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Fisher Funds TWO KiwiSaver Scheme - Your Monthly Update

July 2015

The Greek hokey cokey ...

You put your left leg in, you put your left leg out. You put your left leg in, and you shake it all about.

And once again we are talking about the interminable saga that is the Greek hokey cokey. There's been a lot of putting in, putting out and shaking all about. Okay, maybe not arms and legs, but we've had demands, opinions, reprieves and 11th hour compromises, and so the Greek dance goes on and will do for a while yet.

You may not have been monitoring the Greece situation. You're not alone — the term "Gratigue" has been coined to describe a "fatigue of all things Greek".

A quick update: Greece was due to make a €1.6 billion payment to the International Monetary Fund (IMF) on 30 June, as part of a bailout package agreed back in 2009, and renegotiated several times since. It also owes the European Central Bank (ECB) €3.5 billion by July 20. Greece has asked for some debt relief, but their European creditors don't want to let them off the hook unless the Greek Prime Minister Alexis Tsipras shows a willingness to undertake significant reform or spending cuts. Unfortunately Tsipras was elected on the basis that he wouldn't force his countrymen into years of austerity. Hence yet another stalemate.

Missing the IMF payment is probably more a reputational issue than an economic one. The IMF is not exactly hanging out for Greece's payments to pay its bills. Similarly in the case of the ECB, a default isn't going to cause economic ruin for the rest of Europe; it just makes a mockery of the political and economic union that is supposed to exist between the European nations.

Because markets have traversed this territory before, and had an inkling that negotiations were going to be tough and deadlines might well be missed, investors are currently concerned as opposed to panicking over these latest stalled talks. As one commentator noted — different parties are impacted this time around, so the response can be different. The lenders that Greece defaulted on in 2012 (when their debt was restructured, forcing lenders to accept 70 cents in the dollar) were bondholders. These people took a risk lending to Greece and they lost money.

The lenders to Greece now are mainly political institutions, parties that have lent money to Greece for largely political reasons. Also, we need to keep perspective around the amounts of money involved.

Greece has around US$350 billion in debt. This is roughly the amount of money that the US government borrows every seven months! The total US national debt is around 50 times the amount that Greece owes. It's just that the US gets to call the shots because it is the US, whereas Greece doesn't because its economy is around 0.3% of world GDP (or as one commentator noted "somewhere between Alabama and Louisiana in terms of might").

What we do know is that the Greek hokey cokey will not end this week, or next month. Whether the referendum called by Tsipras sees the Greeks choose to stay in the EU and accept a compromise, or leave the EU and go it alone, the outcome will be similar. A hard and difficult road lies ahead for Greece, and the rest of Europe will be buffeted, politically and to a lesser extent, economically. It will provide media fodder for months ahead, and some of it will be gripping (we've already read of hurt feelings as documents were marked up with "offensive red lines", prompting outraged Twitter comments from the Greek PM!).

Carmel FisherMeanwhile life will go on, markets will endure another bout of volatility, international trade will continue, currencies will bounce and our team will continue to scour the world for opportunities to preserve and grow our clients' wealth. If markets become really volatile, there may well be opportunities to buy well-priced assets as babies get thrown out with the bathwater. Given the relatively strong markets we've enjoyed in recent years, there haven't been many such buying opportunities, so fingers crossed that some emerge from the shakeout.

That's what it's all about!

Carmel Fisher
Managing Director | Fisher Funds

PS. Just for the record, we have no exposure to Greek shares or bonds.

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Team Talk July 2015Team Talk

Denmark may not be top of mind when it comes to investing destinations but it offers some compelling opportunities. Following a recent research trip, Ashley Gardyne compares Denmark to NZ and considers the importance of diversifying your investments internationally.


Your KiwiSaver Portfolios

Highlights and Lowlights

  • Highlights and LowlightsIn fixed interest, the RBNZ surprised the market by cutting the Official Cash Rate by 0.25% at the start of the month. This caused local bonds to rally, with the New Zealand Government Bond Index posting an impressive 0.81% return for the month.
  • Heightened concerns over Greece's stand-off with its creditors saw corporate bond markets weaken over the month. While this represents a change in the recent direction of the market the reaction has been more muted than during past periods of volatility — an encouraging sign.
  • A difficult month in Australia but the portfolio outperformed a very weak market. Burson Group was a standout, taking advantage of its strong position to make a great acquisition. The market also responded positively to Sonic Healthcare's Swiss expansion. Ingenia Communities reported an encouraging pick-up in manufactured home sales increasing confidence in its long run growth prospects. Seek and Flight Centre both had moderate downward revisions to earnings guidance which were poorly received given general market nervousness.
  • In New Zealand, F&P Healthcare's share price performed strongly on the back of a record annual result released late in May. The share price of Trade Me came under pressure, with Trade Me falling out of the NZX10 index.
  • In the Property & Infrastructure universe, NZ listed property (and unhedged currency exposure) provided modestly positive performance whilst NZ utilities, ASX listed property and global infrastructure sectors generally had a rough month. The NZ gentailers especially had a horrid performance, with news that Origin may look to divest its 53% share in Contact (worth ~NZ$2b at current prices) weighing on sector share prices.
  • The International portfolio performed broadly in line with global markets. Our underweight position in China helped as the local Chinese market pulled back strongly after a bubble-like run over the prior 12 months.


