The June Edition of the Generate Member Newsletter.

Welcome to the June edition of the Generate Newsletter. Share markets continued the recovery started in late March. The focus of investors is squarely on progress towards developing a vaccine, the declining number of new cases (at least in developed economies) and the easing of social distancing restrictions.

New Zealand has led the world in reducing the number of cases and easing social distancing but our borders remain closed. A simple but powerful research piece by Deutsche Bank put the drag from the border closure into perspective. International tourism makes up 5% of our Gross Domestic Product (GDP), if we net off New Zealanders' international travel then this impact drops to 3%, equivalent to the same impact as the GFC. They expect that this drag would be further reduced by a trans-Tasman bubble. Attention has shifted to assessing the extent of the economic impact of the lockdowns and what can be done to assist the recovery.

The reduction in the number of cases in large parts of developed Europe has also been encouraging, and these countries have also eased social distancing restrictions, opening up their economies. The United States has opted not to wait for a significant reduction in the number of cases before beginning to open up. The number of new cases remains stubbornly around 20,000 per day, a third less than the peak of 30,000.

The prognosis for developing nations is less positive. Globally, there were 135,000 new confirmed COVID-19 cases on June 10th - the highest number of new confirmed cases in any one day. A lack of financial flexibility makes it difficult for the governments of developing nations to spend their way out of the crisis.

Generate continues to be cautiously positioned by way of holding some additional cash. Companies are facing a very uncertain economic environment and there are risks of a second wave, particularly in countries that have reopened without a meaningful reduction in new cases.

In other news, we have recently updated our Responsible Investment Policy.

Make sure you get your $521.43 Government Contribution this year! If you have already contributed $1,042.86 during the year to 30 June 2020 you will get the full $521.43 freebie from the Govt. If you haven’t you can still do so before 30 June and be eligible (it is voluntary). Please see our website for information on how much you have contributed or for how to contribute.

Generate KiwiSaver Scheme

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

  1 Year  3 Year (p.a.) 5 Year (p.a.) Since Inception***(p.a.)
Focused Growth      8.19%  9.54% 8.15% 9.66%
Growth 6.10% 8.70% 7.79% 8.85%
Conservative 5.30% 6.21% 5.93% 5.87%

**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.





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.

Share markets digested a lot of negative news in May but still managed to climb higher.

In the United States, the S&P 500 index was up 4.8% in US dollars, boosted by a rally late in the month. The start was marked by an increase in US-China tensions.

President Trump claimed that he had seen evidence showing COVID-19 had originated in a Chinese laboratory and Homeland Security stated the Chinese could have done more to prevent the spread of the virus. This prompted speculation that the US may apply new import tariffs, putting at risk the US-China trade deal.

The anti-China sentiment is non-partisan in the United States at the moment. A bill that prohibits Chinese companies from listing on US stock exchanges or raising capital from US investors was passed by the Senate. This further increased investor concerns that the very fragile economy may see unnecessary restrictions.

The Chinese did little to allay tension and instead, the National People’s Congress (NPC) authorised the drafting of new national security legislation for Hong Kong. Commentators raise a number of concerning aspects to this new legislation including the possibility that it may allow China to set up its own security institutions in Hong Kong.

The markets also had to digest a number of other negative stories including news that more companies were filing for bankruptcy protection, cautious comments from Warren Buffet about the economic environment and a slew of negative economic data.

Later in the month share markets were boosted by optimism that we have seen the worst of the COVID-19 impact. This optimism was based on early evidence of a pickup in airline and hotel bookings, positive news on the development of COVID-19 vaccines and a decline in the number of new COVID-19 cases in the United States.

European share markets were up in May with the Bloomberg European 500 up 3.5%. The big news in Europe during the month outside of that already discussed was German and French support of the creation of the EUR 500 billion European Recovery Fund. This Fund is designed to help Southern European nations that are worst hit by the crisis and have limited fiscal flexibility. The Fund is designed to assist the recovery and avoid another European debt crisis. It was significant news that Germany was supporting the European Recovery Fund, but it needs support from all 27 member states, and there seem to be a number of divergent opinions.

