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 sharemarket was an island of calm in a storm during December, with flat performance and very low intra-month volatility compared to global stock markets that had very high levels of volatility and fell sharply. Our NZ portfolio returned 1.2% for the month.
Single stock dispersion, which measures the difference in performance between different companies in the market, was the lowest in years. Consumer staples were the top performer with portfolio heavyweight a2 Milk not only the best performer in the portfolio but also the best performer in the S&P/NZX 50 (+7.7%). A combination of a more benign Chinese regulatory outcome than the market expected, ongoing strong demand for the company’s infant milk , buoyant prices in both Australian and Chinese markets and the weak NZD all helped. Other top portfolio performers were Xero (+5.4%) and portfolio Freightways (+5.0%).
Ryman Healthcare was the worst performer in the portfolio (-6.4%) following the weaker rate of growth in new developments signalled at its half year result in late November.
We reduced our positions in a2 Milk and Michael Hill during the month. a2 Milk had rallied hard following our recent lift in weighting and the valuation was less attractive. We remain unconvinced that Michael Hill’s new strategy including the move away from deep discounting on event days will work.
We added to our positions in Xero and Fletcher Building during the month. Xero’s number one global competitor Intuit raised prices in Xero's most valuable market (UK) by 8-33% signalling an improvement in the competitive landscape in the UK. After the sharp fall in the Fletcher Building share price, and given the continued execution of its strategy under the new CEO (divestment of Formica per our expectations, remain confident of Australian improvement strategy), we added to our position.
The Australian Growth Fund fell –3.7% over the month, as sharemarkets globally continued their volatile performance of recent months. Our diversified mining exposures in BHP +11.5% (in A$) and Rio Tinto +7.1% were our best performers in the month. Both benefited from iron ore pricing which has held up relatively well, and the market continued to reward these companies for their strong balance sheets and disciplined approach to capital management. BHP completed a US$5.2bn buyback during the month and the company announced a US$5.2bn special dividend. Rio concluded the previously announced US$3.5bn sale of its interest in Grasberg mine in Indonesia, the second largest copper mine in the world. This further bolsters Rio’s balance sheet as it heads into 2019.
OML was our worst performing company in the month dropping -20.6%. Although there was no company specific news of note, OML’s sell-off was triggered by soft advertising industry data, which contributed to rising concerns over the growth and magnitude of advertising spend across categories in 2019.
There were no significant changes to our portfolio during the month. We added to our holding in Sonic Healthcare by participating in its equity raising, undertaken to fund an acquisition in the US.
Global share markets plunged last month, experiencing the worst December since the Great Depression. Markets were hit by fears of slowing global economic growth, a partial government shutdown and concerns over the Federal Reserve’s policy in the US. All stock sectors posted negative returns, with Health Care, Industrials and Energy the worst performing. The best performing sectors were Utilities and Materials, falling by 2% and 3.3% respectively.
Our preferred measure of market performance, the S&P Global LargeMidCap index fell by 7.2% in local terms, while the International Fund fell slight less, down 7.1%. The relative outperformance came from having higher exposure to stocks domiciled within the UK and stocks within the Utilities sector, both which outperformed the rest of the market. Owning smaller, less volatile stocks than the average also contributed positively.
The Kiwi dollar weakened versus the US Dollar by 2.5% as investor’s risk appetite fell globally. This fall in the risk appetite hurt most commodity currencies. A weaker kiwi boosted the fund returns, as the foreign assets held are now worth more, improving the fund return to -4.5% in New Zealand Dollar terms.
The top individual contributor to returns was the Italian Utility firm Enel SpA (up 5.3%) while having a lower than market exposure to Citigroup and tobacco firm Philip Morris helped protect the portfolio as both performed worse than the market, falling by 20% and 21% respectively.
December marked the end of a pleasing year for our fixed income strategies. The New Zealand Fixed Interest Fund was again the star performer, as the Fund continued to benefit from the team’s non-consensus view that the global economy was likely to weaken and our preference for long term government bonds. Our global strategies produced strongly divergent outcomes this month, with PIMCO underperforming and Wellington outperforming their benchmark.
PIMCO’s underperformance this month was a result of owning fewer long maturity bonds than the market. This was largely due to a below benchmark allocation to Japanese and Italian government bonds, which both rallied strongly over the month.