The February Edition of the Generate Member Newsletter.

Welcome to the February edition of the Generate Member Newsletter. By now you should have heard about our data security incident.

We sincerely apologise to all members for this incident and we hope that our offers and other steps we have taken in this ongoing breach response from Generate helps to demonstrate to all of our members how valued they are to us.

We have decided to reimburse the cost of replacement photo ID if the photo ID members supplied to us was affected in the data breach and was still valid on 29 December 2019. For those members who had photo ID compromised but don't apply for new documents by 31 March 2020, we will waive Generate’s annual member fee of $36 for 12 months.  In addition in recognition of the wider impact on other members whose personal information was accessed but whose photo ID was not compromised, we will also extend this waiver of Generate’s member fee for 12 months to them.

We would also like to reassure members that we are sparing no expense in trying to ensure that this sort of incident never happens again to Generate’s members.

The strong run of performance for the Funds continues. All Funds maintained their podium positions over one and five years in the recently released December quarter Morningstar KiwiSaver Survey.  We are proud to note that this is the fifth consecutive quarter that all three funds have achieved this result. It was also pleasing to see that all three funds were the best performing fund in their category over the final quarter of 2019.

The Funds have all kicked off 2020 with solid gains. January returns were driven by a combination of a weaker New Zealand dollar, which increased the value of offshore investments, and a strong local share market.

Performance of Our KiwiSaver Funds

Returns to 31 January 2020 (after fees** and before tax)

  1 Year  3 Year (p.a.) 5 Year (p.a.) Since Inception***(p.a.)
Focused Growth      24.03%  16.03% 11.25% 11.55%
Growth 22.80% 14.52% 10.77% 10.81%
Conservative 13.37% 8.24% 7.05% 6.75%

**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.





January was another strong month, the three KiwiSaver funds and the new unit trust all started the year with solid gains. The Focused Growth Fund posted the largest gain up 1.93% for the month, closely followed by the Growth Fund at 1.89%. The more defensively positioned Conservative Fund was up a commendable 1.25%, and the Focused Growth Trust posted a pleasing 1.77% over the month.

The Jupiter European Opportunities Trust was the strongest performing international equities investment in January. Readers of this newsletter may recall that this was the weakest performing international equity in December. A large part of the 2.5% decline in the Trust’s share price in December was a result of an increase in the discount to net asset value. In January the discount reverted back to 1% (from 6%), which was a key driver of the 9.7% gain in January in local currency (which excludes the positive impact of the weaker NZ dollar). The strong returns of the Trust were also a reflection of the 20% gain in the value of the Trust’s largest holding, Wirecard. The market viewed the news that the Chairman was stepping down very positively. The Trust also owns a vitro diagnostics company, Biomerieux, which enjoyed a strong start to the year. No doubt, partly driven by the global Coronavirus outbreak.

It is worth mentioning three further international investments which demonstrated strong gains in January (in local currencies) over the month; Alphabet (aka Google) was up 7.0%, Microsoft was up 8.0% and the T Rowe Price Global Equity Fund was up 7.3%.

January witnessed a reversal in the fortunes for Siemens which after enjoying solid gains in the last quarter of 2019, dropped -4.6% in January. Fears that the Coronavirus could impact both the availability of inputs into its production processes and demand for the company’s products catalysed a period of share price weakness. This weakness was further exacerbated late in the month by a disappointing earnings announcement by the company’s listed wind turbine subsidiary. Siemen’s Gamesa downgraded full-year margin guidance by 1 percentage point and provided headline numbers for its first-quarter results that were significantly below market expectations. The downgrade was primarily the result of the company booking one-off project charges of 150 million euros, which were a consequence of poor weather conditions in Northern Europe impacting the installation schedule of five projects. Reassuringly, the company argued that they had taken steps to improve execution and so this should not be a feature of future results.

Centuria Capital, the Australian listed property investment manager, was once again the strongest performing Property and Infrastructure holding in January. A number of the Australian listed property trusts had a strong start to the month after a soft end to the year, and Centuria was no exception. The company also announced a takeover offer for NZ-based property fund manager Augusta Capital late in the month. Augusta is in some respects a smaller less evolved version of Centuria. It has a good pipeline of developments, which would have no doubt been attractive to Centuria.

Infratil also had a strong start to the year, appreciating 7.5% in January. Early in the month Infratil announced a significant revaluation of its largest holding, CDC (the data centre developer, owner and operator). More specifically, the mid-point between the old and new independent valuation ranges increased by a staggering $600 million to just short of $1.5 billion for Infratil’s investment. The company indicated that the new valuation now includes the completion and delivery of the Hume 4 data centre in December 2019. Later in the month, Infratil announced that CDC’s other major shareholder, Commonwealth Superannuation Corporation had sold half of its 48.2% interest to the Future Fund. They indicated that this sale did not require a change to valuation guidance for CDC, which implies it was within the new valuation range. The AFR’s Street Talk has since speculated that the sale price was in the top half of the new valuation range.

Oceania Healthcare was the laggard of Property and Infrastructure holdings, declining 7.6% during the month. The company announced its first-half result late in the month. This created the opportunity for the two Macquarie managed infrastructure funds that owned Oceania pre-IPO to sell down the balance of their holdings. More specifically, the two funds sold a total of 251 million shares in OCA at a price of NZ$1.20 per share. Subsequently Oceania’s share price fell back towards the placement price, which is quite often the case with large transactions of this nature. The two Macquarie funds are in the process of being wound up and so the sale does not reflect a change in view of Oceania’s prospects by Macquarie. We participated in the placement as we thought the price represented a good buying opportunity.

