The September Edition of the Generate KiwiSaver Scheme Newsletter.

Welcome to the September edition of the Generate KiwiSaver Scheme Newsletter.

At the end of last month we updated our offer documents. This was done to reflect the latest regulatory changes to KiwiSaver and also some changes we have made to our funds. The key changes are:

  • We increased our investable universe to include Australasian equities for all 3 of our funds. Previously our Australasian share market investments were restricted to property and infrastructure companies (albeit we take a broad view of what constitutes property and infrastructure). Although we won’t typically hold Australasian equities we now have the ability to do so should the right opportunity come along.
  • For international equities in our growth funds we are no longer required to hold the majority in underlying funds. This gives us the ability to make more investments directly into stocks which will mean lower fees for members.
  • The funds now have the ability to invest in asset backed securities.
  • Unrated bonds are required to be predominantly of equivalent quality to investment grade bonds in the opinion of the Investment Committee.
  • We made some minor asset allocation changes to our Focused Growth Fund and to our Growth Fund. To see the new allocations and other investment changes please click here.

Global share markets fell in August as bond yields plunged after China allowed its currency to fall through a key level, escalating the trade war between the US and China. The implications from this escalation for global growth was clearly negative. Notwithstanding this headwind all 3 of our funds delivered positive returns in August due to strong performances from some of our local share holdings and also a falling NZ dollar. More on this later…

Performance of Our Funds

Returns to 31 August 2019 (after fees* and before tax)

  1 Year  3 Year (p.a.) 5 Year (p.a.) Since Inception**(p.a.)
Focused Growth       7.17%  12.48% 11.68% 10.70%
Growth  9.57%  10.99% 11.25% 10.13%
Conservative  9.07%   6.00% 7.44% 6.51%

*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 August the Focused Growth Fund was up 0.69%, the Growth Fund was up 1.29%, and the Conservative Fund was up 1.38%. A combination of lower interest rates and strong performances from some of our local holdings meant the Conservative Fund was our top performing fund over the month. A lower NZ dollar also boosted the return of all 3 funds.

The Magellan Global Fund (MGF) was the strongest performing international equities investment in August with a 2.3% return (in local currency). This was mainly the result of the Australian dollar (AUD) falling over a cent against the US dollar as MGF is priced in AUD. Some of MGF’s top holdings – including Alphabet and Microsoft - also chalked up gains on their local bourses. MGF has been an outstanding performer for our growth funds over the years. In the 5 years to August 31 MGF had delivered an AUD return of 17.2% p.a. which is a remarkable 3.9% p.a. above the fund’s benchmark.

Tencent was the weakest performing international equity in August falling a disappointing -11.8%. Tencent was a victim of where its shares are listed (Hong Kong) given the tumultuous state of affairs there. See the Market Update for more on this. On a company specific basis Tencent did release a quarterly earnings result mid-month whereby revenue was lower than the consensus expectation whilst earnings beat consensus. Despite a mixed report the stock did continue to sell off in the days immediately after the earnings announcement. We are still believers in the company as Tencent’s all important gaming division faces less regulatory headwinds and its fintech business continues to become an important growth driver for the stock.

The strongest performing Property and Infrastructure stock in August was Mercury with a phenomenal 13.6% gain. The biggest driver of this return was the dramatic move from the RBNZ on August 7 whereby it cut rates by 50 basis points from 1.50% to 1.0%. Mercury is viewed by many as a ‘bond proxy’ because of its relatively stable earnings and dividends. The lower interest rates go the more appealing dividend paying stocks become. In addition there is speculation that both Mercury and Contact Energy (another very strong performer last month) will be added to the MSCI World Index in November. Passive investors that track this index will have to buy these stocks if they are in fact added in November whether they think they are good value or not!

The company also had an earnings announcement in August whereby it announced EBIDTA (Earnings Before Interest, Depreciation, Tax and Amortisation) $10m higher that its April guidance. This was well received by the market.

Freightways had the dubious honour of being the weakest performing property and infrastructure stock with a fall of -7.2% in August. Freightways also had an earnings release last month. There were few surprises in the result given management had provided a trading update back in May whereby they warned of slowing volumes. Still the market reacted negatively to the result.

