Facebook icon Forward icon

Newsletter | February 2016


Welcome to the February edition of the Generate KiwiSaver Scheme Newsletter. Our year got off to a cracking start with confirmation that our Growth Fund was the number one performing KiwiSaver fund in the Growth Category for the second year running (on a one year return basis). Our Conservative Fund also topped its category whilst the Focused Growth notched up a second place (for the second year running). We are extremely proud of these results and we will be working hard in 2016 to try to stay on the podium!

Since our last newsletter markets have had a tough couple of months. Whilst it is never pleasant to see the Funds’ unit prices dropping we were pleased to see our growth funds outperforming global equities (and the Conservative Fund barely skipping a beat). More on this later. In the mean time we would encourage you to read the following article if you are concerned about the recent fall in markets and unit prices. 


Warren Buffett Wisdoms

After 50 years at the helm of Berkshire Hathaway (which is currently one of our largest investments for both of our growth funds) Warren Buffett has become widely regarded as the world’s greatest investor. 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:

"In the short term the market is a popularity contest; in the long term it is a weighing machine."

Here Buffett refers to the vagaries of the market and how human emotion can often drive direction in the short term. However, in the long term fundamentals are what drive the market.

This is a timely quote as the market is currently going through a bout of fear, which is pushing share prices lower.

“Investing 101”

Short Selling

Short selling (also known as shorting or going short) is the practice of selling an asset that you don’t actually own, in the hope that the price will decline and you can buy it back in the future at a lower level. You can then keep the difference between the price at which you sold the assets and the lower price you paid to buy them back.

When taking a short position in shares, for example, the shares are borrowed from a third party – usually a broker – and then sold. The short seller may have to pay a fee to borrow the securities and  have to reimburse the lender for cash returns the lender would have received had the securities not been loaned out. When the  securities are repurchased they are then returned to the lender.

Some of the underlying International Equities Managers we invest into have the ability to short stocks. This can be helpful as, if executed wisely, it can limit negative returns in falling markets.

Market Update

Last month global equities (or shares) had their worst January since the depths of the Global Financial Crisis (GFC) with the MSCI All Country World Index falling 5.5% (in local currency). Re-kindled concerns over global growth and the health of China’s economy, coupled with fresh lows in commodity prices led to a rapid deterioration in investor sentiment. Given the market’s unanimous “risk off’ behaviour one could be forgiven for thinking that a global recession was around the corner. However, despite the various clouds on the horizon (which by no means are we taking lightly) we don’t subscribe to this theory and instead believe that we are likely to see a continuation of underwhelming modest growth – a theme that has been in place since the GFC. Should we see the U.S. consumer start to “roll over” we would have cause to reconsider our view. Given the strength we have seen in the U.S. in employment, real wage growth and consumer confidence we ascribe a low probability to this eventuality.

In our December newsletter we spoke about our expectation for another year of heightened volatility. Whilst we were not surprised to see markets sell off in January we were surprised by the extent of it given very little had fundamentally changed.

Fear and greed can lead to significant swings in the market and it is months like January when it is worthwhile reminding ourselves that the volatility of the market (the degree to which prices move up and down) is the price we pay for the long-term outperformance of shares.

Whilst we have treated this dip in equity markets with more caution than previous ones - due to there being some legitimate areas of concern - we have been selectively buying where we see value as we strongly believe that in time we will be rewarded for keeping a cool head whilst many other market participants let fear become their overarching driver. 

Following is a recap of market movements in January.

The US share market had a disappointing start to the year with the S&P 500 index down -5.0% in January. 

At a sector level, health care and financial stocks had the biggest falls over the month. Biotech companies dragged the wider health care sector lower amid political criticism over medicine prices. On a wider level, biotech share prices were also caught up in the down-draft that cyclical sectors of the market experienced (those that are more sensitive to the economic cycle). Financials also fell victim to this theme. Unsurprisingly more stable, defensive sectors outperformed. Of interest energy stocks rebounded during the month after the price of oil rose due to talk of possible cuts to crude oil output by oil-producing nations.

In Europe the EuroStoxx50 fell 6.8% following on from a weak performance in December. This despite the European economy continuing to show signs of resilience. For example a number of lead indicators beat expectations in January and continued to point towards economic growth. Elsewhere, bank lending surveys conducted by the ECB continued to show an increase in banks’ willingness to lend. This was complemented by an increase in corporate appetite to borrow, which implies increased confidence in the economy’s prospects.

Due to low inflation and a weaker growth outlook in emerging markets especially, the European Central Bank (ECB) emphasized its commitment to very loose monetary policy. Mario Draghi, the ECB president, said that interest rates will “remain at present or lower levels for an extended period of time” and said there are “no limits” on the extent to which the ECB is willing to deploy measures within its mandate. The markets interpreted this as meaning further “monetary medicine” will be forthcoming at the ECB’s next meeting in March.

