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December 2014

Time to Do Nothing!

“Don’t underestimate the value of doing nothing, of just going along, listening to all the things you can’t hear, and not bothering.”

~Pooh’s Little Instruction Book, inspired by A.A. Milne

We've got to the end of 2014 - a good year, a somewhat forgettable year, a year that for investors was not too different from the preceding two years. There is little that you can do in the remaining weeks of the year that are going to dramatically impact your investments, so why not take Pooh's advice and just go along, listen and not bother? Better still, how about not listening to anything about markets, economies, politicians and all the other "stories" that have kept us on our toes all year, and focus instead on the festive season, family and friends?

It's okay, we will be listening and bothering on your behalf, but actually the way the world is looking and markets are shaping up for 2015, we think there is relatively little that needs to be done so a "Do Nothing" strategy might prove quite effective.

In some ways "Do Nothing" was the catch cry of the last year. Central banks and politicians did nothing to upset the recovering global economy. Corporates did nothing to detract from their improving fortunes, investing only sparingly in future growth so they could keep plenty of money in the tin to pay dividends to yield-hungry investors. Investors didn't need to do anything different in terms of investment strategy – if they had remained invested in the diversified portfolios that served them well in 2012 and 2013, they will have again profited nicely in 2014. If they had stood on the sidelines, worried by an infinite list of concerns published on a daily basis, well they would have paid the same price they paid in the last couple of years.

You will have noticed that our investment strategies were largely unchanged during 2014. Don't interpret this as inactivity or "not bothering" on our part – we simply didn't see the need to fix something that wasn't broken! Our share portfolios were invested according to our selection criteria and we put your cash to work in anticipation of continued share price gains. The decision by our fixed interest managers to position portfolios for continued economic growth and the prospect of rising interest rates proved to be a good one, and our share portfolios performed relatively well despite the fact that investors around the world were far more interested in high-yielding stocks than they were in quality businesses selling more products and services to customers who demanded them.

As we enter the Christmas holiday season, we will no doubt be offered all sorts of opinions about what 2015 holds. The bulls will tell us that there is still plenty to look forward to because the world economy is definitely improving and markets have weathered major geopolitical risks, the end of quantitative easing, the great oil price slide, an Ebola scare, and numerous other factors that might normally lead to a reduced investment appetite. The bears will say that markets are topping out after a meteoric rise and that we can expect more volatility in the year ahead, particularly as interest rates start to lift. But few are likely to predict a major correction any time soon, largely because there is just no evidence that the precursors to a global recession exist anywhere.

Carmel FisherAn article from said it like this: "As long as people have babies, capital depreciates, technology evolves, and tastes and preferences change, there is a powerful underlying (and under-appreciated) impetus for growth that is almost certain to reveal itself in any reasonably well-managed economy. This ultimately is the reason that despite the seemingly persistent belief that the recessionary bogeyman is just around the corner, recessions are remarkably rare events."

Winnie the Pooh says "It is more fun to talk with someone who doesn't use long, difficult words but rather short, easy words like "What about lunch?".

In that vein, we'll paraphrase Seeking Alpha quite simply – relax, take it easy, 2015 is looking like another good year!

Carmel Fisher
Managing Director | Fisher Funds

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Team Talk December 2014Team Talk

2014 delivered many surprises, what does 2015 have in store?
Mark Brighouse shares our thoughts.

Your KiwiSaver Portfolios

Highlights and Lowlights

  • Global share markets enjoyed a strong month propelled by a steadily declining oil price (down nearly 20% over the month which is a significant win for consumers and a boost for global growth) and a continuation of good news from the US (unemployment down again).
  • The Australian market weakened considerably on falling iron ore and oil prices.
  • New Zealand companies with half year results came through the result season well with solid earnings growth from Ryman Healthcare (+13%), Fisher & Paykel Healthcare (+64%) and Mainfreight (+13%).
  • The European Commission slashed its economic outlook for the Eurozone, predicting the currency bloc would grow only 1.1% next year, down from a 1.7% forecast just six months ago, on the back of slowing German and French economies.