Greece is the Word

By David McLeish, Senior Portfolio Manager, Fixed Interest

Greece is the WordThe latest deterioration in the Greek situation is unquestionably a concerning development, not least for the people of Greece. But for those 'euro-skeptics' that are again calling this the beginning of the end for the Euro, disappointment lies ahead!

The last time the European Union faced such uncertainty was in 2012. Three years on, the comparisons are few and very far between.

Essentially, different parties are impacted this time around. In order to break the financial linkage between Greece and its Eurozone partners, officials have skillfully managed a transfer of Greece's government debt out of the European banks and into the Eurozone-funded European Financial Stability facility. The debt still exists but this master stroke has gone a long way to safeguarding Europe's banking system from yet another Greek default.

In sharp contrast to 2012, Europe's central bank (the ECB) now stands ready with many more crisis-fighting tools than they possessed back then.

Having visited Europe numerous times over the last three years, the structural improvement across many of the previously questionable EU members has also been impressive.

This was evident again last week when I met with political figures, bank executives, regulators, and central bankers in Rome. During my meetings with former Italian President, Mario Monti, and the Deputy Head of the Bank of Spain, Fernando Restoy, both were quick to catalog the considerable steps their countries have made to rejuvenate their domestic economies. These tough but necessary structural reforms have already begun to bear fruit. Growth rates across much of the 'periphery' are now showing signs of steady improvement. Conversely, Greece's recently elected anti-austerity Syriza party has resisted, or worse, reversed many of the reforms its former ruling party had begun to implement.

Therein lies the rub. While the Greeks have chosen a different path to date, much of the Eurozone has taken Winston Churchill's advice and not let a good crisis go to waste.


Aussie, Aussie, Aussie ... Buy, Buy, Buy?

By Manuel Greenland, Senior Portfolio Manager, Australian Equities

Aussie, Aussie, Aussie ... Buy, Buy, BuyThe "wealth effect" refers to the idea that consumers spend more when the value of their homes and share portfolios rise. This makes intuitive sense; wouldn't you be inclined to buy that new TV or upgrade your car if your house value had increased and your shares were showing strong gains?

Apparently not if you are Australian. House prices in major Australian cities have risen strongly over the past few years and show no sign of slowing, while the share market has been similarly buoyant. The majority of Australians own their homes, and many own shares, so they should be feeling wealthier and willing to spend; yet consumer spending remains decidedly tepid.

Australian consumers are clearly not confident. There are fewer secure jobs, and inflation, while relatively low, has outstripped wage growth leaving households feeling poorer.

Companies are feeling the pinch. Global fashion heavyweight Zara's Australian expansion is proving tough with profits contracting. Myer is closing stores in response to weaker demand. Even food retailers are struggling, with Metcash selling its profitable auto parts business to raise cash to support its ailing grocery operation.

Some consumer companies are proving their mettle and adapting to the change. Aldi, a food discounter, is rapidly expanding stores as Australians trade down to its cheaper house brands. Furniture retailer Nick Scali is modifying its products to keep them price competitive. Retail Food Group is shifting its donut and coffee stores away from increasingly empty malls to smaller shopping centres, which consumers are visiting more often as they reduce the size of their shopping baskets. In addition to introducing super-affordable offerings, Domino's Pizza is investing heavily in digital technology to drive sales volumes.

The great thing about confidence is that it can turn, and those companies that are using this challenging period to become stronger will be the clear winners when it does. Investment legend Warren Buffet advises investors to "be greedy when others are fearful"; we envisage a point when buying quality Australian consumer companies may be the perfect opportunity to do just that.


A bird's eye view: Is bigger better?

A bird's eye view: Is bigger better?Senior Portfolio Manager Manuel Greenland analyses Australian portfolio company Bursons' latest acquisition.

In the popular TV show "Dragon's Den", would-be entrepreneurs pitch their business ideas in the hope that wealthy tycoons will provide the capital required to turn these ideas into successful realities. Every day investors play the role of these capital providers, and the management teams of listed companies play the entrepreneurs.

During June the management of Burson Group ("Bursons") asked shareholders for A$218m, an amount equal to nearly half Bursons value at the time, to fund the acquisition of Metcash Automotive Holdings ("MAH"). The acquisition would make Bursons' store and workshop network over three times larger, expand its presence across Australia and grow the company's stable of leading brands.

