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
The New Zealand portfolio fell -2.9% in November, similar to the local market (S&P/NZX 50 -2.9%). Two companies that positively and negatively contributed to returns in the portfolio were:
Medical device company Fisher & Paykel Healthcare (+7%) reported a strong first half result, ahead of expectations, boosted by another wave of COVID hospitalisations. The bulk of the strength was in sales of new hardware in the Hospital division, which continues to grow the installed base of F&P products in both established and new customers. We are seeing signs that the step-change due to COVID will endure and grow off a higher base as the COVID overlay wanes.
Travel software company Serko (-18%) announced its first half result below expectations, given COVID lockdowns in Australia and New Zealand and a slow resumption to travel in the US and Europe. Its partnership with Booking.com for Business has launched and is seeing 1000-1500 bookings per weekday, less than 10% of what is expected under normal conditions. We think this large opportunity remains intact and bookings and revenue will ramp up as COVID restrictions ease.
In November the Australian Growth portfolio fell -0.2% net, which compares to -0.6% for the benchmark index.
Fineos rose +10.0% in A$ during the month after reiterating its FY22 earnings guidance at its AGM. Fineos expects revenue to grow +18% for the fiscal year with subscription revenue growing 30%. Fineos also announced a new client win which was also well received.
Westpac (-17.9%) and CBA (-11.0%) fell sharply as both banks reported underwhelming trading updates. Both banks reported softer net interest margins due to intense pricing competition in the consumer mortgage market. In addition, Westpac’s core cost base rose 9%. This disappointed the market given Westpac had only recently set out detailed multi-year aspirational cost base targets.
While global sharemarkets declined over November, the translation into a lower priced New Zealand dollar gave a second month of gains to NZ investors. The NZ dollar declined nearly 4% on a trade weighted basis to new lows for the year, despite a second interest rate hike and news of the lowest unemployment rate in 14 years.
Global markets welcomed the re-nomination of Jerome Powell for another term as Federal Reserve Chair but reacted badly to the news of another variant of COVID-19. US stocks outperformed non-US stocks and growth companies outpaced value names. The strongest performing sectors were Information Technology and Consumer Discretionary which the portfolio is underweight, however the effect of this was offset by underweights to Energy and Financials which were the weakest sectors over the month. Overweight sectors such as Utilities, Material and Healthcare performed in line with the broader market.
The portfolio enjoyed strong performance thanks to holdings in Pfizer (which benefitted from expected strong demand for COVID vaccines), Dollar Tree (which announced that in these inflationary times its key price point would become $1.25), Qualcomm (which projected strong demand for 5G chips), Home Depot (which was able to increase prices on home improvement products) and Ford Motor Company (a shareholder in newly listed EV maker Rivian).
Detractors from performance came from the underweights to electric car manufacturer Tesla and graphics card maker NVIDIA. Both these stocks trade at lofty market capitalisations which are hundreds of times larger than their earnings, and also place them fifth and sixth in terms of US listed corporations by size. On a volatility adjusted basis, Tesla would rise even further to become the third most influential name. The portfolio’s overweight to drug maker Merck & Co was also a drag on performance despite the company receiving authorization for it COVID-19 antiviral Molnupiravir.
The portfolio remains overweight Canada and the UK while underweight Asia. Industry positioning is tilted toward healthcare, communication services, consumer staples and materials and away from information technology, financials, energy and consumer discretionary.
Fixed income markets were relatively calm throughout most of November. But that changed toward the end with the emergence of a new COVID ‘variant of concern’ named Omicron. This led to rising public health concerns which saw investors grappling to understand preliminary medical evidence and its implications for future economic activity.
Consequently, the fund benefited from its investments in the bonds of high-quality companies. For example, Microsoft has experienced strong demand for its products during the pandemic which has boosted cash flow and enhanced the company’s credit profile. Omicron or otherwise, MS Teams will remain a handy tool for many of us.
Dell Technologies is another portfolio company benefiting from an increase in demand for its hardware and software products. This trend was confirmed by its recent strong quarterly financial results. As part of the results briefing, management reaffirmed their commitment to improving the company’s balance sheet strength. This was well received by investors with its bonds outperforming peers.
Closer to home, we received earning updates from three companies within the NZ retirement village sector: Ryman, Arvida, and Oceania. All reported steady financial performance and delivered a high standard of care despite the challenges from the Delta outbreak. We are keeping a close watch on sector dynamics as the government moves away from its elimination strategy and toward managing the risks of living alongside the virus. However, for now the sector has positive business and financial characteristics and, in our opinion, demand for village communities and related healthcare services will continue to grow from the country’s ageing population.