All three funds chalked up a positive month in November with the Focused Growth, Growth and Conservative Funds returning 1.10%, 1.11% and 0.71% respectively. The positive returns for our two growth funds were particularly pleasing given the strong run up in the NZ dollar over the month. For example, the NZD/USD was up 5.6% over the month – which detracted from the value of our US domiciled investments.
After being the weakest performing international equities holding in October, Tencent turned the tables in November delivering the strongest performance (+11.1%). Mid-way through the month the company delivered its third quarter earnings report. The temporary halt on the publication of new online games imposed by the Chinese Government had made the market nervous leading into the earnings report. But Tencent delivered solid earnings for the third quarter suggesting the underlying fundamental story remains strong. In particular ad revenues gained 47% year on year (YoY) confirming that the company has under-monetised media assets. In addition, its cloud business grew by more than 100% YoY.
Facebook was the weakest performing international equities holding in November declining -12.1%. At the end of October, the company reported third quarter earnings which – as expected – showed a further moderation in sales growth and a more pronounced deceleration in operating profit. On a brighter note the company confirmed the continuing popularity of Facebook’s suite of apps with 2 billion people using at least one of the company’s apps on a daily basis.
Facebook has endured substantial negative news-flow in recent months. Despite this, we still believe it to be an attractive investment and as a result have been adding to our positions. We think the company will get its house in order regarding user privacy and policing of the platform’s content. We see substantial growth coming from its messaging platforms (WhatsApp and Facebook Messenger) not to mention Facebook Stories and Instagram. Further, we are encouraged by the $9 billion share buy-back the company has recently launched, which follows closely on the heels of the $9.4 billion of its own stock that Facebook has purchased year to date. We see this as a strong endorsement from management and the board that they see value in Facebook’s shares at these levels.
Infratil was the strongest performing property and infrastructure holding generating an 8.5% return over the month. During the month the company delivered a strong first half earnings report which confirmed Canberra Data Centres and Longroad Energy as stand-out investments.
Infratil and joint-venture partner Mercury Energy continued their takeover attempt of Tilt Renewables in November. Although Infratil managed to increase its holding in Tilt, ultimately the takeover attempt failed. We didn’t sell our funds’ Tilt shares as we believe there is substantial upside given Tilt’s compelling development pipeline.
The weakest performing property and infrastructure holding was Metlifecare with a fall of -4.6%. The fall was not due to company specific news but more to do with sentiment towards the retirement village/aged care sector. The concerns revolve around the Auckland housing market and whether it will follow Sydney’s and Melbourne’s housing market correction. For approximately 2 years the Auckland housing market has been plateauing. We see this as an ideal situation as prior to this it was running very hot. In our opinion, the longer it stays in this mode the less likely there will be a correction.
The sector heavyweights – Ryman and Summerset were down -4.2% and -1.2% respectively in November. The difference between these two and Metlifecare, however, is that Metlifecare didn't enjoy a significant run up in its share price over the first 3 quarters of 2018. In fact, now the company is trading at a 22% discount to NTA whereas RYM is trading 2.7x its NTA. Ryman does deserve a valuation premium – given its remarkable track record and solid future growth prospects – but we think the disparity in valuation is too great and as a result have been adding to Metlifecare and taking some profit in Ryman.