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
The New Zealand sharemarket was an island of calm in a storm during December, with flat performance and very low intra-month volatility compared to global stock markets that had very high levels of volatility and fell sharply. Our NZ portfolio returned 1.2% for the month.
Single stock dispersion, which measures the difference in performance between different companies in the market, was the lowest in years. Consumer staples were the top performer with portfolio heavyweight a2 Milk not only the best performer in the portfolio but also the best performer in the S&P/NZX 50 (+7.7%). A combination of a more benign Chinese regulatory outcome than the market expected, ongoing strong demand for the company’s infant milk , buoyant prices in both Australian and Chinese markets and the weak NZD all helped. Other top portfolio performers were Xero (+5.4%) and portfolio Freightways (+5.0%).
Ryman Healthcare was the worst performer in the portfolio (-6.4%) following the weaker rate of growth in new developments signalled at its half year result in late November.
We reduced our positions in a2 Milk and Michael Hill during the month. a2 Milk had rallied hard following our recent lift in weighting and the valuation was less attractive. We remain unconvinced that Michael Hill’s new strategy including the move away from deep discounting on event days will work.
We added to our positions in Xero and Fletcher Building during the month. Xero’s number one global competitor Intuit raised prices in Xero's most valuable market (UK) by 8-33% signalling an improvement in the competitive landscape in the UK. After the sharp fall in the Fletcher Building share price, and given the continued execution of its strategy under the new CEO (divestment of Formica per our expectations, remain confident of Australian improvement strategy), we added to our position.
Australian Growth Fund
The Australian Growth Fund fell –3.7% over the month, as sharemarkets globally continued their volatile performance of recent months. Our diversified mining exposures in BHP +11.5% (in A$) and Rio Tinto +7.1% were our best performers in the month. Both benefited from iron ore pricing which has held up relatively well, and the market continued to reward these companies for their strong balance sheets and disciplined approach to capital management. BHP completed a US$5.2bn buyback during the month and the company announced a US$5.2bn special dividend. Rio concluded the previously announced US$3.5bn sale of its interest in Grasberg mine in Indonesia, the second largest copper mine in the world. This further bolsters Rio’s balance sheet as it heads into 2019.
OML was our worst performing company in the month dropping -20.6%. Although there was no company specific news of note, OML’s sell-off was triggered by soft advertising industry data, which contributed to rising concerns over the growth and magnitude of advertising spend across categories in 2019.
There were no significant changes to our portfolio during the month. We added to our holding in Sonic Healthcare by participating in its equity raising, undertaken to fund an acquisition in the US.
International Growth Fund
There was no holiday cheer in the global share markets in December with sharp falls in global markets. In New Zealand dollar terms our measure of global share performance ended the month 6.8% lower. Against this challenging backdrop the International Growth Fund fell 7.3% for the month.
In a month where few stocks made gains, the performance of recent addition Tencent was a highlight, gaining 3% as Chinese authorities restarted the online game approval process earlier than expected. New game licenses approvals had been halted since March, so this news was welcomed by the market as Tencent can now look to launch and monetise its pipeline of new games.
Heart valve company Edwards Lifesciences outperformed the market after a well-received investor day which reconfirmed the large market opportunity in trans-catheter heart valve replacement (which allows for valve replacement without open-heart surgery).
Core Laboratories was our worst performer, down 26% as the oil services sector reacted to the ongoing decline in the oil price which is impacting customer demand for its oilfield services and drilling products. Fresenius Medical Care was down 19% as the company downgraded 2019 guidance citing lower dialysis revenue and increased investment in the home dialysis market. We view these headwinds as largely temporary and still see strong long-term fundamental growth drivers as global dialysis patient numbers continue to grow and as Fresenius takes a greater role in managing the full care of kidney patients through risk sharing agreements with insurers.
Property & Infrastructure Fund
Global infrastructure equities outperformed global equities by 4% for the month, as you would expect in a global “risk-off” environment. Australian and NZ property companies performed inline with each other and outperformed infrastructure equities, again as expected.
Our portfolio was down 1.1% for the month displaying defensive characteristics compared to global sharemarkets which were down nearly 8%.
The most defensive names in the portfolio were the best performers – with Stride Property Group (+5.2%), Transurban (+4.8%) and Dexus (+4.1%) materially outperforming. The less defensive positions in the portfolio like the US rails were the worst performers with Norfolk Southern and Union Pacific down 12% and 10% respectively.
We reduced our positions in American Tower and Flughafen Zurich during the month. American Tower was pricing very little risk that the pending but yet to be approved carrier merger between Sprint and T-Mobile will result in the rationalisation of towers. We added to our position in Aeroports de Paris during the month as the price fell to near our bear case valuation on the back of social unrest.
Risk appetite across global financial markets had been waning throughout the quarter and December took that to another level. Falling share prices and a sharp deterioration in the outlook for the global economy in 2019 has seen investors scramble to own safe-haven government bonds which the Income Fund has a large holding in. This resulted in the Fund producing a strong month for returns in December. We have long thought interest rate markets were too optimistic about the outlook for the global economy and this recent reduction in interest rates goes some way to vindicating our previously out-of-consensus view.
While it is pleasing to see the fruits of our economic analysis come to pass the Fund was not entirely immune to the deterioration in risk appetite in December. A widespread sell-off across both equity and credit markets did put some downward pressure on the valuation of a number of our corporate bond investments.
As the yield on corporate bonds nears attractive levels we are likely to deploy more of our, currently high, cash balance towards these investments.