Investing highlights & lowlights — March 2016

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Investing highlights & lowlights — March 2016.

After a torrid start to the year global share markets rebounded strongly in March although some of the gloss was taken off for New Zealand investors by a strengthening kiwi dollar tempering returns on international investments.

  • In New Zealand, Restaurant Brands made a major acquisition in Australia during the month with the purchase of 42 KFC stores spread throughout New South Wales on what we believe to be favourable terms. Its New Zealand operations continue to perform well with same stores sales for the last year up 5.3%. The Restaurant Brands share price was up over 15% for the month. In a month where the broader market was up over 8% it is difficult to find any lowlights. NZX had been trying to purchase NZ Clear (a clearing and settlement system) from the Reserve Bank, but the Bank has decided not to proceed with a sale. This purchase would have given NZX some synergies with its own clearing system.
  • Our Australian portfolio delivered a solid 3.5% return for the month but lagged a buoyant market led north by the resources sector which we don't have exposure to. Toxfree Solutions rallied strongly after announcing the acquisition of a valuable waste disposal business in New South Wales, which is expected to boost earnings in years to come. Medibank had a strong run on the appointment of the reputable Craig Drummond as CEO. Drummond is viewed as having been critical to NAB's successful restructuring and investors look forward to a repeat of his success at the Medibank helm. Disappointingly, the portfolio's largest position, Ramsay Healthcare, was weak as the outlook for its French subsidiary suffered when regulators cut prices paid to private hospitals.
  • A number of our international portfolio companies performed strongly with highlights being Biotest and Sarine Technologies, both of which have been challenging investments over the last year. Biotest, a pharmaceutical and diagnostics company, was strong as it upgraded its profit outlook for the year ahead. Sarine rebounded as demand for diamonds improved and inventory at the retail level was cleared. Sarine is the global leader in diamond processing technology. On the negative side Stratec Biomedical downgraded earnings expectations. Stratec provides diagnostic tests that pharmaceutical companies use in the development of new drugs. Unfortunately they are influenced by the timing of these programs and, in this case, a customer has delayed an expected program.
  • Our Property & Infrastructure Fund had another pleasing month of performance, capturing the rebound in share markets generally and also benefiting from the ~19% appreciation in the share price of Vienna Airport, the Fund's largest investment. A key institutional investor announced it intends to increase its stake in the company from 29.9% to 39.9%. During the month, we initiated a ~2% investment in Arena REIT, a Australian listed owner of childcare and healthcare property. We are attracted to the defensive characteristics of childcare and healthcare properties (long-dated lease terms, healthy contracted rental escalators, minimal cashflow requirements), Arena's strong growth in distributable income over the next three years, and transactional evidence which supports further portfolio gains from revaluations.
  • Fixed interest markets were buoyed by the Bank of Japan and European Central Bank delivering new stimulus packages that exceeded market expectations. This caused prices of most financial assets to rise, with both government and corporate bonds participating strongly in the rally. While European bank bonds posted a strong performance in March, our holdings in equivalent bonds issued by their U.K. peers lagged. We believe the primary reason for this underperformance was the growing uncertainty surrounding the upcoming vote on Britain leaving the Eurozone. While these "BREXIT" concerns are expected to linger until the vote on June 23rd we remain positively disposed to these banks given their strong financial positions and favourable economic backdrop, regardless of the outcome of the vote.


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