Welcome to the March edition of the Generate KiwiSaver Scheme Newsletter.

Throughout February, share markets around the globe continued their strong start to the year. Locally, the earnings season was lacklustre but that didn’t stop the local share market powering back close to all-time highs. More on this later.

In other news the recently released Workplace Savings NZ report  revealed that Generate has been the fastest (%) growing KiwiSaver Scheme in their league tables, by funds under management, in each of the last 11 quarters.

In wider KiwiSaver news, there are important  upcoming changes to KiwiSaver which include the ability to contribute 6% or 10% directly from PAYE income from 1 April 2019. Also, from 1 July 2019, people who are over 65 years old will be eligible to join KiwiSaver. Further details are available in this article.

A Quick Survey

If we offered non-KiwiSaver (not locked in to age 65) investment funds which - if any - of our three funds would you be most interested in investing:

• Focused Growth Fund
• Growth Fund
• Conservative Fund
• KiwiSaver is all I am interested in thanks

Returns to 28 February 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.

All three funds chalked up another positive month in February with the Focused Growth, Growth and Conservative Funds returning 2.23%, 2.02% and 1.12% respectively.

Ping An Insurance shares gained 8.9% over the month making it the strongest performing international equities holding. Given Ping An has a large investment portfolio the stock tends to be leveraged to broader Chinese share markets - which performed strongly in February. Also investors may have been feeling optimistic about Ping An’s approaching earnings announcement in March where the company was forecast to report new life insurance business value growth between 10 and 15%.

On the other side of the ledger, Facebook unsurprisingly gave up some of its stellar returns from January, falling -3.1% in February (but overall is still up 23.2% for the first two months of the year). After the groundswell of enthusiasm for the stock immediately after it announced robust revenue growth some profits were taken (including by our funds) in February as the company’s privacy and fake news issues continue to bubble away.

Aged care stocks experienced contrasting fortunes in February with both our top and bottom performing property and infrastructure (P&I) stocks coming from the sector.

Summerset claimed P&I line honours for the month with a 6.4% return. The stock performed well going into its FY18 earnings announcement and took another leg up after it delivered a solid earnings result on 22 February. Despite a slowing housing market Summerset recorded earnings per share growth of 20%. We believe Summerset is trading on a compelling valuation and recently took the opportunity to add to our holding (at the expense of another – more expensive – aged care stock).

Of all the funds’ P&I holdings only two posted negative returns in February. The most material to the funds’ returns was Metlifecare which was down -1.6%. The company also posted its earnings last month which showed the company is making progress but clearly not as much as what the market was hoping for. In addition hopes of a near term share buy-back, that were raised at the company’s AGM, were dashed when the company stated they didn’t want to be undertaking a buy-back whilst they were considering a corporate bond issue.

In February share markets around the world built on the strong gains enjoyed in January. Hopes of a resolution of the trade conflict between the US and China increased as positive noises came from both camps during a string of meetings. Fading fears of a global recession in 2019 added a further tail-wind. The good news kept on coming with Trump making it clear he was getting closer to accepting a border spending deal which would avert another government shutdown.

As in January, the ongoing debacle that is Brexit failed to dent the stride of share markets with both UK and European bourses posting positive returns.

Global share markets had another strong month in February with the MSCI World Index returning 3.5% (in local currencies).

US shares notched up another positive month (for the aforementioned reasons) with the S&P 500 returning 3.2%. Information Technology was the sector that benefited the most from the “risk on” environment.

On the economic front GDP in the US rose at an annualised pace of 2.6% during the fourth quarter. Although this was a weaker number than those reported in the preceding two quarters it was enough to rein in fears that the economy would suffer a significant downturn any time soon.

Tepid (and slowing) inflation numbers released during the month justified the Fed’s decision to be patient regarding further rate rises. The Fed’s dovish tilt has seen some other central banks follow suit which is typically supportive of share markets.

Eurozone equities also contributed to the solid performance of global share markets. The Bloomberg European 500 Index was up 4.2%. Political developments continued to dominate the headlines as we count down the days to Britain’s scheduled exit date (29 March) from the European Union. However, positive trade and economic developments outweighed investor angst over the Brexit debacle.

Emerging Markets (EM) equities bucked the trend in February with the MSCI EM Index falling -1.0% (in local currencies). Latin American share markets lost some ground over the month, led by Brazil, as investors awaited more clarity on pension reform from the government. Asia was the only region in emerging markets to register gains with sentiment boosted by progress in trade talks between the two global economic heavyweights. Both parties indicated that they are moving closer to reaching a deal which could see the US removing tariffs and China hastening market reform. The announcement of an extension of the deadline for trade talks helped further raise investor confidence in the region.