Global share markets fell in August as bond yields plunged after additional tit for tat tariffs between the US and China were announced and China allowed its currency to fall through a key threshold. This escalation in the trade war increased concern about its impact on global economic growth.

During the month the US yield curve inverted again. This means that it is cheaper for the government to borrow money, or sell bonds, over ten-years than it is on a shorter basis. Investors typically require a higher return to lend money (buy bonds) for longer periods.  An inverted yield curve suggests a lack of confidence in the near-term prospects of the economy and is perceived by many as a harbinger of recession. Notwithstanding the length of this economic cycle we are not convinced a recession in the US is imminent as the US consumer remains in good health and consumer spending makes up some 2/3rd's of the US economy. In addition it is typically a rising short end of the curve which slows an economy. This time the major recent move has been a lowering in the long end of the US Treasury curve as investors who face negative interest rates in their home country opt for positive yielding long-dated US Treasuries instead.

US share market losses were led lower by the energy sector with oil prices falling to their lowest levels in 6 weeks amid growing concerns that US-China tensions would weaken demand for crude oil. The S&P 500 ended the  month -1.6% lower.

European share markets were slightly lower in August as lingering issues continued to weigh on investor sentiment. The aforementioned trade war escalation weighed on stocks but they recovered the majority of this by month end after better than anticipated Eurozone economic data and some softening in Trump's trade war rhetoric.

Given the German economy's dependence on exports it has been hit heavily by a slowdown in China’s economy. Some high profile German economists have recently called for a loosening of the Government's purse strings to combat the moribund economy. This appears to be working with the German Finance Minister exploring fiscal measures to boost the economy.

Asian equity markets ended August significantly lower. Hong Kong was the worst performing market with the Hang Seng Index falling -7.4% over the month as investors sold shares due to the ongoing violent protests and also as US/China trade war concerns intensified.

Unsurprisingly, Chinese equities also did it tough with the Shanghai Composite Exchange falling -1.5%. A raft of economic data was released in August with the broad picture being that of continued softening in the Chinese economy.

Emerging share markets performed poorly overall as fears of a global economic slowdown increased. In these "risk-off" environments riskier assets such as emerging markets' stocks tend to perform poorly whilst ‘safe haven’ assets such as government bonds and precious metals tend to outperform.

Over the ditch and - geopolitics aside - the focus in August was on the corporate earnings season. One word sums up the overall tone of earnings releases - 'lacklustre.' If BHP and Wesfarmers were excluded from the analysis (due to their abnormal increase in profits e.g. Wesfarmers profits rose 360%) then overall earnings only increased 1.2%.

A similar theme prevailed in the NZ earnings season whereby low expectations were largely met and a number of companies provided cautious outlooks. Although the NZX50G followed global markets lower, once again it outperformed all the major indices we closely monitor. A big factor for this outperformance was the RBNZ cutting interest rates by 50 basis points from 1.50% to 1.00% on August 7. Westpac chief economist Dominick Stephens had the following to say about the RBNZ move: "This was a stunning decision… In the history of the OCR, the only times the OCR has been cut by 50bps or more have been after the 9/11 terrorist attack, during the GFC, and after the Christchurch earthquake.” Clearly the RBNZ is wanting to front-foot this slow down. The lower interest rates have helped drive the NZ dollar (NZD) lower which has been a bonus from the RBNZ’s point of view. First a lower NZD increases inflation by making imported goods more expensive. This helps the RBNZ move towards its inflation target. Second it helps with the RBNZ’s employment mandate as a lower NZD makes the country’s exports more internationally competitive. More exports creates more jobs.

Warren Buffett wisdoms

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:

"Time is the friend of the wonderful company, the enemy of the mediocre."

Buffett is well known for having a long investment horizon. Part of the reason for this is because the market often values a company incorrectly in the short term. Over time the merits of a great company will become plain to see and the drawbacks of an only average company will be impossible to hide.

