Welcome to the January edition of the Generate Member Newsletter and a very Happy New Year to all our members and investors. We hope you had a festive period relaxing and enjoying the company of friends and family. After having won ‘KiwiSaver Manager of the Year’ at the Good Returns powered by Research IP Awards evening in 2019 we look forward to continuing to provide you with a leading experience into the year ahead. 2020 will no doubt provide plenty of talking points in the markets as we face political elections in both New Zealand and the United States. We begin this year by touching on a few of the front of mind topics the markets are talking about.

We were pleased to launch the Focused Growth Trust in 2019 which is our new non-KiwiSaver fund. Remember, if you would like to know more about the Focused Growth Trust please email us or call us on 0800 855 322

Returns to 31 December 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.

December was another strong month across our three KiwiSaver strategies rounding out the year in a positive fashion amongst plentiful headlines. The Growth and Focused Growth Funds closely fought for pole position returning a positive 2.29% and 2.12% respectively. The Focused Growth Trust in its first full month returned +1.97%, while the Conservative Fund with its much lower exposure to international equities returned a very pleasing +1%.

Turning first to the Funds’ international holdings, Tencent Holdings led the way with a strong return of 13.2%. Listed Chinese companies generally fared well over the month on the back of positive investor sentiment returning post the confirmation of a “phase one” trade detail between the US and China. More specific to the company however, was investors becoming sanguine towards the Chinese regulator’s stance on gaming. This had been a key headwind for much of the year. Over the month Tencent also had a number of new gaming titles approved for release. Gaming is a key revenue driver for Tencent and as a result, the market became more optimistic on near term earnings growth.

Alibaba turned in a positive month rising +6.1% after the launch of its secondary listing on the Hong Kong stock exchange late in November. The listing prompted very strong demand from Hong Kong retail investors and institutional investors from mainland China. Further, the stock was fast-tracked to inclusion in the Hang Seng Composite Index driving passive investors to buy.

The investment in the Jupiter European Opportunities Trust was the weakest performer within international equities over December with its share price dipping -2.5%. While the share price declined, the underlying net asset value of the Trust rose +1.3%, meaning that the share price discount to net asset value expanded from 2% at the beginning of the month to 6% at December’s end. We used this as an opportunity to add to our position.

In the New Zealand equity market, excitement was driven by the revelation of a fixed price bid for MetlifeCare of $6.50 per share by Swedish-based EQT Funds Management. While the bid was initially deemed to be too low by large shareholders (including ourselves), shareholders received a late  Christmas present when the bid was revised upwards to $7 per share, which more closely represented Metlifecare’s net tangible asset valuation. As the share price of MET re-rated towards the acquisition price, the rest of the retirement village sector enjoyed a strong boost in sentiment. The Funds’ holdings in Oceania Healthcare, Arvida Group and Summerset Holdings gained +22.2%, 19.7% and 15.6% respectively. While it is a shame to lose another company off the local bourse, it is pleasing that investors patience has been rewarded and ultimately a company deemed to be mispriced by the share market has realised a more realistic value.

Outside of the retirement village sector in New Zealand, a key performer was the Funds’ relatively recent position in Australian real estate fund manager Centuria Capital. Two of Centuria’s funds which are listed on the ASX made meaningful property acquisitions in the month which both increases these funds size and in turn the revenue Centuria receives as manager of the funds. Centuria finished the month up +9.6% which compares to the broader Australian real estate investment trust (A-REIT) universe which was down -4.2%.

In a case of deja-vu Z Energy reclaims the title of worst performing stock over the month. After having briefed the market in early December that the company was on track to meet earnings guidance, it dropped a bombshell shortly afterwards announcing that earnings were expected to be a staggering 10% lower. The company sighted further retail margin pressure as a result of continued intensity from competitors alongside an unforecasted slide in refining margins. Although Z Energy is considered to be a “sunset industry” we continue to believe there is value within the business given its ability to generate strong free cash flows. Z Energy has made a number of missteps over the past 18-months, which has made it a regular feature in this newsletter. Instead of selling the company’s shares¬¬ we have engaged with the Board of Directors .