Share markets in China received further good news when MSCI, a provider of global share market indices, said it is going to increase the weighting of China listed shares in the MSCI Emerging Markets (EM) Index. This means that index tracking EM investors will be forced to invest more in China. The Shanghai Composite ended the month up a remarkable 13.8%. After two strong months this index is leading the pack in 2019 but at the time of writing was still some 15% below its 2018 highs.

Over the ditch, Australia also produced a very strong performance with the ASX 200 returning 6.3%. The banking sector made strong gains after the Royal Commission didn’t come down as hard on the banks as many expected.

Back home, the NZ50G Index notched up a 3.8% gain despite a tepid earnings season. The NZX’s growth darlings (A2 Milk and Fisher & Paykel Healthcare) and stalwart yield stocks (such as Meridian and Contact) won favour with investors.

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:

“For 54 years, Charlie (Munger) and I have loved our jobs. Daily, we do what we find interesting, working with people we like and trust. And now our new management structure has made our lives even more enjoyable. With the whole ensemble – that is, with Ajit (Jain) and Greg (Abel) running operations, a great collection of businesses, a Niagara of cash-generation, a cadre of talented managers and a rock-solid culture – your company is in good shape for whatever the future brings.”

This quote was taken from Buffett’s recent newsletter to shareholders which always makes good reading. At the ripe old age of 88 Buffett is under no illusions that he needs to have Berkshire’s succession plan firmly in place. Given Buffett’s experienced and talented lieutenants - Ajit Jain who runs insurance and Greg Abel who oversees the non-insurance businesses - he is very confident he will leave the company in good hands.

Amusingly Buffett refers to himself as the “young one” as his right hand man – Charlie Munger – is now 95. The fact that they both remain sharp as tacks is clear evidence as to why you should keep your brain active in old age!

Active versus passive

Broadly speaking there are two investment approaches: Active and passive. Actively managed investment funds employ investment professionals to scour the fund’s universe for the most attractive investments. Passively managed funds attempt to replicate the returns of the fund’s investment benchmark.

For instance, a passively managed NZ equity fund with an NZX50 benchmark will hold the 50 companies that make up the index in the same weights as the index. An actively managed fund will own the companies that in the view of the fund’s portfolio manager have the most attractive prospects.

Those supporting passive approaches argue that the market is efficient, all publicly available information is incorporated into share prices and it is not possible to use this information to generate superior returns. Consequently, investors should employ a passive approach and avoid the costs of active management.

We disagree with this point of view. First, in our view, it is possible to select well-resourced, skilful managers that can generate superior performance. Second, tests of market efficiency are largely focused on the US market. This market has significantly more research attention making active management relatively more difficult than in markets like NZ where a significant proportion of companies have limited research coverage. For instance, according to Bloomberg, 22 companies in the NZX50 have 5 or less sell side analysts with investment recommendations compared to only 7 companies in the S&P 500 - an index with 10 times the number of companies! You can imagine what analyst coverage is like for companies outside the NZX50… Third, market commentators also argue that the increasing popularity of Exchange Traded Funds* (ETFs) creates additional risks. The easiest of which to observe is that large ETFs can distort market prices; this is particularly evident for NZ stocks during MSCI and FTSE index rebalances.

*ETFs tend to mirror or closely resemble share market indices.

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

Precinct Property

Precinct is New Zealand’s largest owner, developer and manager of premium CBD office space in Auckland and Wellington.

The company listed on the New Zealand Stock Exchange in 1997, initially owning just six properties. Today, Precinct owns 14 properties with a portfolio valuation of approximately $2.5 billion.

Although Precinct’s primary focus is office buildings, in recent times it has broadened its mix of real estate by investing in inner city retail, leisure (hotels) and 100% ownership of Generator, the shared office space provider.

The company has stepped up its development capabilities in recent years and is currently undertaking the substantial Commercial Bay project in downtown Auckland. The precinct will bring together the largest concentration of high quality retail and food and beverage in the city, a luxury hotel and office tower. Fortunately for Precinct it locked in the vast majority of costs for this project and the significant over-runs have had to be borne by the construction team – Fletcher Building.

The other significant developments that Precinct has underway are the Wynyard Quarter and Bowen Campus (in Wellington) projects.

In February the company announced a $150m capital raising in order to pay back bank debt and provide additional capacity to deliver on medium term development opportunities. Generate’s funds participated in this placement of shares.

Next month:

Apple Inc.