Investing 101

Knowledge Builder - Diversification

Diversification is one of the golden rules in investing. We all know the phrase “Don’t put all your eggs in one basket.” Unfortunately, time and again people do not apply this to their investments. For example, during the GFC when New Zealand finance companies were collapsing, thousands of New Zealanders lost much or even all of their savings. Many thought their hard-earned savings were diversified by being invested in a number of different finance companies. Unfortunately, this is not diversification, as all their investments were in one highly-leveraged sector of the same economy.

Diversification is a key component of Generate’s investment philosophy. As such, we invest our members’ savings across a number of geographies, sectors and asset classes.

Top Holdings as of 31 August 2019

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

Conservative Fund Growth Fund Focused Growth Fund
International Equities
Berkshire Hathaway Berkshire Hathaway Berkshire Hathaway
Alphabet Magellan Global Fund Magellan Global Fund
Microsoft T Rowe Price Global Equity Fund T Rowe Price Global Equity Fund
Facebook Platinum International Fund Platinum International Fund
Alibaba Alphabet Worldwide Healthcare Trust
Property and Infrastructure
Infratil Infratil Infratil
Contact Energy Contact Energy Contact Energy
Mercury NZ Mercury NZ Mercury  NZ
Arvida Z Energy Z Energy
Z Energy Arvida Group Arvida Group
Fixed Income and Cash
Term Deposits Term Deposits Cash & Cash Equivalents
Cash & Cash Equivalents Cash & Cash Equivalents Term Deposits
Vector Bonds Vector Bonds Z Energy Bonds
Trustpower Bonds Trustpower Bonds -
NAB Hybrids TR Group Bonds -


Stock Spotlight

Napier Port Holdings

Napier Port Holdings (NPH) listed on the New Zealand Stock Exchange in August as part of a sell down by Hawke’s Bay Regional Council. The Council retained a majority ownership of the asset at 55% post the initial public offer (IPO). The rationale for listing NPH was so the Council could raise the funds required to invest further into it. Principally, this involves adding a 6th wharf which would enable NPH to facilitate larger and more frequent ships, including cruise ships which is a small but growing category. The cost of this investment is estimated to be between $170m and $200m, which NPH may look to monetise through additional charges levied on their customers. These works are expected to commence this year and last through to 2022.

Serviced by both road and rail NPH is the key regional trade gateway for the Hawke’s Bay region. One of thirteen ports operating across New Zealand, NPH is the 4th largest measured by container movements representing approximately 8% of New Zealand’s total. The majority of its export volumes are made up by logs and paper products (68%), with a further 12% being pip fruit . NPH earns revenue by charging inbound and outbound ships for towing, mooring, berthage and pilotage services. Other forms of revenue include streams from container service charges including for storage and volumes handled. 

NPH has been a recent benefactor of the substantial forest planting that occurred in the mid-1990s. As the forests have grown and matured, it has provided a strong log export growth profile that has channelled volumes through the port. Reflective of this, in the last two years export log volumes grew 35%, and NPH has expectations for the next two years to grow a further 20%. A second leg of growth that NPH has enjoyed is in pip fruit, of which apples represent the majority of this segment. The Hawke’s Bay region represents close to 2/3rds of New Zealand’s planted pip fruit and over the last few years has contributed to a growing pip fruit export profile driven by new planting, and the replanting of old orchards with new higher yielding methods. 

NPH listed at $2.60 per share, equating to an enterprise value of approximately $500m and a resulting EV/EBITDA valuation of 14x. This meant that at the time of listing, NPH was priced at a meaningful discount to its largest listed competitor, Ports of Tauranga. This discount, coupled with extensive due diligence of NPH’s operations resulted in the Funds participating meaningfully in the IPO. Following the listing, NPH’s share price appreciated significantly reaching a level some 20% above Funds entry point. As a result the valuation discount to NPH’s peers diminished rapidly. The Funds took advantage of this, selling into share price strength and ultimately exited the position. We will continue to track the progress of NPH throughout its expansion phase, and continue to look for valuation mismatches as and when they occur.

Next month:

Centuria Capital

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