There was a broad dispersion of returns from Asian share bourses in May. The Japanese share market posted the strongest returns in the region. The Nikkei 225 appreciated 8.4% buoyed by success in their fight against COVID-19 and relaxed social distancing restrictions. News of increasing US-China trade tensions dominated headlines dragging down Hong Kong listed shares.

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: Mental accounting

Mental accounting describes the phenomenon where people treat money differently depending on how it was earned and how they intend to use it. From a rational perspective, all money is equal, regardless of its origin (eg work, investment earnings or a gift) or its intended use.

A good example of how this bias can impact investors is the tendency to take bigger risks with money that was made in the share market rather than money that was earned through work. The source of money should not impact risk. Parallels can be drawn with gamblers that view winnings as “house money” (i.e. not their money) and as a result are happier to take bigger risks with this money.

Top Holdings as of 31 May 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 T Rowe Price Global Equity Fund T Rowe Price Global Equity Fund
Alibaba Berkshire Hathaway  Berkshire Hathaway Berkshire Hathaway
Alphabet Magellan Global Fund Magellan Global Fund Platinum International Fund
Ping An Insurance Platinum International Fund Platinum International Fund Worldwide Healthcare Trust
Microsoft Worldwide Healthcare Trust Worldwide Healthcare Trust Alibaba
Property and Infrastructure
Infratil Infratil Infratil Infratil
 Contact Energy Contact Energy Contact Energy Contact Energy
Spark Spark Spark Spark
Arvida   Arvida Arvida Arvida
A2 Milk A2 Milk A2 Milk A2 Milk
Fixed Income and Cash
Term Deposits Cash & Cash Equivalents Cash & Cash Equivalents Cash & Cash Equivalents
Cash & Cash Equivalents Term Deposits Infratil Bonds ANZ Perpetuals
Vector Bonds Infratil Bonds Term Deposits  Infratil Bonds
Genesis Energy Bonds Mercury Energy Bonds Metlifecare Bonds  - 
Trustpower Bonds Genesis Energy Bonds -  - 


Stock Spotlight

Worldwide Healthcare Trust

Worldwide Healthcare Trust Plc (WWH) is a London Stock Exchange listed investment company that holds a portfolio of biotechnology, pharmaceutical, healthcare equipment, healthcare technology and healthcare services companies. WWH has the objective of achieving high levels of capital growth and uses derivatives to mitigate risk and enhance returns.

The manager of WWH, OrbiMed Capital, is the largest independent specialist investor in the biotechnology and pharmaceutical sectors in the world. It employs over 80 investment professionals and has offices in New York, San Francisco, Herzliya, Shanghai and Mumbai. This allows OrbiMed to have a universe of actively covered companies that is approaching 1,000.

OrbiMed looks for companies that have underappreciated products in the pipeline, high-quality management teams and adequate financial resources. They employ a disciplined portfolio construction process to build a portfolio focused on their highest conviction investment ideas.

In a recent update, OrbiMed explained how they had managed the Trust’s portfolio through the COVID-19 crisis. They explained that they had not deliberately targeted companies aiming to produce COVID-19 vaccines or therapies. The portfolio had benefited from news that some of their holdings were making headway in this area, and in some cases they used this as an opportunity to trim the holding. During the crisis OrbiMed reduced the number of names in the portfolio, pruning names that may be materially disrupted and doubling down on quality. They had also looked for severe market dislocations for areas of possible opportunity.  They also noted that the crisis had changed sentiment towards the sector reducing regulatory risk for the foreseeable future.

Next month: Novartis

Take a quick Survey...

How likely would you be to recommend Generate KiwiSaver to others?

1        2          3         4         5         6                       9          10  

(Not At All Likely)                                               (Extremely Likely)