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Fisher Funds TWO KiwiSaver Scheme — Your Monthly Update

July 2016

A well-rested portfolio

Well, as expected Brexit gave us enough anxiety and stress to last until the next big event — the US election, the next Fed meeting minutes, who knows what it will be. Also as expected, markets have largely taken Brexit in their stride and continued on the path they were already on.

I read a column recently that I felt was worthy of sharing, particularly as we sit in the middle of the year, the middle of winter, and the middle of a market that doesn't have enough energy to move decisively forward (or backward either, thank goodness).

Phil Huber of Huber Financial Advisors challenged investors with the question: Is your portfolio getting enough sleep?

He quoted billionaire investor Seth Klarman who said "ultimately, nothing should be more important to investors than the ability to sleep soundly at night". In a world that is 'on' 24/7 sleep loss is a major problem. Without enough sleep, it's only a matter of time before mental, emotional and physical fatigue sets in. Our portfolios are no different — they need sleep too!

There's seemingly no end to the concerns we, and our portfolios, could lose sleep over if we allowed them to. Last month Brexit was at the top of everyone's list, but the other regulars — currency weakness, company earnings, China, Trump, dairy, and any number of experts proclaiming imminent doom — were ever present.

In the last month, our International portfolios suffered most from Brexit, but those investors who had exposure to our Fixed Interest, Property, and Australasian portfolios would have felt less anxious than those holding just one fund.

Huber gave what I consider good advice in terms of how we can 'get some more ZZZs' for our portfolios. It's not too different to the advice any insomniac would be given.

  1. Reduce stress. How? Through diversification. This involves spreading your investment portfolio across different companies, industries, countries, asset classes and investment strategies. Diversification can help to eliminate unwanted or unintentional risk by ensuring that while everything in the portfolio matters, no one thing matters too much.
  2. Eliminate distractions. Just as you shouldn't try to sleep with your computer screen glowing, a portfolio that is inundated with fear-inducing headlines is bound to keep itself awake with anxiety. Some headlines will be real and warrant our attention, but many more will prove to be no more than noise. Rather than wasting energy trying to decide which news we should take seriously, we're far better to focus only on the things that matter: long-term returns. We warned last month about the media circus that would revolve around Brexit, and sure enough, it proved a distraction rather than an issue to lose sleep over.
  3. Stick to a sleep schedule. Consistency is critical. We're told that it's not the total hours of sleep that matter, but the consistency of it, like going to bed at a similar time each night. It's easy to stay up late or sleep in a few mornings, but this can throw off our rhythm and lead to poor rest. Similarly having a plan around our portfolios can help manage our emotions and keep us calm and well-rested. Making regular investments can help us stay disciplined as it avoids us having to make unscheduled decisions, particularly in times of market stress and volatility.
  4. Move the bedroom clock. Checking the time every five minutes is a sure-fire way of not sleeping. Checking your portfolio returns every day will certainly lead to more anxiety than necessary, and may lead to impulse reactions which you may later regret.

Carmel Fisher, Managing Director, Fisher Funds

A sleep deprived portfolio is going to have a hard job lasting the distance and is not going to be able to do the heavy lifting when required.

This middle of the year period is a good time to give our portfolios a well-earned rest. On the road ahead, we've a bit of a breather between major economic, political and company announcements so it's a good time to count sheep. Don't worry though, we'll be staying awake.

Carmel Fisher
Managing Director | Fisher Funds

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Highlights and Lowlights

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

  • Highlights and Lowlights There were a few highlights in the New Zealand portfolio last month with Tegel Group reporting its first profit as a listed company, a good result slightly ahead of forecast. Z Energy successfully completed the purchase of Caltex. The company reported no problems in the first month, which was important given the complexity of the hand-over. On the other side, one company in the portfolio had some exposure to Brexit. Mainfreight's Wim Bosman division in Europe contributes around 17% of their overall revenue. Their share price fell initially following the vote; however, our view is the impact will likely be relatively minor in the medium-long term.
  • Our Australian portfolio saw a 4.5% loss over the month, which was slightly behind the broader Australian market. With the exception of property all sectors of the share market were down due to Brexit fears. Encouragingly our portfolio broadly held its own in these difficult conditions, with one exception — Henderson Group. Its shares were weak given the company's exposure to European share markets, and uncertainty regarding their ability to sell UK-based products to European investors.
  • International shares declined as the Brexit news broke. The banking sector was worse hit and increased risk aversion impacted on shares in other markets with sharp falls being seen in Europe and Asia. Financial shares in the portfolio that saw declines included Banco Santander in Spain (-24%), Intesa Sanpaolo in Italy (-30%) and Kyushu Financial in Japan (-13%). We saw a move to safer, higher quality companies like utilities which benefited the portfolio showing gains in American Water (+8%) and CMS Energy (+4%). Foreign exchange changes didn't help the portfolio return as the New Zealand dollar strengthened against the main currencies which we hold securities in. Emerging markets were ahead of the developed markets, feeling the effects of Brexit less.
  • Bonds issued by developed world governments rose strongly this month — this as investors sort safety from the uncertainty of Brexit. The portfolios holdings in bonds issued by the United Kingdom and United States governments performed particularly strongly, outpacing almost all other bonds globally. A challenging period ahead awaits the UK economy meaning that despite recent strong performance, the safety of United Kingdom government bonds remains a favored investment choice. On the flip side Brexit caused the Fund's holdings in bank-issued debt to fall in value this month. While Brexit uncertainty is likely to rein for a while, we believe the global banking industry is extremely well positioned to weather any storm this may create. We're finding certain bonds issued by European banks to be amongst some of the most attractively priced fixed income assets at present.

