Investing highlights & lowlights — May 2018

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Investing highlights & lowlights — May 2018.

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

New Zealand Growth Fund
It was a strong month for the NZ Growth Fund which was up +4.3%, outperforming the NZSE50G which was up 2.5%. The top 3 positive contributors were Mainfreight after announcing solid full-year results, Vista up after confirming its entry into the Japanese market and reminded the market of the long growth runway for its Movio business, and Restaurant Brands. The biggest drag was Michael Hill which fell out of Australian MSCI index.

We added to our Xero position based on a solid result and our confidence in the new CEO. We also added to our Vista investment and we funded both of these by reducing our investments in a2 Milk, Auckland Airport, and Restaurant Brands.

Australian Growth Fund
The Australian share market mirrored April's trend with a strong result in May. The Australian Growth Fund rose 2.9% comfortably outperforming the broad market which was up 1.3% in New Zealand dollar terms.

Two leading lights in May have been investments we had faith in, yet hadn't been market favourites of late. Logistics software provider Wisetech's share price had tumbled 43.2% after its latest profit result. We maintained a positive outlook for the firm, using weakness to increase our stake. That opinion was vindicated by strong performance in May rising 46.4%. Similarly concerns about Dominos Pizza's growth outlook have dogged the stock in recent months, again we added to our investment, benefiting from a share price rise of 16.7% in May.

The only material negative for the month was a 17.4% fall in the share price of Link Administration Holdings. Link is the largest provider of superannuation services in Australia, enjoying a wide moat based on its scale and customer lock in. Unexpectedly the Australian government announced changes to superannuation negatively impacting Link. While this is a negative we expect Link may be able to flex pricing to ultimately recover some of the lost revenues.

International Growth Fund
Global equity markets were mixed in May, with US markets boosted by the tech sector, weakness in Europe due to political turbulence, and emerging markets continuing to retreat driven by the strong US dollar. The International Growth Fund was up 2.5% in April, ahead of our global benchmark which was up 1.7%. Performance for the month was driven by a number of our large technology holdings, but was also due to solid first quarter financial results from Icon Plc, MasterCard and TJX Companies. Pandora was the most notable drag on performance with its share price falling in response to weaker than expected first quarter sales.

Property & Infrastructure Fund
The P&I Fund performed solidly in May and was up +2.% for the month.

Our large positions in the US rails were among the top performers. North American rail operator Union Pacific was a particular stand out after presenting at investor conferences and highlighting the potential to lower their operating ratio (basically cost divided by income) to below 60%.

Fixed Interest
Developed market sovereign bonds, often referred to as safe-havens, benefited from a bout of volatility caused by the unfolding political situation in Italy this month. This helped the Fund generate a solid 0.3%. We continue to favour highly rated government bonds over those issued by lower rated corporate issuers at this late stage in the economic cycle. This defensive positioning means expected income, the Fund is generating has been slowly reduced over the past 12 months. The upside is when the cycle turns, assets held in the Fund are poised to perform strongly.

Generally speaking, our corporate bond positions were weaker this month, as fixed income investors became more risk averse in light of the political turmoil in Italy and to a lesser extent in Spain. Without downplaying the potential for more broader disruption as a result of these political developments, we are finding pockets of value opening up in the debt of companies far removed from the Mediterranean situation.


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