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Newsletter | March 2016

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

February was a month of two halves. The first half saw the slump in markets deepen but then – as is so often the case – sentiment rapidly swung round so that by the end of the month most losses had been erased. More on this later.

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. The quote this month is from Buffett’s recently released annual letter to shareholders. This is compulsory reading for us and can be found here.

        "For 240 years it's been a terrible mistake to bet against America, and now is no time to start. America's golden goose of commerce and innovation will continue to lay more and larger eggs… And, yes, America's kids will live far better than               their parents did."

Here Buffett is having a dig at the negativity that is currently being ‘preached’ by Presidential hopefuls in the U.S. He strongly believes the standard of living in the U.S. will continue to improve and the U.S. will remain a great place for long-term investment. We agree – hence our growth funds’ investments in the U.S. centric Berkshire Hathaway.

“Investing 101”


This month we are going to talk about diversification and why it is one of the golden rules in investing. We all know the phrase “Don’t put all your eggs in one basket.” Unfortunately time and again people do not apply this to their investments. For example, during the GFC when New Zealand finance companies were collapsing, thousands of New Zealanders lost much or even all of their savings. Many thought their hard earned savings were diversified by having invested in a number of different finance companies. Unfortunately, this is not diversification, as all their investments were in one sector of the same economy.

Diversification is a key component of Generate’s investment philosophy. As such, we invest our members’ savings across a number of geographies, sectors and asset classes.

Market Update

Leading up to the midway point of February it was obvious that financial markets were gripped with fear as ‘risky’ assets such as shares had fallen whilst assets deemed ‘safe’, such as government bonds and gold, were running hot. These movements were being driven by a host of concerns with the spiralling oil price and its impact on oil companies and the banks that have lent to them, China’s slowing economy and the recent ineffectiveness of central banks leading the charge.

Then, as is so often the case, the sell off began to look overdone and share markets around the world started a strong resurgence, which has continued in March. Will global equities hold on to these gains? With some new clouds on the horizon – such as the possibility of the UK voting to leave the European Union in June and the astounding (to us anyway) possibility of a ‘trash talking’ reality TV star taking the White House later in the year – this is a valid question.

The answer lies in whether or not economic conditions and thus corporate earnings improve. There has been some good news in this area of late - particularly in the U.S. where the data is showing that the U.S. consumer is “alive and kicking” which should drive domestic focused companies’ earnings higher. As mentioned above Berkshire Hathaway should prosper in this environment. We observed the release of other encouraging data in Europe, China and Australia. More on this below.

Throughout the month of February we made numerous investments where we saw value. All of these equity (or share) purchases - whether they were made in NZ, Australia or further afield - have increased in value from their purchase price (in local terms at the time of writing) as confidence has flooded back into share markets. As we anticipated in last month’s newsletter fortune has favoured the “cool headed.”

Following is a recap of market movements in February.

The S&P 500 index was down -0.4% for the month. Investors fretted over the outlook for the US economy and the impact of Fed policy on the banking sector. This was set against a wider backdrop of weak global growth with China at the epicentre.

On a positive note US economic growth in the fourth quarter of 2015 was revised upward to 1% from 0.7% last month. This alleviated some fears that the U.S. economy is stalling.

European share markets were lower with the EuroStoxx50 down 3.3% over the month. Data showed that the euro-area economy has maintained its recovery momentum with GDP expanding by 0.3% in the fourth quarter of 2015. This was primarily driven by Germany, its largest economy, which grew at the same pace. Also the eurozone unemployment rate fell to 10.3% in January, the lowest it has been since August 2011.

Even as the euro-area economy showed some resilience, the ECB signalled that it might be prompted to unleash new measures to counter disinflationary pressures from abroad.

A 0.2% gain by the FTSE100 concealed a high level of volatility throughout February, as the turbulent start to 2016 continued. The Bank of England voted 9-0 in favour of no interest rate rise for the first time since July 2015 and cut its forecast for UK economic growth in 2016 from 2.5% to 2.2%. Sentiment then rebounded on the back of more upbeat corporate news flow, a rebound in the oil price, and hopes of further monetary easing in China. Confirmation of the Brexit (Britain to exit or stay in the European Union) referendum date had little impact on an already volatile share market, but did cause further weakness in the British pound which slid to a seven year low versus the US dollar.

