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07 February, 2019

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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

New Zealand 

The New Zealand Growth was up 2.2% for the month. Portfolio company a2 Milk was a standout (+13.5%), on the back of several supportive proof points and various investment firms touting the company’s potential to succeed in 2019. Both sales data for some of the key Chinese e-commerce platforms and Australian supermarket data had a strong finish to 2018, plus New Zealand export data also indicated strong volume growth. These data points reconciled with our positive view from late 2018, when we saw regulatory concerns subside and in-market pricing improving, which when combined with our overall positive view of the company gave us confidence to increase our holding at lower prices.

 Michael Hill (-7.7%) reported its key December quarter sales, which were disappointing in absolute terms, reflective of broader retail market conditions, although showing a marked improvement since new CEO Daniel Bracken has started. The company has backed away from its unsuccessful shift to cutting promotional activity, which saw same store sales fall -11% in the previous quarter. Same store sales rebounded to +1.3% in November/December. Daniel’s initial focus is on retail operating fundamentals and we are of the view his influence will have a positive impact here.

 We reduced our position in Auckland Airport during the month.  The stock has performed strongly recently and given this, together with the signs airlines are reducing capacity we reduced the holding.



The Australian Growth Fund rose 5.2% over the month as global equities bounced back from the soft December quarter.  Gains across our portfolio were broad based, with 19 out of 24 portfolio companies finishing the month in the green.  A number of our higher growth companies rebounded strongly in January including cloud-based software company Wisetech +20.4% in A$, Nanosonics +17.6% and Carsales +14.6%.      

Receivables management provider Credit Corp (+17.2%) was a standout and reported a solid set of financial results in the month.  The company continues to do well in organically growing its profitability in the US purchased debt ledger market.  Closer to home, in Australia, management are also successfully growing the consumer lending business without compromising their credit standards.  This financial discipline was also evident in the Australian purchased debt ledger results.  Credit Corp has elected not to chase business in this division at the cost of price.  In the longer run we think the company and its shareholders will be rewarded for this discipline.

Healthcare device company Resmed (-17.9%) fell after reporting its Q2 financial result.  Sales of Resmed devices in markets outside the US were substantially below expectations in Q2.  Resmed had benefited in 2018 from some regulatory changes in France and Japan, then it became apparent that this one-off benefit was larger at the time than the market had appreciated.  We do not think that this ‘miss’ is a reflection of a structural negative structural shift in the longer run outlook for sales.  Resmed has stepped up its investment recently in software related to the provision of medical care to patients.  The execution and pay-off of this strategy is long dated.  In the near term large earnings growth from this expansion won’t be evident and this also disappointed the market.  We think that the logic and investment rationale behind this software strategy is sound, and remain happy with our investment in the company.

There were no significant changes to our portfolio during the month.  



Global sharemarkets rebounded in January up 7.3% in local terms in contrast to the lows reached in December. The Fund was up 6.9% however New Zealand dollar gains against the US lowered the overall fund return to 3.8% in NZD terms.  The International Equity Fund underperformed the benchmark during the month due to its divergent exposures. The main detractor was a lower exposure to higher volatility stocks. These types of stocks tend to exaggerate market moves, moving higher on market up-moves, but also falling harder during market falls, like in December. Having a lower exposure to recent winners helped, as did having higher exposure to relatively cheaper stocks.

There were no market industries that posted a loss in January. Lower exposure to the Telecommunication Services detracted from relative performance in a month where defensive groups moved less than the overall market. The higher exposure to both the Automobiles and Energy added to performance as crude oil prices rose over 18%. Having a higher exposure to IT company, IBM added to relative performance after the company beat consensus revenue and earnings expectations, and rose 18%.  Lower exposure to Microsoft helped as the firm only rose 2.8% during the month, lagging the rest of the market. A major detractor was a lower exposure to social media giant Facebook, whose reported strong financial performance and stable user counts led to it rising an eye-watering 27%. Owning more AbbVie than the benchmark also hurt after the firm’s price fell  11% due to missing consensus earnings.

Fixed Interest 

The New Zealand Fixed Interest Fund continued its strong outperformance this month, driven primarily by the investment teams decision to remain overweight duration.  Nominal government bond yields have recently hit cycle lows and we are now finding better value in inflation-linked bonds, as they assume only c.1% consumer price inflation all the way out to 2040 – a very low level in our opinion.  Our fixed income global strategies produced a roughly in-line performance versus their benchmark.

Our global managers remain broadly underweight duration and this was the most notable drag on performance for the month.  While there are notable differences in the composition of each managers duration positioning, the broad-based strength across most government bond markets this month put downward pressure on both managers performance.




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