A snapshot of the key factors driving the performance of markets and your funds in October 2019
All Fund returns below are after fees & before tax
The NZ portfolio posted returns of 1.3% in October, ahead of the local share market which returned [-1.3]% (S&P/NZX50G). The outperformance reflected in part our lower exposure to the New Zealand electricity sector, which was negatively impacted by news the power-hungry Tiwai Point aluminium smelter’s operations are subject to a strategic review, with closure one possible outcome.
Fisher and Paykel Healthcare (+10.7%) increased its profit guidance for the 2020 fiscal year in conjunction with announcing approvals to sell its new Vitera mask in the US earlier than expected. The new mask is set to provide market share gains and underlying trading is also proving stronger across the whole business. It is pleasing that the management team continues to underpromise and overdeliver.
Meridian Energy (-11.5%) and the rest of the New Zealand electricity sector saw sharp declines in October. The Tiwai Point aluminium smelter consumes approximately 13% of New Zealand's electricity and any change to its operations would be a significant dislocation for all companies in the industry. Even if it does not close, the smelter is positioning to negotiate lower electricity prices with key players including Meridian.
The Australian Growth Fund had a pleasing result in October, returning 1.1% which is ahead of the ASX 200 Index which returned -0.4% in the month.
Similar to September, Domino’s (+9.8%) share price continued to rise as the trading update released at the company’s AGM provided further confidence that sales growth across the business was on track with market expectations. Ingenia (+9.8%) raised equity and announced an acquisition of some lifestyle communities and development sites in the month which was well received by the market.
Wisetech (-24.7%) fell sharply after the release of a couple of independent research reports which raised perceived concerns about the company. These included the accounting practices employed by Wisetech, the strength of its product offering as well as it acquisition strategy. A number of these points are not new and have been raised by market commentators over the last few years. Management responded (as they have before) with a comprehensive rebuttal of these points. Wisetech also re-affirmed earnings guidance for FY20. Wisetech has many years of growth in front of it as the logistics industry continues to increase its reliance on software to efficiently manage the flow of goods between countries.
Global share markets posted further gains in October, however returns to New Zealand based investors were reduced by a recovery in the New Zealand dollar in the first up month for the currency since June.
The core portfolio outperformed its benchmark again this month as the market continued to shift away from the high momentum names that have dominated this year and toward undervalued stocks that have lagged. Energy, material, financial and industrial companies continued to outperform while the utilities sector trailed thanks to rising bond yields. Security selection was the major driver of portfolio outperformance with overweights in Apple (up 11%), Intel (up 10%), JP Morgan Chase (up 7%) and Amgen (up 10%) making the largest contributions. IBM (down 7%) detracted from returns as its quarterly revenue continued to shrink and investors harboured doubts about the chances of its cloud expansion succeeding.
Concerns about the state of the US economy abated during the month as data on GDP, jobs and manufacturing confidence was not as bad as markets feared. Expectations for interest rate cuts have moderated and the yield curve is now priced for one less cut in 2020 than it was a couple of months ago. A healthier economic outlook should help assuage fears about an earnings recession and the corresponding rise in bond yields may drive a continuation of the recent factor rotation away from interest-rate sensitive stocks. This environment should create further portfolio outperformance given how far the pendulum in factors has swung in recent years.
The headwind that higher bond yields brought to bear on the overweight duration position of the portfolios was again partially offset by security selection this month. Rather than originating from credit selection, as it did last month, this time it was the inflation-linked exposure held by both the NZ Fixed Interest Fund and the global PIMCO fund that aided returns most.
There was, however, no escaping the impact higher bond yields had on the portfolios. Most developed country government bond markets sold off in unison. So there was little diversification benefit to be had from cross-country holdings.