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.