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April 2015

A Market Unleashed

I love nothing more than throwing the ball for my dog and watching her run for it, legs scrabbling, hair billowing, tongue lolling from her mouth, unfettered by leash or physical boundaries. While I would never laugh out loud, her ball chasing is particularly amusing when she is due for a groom and the wind doesn't quite part her hair enough for her to get a good fix on the ball. Then she charges, stops, looks this way and that, charges forward again with real purpose ... only she hasn't realised that she is still 20 metres away from her target.

I think I've just described world share markets over the past three months! It has been exhilarating to watch them and sometimes the ball-catching prowess (or share price performance) has been stellar indeed. But the market definitely needs some help because for all its boisterous enthusiasm, the balls are being thrown all over the place and the big throw, the one markets are really waiting for - rising US Federal Reserve interest rates - is just not coming.

Honestly, markets have been just like my dog - running hard in the direction they think the "ball" will go, then retracing their steps when they realise the ball hasn't been thrown yet. It has been a bit ridiculous frankly, reading headlines explaining each day's market movements with reference to something the Fed said or inferred.

The biggest signal during March was the removal of the reference to the word "patience" by Janet Yellen, chair of the Federal Reserve. Just to recap, for most of last year, Fed statements said interest rates would stay low for "a considerable time" after quantitative easing had come to an end. In December, the language was swapped out; "considerable time" was replaced with a pledge to be "patient" in raising interest rates, and that was further defined as a "couple of meetings" or two months. So most market watchers assumed that come February/March, the word patient would go, and the gradual rise in US interest rates (which remember, are not a bad thing in their own right) would begin.

Carmel FisherImagine the market's confusion therefore when Yellen said last month that a rate rise "could be warranted at any meeting" and that any future decision would be based on economic data? Hang on, how do we read that, where do we run, where is the ball going to land? What the Fed's congressional testimony basically means is that their target interest rate will be held at 0-0.25%. While they plot their next move - and we will hear about that move along with everyone else - they will monitor inflation, jobs, global growth and financial markets, and keep a very close eye on the two things they are supposed to be managing - inflation and employment. They probably won't lift interest rates in April, but they might. In April, they will come out with another opinion and it could well be different from how they are feeling today. And they could introduce yet another phrase that the market will interpret, and reinterpret and run off to chase.

Whether US interest rates rise or not isn't that important in the scheme of things. What does matter is that they are right for the conditions at hand. If they are increased too soon, then the burgeoning economic growth, consumer confidence and business certainty could be snuffed out and nobody in the world wants that. It is a fine balancing act and I guess to some extent, it is understandable that without any other major distractions (positive or negative), markets are focused unreasonably on every Fed move.

But you know, even if I intended to throw the ball twenty metres to the North-West, and I yelled loudly "the ball's over there!" the dog wouldn't get it, would she?

Carmel Fisher
Managing Director | Fisher Funds

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Your KiwiSaver Portfolios

Highlights and Lowlights

  • Highlights and LowlightsWe added two quality stocks to our international portfolios – Mastercard and Alibaba. Now that the IPO hype has passed we have initiated a position at a more favourable entry point in Alibaba after initially missing out on an allocation during the IPO.
  • Despite a flat March, the Australian market concluded its strongest quarter since the GFC. Our Australian portfolios performed comparatively well on exceptional performances from Bursons (investors recognising growth potential), ResMed (new product success and reduced regulatory pricing pressure), Ansell (solid operating performance and attractive acquisition) and CSG. Medibank drifted backwards as Australians bought cheaper health insurance with lower coverage, while investors continued to express scepticism around Ingenia's execution ability.
  • Our New Zealand portfolios underperformed the broader New Zealand share market predominantly due to the share prices of our three biggest holdings falling. While Ryman Healthcare and F&P Healthcare fell on no news, Mainfreight's share price came under pressure as the company lowered short-term earnings expectations for FY2015, but retains a positive outlook for FY2016. While new online entrants revealed & revised pricing and content, Sky TV was the Fund's best performer over the month (and best for the broader NZ market) providing total shareholder return of 8%.

Learning to love Banks

By Manuel Greenland, Senior Portfolio Manager, Australian Equities

Learning to love BanksWe added ANZ and Westpac to our Australian portfolios in March. In our stock-ranking process we look for characteristics that allow a company to earn superior profits over time. Typically bank profits follow general economic conditions, and are vulnerable to cycles in interest rates, income and inflation. So typically, banks would not meet our investment criteria.

How come we've added them then?

