A time to reflect
We are oh so lucky to live in New Zealand. Investors have never had it so good. Not only do we live in this amazing progressive country with a lifestyle to match, we are free to live our lives as we want and also get to spend our hard earned income as we see fit. And this year has offered opportunities such that 2017 has felt like an investment year like no other. Is it the New Zealand share-market being up 19% or the US share-market being up 18%? Or could it be interest rates staying at their lifetime lows? Is it A2 Milk going up nearly 400%? Is it the Fisher Funds International Growth Fund being up over 30%? You could be excused for thinking any of these could be the standout event in investing in 2017, but in reality all of these are indicative of the investing party that we have seen in 2017. In addition, there has been the crypto currency bubble taking Bitcoin from $1500 at the start of the year to $16,000USD now. Bring out the champagne if you speculated on Bitcoin!
Of great note has also been the recent release of the Legatum Prosperity ranking of 148 countries (see prosperity.com). This ranks New Zealand as the second most prosperous country in the world in 2017, behind Norway. In 2016 New Zealand was number 1 so our privileged position is not new. What this study does though, is rank prosperity across 9 broad based measures including business environment, governance, health, education, freedom and safety amongst others. We all know New Zealand is far from perfect, however sometimes we have to be reminded by others just how good we have it here.
Despite the very good times, 2017 has also been a year when the public have said they want changes. There have been concerns regarding those being left behind, housing affordability and the environment. That is the challenge for the new government, while not damaging the already high relative prosperity New Zealand enjoys.
So as we wrap up 2017, has Fisher Funds committed enough to the wishes of you, our clients? Investment returns have overall been very strong, and I have had only very favourable feedback from investors in that regard. 2017 has been a gem. We have had mostly favourable feedback (but not from all of you) to our new commitments on responsible investing and especially the ban on investing in thermal coal extraction. Overall, the Fisher Funds active management philosophy only investing in quality (and responsible) companies enables us to stay current with investor expectations, in a way that passive index tracking funds will never be able to do.
As we look forward to 2018 most investors understand many asset markets are at very high valuations. That does not mean in itself that the party ends with a crash, but does mean markets are unlikely to replicate the performance of 2017. The Fisher Funds investment team may have their work cut out to navigate through any uncertainty, but are up to the challenge.
Thank you for your custom in 2017. We are aware that our clients have many many choices of where they can invest their money, and we are very proud that you continue to support Fisher Funds. I know some of you were a little concerned with Carmel stepping down as Managing Director, and hopefully you can see we are continuing to build on the fantastic legacy Carmel and her husband Hugh created. Carmel is also keeping a watchful eye as she has continued as a Director!
From all of the team at Fisher Funds we wish you a fantastic holiday season, and look forward to continuing our association in 2018 and hopefully beyond.
Chief Executive | Fisher Funds
Your KiwiSaver portfolios: Highlights and lowlights
The New Zealand portfolio was up significantly at 3.2% outperforming the benchmark NZX which was up 0.6%. The biggest contributors to performance were Michael Hill International Ltd and Summerset Group holdings Limited at 11.8% and 8.4% respectively. Xero was down 7% after a knee jerk sell off following the announcement they would transfer to a sole listing on the ASX. We used this weakness as an opportunity to add to our position.
November was another good month for the Australian portfolio. It delivered a return of 2.1%, outperforming its ASX200 benchmark. The portfolio benefited from its underweight position in the major banks. Both National Australia Bank and Westpac delivered slightly disappointing earnings results early in the month and the whole sector suffered late in the month in the build-up to the Federal Government confirming it would establish a Royal Commission into the Australian Financial Services Sector. The standout contributors to the portfolio in November were ARB Corporation and NextDC. Management commentary at both companies’ AGMs confirmed a good start to their 2018 years. The biggest detractor was Nanosonics. The company’s evolving business model means earnings growth will pause this year. However, the long term fundamentals remain strong in our view.
The international equity fund performed in line with its benchmark for November with a 1.7% return. The Kiwi Dollar was down against the US Dollar 0.2% for the month which was a positive contributor to fund returns. The largest contributor to returns was semi-conductor, and telecommunications firm Qualcomm with the share price up 30% after successfully rebuffing a rival chip maker’s takeover offer.
Underperformers for the month were online travel company Priceline whose share price fell 9% after a weak profit outlook due to competitive pressure from companies like Airbnb. Henry Schein an American healthcare company’s dropped 9% in response to its latest earnings announcement.
During the month we increased our exposures to Energy, Utility and Financial stocks while reducing our weighting to the Information Technology, Consumer Staples and Industrial sectors.
In November the New Zealand Fixed Interest Fund mildly underperformed its local benchmark. This is the result of our decision to run the Fund with slightly less interest rate exposure than its benchmark at a time when overall interest rates fell.
Pleasingly though our overweight positioning in Canadian and Australian interest rate markets across our global funds had a positive impact, as these countries continue to outperform other fixed income markets of the developed world.
Your KiwiSaver portfolios
It has been a wonderful year for markets and most investors will enjoy looking at their KiwiSaver balance or investment portfolios, which will look a lot healthier than they did at the start of 2017. Markets have been carried higher on the back of rosy economic growth, which for the first time since the Global Financial Crisis is showing coordinated strength all around the world.
For those of us who have been around for a few years while we enjoy strong markets there is always the question about whether they can continue and for how long. One of the frameworks we take into consideration in order to answer that question is our “traffic light indicator”, an assessment of the risks that typically point to market downturns.