Emerging equity markets stabilised in February after overcoming a weak start. Latin America was the best performing region with share market gains being driven by a rebound in commodity prices.

Over the ditch and the ASX200 fell 2.5% in February with worries about the Australian housing market potentially being over-priced dragging bank shares lower.

Back home and the NZ50G rose 1.0% over the month. Interest rates in NZ fell significantly in February making the dividend yield of the NZ share market more attractive in relative terms.

Generate Funds' Performance

The Conservative, Growth and Focused Growth Funds returned        0.54%, -0.45% and -0.96% respectively for the month (after fees and before tax). As mentioned in the Market Update share markets had a weak start to the month but later bounced. Pleasingly, this strength has continued in March. 

The best performer out of the Funds’ property and infrastructure investments in the month of February was Metlifecare with a return of 7.5%. Metlifecare is one of New Zealand’s leading retirement village and aged care providers and during the month of February it delivered a stronger than expected earnings result that was 29% higher than the result from previous corresponding period.

The weakest performing property and infrastructure stock in February was Z Energy with a 6.7% fall on no discernible news flow. We took the opportunity to add to our position in Z Energy at considerably lower prices to where the stock was trading at the time of writing.

For the second month running the top performing International Equities Manager (IEM) was Berkshire Hathaway, with a 1.5% return in NZD terms. Berkshire released its earnings and annual letter to shareholders towards the end of the month and the stock rose subsequently.

Also for the second month running the weakest IEM performance was from Montanaro UK Smaller Companies Investment Trust (MUSCIT) with a -7.8% return in NZD terms. Fortunately MUSCIT is one of our smallest IEM investments. We suspect the upcoming vote on ‘Brexit’  has continued to weigh on MUSCIT. Also, largely due to the threat of ‘Brexit’ the pound fell heavily against the NZ dollar, which contributed significantly to the poor monthly performance.

Top Holdings as at 29th February 2016

Conservative Fund Growth Fund Focused Growth Fund
International Equities Managers
N/A Berkshire Hathaway Berkshire Hathaway
N/A Platinum International Fund Worldwide Healthcare Trust
N/A Worldwide Healthcare Trust Platinum International Fund
N/A Magellan Global Fund Magellan Global Fund
N/A Jupiter European Opportunities Trust T Rowe Price Global Equity Fund
Property and Infrastructure
Infratil  Infratil  Infratil 
Ryman Healthcare Ryman Healthcare Ryman Healthcare
Contact Energy Contact Energy Contact Energy
Transurban Transurban Transurban
Arvida Arvida Arvida 
Fixed Income and Cash
Term Deposits Cash & Cash Equivalents Cash & Cash Equivalents
Cash & Cash Equivalents Term Deposits N/A
ASB May 2021 Bonds The Warehouse Jun 2020 Bonds N/A
ANZ Perpetual Bonds Port of Tauranga Oct 2019 Bonds N/A
The Warehouse Jun 2020 Bonds ASB May 2021 Bonds N/A


International Equities Manager Spotlight

Jupiter European Opportunities Trust Plc.

Founded in 1985 as a specialist boutique, Jupiter has become one of the UK’s most respected and successful funds management groups.

The objective of the Jupiter European Opportunities Trust (JEO) is to invest in securities of European companies and in sectors or geographical areas that are considered by the Investment Manager to offer good prospects for capital growth. The company adopts a stock picking approach in the belief that a thorough analysis and understanding of a company is the best way to identify long-term superior growth prospects. This understanding begins with identifying those companies that have the ownership structure and incumbent management that are likely to help achieve superior long-term earnings growth.

As of 9 March 2016 JEO had net assets of GBP593 million and had returned an average of 15.0% p.a. over the last 5 years versus 4.2% p.a. for its benchmark (MSCI AC EUROPE) in local currency.

Next month: T. Rowe Price Global Equity Fund

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.

We thank you for your support,

The Generate Team