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
In June the NZ Growth Fund returned +5.9%, ahead of the local market at +5.2% (S&P/NZX50G). This rounded out a strong quarter following the market rout in the March quarter.
Fisher & Paykel Healthcare (+19%) announced a very strong 2020 fiscal year result boosted by strong hardware and consumables orders due to COVID. Its nasal high flow therapy is proving a more effective treatment for COVID patients versus traditional invasive alternatives such as intubation (an ‘endotracheal tube’ physically inserted down the throat and into the airways). Longer term, this experience could prove a powerful proof point for practitioners that F&P's products should be used for treatment of far more respiratory patients than is currently the case.
Delegat (+13%) provided an update that its upcoming fiscal 2020 result will be well ahead of its earlier expectations prior to COVID on the back of higher than expected wine case sales. The result was driven by strong sales of its core Oyster Bay products in the supermarket channel. Customers ensured they had enough product to drink at home through COVID related lockdowns and gravitated towards trusted brands. This was more than enough to compensate for lower demand from restaurants (only around 10% of normal sales mix).
Australian Growth Fund
The Australian Growth Fund rose +3.7% (net) in June which compares to the +2.5% return for the ASX 200 Index (70% hedged into NZ$).
A heightened focus on respiratory health globally continues to drive demand for ventilators and masks, underpinning Resmed’s +16% (A$) share price rise in the month. The challenges the Covid-19 crisis creates for hospital systems is also leading to increased interest in out-of-hospital healthcare solutions. This is a primary focus of Resmed’s software division and provides another tailwind to Resmed’s growth runway.
After being two of our strongest performing companies in recently, oOH!Media (-15.7%) and Credit Corp (-9.3%) were bottom of the table in June. Neither company reported material news in the month. However advertising markets remain weak (affecting oOH!Media). A resurgence in Covid-19 cases in pockets of Australia and the US (Credit Corp’s key markets) weighed on its share price.
International Growth Fund
The International Growth Fund was flat for the month, lagging our index which gained [1.0%]. While markets edged higher, concerns emerged late in the month about ramping coronavirus cases in the United States and the potential for further shutdowns. This saw weaker performance by sectors that are more exposed to lockdown such as retailers, hotels and medical-device names that underperformed during the month.
Our top performer was Hexcel (+25%), which manufactures composite components for aircraft. While the aerospace industry has been devastated by the coronavirus, there are signs of green shoots for the travel industry. Positive progress on the regulatory approval of the Boeing 737 Max further boosted Hexcel’s performance. Tencent was another strong performer (+22%) hitting all-time highs. Tencent held its annual Games conference in June where it showcased a strong pipeline of new games and updates. More importantly, this event highlighted the global reach of Tencent’s gaming business, and the opportunities to capture more of the growing global gaming market outside of China.
Facebook and Alphabet both underperformed in June as a group of advertisers including Unilever and Coca-Cola decided to temporarily halt advertising across Facebook and other social media platforms due to their failure to monitor and remove hate speech. These advertisers only make up a small percentage of these companies’ revenues and it is unlikely to have a material financial impact, but we are following the situation closely given the important issues in play. Advertisers do not want their brands advertised on platforms that carry objectionably content, but at the same time we believe that Facebook and Alphabet are moving in the right direction to remove much of the offending content and set policies that improve the safety of their platforms. This is a difficult balancing act, because they are also trying to provide a platform that allows individuals the freedom to share their unique opinions.
Property & Infrastructure Fund
The Property & Infrastructure Fund returned -0.9% in June, ahead of its benchmark at -2.2%.
Diversified property owner and manager Stride Property (+13%) announced its fiscal 2020 result. Despite some rent relief due to COVID, its balanced portfolio and conservative level of gearing meant it was able to maintain its dividend. It continued to grow its Real Estate Investment Management (REIM) business +16% and this growth should continue with the formation of the Industre industrial property joint venture, which came into effect on 30 June.
Childcare landlord Arena REIT (-9%) raised A$75 million to provide capacity to make further investments. This was unexpected as the company was already conservatively geared and has not been overly impacted from COVID, with its centres remaining open as essential services and childcare operators well supported by government initiative. The company has a strong track record of investing wisely to deliver investor returns so we participated in the raising.
In March we mentioned our investment in BMPS, a leading Italian banking group, as one of the worst performers of the crisis. Since that time its fortunes have reversed strongly. Most recently toward the end of June, the bank announced it will transfer a large portfolio of underperforming loans to an asset management company run by the Italian government. We had been expecting such an announcement ahead of the COVID outbreak and given it will put the bank in a much stronger position for future growth, it is pleasing to see this transaction moving ahead. In anticipation of the final deal announcement, the company’s bond price has risen strongly throughout May and June. We remain constrictive on the bank and its prospects but are currently reviewing the position in light of this positive development.
We believe the global business cycle has recently entered its repair phase, after a sharp and severe downturn. This phase is characterised by economic activity that is still well below its long-term average and is not yet showing signs of sustainable improvement. Despite this mediocre backdrop, the anticipation of a brighter future ahead typically causes safe-haven assets, such as government bonds, to produce more muted returns at this juncture. We have been reducing our holdings in such assets since February and believe the current mix of assets is set up well to benefit from this evolving phase of the cycle.