The four major Australian banks are far from typical. As a group they are super-dominant in areas critical to banking success. They represent 80% of banking sector assets, 80% of total deposits and 86% of sector profits. The four majors hold this share against 17 other Australian banks and 47 foreign banks!

The major Australian banks enjoy significant strengths. Their key advantage is their scale. They have large stable bases of deposit accounts, giving them a cheap and ready source of funds. This in turn supports their ability to offer borrowers loans at attractive interest rates, while still lending profitably and winning market share. Besides great lending businesses, they have diversified earnings by developing considerable wealth management, advisory and insurance enterprises. The big banks can also spread costs over larger operations, resulting in superior cost efficiency.

Recognising the quality of their risk management systems, regulators allow the large banks to lend more per dollar of invested capital, boosting profits and growth potential. As a result the major banks have earned significantly higher returns than competitors over time.

The major banks' strengths are in some ways also their risks. To some extent they have become victims of their own success as their dominant position and relevance to the economy has made them subject to significant regulatory oversight, and made their high profile brands vulnerable to reputational risk.

Nevertheless, we conclude that their key strengths explain the superior performance of this exclusive club. To enable our investors to participate in this success, we've selected those banks with the best earnings prospects and most attractive long-term returns for our Australian portfolios.

Sell the rumour, buy the fact

By Carmel Fisher, Managing Director

Sell the rumour, buy the factMany investors will have heard of the investing maxim "sell the rumour, buy the fact". The saying comes from the phenomenon where buyers push a price up in anticipation of a big news event and then (often) sell off immediately after the announcement. Examples are most often seen in technology stocks where "big" new products are rumoured to be released that will dramatically change the whole industry. Exact product details are not known, but the hype machine goes into overdrive and investors pile into the stock, sure that the new product will be a king hit. Once the details of the product are actually revealed, the reaction can go one of three ways – the product is announced and it is even better than expected, so the price goes ballistic; the product announcement is underwhelming and the share price collapses; or the product is good but only as good as expected, and the price falls.

We have seen a couple of examples of this phenomenon in the New Zealand share market recently. Our erstwhile portfolio company, Kathmandu, warned late last year that Christmas sales might be disappointing, and followed up with a shocker earnings warning in February. We had given the company the benefit of the doubt in December, but by February with a share price some 26% lower, we started to sell our holding, having lost confidence in our ability to predict the company's fortunes with any certainty. We were not alone in our selling – Kathmandu is dual listed and a number of Australian institutions were also quick to push the Sell button. The share price hit a low of $1.39 on February 5 before rebounding 26% to $1.76 on March 19.

Why did the share price bounce, and should we have held off our selling to enjoy this bounce? Of course it would have been nice to have sold at a higher price, but our investment approach dictates that when we have lost confidence in the investment thesis of a company, we will sell immediately, and look to reinvest the proceeds in a company for which we have a higher conviction.

We watched the share price rebound after our selling, and a number of our team scratched their heads as to why, with no new information to digest, the market thought the shares were worth more? There had been some solid profit results from other retailers and that might have led some investors to think Kathmandu might redeem themselves – despite the company saying otherwise. Regardless, the company released its earnings result on March 24 saying that conditions remained tough, and the share price immediately retraced several weeks' gains.

Our approach is to ignore the rumour and act only on fact. We will get stocks wrong from time to time; there is no doubt about that. But the only thing we have to base our investment decisions on is our research. We can't buy on hope or expectation; we insist on buying on knowledge and belief. They are different things.

A bird's eye view

A bird's eye viewSenior Portfolio Manager Roger Garrett tells us about well-known consumer company Nike, which we have invested in through our international portfolios since 2011.

Nike is a name that requires little introduction as the world's largest sportswear company, designing, manufacturing and selling high quality footwear, apparel and sporting equipment. Nike sells its products under the Nike, Jordan, Converse, Nike Golf and Hurley brands and is dominant in running, basketball, soccer and men's and women's training. Additionally, Nike sells its products in golf, cricket, tennis, lacrosse, volleyball, American football and action sports.

Number one for a reason
Nike is the global leader in sports footwear and apparel. This leadership is founded on superior technology and product innovation with a key competitive advantage coming from working closely with the best athletes in the world. The insights they develop from these top athletes together with leading edge technology and research and development are at the heart of their product development. Nike is recognised globally as an iconic sportswear brand through best in class technology, product innovation and style and is supported by sponsorship of premier athletes and sporting organisations such as Roger Federer, Kobe Bryant, Christiano Ronaldo and Barcelona and Manchester City football teams. Furthermore Nike has huge scale, shifting over 900mln units of product through their supply chain of over 18,000 accounts and 140,000 retail outlets. This network is a huge strength to their brand. Nike's best in class status and total focus on innovation allows the brand to command a price premium over its competitors.

