In what were considerably different market conditions relative to March, the three Generate KiwiSaver Scheme funds and the new Generate Focused Growth Trust produced strong performance in April. As could be expected given their larger exposure to international equity markets, the Focused Growth Trust and Focused Growth Fund led the charge returning 6.88% and 6.44% respectively. The Growth Fund returned 5.88% for the month, while the Conservative Fund with its much lower exposure to international equities returned a positive 2.83%.
We will illustrate our view as to what we believe has been driving markets later in this newsletter, but first let’s highlight some of the key contributors and detractors to performance.
Beginning with our international holdings, Facebook was a standout performer over April returning 22.7% in local currency terms. Facebook found favour with investors over the month as varying forms of lockdown policies around the world drove higher social media usage amidst a surge towards online gatherings and communications. Alongside this, sat a counter view Facebook’s advertising revenue may come under pressure as companies reduced marketing budgets. Facebook released their 1Q20 result on the last day of April, which revealed this concern had potentially been overstated. The result detail showed revenue growth of 22% to the end of March, but what really excited the markets were comments that the first three weeks of April was flat compared to the same period in April 2019. This allayed fears that Facebook may be facing a sharp downturn in revenue growth. In aftermarket trading hours
Facebook’s share price rose more than 10%, highlighting the extent of shareholder relief.
Reflecting similar sentiment to that shown towards Facebook was Alphabet, the parent company of Google which returned +15.9% in local terms last month. There had been concern throughout April around Google’s advertising revenues, however 1Q20 reported numbers were a positive surprise to the market. While Google’s advertising revenues are not immune to the current economic environment, it appears that Google may offset some of the decline by taking share from traditional forms of advertising, such as billboards and print. Coupled with management’s commentary around disciplined spending including a slowdown in the pace of hiring, a focus on efficiencies, as well as lower capital expenditure, investors gained confidence that profit margins will benefit when advertising spending returns to normal rates of growth.
Other notable mentions were Microsoft which was up 13.6% and Siemens AG which returned 11% in April. Berkshire Hathaway was somewhat off the pace as they carry more direct exposure to cyclical aspects of the economy, but still returned a positive 2.5%. We continue to think Berkshire is being undervalued by the market.
In last month’s newsletter we highlighted that Jupiter Opportunities Trust was a meaningful negative contributor to performance and traded as low as a 17% discount to net asset value. It was pleasing to see this recover somewhat in April, returning 12.5%. Our investment in Worldwide Healthcare Trust also performed strongly, up 11.6%. More than two-thirds of Worldwide’s portfolio exposure is in the biotechnology and pharmaceutical sectors, which are proving very appealing under pandemic conditions.
Turning to Property and Infrastructure, and after an uncomfortable month in March there was a strong bounce back in share prices. Auckland Airport (AIA) returned 22% over the month, which included the successful equity capital raise of $1.2bn at a price of $4.66 per share. To put this price in context, we need to go back to early 2015 to find the last time that AIA traded at that level. After extensive scrutiny of cashflows and the balance sheet, the three Generate KiwiSaver Scheme Funds and the Focused Growth Trust participated meaningfully in the raise. Notwithstanding the fact that travel will face difficult months to come, purchasing a recapitalised AIA at a steep discount to recent valuations proved attractive. Post the raise, AIA’s share price performed strongly, rallying 28% to $6 per share, at which point we decided to take profits. To put this in context, New Zealand’s
S&P/NZX50G rose 7.5% over the month.
A second standout was our long-held position in Infratil (IFT) which returned 17.6%. During the month Infratil provided an update to the market which provided comfort that Infratil’s capital structure and assets were handling the impacts of COVID-19. The core asset base of Infratil is comprised of Canberra Data Centres (CDC), Trustpower, Tilt and Vodafone. In the case of CDC there is little near-term volume or profitability impact expected as their core rental revenues are underpinned by long-term lease agreements with high creditworthy counterparties such as the Australian Government. IFT’s most recent acquisition, Vodafone, is also a defensive business. While there will be a negative earnings impact from the reduction in roaming charges associated with travel restrictions, Vodafone is expected to be a beneficiary from increased data usage and communication resilience that business and
individuals have sought during, are likely to seek post lockdown.
Also worthy of a mention is A2 Milk, which we discussed in last month’s newsletter. A2 continued its strong performance from March into April returning 14.2%. Additionally, our recently established position in Vector rose 11.4%, and Aventus bounced following March’s difficulties, rising 15%. We discuss Vector more fulsomely in our Stock Spotlight section below.
A key detractor from P&I performance was Precinct (-6.7%). Precinct owns office assets in Wellington and Auckland including the soon to be completed Commercial Bay tower and retail precinct. The office sector has come under the spotlight as cities across the globe entered various forms of lockdown and work from home situations. As a result, some market participants, including the investment team at Generate, are pondering what office demand may look like in the future and whether there may be a structural shift in work methods resulting in lower demand for office space. There are some interesting counter arguments, one of which is whether office density (people per square metre) may reduce to allow for social distancing. Notwithstanding the emergence of this theme, we are cognisant that office as a sector has always exhibited cyclicality and the size of our Precinct position across
the funds reflects this.