The good news is that right now most potential risks that typically point to corrections are not that evident in markets. In fact we see plenty of green lights supporting continued healthy returns. There is only one key red light on the horizon, which while this is something we are monitoring, in our opinion it is unlikely to be enough to derail the strong run of markets into 2018.
The only red light we see is the level of debt that companies have right now. This is very high by historical standards. While this is of some concern, it is a logical outcome of the very low interest rates experienced since the Global Financial Crisis. Companies have taken advantage of this by borrowing money at low interest rates and buying back their own shares. This has been good for shareholders but could go awry if for some reason company earnings come under pressure or interest rates rise dramatically.
There are some things that are flashing amber. We are monitoring these closely to see if conditions deteriorate further but for now they would not stop us being comfortable owning shares. Top of the list of these concerns are equity valuations which are stretched, the fact that interest rates look to have bottomed and that investors on the whole seem too complacent. Complacency manifests itself in many ways including the lack of market volatility, which could signal investors increased willingness to take on more risk.
The reason we remain comfortable with the outlook for shares is many of the typical indicators of market stress are just not flashing any warnings whatsoever. There are plenty of green lights. Inflation is well and truly under control, economic momentum is strong, company profits are growing and wage demands are modest and not impacting profit margins. These measures all suggest a healthy outlook for 2018.
While our traffic light risk indicator system is no guarantee that markets will behave next year they certainly give me the confidence to face Xmas dinner without worrying about a financial market hangover from 2017. Now just need to avoid eating too much!
Responsible investing has become an increasingly important part of the investment landscape in New Zealand in the last 18 months. This has seen the majority of KiwiSaver providers introduce this in some form or another. With everyone having their own different approaches you may be wondering what exactly constitutes responsible investing? Like many things in life it is up to interpretation. For some investors it is merely ruling out the worst industries and not investing in them. This exclusion approach may involve, for instance not investing in some armaments companies. For us an active manager on your wealth this broad brush exclusion approach is simply the start to truly investing in a responsible way.
We have ingrained responsible investing as a fundamental part of our investment framework. As an active fund manager we believe that it is more than just the right thing to do, it also helps us identify the best companies and the worst companies in the World. In our view managing a business to be truly sustainable is one of the many indicators that points to a company’s long term success. We apply our responsible investing overlay in two distinct ways.
The first of these is the more typical broad brush industry exclusions on manufacturers of tobacco, weapons that cause indiscriminate/ disproportionate harm and, somewhat unusually in New Zealand, thermal coal producers. Our process doesn’t stop there. Our second pillar of responsible investing is to evaluate the corporate conduct of companies. This means looking at a company’s behaviour from an environmental, social and governance perspective. We use this information in both a positive way, to identify companies with sound records of sustainability but also to exclude companies with poor sustainability track records.
To do this we partner with research agencies who help us collate a wide range of information and data from sources that provide deeper insight into the culture and operating principles of companies. One such source is people on the ground from Non Government Organisations. A great example of this is feedback that is gathered from Amnesty International staff and volunteers who deal with workers first hand and observe the day to day conditions of that they face. This type of feedback can help identify those companies who have a sustainable long term approach to labour relations and those who don’t.
This information, combined with our own observations and research, helps us form a picture of a company’s conduct. This is taken into consideration when forming our exclusion list of the companies that we will not invest in on the basis of the way they operate. Altruistic and environmental purposes aside, there is sound economic reasoning why companies with a poor record of corporate misconduct should be avoided. Recently published research by MSCI, a well-respected research house for institutional investors found that exclusions of the worst types of corporate wrongdoing had a “mildly positive effect on returns.” The way I look at these results is that while making decisions on this basis of corporate conduct alone is not a silver bullet to guarantee good returns, it definitely helps and we are always looking for every edge we can identify. We continue to believe investing responsibly is investing wisely.
This year saw a milestone reached with the tenth birthday of KiwiSaver.
We've been a champion of KiwiSaver since day one advocating for Kiwis to get on board and save for their first home and/or retirement. And Kiwis have got on board — over 2.7m of us — which is a success in itself.
Since the birthday of KiwiSaver in July there has been a lot of coverage in the media about what ten years of KiwiSaver means. At Fisher Funds, the real success of KiwiSaver for us is how it has helped make a difference to the lives of so many of our members.
We canvassed some of our members who have been with us for that ten year journey and it's been awesome to hear first-hand what KiwiSaver means to them.
And while the money they have saved is really important, what shone through in every case was how KiwiSaver has lifted their confidence, hope and optimism for their future.
KiwiSaver is clearly about more than just numbers. It's about emotional gains as well as financial gains.
We showcased some of these stories in a special feature on our website — Kiwis celebrating KiwiSaver. There's every chance you'll see yourself in one of these stories or hopefully you'll take inspiration from the success of others.
Hear from Helen who has spent the last three years travelling since she retired, all funded by her KiwiSaver account.
Then there's Lucy and Alison who have got themselves onto the property ladder thanks to KiwiSaver. Buying a first home is more challenging than ever but KiwiSaver can and is increasingly helping people through the front door — could you be next?
Sharon is overjoyed that her KiwiSaver savings are allowing her to re-carpet her home; something she didn't think was possible.
David loves the fact his KiwiSaver nest egg is being actively managed and a team of professionals are on his side. It allows him to focus on making the most of his working years.
As a self-employed businessman, Neil rates joining KiwiSaver as one of the smartest things he's done. There's nowhere else he can get $10 back for every $20 he saves.
The Gould family are a great example of how KiwiSaver can help an entire family.
We think there is a story here for everyone.
But what does KiwiSaver mean to you? If you've got a story to share, we'd love to hear it.