During the month of March the three Generate KiwiSaver Scheme funds and the new Generate Focused Growth Trust fell in sympathy with global and local markets. The Focused Growth Fund, the Growth Fund and the Conservative Fund were down -11.77%, -12.19% and -6.22%, whilst the Focused Growth Trust was also down -11.77%. The reason the Growth Fund underperformed the Focused Growth Fund, notwithstanding its lower exposure to growth assets, was primarily due to the fund having the largest exposure to property and aged care stocks – both of which underperformed over the month. As a comparison point for the funds’ returns in March, the S&P500, the ASX 200 and NZX50G fell -12.35%, -20.47% and -13.00% respectively (in local currencies).
It is worth noting that at the time of writing all four funds are up month to date (FGF: 1.43%, GF: 1.08%, CF: 0.27% and FGT 1.67%) as signs of COVID-19 containment are giving the markets hope that economies will be able to get out of lockdown before too long.
In the month of March positive returns were few and far between with only 3 international holdings ending in the green (on an NZD basis) and only 1 local market equity investment contributing positively.
China’s share market materially outperformed over the month which contributed to Chinese internet behemoth Tencent being the funds’ top performer on an NZD basis. When China was in full lockdown mode some of Tencent’s business units such as online gaming, cloud infrastructure and remote working software actually prospered. Businesses that are resilient even when the company’s entire nation is in lockdown are rare indeed – hence Tencent’s strong relative performance. A lower NZD against the Chinese Yuan also boosted the stock’s performance in NZD.
Another international equities’ positive contribution came from Worldwide Healthcare Trust Plc (WWH). March was a wild ride for WWH with its shares trading -23.9% lower mid-way through the month. At this point fear in the markets was at its highest and as a result the shares traded at a 15.9% discount to underlying net asset value (NAV). As sentiment began to turn the other way the discount narrowed to such an extent that the shares were actually trading at a premium by the end of the month and closed the month up 0.5%.
Microsoft also made a positive contribution to returns in March in NZD terms. Microsoft is one of the most highly regarded companies in the US with a highly respected management team. This coupled with its pristine balance sheet and resilient business model meant the stock outperformed the S&P500 by 9.7% in the month of March. The NZD fell -4.5% against the USD in March which boosted the NZD return.
Notable negative returns came from European Opportunities Trust Plc (JEO) and Siemens with falls of -14.9% and -14.1% respectively in NZD in March.
For much of February JEO’s shares were trading at a premium to their NAV. However, when the sell-off began in earnest in late February JEO began trading at an ever-widening discount so that at the trough in markets in mid to late March the shares were trading at a 17.1% discount to NAV. The discount did narrow by month’s end but given the 12.6% fall in NAV over the month it was still a disappointing performance.
Long awaited turn-around story Siemens had another tough month alongside the entire European industrials sector. Bloomberg Intelligence analysts think the sector could be in for a similar experience to 2009 when demand dived and adjusted earnings fell ~30% year on year. One bright spot for the company is that medical devices made up 17% of Siemens’ revenue – and this percentage is likely to grow in this COVID-19 interrupted world. We remain comfortable with our position in Siemens as we look to its €140 billion pipeline of work which is largely supported by advance payments and its strong balance sheet. Restructuring over the next couple of years should also result in a cleaner, more capital efficient entity.
As you know we have the ability to hold some non-property and infrastructure stocks within that part of our portfolio. And it is a good thing we do as A2 Milk (ATM) was the star performer out of our Australasian investments. ATM delivered a 5.5% return in March as investors gained comfort from upward pricing trends and the understanding that the company was benefiting from a shift to online sales during the COVID-19 outbreak in China.
The most notable negative returns during the month came from Aventus (-47.1% AUD return) and Metlifecare (-44.8%).
Aventus – the Australian ‘big box’ retail property owner – suffered a share price that fell almost in a straight line from AUD2.68 on March 11 to AUD1.42 on March 23. The stock has recovered a portion of its losses as market sentiment improved. As the virus spread in Australia many investors figured a lockdown was inevitable which is particularly painful for a retail property owner who we understand to have only ~20% of its income base classified as “essential” services. Rental abatements are inevitable.
Although Aventus has gearing higher than the average of its peers - with a loan to value ratio of 37.4% - this is well below its covenant of <55%. We take further comfort that Aventus has no debt expiring prior to May 2022 and > AUD100m in cash and undrawn facilities available to it.
In early March Metlifecare (MET) outperformed its peers as the market was confident that the takeover of MET by private equity vehicle Asia Pacific Village Group (APVG) would go ahead at $7.00. As COVID-19 swept around the world and share markets began tanking investors began to wonder whether APVG would try to wriggle out of the deal. As a result the share price began a precipitous drop.
On 16 March the Board of MET tried to reassure investors that the takeover would go ahead by stating “Metlifecare… has no reason to believe that the conditions of the Scheme Implementation Agreement (SIA) will not be satisfied to enable the scheme to be implemented in late May 2020.”
Unfortunately, on the evening of 7 April MET received notice of an intention to terminate the takeover from APVG as they see COVID-19 triggering the “Material Adverse Change” clause in the Agreement. MET believes APVG’s assertions are without substance and are currently taking legal advice on the matter.
Fortunately, we sold the vast majority of our holding in MET at prices close to the takeover offer of $7 as we believed the risk of the deal falling over outweighed the minimal upside from hanging on to the shares and waiting for the takeover deal to close. At the time of writing the shares were trading at $3.50.