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

Congratulations to the thousands of our members who are entitled to the full Government Contribution (formerly known as Member Tax Credits). The cut off for eligibility was the end of last month and the $521.43 should be hitting your account any day!

July 1 saw some KiwiSaver law changes come into effect. First, over 65’s will be able to join KiwiSaver. There are approximately 530,000 over 65’s in New Zealand that are not in KiwiSaver who now have the opportunity to join. If you know one of them we would be more than happy to help!

The other change to KiwiSaver is that new members will no longer be locked in for a minimum of five years. Members between the ages of 60 to 64 (inclusive) who enrol on or after July 1, 2019 will be able to withdraw their KiwiSaver funds at the age of 65. But they will also miss out on receiving the Government Contribution for a minimum of five years.

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

1         2         3         4         5         6         7         8         9          10

(Not At All Likely)                                               (Extremely Likely)

Returns to 30 June 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.

After riding through a challenging month in May, the funds bounced back solidly in June. The Focused Growth, Growth, and Conservative Funds returned an impressive 5.29%, 4.93% and 2.54% respectively. 

Markets were sanguine throughout June as expectations for a trade war resolution between China and the United States gained momentum, as did speculation that the Federal Reserve will cut rates in July. The confluence of these factors saw the widely followed volatility index (VIX) move -19% lower, and US 10 year yield down to 2.04%.

Looking at the Fund's international holdings, Alibaba was the strongest performer generating positive returns of +13.5%, closely followed by Apple which returned +13%. In a positive for Alibaba, China retail sales reported for May were up +8.6% year-on-year which was an improvement on April’s print of +7.2%. Also Alibaba is looking at listing on the Hong Kong stock exchange in a move that could raise up to US$20bn, improving liquidity in the stock and increasing its cash buffer. Both Alibaba and Apple are beneficiaries of any reduction in trade war tensions and their respective share price gains in June were reflective of this.

Closer to home, Mercury Energy was the strongest performer in the Funds. Mercury returned a whopping +20.8% over the month, and was the lead performer in the electricity generation and retailing sector. Mercury’s high quality renewable generation portfolio continues to screen attractively and coupled with robust free cash flow generation, desirable cash dividends and a stable regulatory environment it remains a core holding for the Funds.

Infratil continues to perform strongly post their acquisition of 50% of Vodafone New Zealand in May. The acquisition and associated capital raise have been well supported by the local market with many minds turning back to Infratil’s highly successful 50% acquisition of Z Energy. Another of the Fund’s key holdings, Arvida, raised capital in June tapping the equity markets for $180m to assist in the purchase of three high quality retirement village sites in Tauranga and Queenstown. Each of the Fund’s participated in this transaction which upon completion, will provide a meaningful increase to Arvida’s development pipeline.

Returning overseas to touch on the performance laggards in the Funds, Alphabet who is the parent of Google, was the worst performer falling -4.7% for the month. Alphabet performed strongly for most of June before falling away late in the peace. We largely attribute the softness at month end to press reports that Alphabet faces an antitrust investigation into their market dominance. Investigations into Alphabet’s operations are certainly nothing new, and while the latest iteration may result in some investor caution, it is worth highlighting that Alphabet is growing revenues at greater than 20% per year while generating strong cash flows and maintains a robust balance sheet. Finally, there is a view in some corners of the market that any regulator forced break-up of Alphabet may in fact unlock previously underappreciated value across its core operations.

The Fund’s only other laggard in June, was a slight negative return on Metlifecare, -1.8%. Metlifecare continues to be in the market’s naughty corner as concerns persist about the state of the Auckland housing market and consequently is trading at a material discount to its book value. We continue to view this as anomalous and are happy to play a patient, long-run game while waiting for a catalyst to re-rate the stock.

Geopolitical events again dominated market headlines throughout June as the market followed the rise and fall of news related to trade and the Federal Reserve’s interest rates settings. By month end the tone of markets became somewhat more sanguine even amidst mixed economic data releases. Accordingly, the S&P500 rebounded from May’s challenges to print new market highs.

Early in June, President Trump continued to apply pressure on Huawei and China, and as part of his visit to the UK discussed banning Huawei access to Britain’s 5G networks. Prime Minister May had previously rebuffed such a demand. Trump also placed an additional five Chinese tech entities on a trade blacklist. However, a few weeks in “trade wars” is a long time and by month end at the G20 summit in Osaka, President Trump and Chinese President Xi Jinping announced a return to trade negotiations. Trump decided against placing tariffs on the remaining US$350bn of un-tariffed Chinese exports and allowed US companies to continue supplying Huawei with their products.  Unsurprisingly, this provided support to current market valuations and ensured that markets had a positive end to the month.

Underlying the geopolitical themes playing out around the world, the US Federal Reserve again made dovish signs with Governor Powell acknowledging that they had made “significant changes to their policy statement”. A number of FOMC members are now talking to a 50bps “insurance” rate cut in July. Not to miss out in the action, President Trump extraordinarily exclaimed that he could demote Powell if the Fed kept rates on hold. Currently, the market is pricing 50bps worth of rate cuts by September. Low interest rates continue to buoy physical asset prices including listed property trusts and infrastructure assets as investors clamber to find investments providing an attractive and stable dividend yield.

In the Middle East tensions continued to rise as Iran shot down a US navy drone and was reportedly responsible for an attack on two oil tankers near the Persian Gulf. Oil markets reacted in kind with the WTI spot price of oil rallying +9.3% in the month, finishing at US$58 per barrel. Unsurprisingly, President Trump announced sanctions on Iran’s Supreme Leader and other top officials which has resulted in the “permanent closure of the path to diplomacy”. Rising oil prices are of course, a component in the measure of inflation, and as such it will be interesting should there be any inflationary outcomes as a result of the oil price appreciation.