Where to Woolies?

By Manuel Greenland
Senior Portfolio Manager, Australian Equities

Where to Woolies?Australian food retailer Woolworths has an enviable record of growing sales and profits, leading to the company's share price increasing five-fold from 2000 to the end of 2013. Yet 2014 has been something of a mixed bag for Woolies. Here in New Zealand its Countdown brand recently faced accusations of abusing suppliers, while a new Australian venture into the Home Improvement sector seems to be going awry. Importantly its Aussie supermarkets, which are the jewel in Woolies' crown, are about to face a significant competitive challenge. We outline two key questions we seek to resolve when we visit Australia this week.

Can Woolworths stand up to the competitive challenge?

Woolworth's supermarket profit margins of 8% are double the global average, which has attracted international competition. European retailer Aldi buys key grocery items in large volumes at significant discounts. Its small stores run with minimum staff, and display bulk goods simply, limiting running costs. All these cost savings are passed on to consumers in the deeply discounted prices of Aldi's private label brands. To address this challenge Woolworths can differentiate its offering with quality and service, or launch low-priced competing products in Aldi's key categories. We'll be examining both companies' strategies and stores to understand the potential outcomes.

Are management reliable custodians of our investors' capital?

Management could reinvest high returns from the supermarkets into fortifying the company's strengths, expanding into new ventures or returning cash to shareholders. How management makes this choice determines their quality as custodians of investor capital. Recently they chose to enter the Home Improvement sector with their Masters brand. To date Masters has been a A$2.4bn investment, while losses have grown. We question management's choice; would it have been better to invest in their supermarket business to remain competitive rather than entering a tough new sector where they lack experience?

We are constantly monitoring your portfolio investments for emerging risks and opportunities. While we often communicate our conclusions, the greater part of our analysis is asking the right questions. In seeking answers there is no substitute for putting our feet on the ground, talking to people in the industry and visiting operations. Watch this space.

Quality shines through

By Murray Brown
Senior Portfolio Manager, New Zealand Equities

Quality shines throughAs a testament to our investing process which steers us towards investing in quality companies with strong "moats" around their businesses, many of the New Zealand companies we invest in on your behalf were represented in this year's recent Best in Business Deloitte Top 200 Awards.

As many of you will know, we place significant emphasis on the quality of the people and management running your portfolio companies. We have had a near clean sweep of these particular awards with Simon Challies (Managing Director of Ryman Healthcare) winning Executive of the Year, Bruce Plested (Executive Chairman of Mainfreight) winning Visionary Leader Award and Tony Carter (Chairman of Fisher & Paykel Healthcare) winning Chairman of the Year. These are three of our biggest New Zealand companies in terms of weighting and it is gratifying that others can see what we have known for a long time – quality management is paramount to running successful companies. As the Convenor of the Judging Panel succinctly said "These are business leaders who understand the need to deliver today while transforming the workplace to meet tomorrow's challenges". Our congratulations go to these leaders in our portfolio companies.

It is also pleasing to note that an additional three of our portfolio companies were recognised as finalists in the awards; Dean Bracewell (Managing Director of Freightways) finalist for Executive of the Year, Port of Tauranga finalist for Excellence in Governance, and Infratil finalist for Best Growth Strategy.

Editor's note: In the spirit of acknowledging Best in Business people, we congratulate Murray Brown and Zoie Regan for winning the FundSource Fund Manager of the Year 2014 award for New Zealand Equities. Your savings and investments really are in the best hands!

