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

Returns to 31 October 2016 (after fees and before tax).

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

October saw the New Zealand share market dramatically underperform international shares. More on this later.

After 50 years at the helm of Berkshire Hathaway (which is typically 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:

“When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

Here Buffett surmises that no matter how good a management team is they are destined to fail if they take on a business in a sector that is fundamentally challenged. Early on in his career Buffett bought into a few companies that were in structurally challenged sectors (e.g. textiles) that ended up losing him money. He learnt this lesson the hard way!

If you haven’t already tried the new Generate online member area we would encourage you to give it a go. We are getting very positive feedback from new members who log in and experience all the functionality - especially compared to what they were used to seeing on their internet banking apps. Our functionality allows you to see your balance, the breakdown of contributions and performance, your transactions history and to switch between our funds with the click of a button. Importantly we also provide a full breakdown of all your direct investments so you can see exactly what your KiwiSaver account is invested in, or what it is not invested in (think cluster bombs!).

Click here to log in.

Bond prices and yields move in opposite directions

When a bond is first sold as a part of a new issue, its price is fixed. From then on, the price of a bond moves up or down in relation to changes in interest rates. When interest rates rise, the price of a bond goes down because its coupon rate (the fixed, periodic payment) becomes less desirable relative to the higher rates of newly issued bonds of a similar quality. If interest rates fall, the bond's coupon rate becomes more attractive to investors, which drives up the price. If the yield to maturity (i.e. the rate at which the bond could be sold in the secondary market) is greater than the coupon rate the bond will sell at a discount to its issue price. If the yield to maturity is less than the coupon rate, the bond will sell at a premium to its issue price.

The longer the maturity of a bond, the greater its price will be affected by changes in interest rates. For example notice what happens to the price of $100 worth of these different bonds when interest rates fall from 6% to 5.5% and then to 5%.
 

*Yield to maturity

*Log in to your Generate online member area to see all your direct investments

T. Rowe Price Global Equity Fund

Founded in Baltimore in 1937, T. Rowe Price has grown in to one of the world’s largest fund managers with more than USD$813 billion in funds under management. The company focuses exclusively on investment management; and the company’s key mantra is “if you take care of your clients, your clients will take care of you.”

The T. Rowe Price Global Equity Fund is run by Scott Berg. Generate has had the pleasure of hosting Scott in Auckland twice - most recently in October 2016 - where he described how he has the ability to tap into T. Rowe Price’s 130 Equity Research Professionals, 9 Sector Portfolio Managers and 57 Regional and Diversified Portfolio Managers to assist him with his investment selection.

Scott took over the management of the Global Equity Fund in June 2012 and since then has delivered an annualised return of 17.5% p.a. (net of fees in AUD as at 31 October 2016). Also as of this date some of the fund's largest holdings were in Alphabet (the parent company of Google) Amazon, and Tesla Motors and it had funds under management of AUD$1.3 billion.

A key differentiator of the Global Equity Fund is its ‘truly global’ nature with investments in approximately 30 countries. This compares with the average of its peer funds of only 18 countries.

Next month: Jupiter European Opportunities Trust Plc.

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.

We thank you for your support.

Kind regards,

The Generate Team