The July Edition of the Generate Member Newsletter.

Welcome to the July edition of the Generate Member Newsletter.

June was a ‘choppy’ month for share markets but the net result was a continuance of the ‘Fed and fiscal’ inspired recoveries which began in late March. More on this later.

Last month Generate staff began a partnership with Peter Burling’s and Blair Tuke’s new charity - Live Ocean. We feel strongly that more needs to be done to protect New Zealand’s oceans. Approximately a third of New Zealand’s land mass is protected in parks and reserves but less than half a percent of our territorial waters are protected by marine reserves. To show our support for Live Ocean ‘Generators’ right across the country braved a mid-winter swim. Some needed a little encouragement so we decided to donate $1,000 for every North Islander taking the plunge and $2,000 for every South Islander (given the additional bravery required for the lower latitude swims!). The Auckland office dip can be viewed here. Because of this great team effort a grand total of $25,000 was donated by Generate Investment Holdings to Live Ocean to help them keep up their great work.

Generate KiwiSaver Scheme

Returns to 30 June 2020 (after fees** and before tax)

  1 Year  3 Year (p.a.) 5 Year (p.a.) Since Inception***(p.a.)
Focused Growth      3.20%  9.76% 8.03% 9.61%
Growth 1.87% 8.95% 7.75% 8.85%
Conservative 3.48% 6.39% 5.94% 5.91%

**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 trend which began in late March continued in June - whereby share markets rallied but the shine on the funds’ returns was dulled somewhat by a stronger NZ dollar. The Focused Growth, Growth and Conservative funds returned 0.43%, 0.74% and 0.77% last month, whilst the (non-KiwiSaver) Focused Growth Trust returned 0.32%. The Conservative Fund eked out first place for the month’s returns primarily due to its lower offshore exposure (and therefore was impacted less by the rising NZ dollar).

The top performing property and infrastructure stock for the month of June was Metlifecare with a return of 22.7%. Early in June Metlifecare announced that it was seeking shareholder approval to proceed with litigation against EQT Funds Management after EQT had walked away from what was effectively a takeover offer for the company. Investors drove the stock higher over the month based on the hope that the litigation – if approved by shareholders – could force EQT to complete the takeover or that the threat of legal action may at least bring EQT back to the table with a revised offer. In July the latter transpired with EQT revising its takeover price down from $7 to $6 which appears to have the support of a majority of shareholders.

The weakest performing property and infrastructure stock in June was Goodman Property Trust with a return of -6.9%. Towards the end of May Goodman posted its annual earnings result which saw adjusted earnings fall 6.2% year on year. The company also announced it was reducing its pay-out ratio which although prudent from a balance sheet perspective meant guidance for its FY21 dividend was reduced to 5.3 cents per share (cps) from 6.65cps in FY20. Given many investors own Goodman shares for its dividend yield this announcement led some to head for the exit. We thought this would be the case so we reduced our positions in the stock prior to the worst of the sell-off.

The strongest performing global equity holding was Tencent with a 21.5% gain over the month in local currency. Tencent reported stronger than expected revenues mid-May which confirmed that Tencent was a ‘stay at home’ winner with mobile games revenue growth accelerating to 64% yoy in the COVID-affected quarter. Many digitally focused companies reported that lockdowns have dramatically accelerated existing digital trends. Tencent is a big beneficiary of this – not only via its online gaming and social network businesses but also through its work from home applications such as Tencent Meeting and WeChat Work. In addition Tencent owns the second largest share of  China’s cloud infrastructure (behind Alibaba - which is also owned by Generate).

The weakest performing global equity holding in June was the European Opportunities Trust Plc (the Trust) with a fall of -7.6% in local currency. Fortunately the Trust is our smallest underlying fund investment for all 3 of our growth funds.

Over the month one of the Trust’s largest holdings suffered a precipitous fall. This led to a fall in the Trust’s net asset value but also a widening in the share price discount to net asset value. After talking to the Portfolio Manager and taking into account the Trust’s long term track record we decided the fall presented a buying opportunity and added to our positions.


Global share markets continued to gain confidence in the fact that central banks and governments are largely “throwing the kitchen sink” at trying to minimise the COVID-inspired recession. Central banks continued to reveal huge stimulus packages and governments continued to spend aggressively in order to limit further carnage in labour markets. Over the month the MSCI World rose 2.5% in local currencies.

In the US, equities made strong gains in the first week of the month after the release of some better than expected economic data. In particular, the labour market in the US rebounded unexpectedly in May with nonfarm payrolls gaining by 2.5 million.

At the end of May the global count of daily new COVID-19 cases was 110,000. A month later and the rate had climbed to 175,000. This -  coupled with the respective numbers in the US going from 21,000 to 46,000 - made markets worry about a delay to scheduled re-openings and the introduction of new lockdowns. In addition, US-China tensions returned to the fore as China imposed new, controversial regulations on Hong Kong. As a result some of the market’s gains were given back with the S&P500 ending the month up 1.9%.

