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 Growth Fund
Our NZ portfolio returned an outstanding 6.6% for the month, significantly outperforming the NZ market (+3.8%). Top portfolio performers included Fisher & Paykel Healthcare (+17%) after the market reacted well to the mutual agreement with competitor ResMed to end their respective global patent litigation, which will deliver meaningful cost savings over the next couple of years. Software player Vista Group (+13%) reported a strong 2018 result with revenue growth of 23%, ahead of its guidance. Vista is entrepreneurial and proactively invests in developing new businesses and many of these like Powster, Numero, and Cinema Intelligence continuing to gain traction. We think Vista is a high quality software player in its niche and there is significant scope for it to continue growing at strong rates for many years.
A drag on performance was Pushpay -5% after revenue for the December quarter was softer than anticipated. with processing volumes in the last week of December fell short of expectations. The company still expects strong revenue growth for the next year of around 30%.
Australian Growth Fund
The Australian Growth Fund rose 3.8% in February as the ASX 200 delivered its strongest monthly return since July 2016. Financials (+9.1%) led the index up, enjoying a relief rally following the release of the Royal Commission’s final report.The majority of our portfolio companies reported results during the month. On the whole, the results were well received by the market.
Nanosonics (+24.3% in A$ in the month) was the standout performer. It delivered strong revenue and profit growth on the back of the second generation trophon release. It also had high growth in (recurring) consumable revenues to meet the needs of its growing installed base. This is a longstanding portfolio holding for us and pleasingly, management continues to execute well.
Next DC (-8.9%), our worst performer for the month delivered a credible result. It disappointed the market in the sell-through rate of its Melbourne (M2) facility. This is largely a function of timing in our view and the fundamentals for its long run growth remain sound.
International Growth Fund
The International Growth Fund gained 4.7% in February, which was a month where global share markets continued to rebound. The US S&P 500 Index rallied 3% in February and is now up 11% for the year and 18% from its pre-Christmas lows. Fourth-quarter reporting season continued in February and most of our portfolio companies delivered pleasing updates. Animal healthcare company, Zoetis, reported 7% revenue growth and 21% earnings growth driven by strength in its companion animal business. Its dermatology products for cats and dogs delivered strong growth and the recent acquisition of Abaxis (diagnostic tools for vets) is being integrated on schedule and initial results are promising.
Off-price retailer, TJX Companies, delivered impressive fourth-quarter results. Same store sales growth of 6% would be the envy of many retailers and on top of this they continue to roll-out new stores. Management provided upbeat guidance for 2019.
We exited our position in long time portfolio holding eBay in February. Recent financial results have demonstrated that growth continues to slow (in a strong e-commerce market) despite managements’ best turnaround efforts, which has caused us to question our investment thesis. Despite recent weak financial results, its share price has gained over 30% this year on news that activist investors Elliott Management and Starboard Value have taken stakes in the company and are agitating for change. As a result we have been able to exit our holding at what we think is a fair price.
Property & Infrastructure Fund
The portfolio returned a respectable 2.8% for the month. US railroad operator Norfolk Southern (+7%) announced new financial targets ahead of expectations at its analyst day. These were underpinned by cost efficiencies as it adopts precision scheduled railroading principles (PSR).
Australian early childcare landlord Charter Hall Education Trust (+7%) reported a solid first half 2019 financial results which demonstrated a continuation of solid 2.6% like-for-like rent growth and rental uplifts from market rent reviews (averaging 7.8%). Following the commencement of Australia's new Child Care Subsidy (CCS) framework the company's tenants observed 2-3% increase in occupancy and care is now on average 11% more affordable for parents. Positively, supply of new centres is moderating after a period of localised oversupply in 2018, although the company was insulated by its long leases and disciplined approach to developments and tenant selection. The solid result during a period of uncertainty in the sector demonstrates the resilience of the trust’s business model.
Our economic indicators show global growth is now slowing quite quickly. However, financial markets continue to cheer (this less than cheery outcome) as the world’s central banks backpedal on their efforts to remove stimulus that has been in place for over a decade now. Appetite for financial assets has been insatiable this year – strongly lifting the value of a majority of asset in the portfolio.
As we’ve been doing for more than a year now, we continue to prepare the Fund for a more tumultuous time ahead, when monetary stimulus is no longer enough to lift asset prices alone. This preparation has seen a further reduction in the corporate bond holdings within the portfolio.
Despite its strong result this month, the Fund did have one laggard. Questions over the plan set forth by the new executive team at Boparan (UK food manufacturer) continue to divide investors. This caused the yield to the companies bonds to adjust higher over the month, in order to compensate investors for this ongoing uncertainty.