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Fisher Funds TWO KiwiSaver Scheme — Your Monthly Update

February 2017

Making portfolios great

Welcome to 2017, it's good to be talking to you again. We haven't been in touch since mid-December; not that we would have got a word in, what with the countless column centimetres devoted to all things Trump.

With each passing week I am asked "what do you make of this Trump thing?" The question is asked not with a social or moral response in mind, but rather, what does Trump's presidency mean for investment markets and economic matters? My response is usually short, "I don't know, and neither does anyone." I don't mean to sound rude, but my view is by all means have an opinion on the man, his personality, his hairstyle and his utterings but try not to let that opinion, or anyone else's, spill into your investment thinking.

Of course Trump is big news; most newly elected US Presidents are. He's controversial, but arguably, so was President Barack Obama when he took possession of the White House keys eight years ago.

Obama's reign wasn't expected to be good for share markets as he was not exactly pro-business. But guess what? The US share market lifted nearly 300% during his time in office.

There's no denying Trump is pro-business, and that explains why the US share market rallied after his election. Though, as with all presidents, it's the doing not the talking that matters in the end. So far, he's walked the talk on several significant campaign issues such as the Mexican wall and immigration restrictions, but it remains to be seen whether — and how soon — Trump implements the corporate and personal tax cuts that should stimulate economic growth and underpin the US share market. We are going to be distracted by politics for a long while. Trump has only begun to unveil his policies and you just know there's a lot of rhetoric to bombard us yet. We've got a few European elections happening this year, as well as our own domestic election now set for September, so political distractions are here to stay.

But being fixated with politics, just like being fixated with anything really, can lead to a loss of perspective and a focus on the wrong things, leaving the right things unattended.

One financial columnist said recently, "Trump's stated objective is to Make America Great Again. Our objective should be to make our portfolios great, all the time." I agree.

With that in mind, our focus has been on the businesses we own in your portfolios, the fixed income investments we own (as the "safer" assets within your portfolios) and the mix of currencies and asset classes that combine to give you diversification.

Each single investment and each asset class will at some point be affected by politics, as interest rates respond to economic trends and policies. Our goal is to be positioned correctly so that we are on the right side of the trend, or at least, if our investments temporarily fall out of favour, we remain confident that the intrinsic value is intact and they remain appropriate assets to own over the long term.

It pays to remember that just as we are getting our heads around the Trump effect on our clients' portfolios, the managers of our portfolio companies are doing the same thing. They too will be positioning their businesses to ensure they remain competitive and that their strategies will withstand whatever comes out of a President's mouth or keyboard.

Carmel Fisher, Managing Director, Fisher Funds

I read recently that corporate leaders in the US are "learning to live with Mr Trump, or 'normalising', him in the current jargon". This is partly necessity — his threats could do them damage — and it's partly genuine enthusiasm as he plans to cut their personal and their corporate income taxes. While analysts, media and Democrats remain suspicious and even hostile towards Trump, I am at least pleased (with my investor hat on) that corporate America is coming to terms with the new political regime.

We don't need to like Trump or his politics — and please do not read any political view into my comments; I don't have one. Maybe we just need to 'normalise' him and return our focus to the more important parts of our lives.

Carmel Fisher
Managing Director | Fisher Funds

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Managing your KiwiSaver account

KiwiSaver — When a holiday isn't really a holiday

KiwiSaver — When a holiday isn't really a holiday

By Mark Brighouse, Chief Investment officer

As Kiwis come back to work after summer holidays there are always a number of adjustments to make. Jandals are swapped for shoes or workboots, t-shirts are replaced with ties or hi-viz vests and we exchange novels for alarm clocks.

Being the start of a new year, it's a good time to be thinking about all things financial. If you're one of the tens of thousands of Kiwis on a contribution holiday, maybe it's time to reassess whether being on a break is still the right thing for you.

While a contribution holiday provides flexibility if your circumstances change, the cost of such a holiday can be high in the long term and may significantly impact your retirement lifestyle.

