpower to complete a transmission upgrade in the lower South Island. The completion of these works will allow Meridian and Contact Energy’s deep South Island hydro generation to flow to the north of the South Island and reduce the amount of water spilled at times when supply overwhelms demand. These works are expected to be completed by May 2022. Until these works are completed wholesale South Island electricity prices are likely to be depressed, which in turn will have a negative impact on Meridian and Contact Energys’ earnings. During this stage North Island power prices will be relatively less impacted which will create price separation between the two islands.

The second stage involves the laying of an additional transmission cable along the bottom of Cook Strait which would allow for surplus South Island electricity to be delivered into Wellington and the lower North Island. It is expected these works, again undertaken by Transpower, would cost approximately $150m and take up to 8 years to complete. 

The third and final stage, would see transmission upgrades made in the North Island which would have the ultimate impact of allowing low cost renewable electricity generated by Meridian and Contact Energy to be delivered into the highly attractive demand catchment of the Greater Auckland region. This is likely to be disruptive to Mercury’s valuable Waikato hydro scheme.

In summary, the near-term beneficiaries are those companies that have North Island renewable generation as they will benefit from the relatively higher power prices achievable in the North Island. However in the long run, South Island hydro will compete in the North Island and likely earn a higher return than the electricity that was once sold to Rio Tinto.  Additionally, the country’s demand for higher cost thermal fuel generation will decline meaningfully, boosting the proportion of renewable energy in New Zealand into the high 90%’s.

Investing 101

Knowledge Builder: Investor Biases

We firmly believe that in order to be a successful investor over the long term, it is vital to understand, and hopefully overcome, common human biases that often lead to poor decision making when investing. These biases are ‘hard-wired’ which means we are all liable to take shortcuts, oversimplify complex decisions and be overconfident in our decision-making process. Understanding our biases can lead to better decision making which is crucial to improving investment returns over time. Over the coming months, we will look into some of these in-built biases with the goal being to help you recognise them when they occur and therefore be able to overcome them.

This month: Loss aversion/endowment effect

Loss aversion is the tendency to prefer avoiding losses over obtaining gains. Closely related to loss aversion, is the endowment effect where a higher value is placed on a good that one owns than on an identical good that they do not own. Loss aversion/endowment effect can lead to poor and irrational investment decisions whereby investors are reluctant to sell loss making investments in the hope of making their money back.

To be a successful investor over time you must be able to properly measure opportunity cost and not be anchored to past investment decisions only so as to not record a loss. Investors who become anchored due to loss aversion may pass up on new investment opportunities as they would prefer to wait for the underperforming investment to “come right”.

At Generate we regularly compare the basis for a new investment idea against incumbent positions in the portfolio and interrogate whether the idea warrants being an additional holding or whether it should displace a holding by virtue of having the potential to earn a higher return.

Top Holdings as of 31 July 2020

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

Conservative Fund Growth Fund Focused Growth Fund Focused Growth Trust
International Equities
Berkshire Hathaway T Rowe Price Global Equity Fund T Rowe Price Global Equity Fund T Rowe Price Global Equity Fund
Alibaba Magellan Global Fund Magellan Global Fund Magellan Global Fund
Ping An Insurance Berkshire Hathaway Berkshire Hathaway Berkshire Hathaway
Alphabet Platinum International Fund Platinum International Fund Platinum International Fund
Tencent Worldwide Healthcare Trust Worldwide Healthcare Trust Worldwide Healthcare Trust
Property and Infrastructure
Infratil Infratil Infratil Infratil
 Spark Spark Spark Spark
Contact Energy Contact Energy Contact Energy Contact Energy
Arvida   Arvida Arvida Arvida
A2 Milk A2 Milk A2 Milk A2 Milk
Fixed Income and Cash
Term Deposits Cash & Cash Equivalents Cash & Cash Equivalents Cash & Cash Equivalents
Cash & Cash Equivalents Term Deposits Infratil Bonds ANZ Perpetuals
Vector Bonds Infratil Bonds Term Deposits Term Deposits
Genesis Energy Bonds Mercury Energy Bonds Metlifecare Bonds Infratil Bonds
Mercury Energy Bonds Genesis Energy Bonds -  - 


Stock Spotlight

Oceania Healthcare

Oceania is a New Zealand based retirement and care facility operator. The company currently has a higher proportion of its portfolio in care than the other large listed operators which in turn should equate to an earnings base that is less sensitive to changes in the housing market.

The care facilities and retirement villages are well spread geographically. The highest concentration of units and beds are in Auckland, followed by Canterbury. This diversity is also reflected in a higher proportion of facilities outside of New Zealand’s four main cities, a number of which are in what we classify as smaller towns and cities.

The company listed on the NZX in 2017 after having acquired a number of well-located facilities that were in need of redevelopment. The company intended to significantly increase the number of retirement units and care suites on these sites and in particular offer a new product of premium care. By offering premium care Oceania would be able to earn a higher rate of return than would otherwise be the case.

One of the challenges Oceania has faced through the redevelopment phase has been to grow earnings. This is a function of sites being decommissioned before development and there being a time lag before vacancy levels pick up again in the redeveloped facility.

As long-term investors we are able to look through the earnings being impacted by development and are attracted to a higher quality and growing cash flow in the coming years as developments are completed.

Next month: Investore Property

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