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Investing highlights & lowlights — July 2018

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Investing highlights & lowlights — July 2018.

A snapshot of the key factors driving the performance of markets and your funds last month

New Zealand

In July the New Zealand portfolio was down for the month at -0.1%. Market performance was led by the interest rate sensitive sectors of telecommunication and real estate. Consumer staples were down due to a combination of a stabilising New Zealand Dollar in July and weak milk powder prices earlier in the month. In portfolio news, top performers for the month were Vista Group +9.7%, and Delegat +5.8%. While Mainfreight ended the month with a modest result of +0.6% at their ASM in July sentiments were positive, drawing attention to strong revenue growth from April to June, leading to profit improvements. A2 Milk fell 8.7% due to weaker than expected margins for next year. These have been impacted by a step up in marketing spend in China and the US plus CEO transition costs.


Australia

July was a solid month for the Australian market overall, with telecommunication, industrial and healthcare sectors performing well. Our Australian portfolio returned 0.8%. Technology One Limited was a top performer, up 16% after alleviating market concerns that a change to a Software as a Service business model would not impinge the long run earnings power of the business. Credit Corp was up 13.9% for the month after reporting full-year results that were in line with earlier forecasts and pointing to strength in its US business.

The biggest drag on performance was ARB (-7.9%). This result seems to be reflective of moderately softer industry data rather than any specific company news, and we remain confident in this investment.


International

The International Equity Fund returned 2.7% for the month of July. Rising interest rates weighed on the Real Estate and Utilities sectors while tariff costs impacted on the Consumer Discretionary sector and slowing social media growth dragged on Information Technology companies. Healthcare and Financial stocks enjoyed a strong month with a good start to the earnings reporting season. Facebook’s earnings announcement late in the month dampened market sentiment. Read our thoughts on Facebook here. The gradual process of normalizing global interest rates continued this month, with the Bank of Japan initiating the debate around tapering quantitative easing. As a consequence Japanese bond yields crept higher and began to weigh on the Japanese stockmarket.

The most significant contributor to the portfolio’s outperformance over the month was its underweight to Netflix. Netflix reported disappointing growth in subscriber numbers, leading the market to question its growth trajectory. Another contributor was the overweight to JPMorgan Chase which posted a record second quarter profit thanks to strong economic growth in its home market, the USA.

Detractors to performance included the overweight to Twenty-First Century Fox (which gave up some gains after Comcast withdrew from the bidding war for the company) and underweight to drug company Novartis (which is an ESG exclusion due to allegations of bribery at its Greek subsidiary).

The New Zealand dollar rose slightly over the month creating a slight drag on NZ dollar based returns.


Fixed income

All our fixed income portfolios again contributed positively to this month’s outperformance over the benchmark. Each manager currently holds quite divergent views on fixed income markets at present. So it is particularly pleasingly that each are finding uncorrelated sources in which to produce superior returns. This gives us confidence in the complementary attributes each portfolio brings with it. Our international managers remain overweight corporate credit risk at this time and it was the underperformance of this asset class that held back an otherwise strong month for returns. Their exposure to corporate bonds has been reduced recently however it remains a key overweight for now.

 

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