It's not just because you need to make up for the gap in contributions with higher payments in the future; it's because you miss out on the powerful effect of compounding returns. Even if you make higher contributions later on in your working life, those contributions don't get the time to compound up like your early ones do.

Not only that, but you will miss out on employer contributions and on the annual government KiwiSaver Member Tax Credit contribution of up to $521.43 — effectively free money from the government.

For example, a 25 year old in a growth portfolio will miss out on as much as $18 at retirement for every $1 that they decide not to contribute today. That's compelling right? The beauty of KiwiSaver is that it is working while you are working and returns are compounding over a long time period.


Your KiwiSaver portfolios: Highlights and lowlights

A snapshot of the key factors driving the performance of markets and your portfolios last month.

New Zealand

Highlights and Lowlights

The NZX50 bounced back in January (+2.5%) after a weak final quarter in 2016. The New Zealand shares part of the portfolio was up slightly more than the index in January at +3.1%.

Ryman Healthcare had some positive news in January when its proposed retirement village in Devonport got the green light by the Auckland Council. The six level village will have 195 independent living units, 78 serviced apartments and over 120 care beds. Abano Healthcare's interim result in late December confirmed a record half year result, with underlying earnings up 71%. Importantly, the trajectory of its Australian business is also improving.

The only laggard was Tegel (down 4%), with weak poultry prices continuing to weigh on its share price.


Australia

The share price of our largest Australian portfolio position, CSL, was strong when it told investors that profits would be higher than expected on particularly strong performance in key therapies. ResMed had a strong earnings report, showing continued strength in its flow generator sales and gathering pace in its mask sales. Rio Tinto continued a strong run, with its disposing of non-core assets increasing the likelihood of strong cash returns to shareholders. Portfolio heavyweight, Brambles, disappointed investors with weak performance in its key US market on lower customer activity.


International

The international part of the portfolio's return of -2.4% was in line with benchmark returns for January, which fell by -2.3%. Currency movements, primarily the +5.15% monthly appreciation of New Zealand Dollar versus US Dollar, turned what was strong equity returns in local currency terms from positive to negative. This happens because the foreign shares we own are less valuable when converted back into NZ Dollars.

Relative to the market, our underweight position to Financials helped in a month where the steam ran out of the sector's recent rally. On the flip side, having a lower than market exposure to North America, hurt relative to market performance.

Top company contributors to returns included Facebook which rallied +13.2% after announcing better than expected earnings and United Rentals rose 19.8% after the company reported earnings and a new acquisition. Major detractors included Exxon Mobil which fell -7% as oil prices slipped over the month and QualComm Inc. was down -18% after being fined in South Korea for antitrust violations.


Fixed income

January was a calmer month for financial markets with global investment flows reflecting a more balanced view towards fixed income assets. This improved appetite is likely to have been driven by the marked increase in yield that bonds now offer, as well as a growing suspicion that "Trumponomics" may not be the source of sustained growth that many had initially hoped it would be. We too are finding more attractive opportunities across fixed income markets.

Growing political uncertainty ahead of upcoming national elections in Europe this year saw government bonds across the region underperform their global peers. Our holdings in a range of European government bonds were negatively affected by this development. We expect this performance to be recovered over the coming months as the chances of the most extreme political possibilities are reduced.


Your KiwiSaver portfolios

Disregard Dow 20,000

By Carmel Fisher, Managing Director

Disregard Dow 20,000

Did you notice the headlines about the Dow Jones index hitting the 20,000 mark during January? In New Zealand it wasn't a big deal, but for Americans this was massive news ... in the days leading up to it, on the day (25th January), with breathless hour by hour commentaries, and in the days following. So what is the big deal about the Dow hitting 20,000?

According to most media commentaries the 20,000 mark is an "emotional milestone". The Dow is the oldest stock market index in the US and American investors watch it and will invariably quote the Dow when asked how the market is doing. The media love big numbers with lots of zeros, and so do a lot of investors, so the 20,000 mark certainly attracted attention.

