Welcome to the December edition of the Generate Member Newsletter. We are delighted to say that last month we won ‘KiwiSaver Manager of the Year’ at the Good Returns 2019 Awards evening. This has put a spring in the step of the team here at Generate, as we wind into Christmas. We will continue to strive to be the best KiwiSaver provider and we thank you – our members – for your continued support. 

In other news our new non-KiwiSaver fund - the Focused Growth Trust – has received some good initial interest from both members and new investors alike. If you would like to know more about this sister fund of the Focused Growth Fund please email us or call us on 0800 855 322.

Returns to 30 November 2019 (after fees** and before tax)
 

**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.

November was a strong month for our KiwiSaver funds with the Focused Growth, Growth and Conservative Funds returning 3.82%, 3.06% and 1.32% respectively. That brought calendar year to date returns up to 24.47%, 21.32% and 11.97% respectively.

The strongest international equities investment in November was the Worldwide Healthcare Trust (WWH) which was up 14.6% (in GBP). WWH had been somewhat of a laggard in recent times with the share price making little progress over the last 2 years. We believe the key reason for this has been the potential for tougher regulation in the U.S. healthcare sector. However, since mid-October WWH has soared more than 20% due to a number of factors. First, President Trump revealed new plans to try to bring down the cost of hospital visits. The announcement was greeted positively by investors as it was not as bad as some had feared. Second, healthcare stocks posted solid earnings for the quarter. Third, a wave of deals were announced in the biotech sector with heavyweights Merck, Sanofi and Roche all either completing acquisitions or extending in-market takeover offers.

The weakest international equities performance last month was from Ping An Insurance which fell -2.3% (in HKD). In late October Ping An released its Q3 earnings report. There were a number of positives in the report such as improved profitability in the company’s property and casualty business and better asset quality at (subsidiary) Ping An Bank. Operating earnings grew 16% but the market seemed concerned about the ‘quality’ of this number as it benefited from a lower tax rate. Also the New Business Value for Ping An’s all-important life insurance division underwhelmed as it only grew 4% year on year vs the market’s estimate of 10%.

We have been adding to our positions in Ping An as we believe the stock represents good value at these levels for those who are willing to be patient (like us!).

For the second month running Metlifecare was the standout performer amongst our property and infrastructure investments. The stock returned a remarkable +21.2% for the month, more than 16% above the local market index (NZSE 50G).

In October the company announced a $30m share buyback programme which, alongside a pick-up in the Auckland housing market, led to solid gains in October. But in late November the stock soared higher when the company announced it had been subject to a conditional takeover offer from a credible third party.

Investore Property Limited (IPL) was the weakest performing property and infrastructure investment in November falling -5.5%. The company reported a “nothing to see here” earnings result mid-month. However, a few days later IPL announced the conditional purchase of three large format retail properties and an associated $80m capital raise at a price of $1.75/share (of which we participated in). Prior to the announcement IPL shares were trading at $1.91. Capital raises often see the share price fall towards the new issue price as was the case with IPL.

As we have previously highlighted we now have the ability to hold Australasian stocks outside of our (albeit widely defined) property and infrastructure universe. The first of these investments is a recently established position in the A2 Milk Company (ATM). Despite this being a new investment, ATM is a company well known to our growing investment team.

Subsequent to ATM’s August FY19 result the share price came under pressure, falling 27% from ~$17 to a low of $12.30. In part, this can be explained by the market’s reaction to ATM’s announced strategy of investing heavily into both the direct offline China channel and expanding the U.S. fresh milk operation. As a result of this strategy the company forecast near term earnings margins to contract. The market didn’t like this and hence the aggressive sell off in the stock. We disagreed with the market reaction as we think that investing in order to strengthen distribution channels makes sense in the long term. The compelling valuation meant we established a position in the stock at ~ $12.80. At the time of writing the stock was trading at $15.20 (a gain of approximately 19%) due to some reassuring comments made at the AGM in regard to future earnings and margins.

For more on ATM see our Stock Spotlight section at the end of the Newsletter.

For this month’s market update we thought we would take a quick look back at 2019 and then look ahead to how we see share markets performing in 2020.

2019 saw investors obsess about trade conflicts and Brexit, whilst share markets marched on to deliver a very strong year (to date). As of mid-November the key indices in NZ, Australia, the U.S. and Europe were all up between 20%-29%. We believe the key driver of this has been the action taken by various central banks (in particular the Fed) which, due to low inflation and worries about future growth, cut rates through the year. A drop in interest rates lowers companies’ cost of capital and makes equities more attractive than bonds.

Looking ahead to 2020 we think share markets should have another positive year as a whole but not to the same degree as 2019. Whereas 2019 saw very strong returns across most developed markets we think 2020 will require a more selective approach which is when active investing comes into its own.

We think non-U.S. equities as a whole will outperform U.S. equities in 2020. That is because valuations are more attractive outside of the U.S. and geographies such as Europe and Asia are more leveraged to a pick-up in global growth. The reasons why we see a pick-up in global growth next year is because (i) geopolitical risks have faded (but not disappeared) given the thawing in U.S./China trade tensions and the chance of a ‘hard Brexit’ happening any time soon has considerably diminished and (ii) the action taken by central banks takes a while to feed through to the real economy and will be felt most strongly in 2020.

All this is not to say we don’t see opportunities in the U.S. For example we continue to like U.S. G.A.R.P. (Growth at a Reasonable Price) stocks such as Alphabet and Facebook. Also, portfolio mainstay Berkshire Hathaway has presented us with what we believe to be good buying opportunities in recent months.

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:

"Only when the tide goes out do you discover who is swimming naked.”

You’ve heard the saying “a rising tide lifts all boats” well here is the low-tide version. Here Buffett makes it clear that it is easy to look good when the economy or markets are going well but when a recession hits those who have taken on too much debt or are running shonky operations will be ‘exposed’.

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: Oversimplification tendency

In seeking to understand complex matters people tend to want clear and simple explanations. Unfortunately some matters are inherently complex or uncertain and do not lend themselves to simple explanations. In fact, some matters are so uncertain that it is simply not possible to predict the future with any conviction. In our view, many investment mistakes are made when people oversimplify uncertain or complex matters.

A key to avoid falling into this trap is to stay within one’s ‘circle of competence’. Warren Buffett summed it up nicely when he said “Never invest in a business you cannot understand.”

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

The A2 Milk Company

The A2 Milk Company (ATM) is a global dairy company, marketing its products with the ‘A2 only’ protein proposition, a key differentiator in a highly commoditised category.

Conventional cows’ milk contains two main types of beta casein protein, A2 and A1 protein. ATM’s branded milk is different from conventional cows’ milk because it comes from cows selected to naturally produce only the A2 protein type and no A1.

Many consumers and healthcare professionals report that certain people who experience challenges drinking conventional cows’ milk may experience benefits when they switch to A2 Milk

ATM has rapidly become New Zealand’s second largest listed company, having grown revenues from $40m in FY11 to $1.3bn in FY19. Having initially established the A2 brand in the fresh milk and infant formula (IF) categories in the Australian market, in 2013 A2’s focus turned to the China IF market where it now has a ~ 6% market share. In 2015 ATM launched into the U.S. (fresh) market where it now sells into more than 13,000 stores.

Notwithstanding some recent governance issues the future looks bright for ATM with the company’s growth set to continue.

Next month: Aventus Group

Merry Christmas!

We wish all of our members (and non-member readers!) a happy and safe holiday.

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