Investing highlights & lowlights — October 2017

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Investing highlights & lowlights — October 2017.

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

New Zealand Growth Fund
The New Zealand share market shrugged off any uncertainty caused by ongoing post-election negotiations delivering its strongest month of the year, with the headline NZX50 up 2.8%. Our New Zealand portfolio gained 0.5%, underperforming the index principally due to not owning market darling A2 Milk. Leading the way for our portfolio was Fisher & Paykel Healthcare up 3.7% for the month and recent addition, Xero up 11.3%. The cloud accounting software provider held its annual XeroCon London conference during the month and the attendees were up over 80% and they confirmed our expectations that UK subscriber growth continues strongly. Vista was the biggest drag on performance for the month, (down 9.0%), following some insider selling.

Australian Growth Fund
A strong month with the Australian portfolio return of 7.0% well ahead of the benchmark ASX 200 Index return of 5.1%. Both at the portfolio and market levels the strong performance was broad-based across sectors. A standout strong performance came from Wisetech Global as investors priced its increasing competitiveness in the third party logistics software space, while NextDC was similarly strong. Technology One however disappointed investors with an earnings downgrade. We visited the company and after spending a morning with the head of R&D we remain confident of the company’s long-term earnings power.

International Growth Fund
We are currently in the middle of third quarter earnings season, which has seen strong results for a number of large cap technology companies. Amazon, PayPal and Alphabet (parent company of Google) all contributed strongly to our performance this month, up 15%, 13% and 6% respectively. Amazon’s results showing an acceleration in revenue growth (+34%) on the back of a significant increase in Prime membership (now estimated at 60% of US households). PayPal delivered a 29% gain in transaction volumes as they take share in online payments, and despite Alphabet’s high market share in digital advertising, its revenues grew 24%.

Earnings season is never plain sailing and Expedia’s results were impacted by the recent hurricanes in the US and Caribbean and 2018 earnings growth guidance was also disappointing. Blackhawk Network came under pressure after announcing increasing competition as they seek to renew gift card distribution contracts with key US supermarket chains.

Property & Infrastructure Fund
The Property & Infrastructure portfolio continued its strong run, rising 2.3% in October. The portfolio is now up 16.5% for the calendar year to date. Cellular tower company Crown Castle International had the biggest impact on returns in October, up 7.1% following the release of their latest quarterly results. Their proposed acquisition of Lightower Fiber Networks is close to crossing major regulatory hurdles and this was main driver of upgrades with analysts now fully baking in the accretive acquisition. Renewable energy generator Tilt Renewables was weak, down 5.3% with weak wind conditions and a competitive environment for new projects impacting the company currently.

Income Fund
The Income Fund had a strong October. Key drivers of this performance were our holdings in Spanish and Italian government bonds and European bank debt. Europe is demonstrating solid signs of growth at this juncture. When combined with still extremely “easy” monetary conditions we expect peripheral European economies to continue their strong recovery. We view this as a strong tailwind for asset prices in the region into year-end.

HCA bonds, traded lower this month as U.S politicians continued to debate healthcare reform.  Fortunately HCA is well positioned compared to other operators and we believe they would be in a strong position to purchase attractive assets from their weaker competitors, should federal funding be reduced more permanently with changes to the Affordable Care Act.

In a similar vein, Voyage Care in the U.K are impacted by increased labour costs from incoming legislation. Over time we expect the company will be able to factor these costs into their pricing, however this lag will modestly impact profitability in the near term.


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