Global share markets started the year off on a positive note, driven higher by the signing of the first phase of the trade deal between China and the United States.

In the agreement, China agreed to buy an additional $200 billion of US goods and services over the next two years. The step-up is based on 2017 imports (i.e. before the trade war started). To put this into perspective, China imported a little under $200 billion of US goods and services in 2017. If China meets its obligations under the deal it will import $260 billion in 2020 and then $310 billion in 2021.

One observation made by a number of analysts is that other countries will bear the brunt of this new trade deal. It is likely that China will significantly reduce the consumption of goods and services from other countries. The bad news for NZ farmers is that agricultural goods account for a big chunk of the new purchases. Under the agreement, China will buy an additional $12.5 billion of those goods in 2020, and then $19.5 billion in 2021.

In return, the United States has agreed to reduce tariffs on $120 billion in Chinese products from 15% to 7.5% and dropped plans for another tariff on US$160 billion of goods.

Later in the month, news of an outbreak of a novel coronavirus in Wuhan, China captured the market's attention. Chinese authorities have been criticised for being slow to act initially, but then took significant measures in a bid to slow the spread of the virus: extending public holidays and putting millions of citizens in lockdown in the areas with the highest infection rates. By months end 11,791 people had contracted the virus and 291 people had died as a result.

News that the virus had spread globally catalysed a sell-off of global share markets, all of the gains made earlier in the month were erased and the MSCI World ended down 0.2% in local currency terms.

We are still in the early stages of the spread of the new Coronavirus, and as a result, it is difficult to predict how widespread the impact will be. The significant steps taken by the Chinese Government to prevent the spread of the virus and the caution exercised by those outside the lockdown areas suggest that there will be a significant impact on economic activity in the first quarter. Given the importance of China in terms of contribution to the global growth rate this is likely to have a meaningful impact in the short term.

The portfolios have relatively high levels of cash, which will act as a buffer if share markets slide and will also allow the portfolio to add new positions if they become attractively priced.

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:

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

This quote emphasises the importance of investing in quality companies. Buying a company simply because it is cheap is a dangerous strategy, you are likely to be disappointed by future announcements. A better strategy is to buy a great company with a durable competitive advantage at a fair price.

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: Anchoring bias

Anchoring bias is the tendency to rely too heavily on the first piece of information received when making decisions. In finance, a common example of this bias is when investors hold on to investments that have declined in value. They have anchored their fair value estimate to the original price rather than adjust their fair value estimate to new information that has subsequently become available.

Top Holdings as of 31 January 2020

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

Conservative Fund Growth Fund Focused Growth Fund Focused Growth Trust
International Equities
Berkshire Hathaway T Rowe Price Global Equity Fund Berkshire Hathaway Berkshire Hathaway
Alphabet Berkshire Hathaway T Rowe Price Global Equity Fund Platinum International Fund
Ping An Insurance Platinum International Fund Platinum International Fund T Rowe Price Global Equity Fund
Alibaba Magellan Global Fund Magellan Global Fund Magellan Global Fund
Facebook Ping An Insurance Alibaba Ping An Insurance
Property and Infrastructure
Infratil Infratil Infratil Infratil
Contact Energy Contact Energy Contact Energy Contact Energy
Summerset Summerset Arvida Arvida
Arvida   Arvida Summerset Summerset
Meridian Energy Meridian Energy Meridian Energy Meridian Energy
Fixed Income and Cash
Term Deposits Term Deposits Cash & Cash Equivalents Cash & Cash Equivalents
Cash & Cash Equivalents Cash & Cash Equivalents Infratil Bonds ANZ Bonds
Genesis Energy Bonds Vector Bonds Term Deposits  Infratil Bonds
Mercury Energy Bonds Genesis Energy Bonds Metlifecare Bonds  - 
Vector Bonds Trustpower Bonds -  - 


Stock Spotlight

Stride Property Group

Stride Property Group (Stride) specialises in the ownership and management of property assets in NZ. It has 29 direct property investments (which were valued at ~ $1 billion at the time of the last result) as well as cornerstone ownership stakes in Investore and Diversified Property Trust.

Stride was originally formed through the amalgamation of 30 unlisted property syndicates. After a period of stabilisation and portfolio optimisation, it was listed on the NZX. In 2015, after a period of strong growth, the company changed its name, strategy and structure. In effect Stride transitioned its investment management function from an internal focus to one that was looking to expand its client base.

The first significant move into investment management occurred when Stride spun-off its large format retail investments into a new specialist listed property trust (Investore) and retained the management rights. Investore’s portfolio is largely made up of supermarkets which have long lease terms and pay predictable rentals.

More recently, Stride announced that it was creating a new vehicle - Industrie Property - that it will manage to invest in industrial property. The new vehicle is a JV between a group of institutional investors advised by JP Morgan and Stride. As part of the agreement, the new investors will initially contribute $70m and Stride will contribute its 12 industrial properties, which will give Stride a circa 70% shareholding. The new investors have allocated another $115m of capital to fund growth initiatives, further boosting the kitty available to grow the portfolio. In time, the target is for the portfolio to increase in size until Stride’s stake declines to 25%, which implies Industrie has a target size of $1 billion.

The expansion into investment management not only provides much-needed economies of scale but in time should also generate strong returns on the capital invested. This should translate into Stride boosting its dividend growth.

Next month: Spark

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