A crude Christmas present

By Carmel Fisher, Managing Director

A crude Christmas presentOne of the biggest stories of November was the fall in the oil price. Every so often we get an oil shock - sometimes the price spikes (1973-4 saw a quadrupling) and occasionally it plummets (a drop from $US115 a barrel in June 2014 to under $US70 in November 2014). This recent fall is big both in terms of the raw numbers, and in terms of its impact on the world economy. It is not an exaggeration to say it might be the biggest thing that has happened for the world economy in the past six months, and the best Christmas present we could hope for!

Ignoring any environment considerations (that's another story altogether) lower oil prices are thoroughly good news. A fall in the oil price brings down all prices - we benefit immediately at the pumps (often not as quickly as we'd like) and gradually it feeds through the production and distribution chains. Retailers can buy and sell their goods cheaper, and consumers spend more because they have more cash in their pockets. As energy becomes cheaper, fertiliser gets cheaper so food is cheaper, so are holidays, and so it goes on.

How big is the impact? It is hard to know because you have to make a number of assumptions about the linkages in the world economy, and of course, the price might well rebound. But the International Monetary Fund suggested that a price fall of 20% (and we've seen more than that so far) would add 0.5% to global economic growth in the next year – that's huge in a low growth environment.

So why did the oil price fall? This is the bit that bodes well for a sustained lower price. The oil price is determined by global demand and supply, and both are trending in the right direction. Demand is lower partly because Japanese, European and Chinese economic growth is slower so their energy demands are less, but also because of innovations such as smart cars and alternative fuel technologies. As for supply, the shale revolution in the US alone and new supply out of Canada means that the world is awash with black gold, which drives the price down.

Lower petrol prices may not have been at the top of our Santa wish list but they will nevertheless make for a more joyous festive season, the world over.

A bird's eye view

Union PacificWe'd like to introduce US railroad company Union Pacific to you;
a company we've known for a number of years.

Train Whistle Blowing

Like Warren Buffet and Bill Gates, we believe railroads provide compelling investment opportunities which are particularly well suited to longer term investors like KiwiSaver members. Railroads typically have a significant competitive advantage due to their dominant market positions and their established, yet ever expanding, networks. Also the capital requirement associated with railroads results in a high barrier to entry, keeping competitors at bay.

Union Pacific is one of two large railroads servicing the western two-thirds of the United States, offering competitive routes from all major West Coast and Gulf Coast ports to eastern gateways and serving many of the fastest-growing U.S. population centres. Union Pacific operates across diverse commodities and markets, with revenue split across intermodal, industrial products, coal, agricultural, chemical and auto segments.

Union Pacific has over the last two years achieved 6% and 12% annual growth in revenue and operating income respectively. It is our view that Union Pacific is attractively positioned to continue to capture healthy earnings growth over the medium term from the enviable trifecta of prospective volume growth, pricing growth as well as productivity improvements.

The strengthening US economy is an obvious driver of volume growth, but highway conversions and the growth in shale energy also have the potential to drive significant volume growth for the US railroad industry generally. Converting transport from road to rail is viewed as a long-term structural growth opportunity for the sector driven by increasing road congestion, constrained trucking capacity, driver shortages, and transport economics (both cost and environmental advantages - Union Pacific's trains are almost four times more efficient than trucks). The shale boom in the US is another structural growth trend, and Union Pacific has enjoyed a 39% year-on-year increase in frac sand shipments in the third quarter of 2014.

Union Pacific is also uniquely positioned as the only railroad serving all six major gateways to Mexico, with the company capturing 65% of all cross-border Mexico trade. Mexico-related business represents around 10% of Union Pacific's revenue, and management have indicated that volume growth looks set to continue.

Volume growth for railroads also has the potential to translate into material profit margin growth, as volume growth can be serviced by improved network productivity (e.g. increasing train lengths, with minimal additional capital expenditure required). Union Pacific has seen its operating ratio (a measure of efficiency, with the lower the measure the better) improve from 71% in 2011 to 66% in 2013 and has a target of circa 60% by 2019.

