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Investing highlights & lowlights — September 2018

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Investing highlights & lowlights — September 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

 

Our New Zealand portfolio was down -0.5% for the month. This was a mild underperformance of the New Zealand Sharemarket, which gained 0.4% driven by the utilities and telecommunications sectors - generally not our favoured sectors. Portfolio performance was driven by our logistics companies with both Mainfreight (+7.8%) and Freightways (+5.1%) having good months.   Notable drags on performance were Vista Group (-6.4%), Summerset (-8.2%)  and a2 milk (-10.8%)

We increased our positions in a number of companies. The Xero holding was increased given we continue to be impressed, as we get to know the company more closely and meet more personnel. We also increased in Fletcher Building and A2 Milk.  We reduced our position slightly in Ryman.


Australian Growth Fund

 

Our portfolio was down 1.6% for the month of September.  One of the biggest drags on performance was CSL, which is one of our largest company holdings in the Australian portfolio. After a strong run year to date, CSL was down -11% in the month. There was no specific catalyst for this although the company was sued late in the month by competitor Shire for patent royalties relating to the sales of one of their products. We will be watching this closely, however our initial assessment is that this is not materially problematic to CSL. Datacentre company NextDC was down -8.3% during the month. Despite an initial positive response to the earnings result delivered on the last day of August, the market then reacted to the lack of progress in contracting more of its recently constructed data centre capacity.  Management put this down to timing delays rather than a lack of demand and in fact have bought forward the expansion of its second data centre in Sydney because of the strength of the underlying demand for capacity.  We remain confident in this investment and increased our investment in the company during the month.

Performance was driven by resource companies Rio Tinto and BHP, returning +8.3%  and +7.2% respectively, due to resilient bulk commodity prices.  Following on from a strong performance in August, Wisetech rose +3.5% in the month.  Resmed (+2.5%) also contributed meaningfully to the month’s returns after hosting an investor day in San Diego in September where it shed further light on its investments in software and data analytics functionality and updated the market on new product releases. 


 International Growth Fund

 

International share markets had mixed results in September and our International portfolio was down 0.2% for the month.  Two notable drags on performance for the month were Alibaba and LKQ.  While Alibaba was dragged down with Chinese technology stocks more broadly, another factor was the announcement of Jack Ma’s retirement from the role of Executive Chairman. While Jack Ma hasn’t been as active in the business in recent years (now run by CEO Daniel Zhang), the announcement came earlier than investors had anticipated. Despite limited company-specific news for aftermarket car parts distributor LKQ (-8%), its share price was dragged down with the broader auto sector, which has come under pressure from the ongoing US-China trade war.

Edwards Lifesciences (+21%) and Abbott Labs (+10%) were top performers this month, following Abbott’s announcement of positive results from the trial of its MitraClip device that is used to treat patients with a form of heart failure. The results were better than anticipated, showing significant improvements in hospitalisation rates and mortality and the stock also reacted positively to this news.  Electronic Arts (EA), was also a strong performer, gaining 6% after being added to the portfolio during the month. EA is one of the world’s leading video game publishers, with hit franchises including FIFA, Madden and Battlefield. The company operates in an industry we believe is positioned for sustainable revenue growth and margin expansion. The gaming industry is transitioning from a hit driven revenue model, based on game units sold, to more of a recurring revenue model, where customers not only pay the up-front cost of a game, but also spend money on in-game items, which may be cosmetic or improve game play. The result of this transition is that EA is able to better monetise games, with these new digital revenue streams also having higher profit margins.   


Property & Infrastructure Fund

 

The Property and Infrastructure portfolio had a positive month in September with a return of 2.0%, which was an improvement on August performance. This was particularly positive in the context of the global infrastructure share market, which was down -1.0% and once again underperforming global equities during the month. NZ Real Estate Investment Trust's (REIT's), where we have a number of portfolio holdings,  materially outperformed Australian REITs during the month. The performance of all of the above can be largely explained by relative global bond movements. 

Notable gainers in the portfolio were United States based Union Pacific Railroads (+8.1%) and airport operator Flughafen (+7%)  


Income Fund 

 

Rising interest rate expectations put downward pressure on the value of high grade, safe-haven fixed income assets this month.  Despite this weighing heavily on the performance of the Fund in September, there were still a number of highlights.  The most significant of these was the strong performance of a selection of our corporate-issued bonds.  These are investments in companies which are seeing their profitability and therefore perceived creditworthiness improve as the ongoing robustness of some offshore economies persists.  

September was a weak month for the Income Fund.  Following two strong months, the Fund fell by 0.1% in September.  This was largely attributed to our holdings in the United States which further extended their recent sell-off.  This, the world’s largest, economy continues to benefit strongly from the recently enacted tax cuts at a time when unemployment is at a cyclical low.  This strong near-term economic performance has forced interest rate expectations materially higher this year, which in turn has driven down the value of most fixed income assets.  

 

 

 

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