The bounce back in markets that started in late March continued in May, albeit a stronger NZ dollar knocked the shine off returns when viewed in NZ dollars. The Funds all participated in the bounce back in May, which helped push the 1 year returns displayed in the table above back to levels we have been more accustomed to.
The buoyant market conditions allowed the more equity centric Focused Growth Fund and the (non-KiwiSaver) Focused Growth Trust to lead the charge last month, up 2.45% and 2.37% respectively. The Growth Fund was not too far behind with a 2.04% return followed by the Conservative Fund at 1.16%.
Siemens was the strongest contributor to returns in May up 17.5% in local currency. In May, Siemens published its financial results. Investor attention was firmly focused on how COVID-19 had impacted the company’s manufacturing operations and forward-looking guidance. The highlight of the result was a strong performance from its Digital Industries division. Siemens has developed technology that can be used by its customers to shift their manufacturing to smart autonomous production systems, where individual machines in the production process communicate directly with each other, thus avoiding human intervention. This shift is so important it has been labelled the fourth industrial revolution.
Siemens also confirmed that it was still on track to continue to streamline its organisational structure with a spin-off of the energy division. Conglomerates tend to trade at a discount to the sum of their parts due to the difficulty investors have in understanding the business. As Siemens simplifies its structure this discount may reduce.
The weakest performing global equity holding in May was Ping An Insurance, which was only down 2.3% in its local currency. Ping An is one of China’s largest insurance companies. The company has invested heavily in R&D and has built technology platforms that not only enhance customer experience but also improve the efficiency with which it can deliver its products to customers.
Ping An released its first-quarter results in late April, which may have contributed to the fall in the share price in May as investors digested the results. The value of new business written had declined, which is not surprising as China was in lockdown for some of this quarter. This decline was mitigated by Ping An’s continued shift to online sales, with a remarkable 8.7 million new clients acquired online during the quarter.
In our view, what was more likely to be weighing on the company’s share price in May was a ratcheting of tensions between the US and China. Homeland Security accused Chinese officials of holding back information and President Trump weighed in suggesting the possibility of new tariffs. This made the markets start to worry about the Phase One US-China trade deal announced in mid-January. Later in the month tensions escalated further when the Chinese proposed new security legislation in Hong Kong. The Hang Seng Index, a barometer of Hong Kong listed stocks (which is where Ping An is listed) declined 6.8% during the month.
Our strongest performing Property & Infrastructure holding in May was Aventus, which was up 15.8% in local currency. Aventus is a listed property company that owns 20 large format retail precincts (or big-box retail outlets). We were originally attracted by Aventus’s strong dividend yield, above-inflation growth and conservative management.
Aventus made no significant media statements or stock exchange releases in May, which suggests that the strong share price performance in May is best categorised as a bounce back from the COVID-19 sell off earlier in the year. This is a good opportunity to explain what we do when a holding goes through a tough period. The COVID-19 social distancing restrictions created significant short-term issues for all retail landlords.
In April, we had a call with management to discuss the impact of COVID-19 social distancing restrictions and understand the company’s financial position. The management team confirmed that all of Aventus’s centres had remained open (Australia had looser COVID-19 restrictions than New Zealand) and 80% of stores remained open but were operating with reduced hours and foot traffic was down. The company indicated that they were working with some tenants to provide rent deferrals and/or abatements, but they typically negotiated increased tenure in return. In summary, COVID-19 will have reduced operating income but we did not identify any unexpected issues and were reassured that the company was still in a strong financial position.
In our view the share price reaction was overdone. We are pleased to note that this recovery has continued in June and it is one of the strongest Property & Infrastructure holdings month to date.
Z Energy was once again one of the worst performing Property & Infrastructure holdings. The company released its annual result during the month and raised capital through a combination of an institutional placement and shareholder participation plan (a plan that allows retail shareholders to participate in the capital raise). When companies raise additional capital this tends to depress their share prices in the short term and Z Energy was no exception with its share price slumping 9% in May. As we write this newsletter, Z Energy is one of the strongest performers month to date in June.
The company has faced what is close to a perfect storm over the past year. In August, Z Energy warned investors that an increase in competition had led to a significant deterioration in margins. This headwind was replaced with COVID-19 travel restrictions which dramatically reduced demand for fuel. Management took a conservative stance and opted to raise capital to avoid the potential for the risk of a breach of one of the company’s debt covenants.
Generate took advantage of the opportunity to buy Z Energy shares in the capital raise at what we believed to be an attractive level. While we have some reservations about the level of expenditure on ‘growth projects’ we like the company’s leverage to increasing volumes as the local economy emerges from lockdown. More specifically, the faster than expected shift down to level 1 will see vehicle traffic volumes pick up, increasing the demand for fuel. We also like the fact that Z Energy’s management has a renewed focus on cost control which in time should bring expenditure on ‘growth projects’ down.