In Europe share markets rallied strongly for the third month in a row driven by improving economic data and continued monetary and fiscal support. Highlights included the European Commission’s Economic Sentiment Indicator registering its largest one month rise on record and the European Central Bank adding a further €600bn to its Pandemic Emergency Purchase Programme - bringing its overall size up to an astonishing €1.35 trillion. The Bloomberg European 500 Index gained 3.2% over the month.

Share markets in China also made gains as economic data signalled that a V-shaped recovery was getting back on track with the production side of the economy returning to pre-Covid-19 levels. Meanwhile consumer spending also improved – admittedly from a low base. The fact that China appears to be on top of the virus, by enforcing stringent lockdowns wherever virus flare-ups are found provided additional investor confidence. The Shanghai Stock Exchange Composite Index returned 5.6% over the month.

Locally the S&P/NZX50G had another stellar month rising 5.2% bringing its year to date return (to 30 June) to -0.4%. The top performers for the month were Metlifecare (up 23%) and Fisher & Paykel Healthcare (up 19%).  As discusssed above Metlifecare rose on hopes that the company may yet strike a deal with Swedish investor EQT Funds Management after EQT had walked away from a takeover offer for Metlifecare in late April. F&P Healthcare continued the year’s meteoric rise due to the unrelenting demand for its products. The company posted record earnings with net profit after tax of $287 million, up 37% from last year.

Looking ahead and we think the current global earnings season will need to be a strong one in order to outweigh a resurgence in negative COVID-19 headlines and uncertainty created by the upcoming US Presidential election. The US Government also needs to approve an extension of US unemployment benefits by the end of the month. Consensus is this should happen but if both sides of the House don’t come together in time this would weigh on markets.

Quarterly earnings are always of interest but the forward guidance provided by company top brass will be particularly important in the global earnings season which recently kicked off. Notwithstanding that we are in the midst of a global pandemic share markets the world over have rebounded vigorously. It is fair to say a rebound in earnings is well and truly being priced in. If guidance disappoints it will create more volatility for share markets.

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: Neglect of probability

The neglect of probability is the tendency to disregard probability when making a decision under uncertainty. Small risks are typically either neglected entirely or hugely overrated. The continuum between the extremes is ignored.

An example of this bias in action can be seen via a study conducted in 2016 whereby participants were given a choice between two games of chance. In one, you have a one in 100 million chance of winning $10 million; in the other, you have a one in 10,000 chance of winning $10,000. It is more reasonable to choose the second game; but most people chose the first. Is it any wonder Lotto’s winning dollar amounts reach record numbers year after year?

Moving into the investment world and there was a classic example of this bias quite recently. In the U.S. Hertz filed for Chapter 11 bankruptcy protection in late May. As one would expect the shares plunged on the announcement and then traded sideways for two weeks. But what happened next defies almost all probabilities. The shares started to rise and soon the shares had become a favourite of the Robinhood retail investor platform. Investors seeing the gains that were being made elsewhere jumped in boots and all and within three trading days the stock went from USD0.82 to USD5.53 – an astonishing gain of 574%. Unfortunately for some of these “investors” common sense prevailed and the stock then plunged 63% over the next three days. The probability that the gains in the stock were grossly inflated was neglected…

Top Holdings as of 30 June 2020

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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 Berkshire Hathaway  Berkshire Hathaway Berkshire Hathaway
Ping An Insurance Platinum International Fund Platinum International Fund Platinum International Fund
Alphabet Magellan Global Fund Magellan Global Fund Worldwide Healthcare Trust
Tencent Worldwide Healthcare Trust Worldwide Healthcare Trust Magellan Global Fund
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  Infratil Bonds
Genesis Energy Bonds Mercury Energy Bonds Metlifecare Bonds  - 
Trustpower Bonds Genesis Energy Bonds -  - 


Stock Spotlight


Novartis is one of the world’s largest pharmaceuticals companies with a market cap equivalent to USD210 billion. The Switzerland based company develops, manufactures, and markets branded and generic prescription drugs, active pharmaceutical ingredients (API’s), biosimilars, and ophthalmic (eye-related) products.

The company sells its products in more than 150 countries around the world. Its largest single market is the US, which brings in more than one-third of total revenue. Other key markets include Japan, Germany and France. Emerging Markets account for about a quarter of sales.

One of the key attractions of Novartis is its diversified revenue streams. The company does not rely on only one or two drugs – and in fact has 15 blockbuster medications, or drugs that bring in more than $1 billion in revenue annually.

Novartis’ established product line creates the enormous cash flows needed to fund the average $800 million in development costs per new drug. Currently the company is in the early stages of launching several new medications which should add meaningfully to the company’s revenues in the years ahead.

Next month: Skellerup

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