However, a bit of perspective is required. The Dow is based on the share prices of just 30 of the largest companies in the US and the index is price-weighted so that stocks with higher share prices carry more influence. Currently, Goldman Sachs is the largest weight in the Dow Jones index at 8.4%. Cisco Systems has the lowest weight at 1.3%. So if Cisco jumps 10% but Goldman Sachs falls just 1%, the two cancel each other out as far as the Dow is concerned. This is despite Cisco being a much larger company than Goldman.

With just 30 randomly selected companies, the Dow lifting 1,000 points doesn't tell us a lot about anything.

The other thing is that 1,000 points on the Dow does not mean as much as it used to. When the Dow doubled from 1,000 to 2,000 in 1987, that move represented a 100% advance. But a climb to 20,000 from 19,000 represents a relatively ordinary 5% rise.

There is no doubt that the 20,000 mark is symbolically important, but that's where it ends. Like all index milestones, it tells us where we are, not where we are headed.


Short term focus not the driver of long term results

By Ashley Gardyne, Senior Portfolio Manager

Short term focus not the driver of long term results

Did you hear the one about the hedge fund using satellites to spy on car parks to gain an investment edge?

Sorry, there's no punchline; that was a genuine question. The hedge fund is fighting to remain one step ahead of competitors by using satellites to check car park occupancy at retailers like Walmart. The gist is they are willing to do anything to get a better read on quarterly sales and position their portfolios accordingly. While this could work for a couple of quarters, it won't be long before competitors replicate the first mover's advantage, install the same technology and compete those gains away.

It's not just hedge funds that engage in this short term gaming. As investors increasingly focus on quarterly results, the pressure on CEOs to deliver earnings growth rises every quarter and there are numerous examples of companies demonstrating the same short-sighted behaviour.

The shocking part is that time and time again we have seen this end badly. Before the global financial crisis, we saw it with banks — loosening lending standards for homeowners to drive short term growth — we know how that played out. Closer to home we saw this with Woolworths in Australia. After years of steady growth and margin expansion, it turned out this was at the expense of refreshing their stores and keeping prices sharp. Ultimately, it resulted in an uncompetitive business, market share losses, and a dramatic drop in its earnings and share price.

In contrast, Port of Tauranga invested heavily to deepen its shipping channel and expand the port — allowing it to attract larger ships and take market share. Michael Hill is rolling out its new Emma & Roe interchangeable jewellery offering, leveraging its expertise to target a new and rapidly growing market opportunity. Infratil has set up new platforms in renewable energy, data centres and student accommodation to provide the next leg of growth.

To generate an investment edge you don't need to correctly pick quarterly earnings. On the contrary, we seek to identify factors that are missed by short term investors and look for superior business models, long growth runways and management teams with a long term focus.


Clarity of vision a winner

By Ashley Gardyne, Senior Portfolio Manager

Clarity of vision a winner

Are you are reading this on a digital screen — your mobile, tablet or PC?

Studies show that people are spending more and more time staring at digital devices. In the US, the average person now spends over 10 hours a day staring at a screen. With that in mind, it may not surprise you that an increasing number of people are experiencing deteriorating vision.

But fear not — French company Essilor "Your vision is our mission" — which we have recently been researching, has a solution to this. Essilor produces lenses that block the damaging blue light from digital screens and subsequently reduces eye strain. While it may not sound revolutionary on its own, Essilor has a history of innovation in optical lenses and developments such as polarisation, transition lenses, progressive lenses and anti-reflectives.

Over time there has been a trend towards premiumisation of lenses as the benefits of the features above are better understood. As a result, Essilor has steadily increased the prices of its lenses and grown its profitability. They control 40% of the lens industry; and through innovation and market consolidation their operating earnings have grown at 11% pa over the past 10 years.

