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 stabilised in November after a sharp sell-off in October, with the S&P/NZX50G up +0.9%, similar to global markets. The New Zealand portfolio performed worse than the market, falling -0.8% as low-growth sectors, like telecommunications companies or electricity utilities, generally outperformed the more strongly growing companies which we favour. The best performing shares in the portfolio were our defensive holdings in Intratil (+8.2%) and Meridian (+5.4%), while Mainfreight (+6.7%) also performed well on the back of a good first half result. Fletcher Building was the worst performer (-21.2%) after it reduced its profit guidance at its Annual Meeting.
We are constantly considering the prospects of our companies and the reasons for owning them, especially in difficult markets, while remaining mindful that one or two months is a short time when it comes to investing in shares.
Mainfreight is an excellent example of a key position in the portfolio taking a long-term approach to business that is paying off. Mainfreight’s mantra is that “decisions are made on the basis that we will be here for another 100 years”. The team continues to win new customers by taking this long-term approach and by providing superior service. A recent initiative that is paying off is the firm’s move to run its own intercity line haul services in the United States. Doing this means improved service to customers helping retention and customer acquisition. The company continues to expand its global network into new regions to expand with its customers and has made changes to underperforming areas of the business that have needed attention, with improved performance. This long term customer focus holds the company in good stead for continued growth.
The Australian portfolio fell –1.5% over the month, performing better than the market in what was a choppy month. Wisetech was the top portfolio performer and rebounded +16.5% (in A$) on improving sentiment towards the tech sector after the October sell-off. This was closely followed by Technology One which rose a solid 16% after delivering a strong full-year result which saw the company deliver mid double-digit earnings growth. This growth was underpinned by the signing of new customers in addition to ongoing and value additive migration of existing on-premise customers to the cloud.
Dominos (-14.9%) was our worst performing investment with the share price falling the back of soft AGM commentary regarding current trading conditions, albeit management re-affirmed guidance for FY19. Aristocrat (-10.7%) also suffered after missing market expectation in announcing their full-year result. This included a strong performance from its land-based gaming operation, offset by a messy result from its digital division as recent acquisitions were integrated into the group. Management expects this division to continue to grow into FY19 with the timing of this growth skewed towards the second half of the financial year.
We increased our weighting in Resmed during the month given a more benign regulatory environment in the US will underpin its earnings outlook for the next few years.
Global share markets ended the month slightly ahead, up 1.3% in local terms, after a sharp decline intra-month. This volatility confirmed October’s sharp change from the low volatility environment the market has been experiencing for the past few years. Information Technology, Energy and Material stocks lagging the rest of the market while Health Care, Utilities and Real Estate all outperformed.
When looking at the returns from a benchmark-relative perspective, the fund had a strong month. The portfolio outperformed the S&P Global LargeMid Cap index by 0.6% in local terms. A range of factors contributed to this relative outperformance. The dominant factor this month was due to our style tilts. As the fund currently favours stocks that are relatively inexpensive, this naturally leads to having a lower exposure to recent winners, when measured over the past year. These recent winners were among the worst performers last month, partly due to their more expensive valuations, boosting the fund's returns. Higher exposure to stocks within the Energy Industry detracted from relative performance as oil prices fell over 20% during the month. A larger exposure to the UK stock market also detracted from performance as continued uncertainty around Brexit caused the local stock market to slide. Another positive contributor to returns was due to our Ethical Investing Policy. By not investing in companies involved in the Tobacco industry, we avoided the losses suffered by others after the US government announced they might take steps to ban menthol and e-cigarettes, with the aim to curb youth smoking rates.
The New Zealand Dollar appreciated significantly against the US Dollar by over 5.5% after positive domestic economic data and higher interest rates; this led to the portfolio returns declining below zero in NZ Dollar terms.
Not owning General Electric boosted relative returns after the stock plunged 25% amidst concerns around its liquidity, and as news spread that law enforcement was questioning former employees regarding its troubled insurance business. Having a higher exposure to Vodafone than the benchmark significantly boosted relative returns as the firm announced earnings above market expectations, their share price rising 17%. While a higher exposure to Apple detracted from relative performance as concerns of low growth in iPhone sales as well as their relatively higher prices caused its share price to fall by 18%.
November was an extremely volatile month for fixed income assets, especially New Zealand dollar assets. On the back of what could be described as an entirely unbelievable unemployment number, the 10-year New Zealand Government bond initially rose 30 basis points in yield, only to then fall back to almost unchanged on the month on the back of a continuing deterioration in the global outlook for 2019 and beyond. During the aforementioned weakness in bonds earlier in the month, we took the decision to add roughly 0.2 years to the, already overweight, duration position of the New Zealand Fixed Interest Fund.
Our international managers remain mildly overweight corporate credit risk at this time and it was this that caused a majority of the Fund’s underperformance for the month. Both managers have recently reduced their exposure to corporate bonds in favour of higher rated government bonds, as the outlook for 2019 continues to deteriorate further.