In the UK the FTSE100 fell 2.5%. Confirmation that the economy grew by 0.5% in the fourth quarter of 2015 and 2.2% for the year, appeared to lend support to the market. The month was also notable for a series of positive trading updates from retailers, proof perhaps that the UK consumer, if not the stock market, is benefiting from lower fuel prices.

Asian equity markets had a particularly tough month, as investors reacted to a familiar list of concerns: worries about China adjusting to a lower growth path, efforts by the Chinese authorities to manage the renminbi (RMB) and a falling oil price. Japan’s TOPIX down 7.5% whilst the roller-coaster ride that is the Chinese stock market saw the Shanghai Stock Exchange Composite Indicator fell 22.7%.

The MSCI Emerging Markets Index fell 5.3% over the month with all of the various emerging market regions posting a negative performance. The ECB’s commitment to “do more” and Bank of Japan (BoJ) Governor Kuroda’s surprise move into a negative interest rate strategy helped avoid further losses.

Across “the ditch” and the ASX200 posted a drop of 5.5%. The mining and energy sector again dragged the market lower whilst tumbling share prices also contributed to the poor performance.

Back home and the NZ50G outperformed global equities posting a loss of 2.4%.

Generate Funds' Performance

The Conservative, Growth and Focused Growth Funds returned        -0.30%, -2.69% and -3.68% respectively for the month (after fees and before tax). Whilst it is never pleasant to see the Funds’ unit prices dropping we were pleased to see our growth funds outperforming global equities (and the Conservative Fund barely skipping a beat). A lower NZD cushioned the funds’ performance as did the outperformance of our Australasian property and infrastructure investments.

The best performer out of the Funds’ property and infrastructure investments in the month of January was Transurban with a return of 5.9%. Transurban manages and develops urban toll road networks in Australia and the United States. Strong traffic and toll growth is holding the company in good stead.

The weakest performing property and infrastructure stock in January was Ryman Healthcare with a 5.4% fall on no discernible news-flow. Given the pull-back we have taken the opportunity to add to our position in Ryman as we believe it currently offers good value.

The top performing International Equities Manager (IEM) was Berkshire Hathaway, with a 4.0% return in NZD terms. The fall in the NZD during the month was the driver of this gain.

The weakest IEM performance was from Montanaro UK Smaller  Companies Investment Trust (MUSCIT) with a -7.3% return in NZD terms. We suspect the upcoming vote on ‘Brexit’ (Britain to exit or stay in the European Union) has weighed particularly heavily on MUSCIT. The referendum is likely to take place in June and we will be watching developments carefully.

Top Holdings

Conservative Fund Growth Fund Focused Growth Fund
International Equities Managers
N/A Magellan Global Fund Magellan Global Fund
N/A Jupiter European Opportunities Trust T Rowe Price Global Equity Fund
N/A Berkshire Hathaway Jupiter European Opportunities Trust
N/A T Rowe Price Global Equity Fund Berkshire Hathaway
N/A Worldwide Healthcare Trust Worldwide Healthcare Trust
Property and Infrastructure
Infratil  Infratil  Infratil 
Ryman Healthcare Ryman Healthcare Ryman Healthcare
Contact Energy Contact Energy Contact Energy
Arvida Group Arvida Group Transurban
Transurban Transurban Arvida Group
Fixed Income and Cash
Term Deposits Term Deposits Cash & Cash Equivalents
Cash & Cash Equivalents Cash & Cash Equivalents N/A
ASB May 2021 Bonds The Warehouse Jun 2020 Bonds N/A
The Warehouse Jun 2020 Bonds Port of Tauranga Jan 2021 Bonds N/A
ANZ Perpetual Bonds ASB May 2021 Bonds N/A


International Equities Manager Spotlight

Platinum International Fund

The Platinum International Fund's investment objective is to provide capital growth over the long-term through searching out undervalued listed (and unlisted) investments around the world. The Fund primarily invests in listed securities and typically consists of 100 to 200 securities. Cash may be held when undervalued securities cannot be found. Platinum may short sell securities that it considers overvalued.

As of 31 January, 2016 the Fund had A$10.8 billion under management and a return of 12.7% compound p.a. since inception in 1995 (in local currency). This compares with a return of 6.1% compound p.a. for the Fund's benchmark index (the MSCI All Country World Net Index in A$).

Next month: Jupiter European Opportunities Investment Trust

Contact us

If you have any questions after reading your newsletter, give us a call on 0800 855 322 or email us at info@generatekiwisaver.co.nz and we would be more than happy to help.