In New Zealand the S&P/NZX 50 index continues to perform strongly. This was no surprise given our local listed market place is dominated by stable, defensive, dividend paying companies. The S&P/NZX All Real Estate Index returned +5.9% over June, while the S&P/NZX Utilities Index returned +11.2%. This compares to the positive 3.8% returned on the broader S&P/NZX 50 Index. Taking a closer look, Mercury Energy, Meridian Energy and Contact Energy returned 20.8%, 11.6% and 8.5% respectively. While dividend yields continue to fall in the local market due to share price rises, it is interesting to note that the relative spread between dividend yields and Government bonds remains stable. This helps to paint a picture that as long as Government bond yields remain low, demand for yield stocks in New Zealand will remain.

As we look forward, the US is set to encounter plentiful news flow over the next few months with Federal Reserve meetings and continuing trade negotiations likely to be the highlights. It is expected that central banks will continue to be the key driver for global markets in the foreseeable future as dovish policies are acting to mitigate growth concerns. Earnings growth expectations have been lowered to a more reasonable 4%-5% pace, which is a marked change from the overly optimistic forecast of +12% late last year. This reset may provide an opportunity for companies to beat 2Q19 projections in a period where more earnings risk exists than previous quarters.

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:

“It is rat poison squared.”

The quote above is Buffett’s view on Bitcoin. Below you can find out the Generate’s investment team's latest thoughts on Bitcoin.

Knowledge Builder - Bitcoin Strikes Back?

With the price of Bitcoin again surging - after a precipitous drop which began in late 2017 - there is much debate regarding the merits (or otherwise) of Bitcoin. FYI the investment team at Generate falls firmly into the “otherwise” camp and regular readers of this newsletter may recall just prior to its previous peak we likened the run up in Bitcoin to the tulip bulb mania of the early 17th Century. View December 2017 newsletter. Before we lay out why we think Bitcoin (and any cryptocurrency not linked to the value of a real asset for that matter) continues to be on par with an evening at the casino let’s give the uninitiated a 101 on what it actually is.

Bitcoin is currently the largest crypto or digital currency meaning that it is virtual money. It can be used to buy products and services although currently not many businesses accept it and some countries have banned it outright.

Each Bitcoin is a computer file which is stored in a digital wallet app on a smartphone or computer. Bitcoins can be sent from one person’s digital wallet to another. Importantly every single transaction is recorded in a public ledger called the blockchain. We are far from convinced that Bitcoin has a rosy future but blockchain technology can be used for any digital ledger (tracing goods through the supply chain for example) and appears to be here to stay.

In order for the blockchain to work powerful computers need to be made available to process every Bitcoin transaction. This is energy intensive work and after a period of times the owners of these computers will be rewarded with a Bitcoin to keep. This is called Bitcoin mining. It is important to note that when the price of Bitcoin is low the electricity cost to generate a Bitcoin may exceed the value of the Bitcoin reward.

Some believers in Bitcoin think that banks and governments can’t be trusted and - given Bitcoin avoids both - it is the future. But tell that to James Howell, a British I.T. worker, who started mining Bitcoin in 2009 and managed to accumulate 7,500 “coins” on one of his hard drives. Today that would be worth approximately USD98 million - if he still had the hard drive. Unfortunately for James he mistakenly threw the hard drive out and it is now buried under thousands of tonnes of landfill… Also tell that to the people who lost out from the Mt Gox debacle. Mt Gox was once the largest Bitcoin exchange in the world but went bankrupt in 2014 after months of technology issues. In addition it was reported that 744,000 Bitcoins had been stolen from the company without anybody noticing. This theft accounted for almost 6% of all Bitcoin at the time…

If Buffett’s quote above didn’t alert you to the risks of Bitcoin here are some comments from two more investment legends:

“In my view, digital currencies are nothing but an unfounded fad (or perhaps even a pyramid scheme). It is on a willingness to ascribe value to something that has little or none beyond what people will pay for it”. Howard Marks

“Bitcoin has no underlying rate or Return. You know bonds have an interest coupon, stocks have earnings and dividends… There is nothing to support Bitcoin except the hope that you will sell it to someone for more than you paid for it.” Jack Bogle.

To wrap up Bitcoin is not an investment - it is a gamble. There is nothing wrong with an occasional punt as long as the money being punted can afford to be lost indefinitely. A lot of people have made a fortune from Bitcoin and many others will join their ranks. But it is lady luck who determines who comes out on the right side of the ledger.

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Goodman Property Trust

Goodman Property Trust (GMT) is a listed REIT in New Zealand specialising in the development and management of industrial assets. GMT is a sub-fund of the Goodman Group who are one of the largest listed investment managers of industrial property globally and listed on the Australian Securities Exchange with a market cap of approximately A$29bn.

GMT owns, develops and manages industrial and business park assets in New Zealand. Over the last few years GMT has actively managed it’s property portfolio with proceeds from asset sales going into new development programmes. With a current portfolio valued at approximately NZ$2.6bn, GMT is the largest player in the listed property sector in New Zealand.

GMT’s flagship asset is Highbrook Business Park, conveniently located near motorways and Auckland International Airport. Via Highbrook, GMT is landlord to over 100 companies, some of which are large global companies such as Panasonic and Ford Motor Company. With a meaningful development pipeline in place, GMT expects to be able to continue to build, develop and lease out new assets for years to come.

With online retailing growing at rapid rates, the need for industrial assets such as large distribution centres has seen a surge in global demand. GMT has been a major beneficiary of the trend towards online retail, which has been reflected in the share price having increased by more than 30% over the last twelve months.

Generate’s funds have been happy holders of GMT throughout time, but as always we’re keeping an eye on the future and asking ourselves “what’s next”?

Next month:

Kiwi Property Group