The November edition of the Generate KiwiSaver Scheme Newsletter.

Generate KiwiSaver Newsletter - November 2017

Welcome to the November edition of the Generate KiwiSaver Scheme Newsletter. October saw the growth funds post stellar returns with the highlight being the Focused Growth Fund returning 5.10% for the month (after fees and before tax). More on this later…

Performance of Our Funds

Returns to 31 October 2017 (after fees* and before tax).

  One Month One Year Three Year (p.a.)
Focused Growth 5.10% 24.68% 12.35%
Growth 3.54% 17.71% 11.20%
Conservative 0.63% 4.82% 6.83%

*except the $3 per member per month fee.

Note: Past performance is not necessarily an indicator of future performance.

Our constructive view on global equities was warmly rewarded in October with the growth funds powering ahead. Strong earnings from a number of big tech companies that the growth funds are directly invested in*, coupled with a falling NZD helped propel unit prices higher. The Focused Growth and Growth funds returned 5.10% and 3.54% respectively. The Conservative Fund notched a 0.63% gain over the month.

The IEM or large cap international stock with the highest return was Ping An Insurance (PAI) which returned 20.7% (in NZD) in October. Last month in our Spotlight section we wrote about how we thought the company had a bright future - and in October it seemed like the market strongly agreed. Late in the month (PAI) reported strong Q3 numbers, driven by an excellent performance from its life insurance business. The company also reported some encouraging metrics on the technology side of the business. We look forward to PAI’s Corporate Day on 20 November which will again focus on the company’s technology and could be a catalyst for further share price strength.

The IEM or large cap international stock with the lowest return for the month was the Salt Long/Short Fund with a return of -1.4% (in NZD). This fund has a number of short positions and when markets rally strongly it tends to underperform.

The top performing Australasian stock for the funds in October (in which we have a material position) was Australian and U.S. toll road company Transurban (TCL) with a return of 5.3%. During the month TCL provided its September quarter update, which was well received by the market. The fall in the NZD/AUD in October was a further tail-wind for our holding in the stock.

On the other side of the ledger was aged care provider Summerset Group (SUM) with a -4.1% return. SUM’s stock price began its descent on the day that Winston Peters decided to form a government with the Labour Party as investors believe Labour’s policies will be less beneficial to house prices in New Zealand than those of a National Government.

*See the “Large Cap International Stock Spotlight” section below for which stocks the growth funds are currently directly invested in.

Time for a breather?

Whilst we remain constructive on global equities we think the risks of a temporary pull back are increasing. We don’t think we are at the end of the bull market by any means. But it is time for a breather - at the very least - and we wouldn’t be surprised to see a hang over emerge after the party-like conditions seen over the last 2 months.

Following is a recap of market movements in October

Global share markets (or equities) piled on further gains in October with the MSCI All Country World Index returning 2.6% over the month (in local currencies). Headlines regarding the 30th anniversary of the October 1987 share market crash failed to spook the market, which instead focused on strong corporate earnings, and the potential for U.S. tax cuts being enacted this side of Christmas.

U.S. equities had yet another positive month with the S&P500 rising 2.2% during October. This marked the 7th positive month in a row and brought year to date returns up to 15.0%. Equities were supported by generally positive economic data, including better than expected GDP figures, and robust corporate earnings (particularly from the technology sector).

The Trump administration made some progress in the Senate with its proposed tax reforms. However, reports that any corporate cuts might be phased in over five years did weigh on domestically focused small cap companies.

European equity markets followed up September’s stellar run with a solid showing in October. The Bloomberg European 500 Index rose 2.0%.

Economic data showed that the eurozone’s recovery is continuing via solid GDP figures and the unemployment rate falling to the lowest rate since January 2009. European Central Bank President Mario Draghi provided an upbeat outlook for the eurozone economy. He announced that quantitative easing would be extended through to September 2018 but that the pace of central bank purchases would be reduced from €60 billion per month to €30 billion.

Political factors were front and centre during the month. The aftermath of Catalonia’s unofficial independence referendum caused some volatility. Madrid suspended the power of the Catalan Government and called for fresh regional elections to be held in December.

The Japanese market rose steadily throughout October and recorded its best month of the year with the TOPIX closing 5.5% higher. In the first half of the month, after considerable uncertainty over the final election outcome, the probability of an LDP victory increased, which gave investors comfort that existing monetary and fiscal policies would continue. This saw a significant pick up in net purchases of Japanese equities by foreign investors. In the final week of October Japanese corporations began reporting their earnings for the September quarter, which are expected to continue the positive trend seen in the previous quarter.

