A snapshot of the key factors driving the performance of markets and your funds last month
All Fund returns below are after fees & before tax
In November the NZ Growth Fund returned +7.0%, outperforming the local market at +5.7%(S&P/NZX50G).
Xero (+22%) issued a US$700m convertible note. It will use the proceeds to buy back existing convertible bonds ($294m principal value) and to fund potential acquisitions or strategic investments. This provides significant further liquidity to an already liquid balance sheet.
Pushpay (-22%) announced its 1H21 result and also hosted a mini virtual investor event in lieu of a full investor day in the US. As expected, the result was strong and full year EBITDA guidance was upgraded from US$50-54m to US$54-58m. the stock was caught up in the acute global rotation out of COVID-19 winners (PPH) into COVID-19 losers.
The Australian portfolio returned +6.1% in November, behind the +9.7% return for the ASX 200 Index (70% hedged into NZ$).
Our shareholdings in financials such as Credit Corp (+29.8% in A$) and the banks including National Australia Bank (+24.8%), ANZ (+22.6%), CBA (+14.6%) and Westpac (+14.3%) buoyed our portfolio returns in the month. Following Australia’s stimulatory budget in October, enthusiasm about COVID-19 vaccine trial results saw a strong market rotation in November out of high growth companies and COVID-19 beneficiaries into cyclicals and companies that will benefit from continued re-opening of the global economy. This, coupled with a generally improving outlook for the banks (likely lower bad debts than currently provisioned for) drove the sharp increase in their share prices in the month.
In contrast, this rotation contributed to the underperformance of high growth companies like data centre operator Next DC (-11.8%) and insurance claims software company Fineos (-16.6%). Fineos was also affected by a cautious near term trading update at its AGM. The longer term potential for both companies remains sound.
Two significant events dominated global sharemarkets in November and contributed to one of the strongest months on record for investors. The first was the US election, which delivered a contested outcome for the Presidency and a narrow republican senate majority. Despite this combination previously being thought to be the worst for markets it was embraced by investors particularly buyers of high growth technology names. Shortly after, Pfizer announced successful results from their COVID-19 drug trial which boosted shares of the financial and energy companies thought to do better as the economy returns to pre-COVID conditions. The rotation back into the stocks that have lagged this year was one of the most significant moves out of momentum stocks and into value stocks that we have seen in many years.
The core portfolio benefited from strong security selection within financials, materials and real estate. The strongest gainers in the portfolio were Spanish bank BBVA (up 55%) and refinery operator Valero Energy Corp (up 41%). The underweight to Tesla Inc was again the largest detractor from performance as the shares in the car maker jumped 42% upon news of its pending inclusion in the S&P500.
Weightings to industry sectors were a drag on relative performance as the portfolio is overweight healthcare and utilities while underweight energy and financials. Geographically, the portfolio is tilted toward the UK and Japan and away from North America which was also detractor.
Global corporate bond markets were in fine fettle during November as, notwithstanding the ongoing negative impact of the coronavirus on current business activity, there were several positive announcements regarding vaccine candidates which supported confidence in improved economic growth rates for the coming years. Mirroring this confidence, our investment in Whitbread plc delivered a strong return during the month. The company’s market position in the UK branded hotel segment has improved during the year which reflects management’s ongoing focus on consistent service standards that drives customer loyalty. In addition, the company’s strong balance sheet – which was augmented by a £1.0bn share issue in June – provides the company with a solid base to build upon its market leading position in the UK and expansion into the German hotel market.
New Zealand bonds had a torrid time of it in November. First, the Reserve Bank intimated that, should their Funding for Lending Programme (FLP) prove as successful as they think it will be, then there would be less need to lower the Official Cash Rate. Then it was the governments turn to push bond yields higher, with Finance Minister Robertson voicing his concern in a letter to the RBNZ Governor that it was low interest rates that were putting unwelcome upward pressure on house prices. When coupled with more positive vaccine developments this saw NZ bond yields rise at one of their fastest paces in recent years.
Pleasingly, our holding in Synlait bonds did buck this trend however. The company has come to the end of a heavy investment period which has resulted in additional infant formula manufacturing capacity and integration of Dairyworks Limited and Talbot Forest Cheese – the latter two entities providing end market diversification benefits for the group. Given such investment and in view of the global pandemic, the company raised $200m via the issue of new shares with proceeds earmarked for a reduction in bank debt. We are pleased with this development and will be visiting the company’s Dunsandel plant during December for a glimpse into the company’s world class manufacturing assets (and hopefully some cheese tasting!)