In January, Essilor announced a merger with Luxottica, which in our opinion demonstrates sound strategic thinking. Luxottica is the Italian eyewear frames manufacturer that owns Ray-Ban and Oakley. They also manufacture frames for luxury houses like Prada, Armani and Chanel and they're the world's largest eyewear retailer through their OPSM, Sunglass Hut and LensCrafters chains. Despite the obvious complementary nature of the products, lenses and frames have generally been manufactured by different companies, until now.

There is no doubt the merger creates an industry heavyweight and a leading platform in an attractive market. With it estimated that over half of people requiring vision correction still go untreated, combined with the trend towards premiumisation in lenses and sunglasses, we see a long growth runway. The merger highlights a clear long term vision for EssilorLuxottica.

Click here to take Essilor's quick online eye test.


Shopping centres: evolve or dissolve

By Zoie Regan, Senior Investment Analyst

Shopping centres: evolve or dissolve

News early this month that Amazon is now pushing into selling car parts saw a flurry of conversations around our investment team. Given Amazon's success selling electronics and toys, the team once again queried the future of bricks and mortar retailing and the looming disaster of "Dead Malls".

However, focusing on the property aspect, our thinking hasn't changed. Firstly, Amazon (and the general growth of online retailing), do not spell the death of all retail malls and secondly, dominant, well located, actively managed regional shopping centres continue to present attractive investment opportunities.

Don't get us wrong, the threat of online shopping is real and it continues to take market share from bricks and mortar retailers. In New Zealand, online spending grew at about 14% over the last year versus core retail (excluding hospitality) +5%, with online retail sales now representing approximately 7% of all retail spending. But it's not a new threat, and like other businesses, shopping centres must continue to evolve if they are to remain relevant. And they are.

In recent years, we have seen offerings becoming increasingly diverse with other services beyond conventional retail such as restaurants/dining, movie theatres, health clubs and even libraries. Shopping centres are also jumping online with new retail websites, social media profiles and enhanced WiFi capabilities, all to improve the customer experience.

Successful shopping centres are those that: deliver respectable retail sales growth, rental growth and returns on invested capital; continually refine their offering; and increasingly focus on the social aspects of shopping to help drive and foster higher foot traffic.

So yes, while there are stories about hundreds of shopping centres across the US facing obsolescence (some estimate that 15% of US malls could falter in the next decade), online shopping is just part of the story. The US is also grappling with the consequences of years of overbuilding. We remain comfortable with our exposure to New Zealand retail property but we are keeping a wary eye on evolving consumer trends.


The lucky country for whom?

By Manuel Greenland, Senior Portfolio Manager, Australia

The lucky country for whom?

Do these famous opening lines of a nineteenth century novel describe Australia today?

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness… it was the spring of hope, it was the winter of despair. . . ."

Referring to Europe just before the French Revolution, the lines from Charles Dickens' A Tale of Two Cities depict a moment where popular discontent with wealth inequality was about to drive a major change in politics (peasants versus the aristocracy). Is history repeating itself?

In a 2014 report, Oxfam found the top 1% of the wealthiest Australians own more than the country's poorest 60%; resulting in a tale of two countries. It may well be that rising inequality and social polarisation drove the surprise results in both the US election and the Brexit referendum.

While politics again seem on the precipice of change, the impacts have already been felt in Australia. Politically, a string of Prime Ministers have left their terms in office prematurely. The economy, once buoyed by a strong mining sector, has had to rely on other industries to drive growth. Jobs have shifted back from West to East. Investors have to choose between growth or value stocks; volatile or stable industries; and domestic or export sectors. With sharp changes in what the market likes, these choices have had a dramatic impact on share prices. Yesterday's losers can easily become today's winners.

While share prices may swing around with sentiment, the capacity of companies to generate earnings does not. Earnings power depends on a company's strengths versus its competitors, suppliers and customers — in a word, its quality. Our focus remains on selecting the best quality companies for our Australian portfolio.


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