Bursons is Australia's largest workshop-focussed car part distributor. Starting off in Victoria in 1971 the company has grown to operate 114 stores today. Demand for Bursons' products is resilient as cars need parts regardless of general economic conditions. Bursons has built a solid reputation by controlling the purchasing, distribution, selling and delivery of parts, allowing them to meet customer requirements quickly and effectively. MAH is similarly successful, but its 416 stores serve consumers as well as workshops. It is a successful business that has grown well over time, with trusted brands and an enviable network of stores.

Clearly buying MAH would make Bursons bigger, but would it make it better?

Rather than focus on size, we want to see management allocate capital to enhance the competitive strengths and long-term growth prospects of our portfolio companies.

When combining two businesses, the objective is to create a new company that is worth more than the sum of its parts. The combined Bursons-MAH group could grow sales by sharing customers, and their combined store network would cover all of Australia, allowing them to sell to valuable new national customers. They would also be a significant buyer of auto-parts, improving their prospects of getting better prices and terms when dealing with suppliers. Administrative functions could be shared across the greater business, improving cost efficiency.

The acquisition looked strategically sound, but the best business bought at the wrong price can be a bad investment. We analysed the negotiating positions of Bursons and MAH's seller Metcash, as relative negotiating strength could well impact the price ultimately paid. Metcash needed to reduce their debt and urgently refocus on their ailing core grocery business. Raising cash by selling a valuable non-core asset like MAH was one of Metcash's few viable options in a rapidly diminishing set of alternatives. In contrast, Bursons had a track record of success backing their ability to quickly raise capital and offer cash for MAH. Bursons would likely have had the advantage in the negotiation.

We concluded that Bursons management had identified a rare opportunity to buy a business that would make the company stronger and more profitable in the long run, and we supported their capital raising effort.

Management's most fundamental responsibility is to build long-term shareholder value. The astute allocation of capital underpins this effort and is a key focus in our selecting and monitoring investments.


Claiming your annual government contribution — it's under controlManaging your KiwiSaver account

Claiming your annual government contribution — it's under control

There is nothing you need to do!

We've already filed claims for the annual government contribution on behalf of all eligible members for the year ending 30 June 2015. These claims have started to be paid and will be allocated to your KiwiSaver accounts when we have received your funds.

You might think that we harp on about maximising your MTC but it's not often you can get free money from the government! We're just making sure you don't miss out!


Happy 8th birthday KiwiSaver!

Happy 8th birthday KiwiSaver!On 1 July, KiwiSaver turned 8. Where does time go?

KiwiSaver has certainly established itself as the pre-eminent way for New Zealanders to save for their retirement. Over 2.5 million Kiwis are enrolled — well ahead of expectations — and collectively with the help of our employers and the government we have saved over $27 billion. That's a pretty good effort.

Despite the various changes along the way, we still think KiwiSaver is a great way to save for your retirement or your first home. It's simple, makes saving accessible for almost everyone, and of course, there are a few incentives to help you save:

  • For every $1 you put into your KiwiSaver account, the government will give you 50 cents up to a maximum of $521.43 — free money!
  • If you are employed and aged 18 or over, compulsory employer contributions of 3%
  • First home withdrawal*
  • KiwiSaver HomeStart Grant* of up to:
    • $5,000 if you're buying an existing home; or
    • $10,000 if you're buying or building a new home.

*Eligibility criteria applies

While the media often paints a negative picture of the impact of KiwiSaver, we know from our conversations with you how much of a difference KiwiSaver has actually made. We've helped many of you buy your first home and at the other end of the spectrum, KiwiSaver has helped people buy a new car, go on a holiday at retirement or just have a bigger nest egg to be able to call on. We love being able to help and make a difference.

So thanks to you all for choosing to take your KiwiSaver journey with Fisher Funds. We really appreciate your support!


Getting to know ... Annuities

Getting to know ... Annuities We have started to hear more about annuities in connection with KiwiSaver and retirement income. Annuities are essentially a financial backstop to guarantee a minimum income in retirement. They work like an old-fashioned corporate pension plan, paying you a regular amount of money over the course of your retirement until you die. The amount you receive is wholly dependent on how much you put into the annuity.

Annuities can come in all shapes and sizes. An annuity can be fixed or variable — the former pays a set amount through your retirement, the latter pays according to the performance of the underlying assets. An annuity can begin paying regular income on retirement day, or you can choose a deferred annuity that allows you to nominate a date further down the road, say at age 80, when you want the payments to begin.

The advantage of annuities is that you can have certainty of income throughout retirement and you can be sure that you won't run out of money. And annuities mean you won't have to make decisions about what and when to buy and sell to generate an income. The negatives are that annuities tend to be less flexible than 'ordinary' investments because once you have committed your funds you cannot free up cash whenever you want. Annuities have also typically been expensive products with total annual costs of 2-3% or more, which compare unfavourably to other investments. As with any financial instrument, you need to do your homework and take it in moderation!


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