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 Growth was up 2.2% for the month. Portfolio company a2 Milk was a standout (+13.5%), on the back of several supportive proof points and various investment firms touting the company’s potential to succeed in 2019. Both sales data for some of the key Chinese e-commerce platforms and Australian supermarket data had a strong finish to 2018, plus New Zealand export data also indicated strong volume growth. These data points reconciled with our positive view from late 2018, when we saw regulatory concerns subside and in-market pricing improving, which when combined with our overall positive view of the company gave us confidence to increase our holding at lower prices.
Michael Hill (-7.7%) reported its key December quarter sales, which were disappointing in absolute terms, reflective of broader retail market conditions, although showing a marked improvement since new CEO Daniel Bracken has started. The company has backed away from its unsuccessful shift to cutting promotional activity, which saw same store sales fall -11% in the previous quarter. Same store sales rebounded to +1.3% in November/December. Daniel’s initial focus is on retail operating fundamentals and we are of the view his influence will have a positive impact here.
We reduced our position in Auckland Airport during the month. The stock has performed strongly recently and given this, together with the signs airlines are reducing capacity we reduced the holding.
Australian Growth Fund
The Australian Growth Fund rose 5.2% over the month as global equities bounced back from the soft December quarter. Gains across our portfolio were broad based, with 19 out of 24 portfolio companies finishing the month in the green. A number of our higher growth companies rebounded strongly in January including cloud-based software company Wisetech +20.4% in A$, Nanosonics +17.6% and Carsales +14.6%.
Receivables management provider Credit Corp (+17.2%) was a standout and reported a solid set of financial results in the month. The company continues to do well in organically growing its profitability in the US purchased debt ledger market. Closer to home, in Australia, management are also successfully growing the consumer lending business without compromising their credit standards. This financial discipline was also evident in the Australian purchased debt ledger results. Credit Corp has elected not to chase business in this division at the cost of price. In the longer run we think the company and its shareholders will be rewarded for this discipline.
Healthcare device company Resmed (-17.9%) fell after reporting its Q2 financial result. Sales of Resmed devices in markets outside the US were substantially below expectations in Q2. Resmed had benefited in 2018 from some regulatory changes in France and Japan, then it became apparent that this one-off benefit was larger at the time than the market had appreciated. We do not think that this ‘miss’ is a reflection of a structural negative structural shift in the longer run outlook for sales. Resmed has stepped up its investment recently in software related to the provision of medical care to patients. The execution and pay-off of this strategy is long dated. In the near term large earnings growth from this expansion won’t be evident and this also disappointed the market. We think that the logic and investment rationale behind this software strategy is sound, and remain happy with our investment in the company.
There were no significant changes to our portfolio during the month.
International Growth Fund
Global equity markets rebounded strongly in January after a very difficult end to 2019. The US S&P 500 Index rallied 7.9% in January, making it the best start to a year in more than 30 years. The International Growth Fund gained 9.4% for the month, significantly ahead of our global benchmark which was up 6.5%.Performance was supported by a good start to earnings season and financial strong results from Alibaba and Facebook.
Alibaba’s core e-commerce revenues grew 27% in the December quarter despite the slowing Chinese economy. The company also continues to invest heavily in new growth areas including food delivery, cloud computing, online video streaming and logistics. We believe these businesses provide attractive growth options over and above the growth we expect from its e-commerce business. Alibaba’s share price gained 23% in January.
Facebook saw advertising revenues jump 30% in the December quarter and the company added new users in every major region (including the mature US and European markets). These results support our view that users will continue to spend significant time on Facebook and Instagram despite the regulatory scrutiny, and that advertisers will increasingly move advertising dollars to these platforms. Facebook’s share price advanced 27% during the month.
Property & Infrastructure Fund
With 23 out of our 24 holding posting gains in January, there were plenty of highlights. Railroad company Union Pacific (+15%) continued its positive start to adopting Precision Scheduled Railroading (PSR) efficiency principles, outlining strong progress at its fourth quarter 2018 result. The company has introduced new operating efficiency indicators which are trending positively and confidently called out improved operating margin targets, while leaving room for upside gains. It also gave the first more detailed insights into areas it is targeting for productivity gains. For example, increased efficiency means it has been able to store 1200 locomotives of a fleet out of around 8500 since August. Union Pacific has also hired well regarded railway executive Jim Vena as its new Chief Operating Officer, further increasing confidence in enabling a successful transition to PSR. Our other US railroad, Norfolk Southern (+12%), also delivered strong gains in anticipation of its investor day in February where it is expected to outline in more detail its plans to operate its network more efficiently.
We reduced our position in Auckland Airport during the month. The stock has performed strongly recently and given this together with the signs airlines are reducing capacity we reduced the holding.
Risk appetite across financial markets improved dramatically in January. This as the United States Federal Reserve made an U-turn in their stance towards tightening monetary policy. The ensuing relief-rally boosted valuations across a wide range of financial assets – resulting in a strong performance in a majority of the portfolio’s assets. We continue to prepare the Fund for a tumultuous 2019 as our economic outlook continues to point to a notable slowdown in global activity. As such, we have used this recent rebound in asset prices to further reduce our corporate bond holdings, in favour of higher quality government bonds.
Necessary as they are, on the rare occasion where almost all financial assets are registering strong gains, it was the portfolios cash holdings that dragged back performance most this month. We continue to hold an above-average level of liquidity in the portfolio at present as we expect a deteriorating economic outcome in 2019 to drive corporate bond yields higher (and therefore prices lower). Until such time as our economic outlook changes or corporate bond yields reflect our current outlook, we would expect liquidity to remain high.