While the outlook for coal continues to be challenged by global demand and is at the mercy of the weather, Union Pacific's diverse business mix means it is less exposed to coal than other U.S. railroads and overall we are encouraged by Union Pacific's prospects for earnings growth and ability to grow shareholder value over the medium term.

KiwiSaver classroom

While we try and keep our communications simple to understand, sometimes investment lingo can sneak in. We continue our series breaking down some of that jargon.

This month we look at the term "yield"

Yield is the income return on an investment over a given period (typically 12 months) relative to the price of the asset. However, because the term is often used differently depending on the asset class, it can be confusing. Let's take a look at yield for shares, bonds and property investments.


In the case of shares, your total return is made up of two elements – the capital gain (or loss) from the change in share price and the income received from the company in the form of a dividend. Dividend yield is calculated by taking the amount of dividends paid per share over the course of a year and dividing by the stock's price. For example, if a share pays out 40 cents in dividends over the course of a year and trades at $8, then it has a dividend yield of 5%. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower ones, and many small growing companies don't have a dividend yield at all because they don't pay out dividends.


The term you will hear about bonds the most is their yield and it can also be the most confusing. There are three different types of yield to explain:

  1. Nominal Yield: This is the coupon rate (or interest rate) that is promised when a bond is first issued. Nothing else is factored into this number. It is actually not very helpful.
  2. Current Yield: The current yield considers the current market price of the bond, which may be different from the par value (the price the bond is issued at) and gives you a different return on that basis. For example, if you bought a $1,000 par value bond with an annual coupon rate of 6% ($1,000 x 0.06 = $60) on the open market for $800, your yield would be 7.5% because you would still be earning the $60, but on $800 ($60 / $800 = 7.5%) instead of $1,000.
  3. Yield to Maturity: Yield to Maturity is the most complicated, but the most useful calculation. It considers the current market price, the coupon rate, the time to maturity and assumes that interest payments are reinvested at the bond's coupon rate. It is a complicated calculation best done with a computer or calculator. However, when you hear the media talking about a bond's "yield" it is usually this number they are talking about.


There are two types of yield commonly referred to in relation to property investments – gross yield and net yield:

  1. Gross Yield: Gross yield = Annual rent / Property value. For example, if the annual rent of the property is $25,000 and the property value is $500,000, then the gross yield is $25,000 / $500,000 = 5 %.
  2. Net Yield: Net yield tends to be what most professional property investors would use to calculate the profitability of owning a rental property, as it takes into account all operating costs. Net Yield = (Annual rent - Annual costs) / Property value. Expanding on the example above, if operating costs for the year (i.e. maintenance, insurance etc.) are $2,000, the net yield would be: Net Yield = $25,000 - $2,000 = $23,000 / $500,000 = 4.6%.

Getting to know ... Monique Bon and Ivana Vasilevska

Getting to know ... Monique Bon and Ivana VasilevskaMonique and Ivana bring a little piece of continental Europe to our multi-cultured Fisher Funds family. Monique's family hails from the Netherlands with its flat landscape while Ivana was born in Macedonia, a very mountainous country and home to the oldest lake in Europe.

Ivana, a dog lover like many of our clients, is mum to Lola her beloved Rottweiler and she loves her adopted country so much that she is slowly building a property portfolio on Auckland's North Shore.

Monique, originally a Wellingtonian, enjoys typical summer holidays in the caravan on our northern beaches with a cold drink and a guitar.

Monique and Ivana manage our corporate compliance obligations. This involves taking the law that affects the financial services industry and developing useful and practical programmes to help Fisher Funds meet our commitments to our investors and other stakeholders. For example, the corporate compliance team check that any financial advice you receive follows the industry approved six step process, while still meeting your needs and being easy to understand. They also help educate our team to understand how regulation impacts on our clients and our business thereby ensuring we are able to help you when the rules change. Monique lends an impartial ear to any client complaints and you are encouraged to call or email her (on those rare occasions where we might disappoint you!).

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