A snapshot of the key factors driving the performance of markets and your funds in December 2019
All Fund returns below are after fees & before tax
New Zealand Growth Fund
The NZ Growth Fund posted returns of 2.1% in December, ahead of the local share market which returned +1.6% (S&P/NZX50G). This capped an extremely strong quarter for the fund which was up 13.7% vs the local share market +5.3%. The 12 month return for the year was a staggering 37.0%.
Summerset (+15.6%) continued its extraordinarily strong run. The stock is up almost 70% from its lows six months ago. The ongoing recovery in particularly the Auckland housing market after the sharp falls in mortgage rates has been a key driver as was the announcement of Summerset’s first foray into the Australian market. More recently, the takeover bid for lower quality competitor Metlifecare by offshore entity Asia Pacific Village Group has further driven sector performance.
In what was a fairly quiet month to end a strong year for markets, Xero and A2 Milk drifted lower on no news and profit taking after rallying very strongly in November.
Australian Growth Fund
The Australian Growth Fund returned -1.4% in December closing out a strong year for the fund which returned 28.9% for the 2019 calendar year.
Christmas came early for oOH!Media shareholders as it upgraded earnings guidance in December and the stock was up +16% in the month. While the Australian advertising market remains subdued, oOH!Media’s team have done well selling advertising space on their outdoor billboards in what is a seasonally important period for the company.
Volatility continued in Wisetech’s (-14%) share price as it fell after having rebounded in November. Technology One (-10%) likewise gave back some of November’s gains. There was no new material news related to either company. NAB’s (-5%) share price fell as ASIC lodged a civil action against the bank based on ‘fees for no service’ conduct over the previous decade. NAB’s customer remediation process related to this is well advanced. However, coming as it did on top of an ongoing AUSTRAC investigation into the bank, the additional uncertainty posed by ASIC’s filing weighed on the share price.
International Growth Fund
The International Growth Fund was -0.6% in December. For the year as a whole, the fund performed very strong, gaining 33.3%, this was 8.7% ahead of our global market benchmark, which gained 24.6%.
A global ‘risk-on’ rally drove markets higher in December, with broad market strength across the US (+2.9%), Europe (+2.0%) and emerging markets (+7.2%). The risk-on environment was supported by the removal of geopolitical uncertainty, with the US-China trade deal and UK election addressing (at least temporarily) two risks that have weighed on markets for almost two years.
Hexcel (-12%), the aerospace composites supplier, was the biggest drag on portfolio performance in December as Boeing announced it would temporarily halt production of its troubled 737 Max. Hexcel is a supplier of carbon-fibre composites for the plane, which was grounded following two fatal crashes. Given the complexity of the issue and with regulators not expected to certify the plane in the immediate future, Boeing made the decision to stop production. We expect that certification will eventually be issued and therefore see any earnings impact on Hexcel as transitory. Longer term, Hexcel will continue to benefit from increased composite content on new planes as manufacturers look to reduce weight and increase fuel efficiency.
Tencent (+8%), the Chinese video gaming, social media and payments giant was the biggest gainer in December. While there was limited company specific news during the month, Tencent rallied along with other Chinese stocks as progress was made on the US-China trade deal and the intensity of tensions in Hong Kong subsided.
Property & Infrastructure Fund
In December the Property & Infrastructure Fund returned 2.1%.
Despite a well-publicised trade war that has had flow-on effects to most trade lanes globally, our two port investments have continued to perform strongly. Napier Port, in particular, was +23% for the month. Some in the market had feared that due to the well-publicized fall in log prices, we might see a deferral of log volumes or pricing pressure from customers. Napier Port’s moat is based upon its captive customers – 85% of its volumes come from within 100km of the port. This means it has superior pricing power and this was reflected in it retaining its forecasts in November despite a weak backdrop. It was great to see the sharp bounce in price come after we increased (doubled?) our position in the previous month.
Charter Hall Education Trust (-6%) continued to underperform after the surprising and disappointing departure of the CEO after 14 years at the helm in late November.
While our Fixed Income Fund was down -0.1% for the month it finished 2019 very strongly with a return of 5.4%. Our investment in Dell International continued to perform strongly, rising 0.9% in value during the month. This was in reaction to yet another steady set financial results. At the time of the results, management also reiterated their intention to use the company’s growing cash flow to further reduce the company’s debt burden. We expect further improvements in the company’s credit risk profile over the coming 12 months, which in turn should further benefit our holding.
Rising interest rates put further downward pressure on the value of our fixed rate investments this month. While this trend has persisted for the last three months, we see good reason to expect interest rates to first stabilise at around these levels before moving lower during the new year.