Investing highlights & lowlights — FFKS & Managed Funds November 2018
By Fisher Funds
05 December, 2018
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 stabilised in November after a sharp sell-off in October, with the S&P/NZX50G up +0.9%, similar to global markets. The New Zealand Growth fund performed worse than the market, falling -0.8% as low-growth sectors, like telecommunications companies or electricity utilities, generally outperformed the more strongly growing companies which we favour. The best performing shares in the portfolio were our defensive holdings in Intratil (+8.2%) and Meridian (+5.4%), while Mainfreight (+6.7%) also performed well on the back of a good first half result. Fletcher Building was the worst performer (-21.2%) after it reduced its profit guidance at its Annual Meeting.
We are constantly considering the prospects of our companies and the reasons for owning them, especially in difficult markets, while remaining mindful that one or two months is a short time when it comes to investing in shares.
Mainfreight is an excellent example of a key position in the portfolio taking a long-term approach to business that is paying off. Mainfreight’s mantra is that “decisions are made on the basis that we will be here for another 100 years”. The team continues to win new customers by taking this long-term approach and by providing superior service. A recent initiative that is paying off is the firm’s move to run its own intercity line haul services in the United States. Doing this means improved service to customers helping retention and customer acquisition. The company continues to expand its global network into new regions to expand with its customers and has made changes to underperforming areas of the business that have needed attention, with improved performance. This long term customer focus holds the company in good stead for continued growth.
Australian Growth Fund
The Australian Growth Fund fell –1.5% over the month, performing better than the market in what was a choppy month. Wisetech was the top portfolio performer and rebounded +16.5% (in A$) on improving sentiment towards the tech sector after the October sell-off. This was closely followed by Technology One which rose a solid 16% after delivering a strong full-year result which saw the company deliver mid double-digit earnings growth. This growth was underpinned by the signing of new customers in addition to ongoing and value additive migration of existing on-premise customers to the cloud.
Dominos (-14.9%) was our worst performing investment with the share price falling the back of soft AGM commentary regarding current trading conditions, albeit management re-affirmed guidance for FY19. Aristocrat (-10.7%) also suffered after missing market expectation in announcing their full-year result. This included a strong performance from its land-based gaming operation, offset by a messy result from its digital division as recent acquisitions were integrated into the group. Management expects this division to continue to grow into FY19 with the timing of this growth skewed towards the second half of the financial year.
We increased our weighting in Resmed during the month given a more benign regulatory environment in the US will underpin its earnings outlook for the next few years.
International Growth Fund
While global share markets were stronger in November this strength was blunted when translating returns back into New Zealand dollars. Over the month the fund fell 0.7% beating the broad share market which was pleasing.
Our Chinese technology holdings, Tencent and Alibaba, were the two top contributors to portfolio performance in November. Alibaba (+13.1%) announced its quarterly results during the month, showing continued growth in the number of users on its Taobao and TMall e-commerce platforms, and core commerce revenue that grew 55% compared to last year. Alibaba’s annual Singles Day shopping festival also broke retail records again this year, with a massive US$30 billion of goods sold on Alibaba’s platforms on 11 November. Tencent (+16.9%), the Chinese video game and social media giant, reported third quarter revenues that grew 24% on the prior year. Despite a temporary halt on new video game approvals in China, Tencent’s mobile gaming revenues held up well as existing game titles continued to monetise well. The results also showed strong growth in Tencent’s advertising and digital payments businesses.
TJX Companies (-10.8%), the US-based off-price retailer, detracted from performance in November despite reporting a solid set of results during the month. Revenue growth of 12% was driven by strong US consumer spending. That said, increasing freight costs and wages are starting to impact profitability across the retail sector, and these pressures caused TJX management to provide slightly cautious guidance for earnings growth next year. TJX has been a strong performer for the portfolio this year and we see significant growth runway for new stores in the US and Europe.
Property & Infrastructure Fund
The global infrastructure and property sectors performed similarly to global equities. The Property and Infrastructure Fund was up 1.5%, outperforming its benchmark which was up 0.8% for the month. It was pleasing that October’s new portfolio additions, American Water and CMS Energy, made strong contributions in their first full month in the portfolio, delivering returns of +8.3% and +6.0% respectively, although it is early days.
During the month we exited our position in toll road operator Atlantia after reviewing the circumstances around the partial collapse of the Ponte Morandi Bridge, operated by its Autostrade subsidiary. In light of some further information around the incident, we formed the view that some of the company’s conduct had been questionable and its removal from the portfolio is appropriate.
November was very challenging for fixed income investors. Usually there is some diversification within the income portfolio. The government bonds we own tend to perform well when corporate bonds struggle, and vice versa. This was not the case in November. The yield on government bonds was flat to marginally down over the month generating (small) capital gains, whereas corporate bonds were very weak in what was almost a slow-motion reaction to the October weakness in sharemarkets. This meant there really was no place to hide for fixed income investors.
It was a violent sell-off in global corporate bond markets although the yields on offer now are beginning to catch our eye. This sets the Fund up well to generate noticeably higher levels of income in future.
While the Fund continues to maintain a historically low allocation to corporate bonds, a small number of the investments we do hold played an outsized role in this weak result – such was the severity of the move across the asset class. Specifically, our investments in Altice and Boparan have been the most notable underperformers.