In China, the Shanghai Stock Exchange Composite Index rose 1.3% over the month, which pushed the market close to a 2-year high. Investors were buoyed by stronger economic data and a cut in the reserve ratio requirement for Chinese banks. The 19th Party Congress took place over the month but had a relatively subdued impact on markets given the lack of any major surprises. Stability in the Chinese yuan, which ended the month slightly higher against the USD, was another tail-wind for the share market.

Emerging equity markets as a whole produced another strong month of returns with the MSCI Emerging Markets Index rising 3.9% over the month (in local currencies). The Index is yet to post a negative monthly return in 2017 and is up 25.9% year to date. Taiwan and South Korea were among the top performing markets in October with tech stocks registering strong gains. Elsewhere, India posted a solid return as the government announced plans to recapitalise its state-controlled banks.

In Australia, equities made robust gains over the month with the ASX200 Accumulation Index returning 4.0%. Higher commodity prices for the likes of copper and oil sent Aussie mining and energy company share prices higher in October whilst bank shares also rallied - perhaps in anticipation of solid earnings results.

Back home and the NZ50 Gross Index posted a healthy 2.7% return over the month. Market darling A2 Milk drove the market higher again with a whopping 34.8% return in October - although we note it has given up some of these gains in November.

Warren Buffett wisdoms

After 50 years at the helm of Berkshire Hathaway (which is currently one of the largest investments for both of our growth 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:

“Charlie and I believe it’s a terrible mistake to try to dance in and out of [the market] based upon the turn of tarot cards, the predictions of ‘experts’, or the ebb and flow of business activity. The risks of being out the game are huge compared to the risk of being in it.”

Buffett believes that trying to pick the top or bottom of markets is a fool’s game and a riskier business than just staying invested. Even if an investor does have some luck calling a top or bottom he or she is never going to get it right all of the time. By being out of the market and waiting for it to fall can be very costly if the market grinds higher. When markets do fall - as they inevitably do from time to time - that is when investors should stay put, or invest more if possible, as history says previous peaks will always be recaptured!

Investing 101

Time in the market

All investments need to be considered in the context of time. Time is particularly important with more volatile investments such as shares. The more volatile the investment, the greater the time required to ‘ride out’ any possible downturns in the investment’s value and maximise long-term returns.

The locked in nature of KiwiSaver ensures that most people get to benefit from having time in the market. When members are close to withdrawing some or all of their KiwiSaver accounts - such as when buying a first home or nearing retirement - it can often be wise to have one’s investments in a conservative fund as members may not have the time available to recoup any potential short term losses.

Top Holdings as of 31 October 2017

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

Conservative Fund Growth Fund Focused Growth Fund
International Equities Managers
N/A Berkshire Hathaway Platinum International Fund
N/A Platinum International Fund Berkshire Hathaway
N/A T Rowe Price Global Equity Fund T Rowe Price Global Equity Fund
N/A Magellan Global Fund Magellan Global Fund
N/A Polar Capital Technology Trust Polar Capital Technology Trust
Property and Infrastructure
Infratil Infratil Infratil
Contact Energy Metlifecare Contact Energy
Metlifecare Contact Energy Arvida Group
Arvida Group Ryman Healthcare Metlifecare
Ryman Healthcare Arvida Group Ryman Healthcare
Fixed Income and Cash
Term Deposits Term Deposits Cash & Cash Equivalents
Cash & Cash Equivalents Cash & Cash Equivalents N/A
Kiwi Income Property Aug 2021 Bonds Powerco September 2022 Bonds N/A
Z Energy Nov 2021 Bonds Fonterra Oct 2021 Bonds N/A
Powerco September 2022 Bonds Kiwi Income Property Aug 2021 Bonds N/A

 

Large Cap International Stock Spotlight

Alphabet Inc

With the changes to our investment mandate that we have written about in recent newsletters we have now made five investments into large cap international stocks. They are Alphabet, Alibaba, Apple, Facebook, and Ping An Insurance.

This month we want to focus on the world’s leading internet search company – Alphabet Inc (the parent company of Google).

Google first started taking shape as a research project undertaken by the company’s co-founders whilst at Stamford University in 1996. The following year the company was incorporated and like many Silicon Valley start-ups its first “office” was a garage. Early in 1999 the co-founders decided they wanted to sell Google to a company called Excite for USD1 million but the Excite CEO turned them down. The company is now worth some USD730 billion… Clearly Google went from strength to strength and after its restructuring in 2015  – whereby it changed its name to Alphabet - is made up of the following entities:

  • A smaller company called Google that includes the company’s core businesses such as search, ads, maps, YouTube and Android.
  • Other businesses such as Alphabet’s self driving car company - Waymo, its home automation company – Nest, as well as its investing arms, which are all managed separately from the Google business.

Next month:

Alibaba