Two further laggards over the month were Mirvac Group (-3.9%) and The A2 Milk Company (-3.2%). As mentioned above, the A-REIT’s sector experienced soggy performance in December, possibly explained by a combination of interest rates increasing, renewed optimism for a US/China trade deal and profit taking after a very strong year of performance. Pleasingly however, Mirvac performed better than its collective peers in the A-REIT universe. With respect to A2, the share price had a very strong November return following a positive trading update and in part has, drifted off gently since then. We continue to be comfortable with A2’s operating momentum and competitive positioning.

As we mentioned in previous newsletters, 2019 was filled with the market’s obsession over concentrated geopolitical issues. Looking ahead to the rest of the year, in many ways these types of events will likely continue to dominate the headlines.

For better or worse we are likely to get an outcome to the multi-year Brexit debacle after Boris Johnson led his Conservative Party to a resounding victory in the UK elections. The result relieves the stonewalling of any Brexit progress and paves the way forward to remove the huge degree of uncertainty which has paralysed business confidence and investment within the UK over the last few years.

Elsewhere, we look forward to the ratification of the “Phase One” trade deal between the US and China later this month. While this outcome was within the market’s expectations, the calmer sentiment from both parties has been well received  and renewed optimism of more a substantive agreement later in 2020 has emerged.

Staying in the US, President Trump will seek to retain his Presidency for a second term in the US elections later this year. Given the increasing divergence between Republican and Democratic ideals this presidential race will no doubt provide plenty of market volatility.

Of course, in New Zealand, we have an election of our own, and while this will be decidedly less divisive than the US, it will nonetheless provide plentiful talking points.

While 2019 saw equity market valuations close to record levels, there is no historical correlation between one year’s market performance and the next. Certainly, companies with very high valuations will have requisite expectations of earnings growth, but equally this provides opportunities for active managers, such as ourselves, to find the mispriced opportunities.

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:

"Price is what you pay, value is what you get.”

A lesson that Buffett suggests he received from his mentor Benjamin Graham, is that the volatility in asset prices suggest little about an asset’s underlying value. Prices will always move up and down, but understanding what the true value is remains the fundamental core of investing. As Buffett says; “whether we’re talking about socks or stocks, I like buying merchandise when it is marked down.”

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: Confirmation bias

Confirmation bias is the natural human tendency to seek and emphasise information that confirms or supports an existing view or hypothesis. Confirmation bias can be a major reason for investment mistakes as it can lead to investors becoming overconfident in their decision making as it appears that new information reconfirms a decision already made. This overconfidence can result in a false sense that nothing is likely to go wrong and consequently increases the risk of being blindsided when something does go wrong.

In order to minimise confirmation bias, it is important to continually challenge the status quo and investment thesis. Indeed, it is as equally important to try to prove the counter-argument to an investment idea is true. We must always be striving to critically analyse where we may be wrong.

Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s business partner, said: “We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side”.

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Aventus Group

Aventus is an Australian Real Estate Investment Trust (REIT) and is the landlord of large format retail stores. Its centres tend to be in the middle/outer ring suburbs in major metropolitan areas where tenants cater to everyday needs of shoppers including vet services, hairdressers, chemists and household goods.

Aventus pays a 6% dividend yield which we expect to be able to grow at 3% per annum without acquisitions.  In today’s low yield environment this is an attractive trait.

Aventus’ retail tenants have enjoyed robust growth in top-line sales during a period where most retailers have struggled to stand still. This is reflected in high occupancy statistics: at the end of June, Aventus had vacancy of 1.4% compared to a market average of 6%.

Being a specialist large format REIT manager, Aventus has a long and desirable track record of acquiring and developing assets which have continued to add value to shareholders.

Next month: Stride Property Group

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