Nike's growth potential remains strong
The business has an impressive pipeline of new products that help sustain a competitive advantage as a company of innovation – running shoes that change colour depending how far you run or basketball shoes that tell you how high you jump. At a regional level, the fine tuning of their strategy in Western Europe and China, with a premium product focus, is starting to deliver results with Nike gaining market share in both regions. On the digital front, Nike is heavily involved in the fitness monitoring area with running, fitness, soccer and golf apps and a close tie-up with Apple (Apple CEO Tim Cook is on the Nike board). This is potentially a huge growth area with the European Commission estimating up to 1.5bln people could be using health and fitness apps by 2017 – the basis for a significant community of interconnected members.

Clearly, Nike is a great company and a desirable investment. Nike certainly "walks the walk". When it comes to innovation and when combined with its iconic brand image and total customer focus, we believe Nike is well positioned to maintain its market leading status. Furthermore, they are shareholder friendly, returning virtually all cash flow back to shareholders via dividends and buybacks. We are confident our investment in Nike will continue to deliver strong returns over the medium to long-term.

KiwiSaver classroom

KiwiSaver classroomA common question from members at this time of year is "How is my KiwiSaver account taxed?"

The Fisher Funds TWO KiwiSaver Scheme is classified as a Portfolio Investment Entity (or PIE for short) for tax purposes. The PIE regime was introduced at the same time as KiwiSaver was launched providing a number of tax advantages for investors and making the administration of it all very easy. The key advantages are:

Firstly, there is no tax on gains in New Zealand shares and certain Australian shares. Investments in companies outside that criterion are taxed as if they have earned 5% total income (regardless of how they have actually performed). Fisher Funds invests in growing companies which often have a low dividend yield and the majority of returns come from the increase in the value of the shares. This is a significant advantage for investors.

Secondly, investors are taxed at their marginal tax rate with a maximum of 28%. For investors on a top personal income tax rate of 33% this represents a 5% reduction.

Thirdly, the Scheme takes care of all tax obligations on behalf of investors so there is nothing to include in your personal tax return. As long as we have the correct tax rate (known as your Prescribed Investor Rate or PIR) for you then we claim a tax refund or pay your tax liability on your behalf and adjust your KiwiSaver account accordingly.

Calculating your correct PIR
There are three PIR's available for individuals to choose from: 10.5%, 17.5% or 28%. The correct rate for you depends on your income. To help calculate your PIR use the following chart:

Calculating your correct PIR
Calculating your correct PIR

If you need to change your PIR, simply download and complete our PIR form from then return it to us.

Managing your KiwiSaver account

Asset allocation changes

We have recently completed a review of the strategic asset allocation of the Fisher Funds TWO KiwiSaver Scheme. This is a practice our investment team undertakes every two years to ensure we have sufficient flexibility in managing your savings in light of the global investing environment.

The most notable change has been to increase the weighting towards international shares in the Conservative Fund, Balanced Fund, Growth Fund and Equity Fund while at the same time reducing the exposure to Australasian shares. This change ensures your Funds have better global diversification and rely less on the relatively narrow economies of New Zealand and Australia.

The changes are effective Monday 13 April. You can view updated fund profiles including asset allocations in the latest Investment Statement for the Scheme.

Don't miss out on your annual Government contribution!

Sorted have just launched a national campaign to remind eligible KiwiSaver members that they can benefit from a $521 top-up by the government to their KiwiSaver account.

As a reminder, for every $1 you contribute to your KiwiSaver account you'll receive 50 cents from the Government, up to a maximum of $521.43 each KiwiSaver year. This generous KiwiSaver incentive is known as the MTC.

To maximise your full MTC entitlement of $521.43 you need to have contributed at least $1,042.86 (the equivalent of $20 per week) into your KiwiSaver account. If you haven't put in at least this amount already, you can top up your KiwiSaver account for the current KiwiSaver year (1 July 2014 to 30 June 2015) before Friday 26 June 2015.

You can read more about who is eligible for a MTC, how it is calculated and how to make a payment.

Changes to KiwiSaver first home buyer rules

As explained in last month's newsletter, changes to the way you can use your KiwiSaver account to help buy your first home came into effect on 1 April 2015. The changes potentially make it easier to buy your first home. Check out how your KiwiSaver account may give you a helping hand into your first home.

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