Your KiwiSaver portfolios

Consumer NZ People’s Choice KiwiSaver Provider — that’s us!

By Fisher Funds

Consumer NZ People’s Choice KiwiSaver Provider — that’s us!

Last month was exciting for the team at Fisher Funds. We were named winner of the Consumer NZ People's Choice KiwiSaver provider award. The Consumer NZ survey compares all providers on a range of performance measures: easy access to information, response to enquiries, investment returns and overall satisfaction.

We achieved an overall satisfaction rating of 67% compared with the industry average of 48%. Derek Bonnar, General Manager Business, Consumer NZ said the winner had to be a "standout performer in customer satisfaction to achieve People's Choice status" and that "Fisher Funds could be proud of their performance".

We hit some home runs and scored particularly well relative to other KiwiSaver providers in the key areas of fees and charges, investment returns, and keeping customers updated about their investments.

With the recent media focus on KiwiSaver providers we're glad that you think the service we're providing is top notch. We want to be involved with clients every step of the way, on what is often a long and unpredictable journey, and we're thrilled and honoured that you want us there with you. To win this award so resoundingly is humbling and we thank you, our clients, for your continued support.

Brexit: The unfolding story

By Mark Brighouse, Chief Investment Officer

Brexit: The unfolding story

United Kingdom's shock decision to leave the European Union late last month after months of bitter campaigning has not only made for glorious news headlines, it has also led to falls in share markets and the UK pound and caused market volatility around the world.

Markets, just like most people, don't respond well to change so what we're seeing is normal albeit a bit unnerving. We only have to look back to the Greece crisis to see how uncertainty can make markets twitchy. The UK story is unfolding daily and the Americans are about to start a new chapter with their elections so one thing we do know is there's more change coming. This will likely mean more market volatility — but that doesn't always mean losses.

The biggest impact of Brexit will be on the UK economy — leading to slower growth — and to a lesser extent Europe's growth. The impact will be much smaller on the global economy.

So far we've seen UK shares and higher quality UK fixed income investments holding up better than expected. The biggest falls were in areas like bank shares, which we don't hold a lot of.

We prepared and went into the Brexit vote with fewer shares than normal and only a small exposure in UK shares (1.6%) with our portfolio focused on high quality companies. This combination has enabled shares in the portfolio to perform better than the market.

We know further change lies ahead, but we're well placed to take advantage for our clients where we can. We're keeping a close watch on the markets, economies and trends and are ready for opportunities as they arise.

If you're feeling unsettled about your investments the best thing to do is talk to us. We can help you ensure that your investment strategy is aligned with both your financial goals and tolerance for risk.

Regulators step in

By Manuel Greenland, Senior Portfolio Manager, Australia

Regulators step in

The quality of companies seeking to sell their shares through initial public offerings (IPOs) has, in our view, been increasingly questionable. Recently listed Redbubble has designers put their work on its website so that consumers can have designs they like printed on t-shirts, cushions, canvas, or whatever they choose. This may well be a clever combination of technologies; but is it "... the most diverse creative community and marketplace on the internet" as described in the company's annual report?

We were recently offered shares of what was described as a "local category killer in the book sector" which was apparently the "leading Australian online retailer of books, e-books, DVD's." The internet has no borders, so how does an online bookseller compete with the giant that is Amazon?

This issue came to a head when the Australian Securities Exchange (ASX) refused to permit the listing of online music streaming company Guvera. Aside from making significant losses, the company was burning through cash so fast that it risked insolvency. We did not like that a company owned by one of Guvera's co-founders stood to profit from the IPO, nor the reported rumours of kickbacks and unfair dealing in its previous capital raisings.

So was the ASX right to prevent the company offering its shares to investors? Listing rules ensure that companies offering shares give full, accurate and relevant information to potential investors. By stopping Guvera's listing after it had complied with these rules, the ASX effectively changed the rules. While we don't like poor quality companies, we support a market where the rules are applied evenly to everyone.

CEO of portfolio company Technology One echoed this view when he said, "The ASX has made an arbitrary decision ... companies meet the guidelines, or they don't ... They did meet it, so they should be allowed to list."

Consumers pay more for premium brands

By Roger Garrett, Senior Portfolio Manager, International

Consumers pay more for premium brands

Trends from the Consumer conference this year wouldn't be referred to as fresh or new, but the titles are certainly eye catching. The top three focus areas for most companies were investing in innovation, digital marketing, and developing new premium or luxury products — which they're calling Premiumisation.

Premiumisation certainly caught my eye as innovation and digitalisation have almost become necessary just to stay in business. Premiumisation however is where companies develop more premium products and it's a trend that's big in the alcohol industry.

Diageo, who creates brands like Baileys and Guinness, noticed a recent global trend where consumers wanted to drink less, coupled with a desire to have premium quality especially in spirits. There was an attitude of 'if I'm going to have just one, then it's going to be exceptional'.

This consumer desire saw the company develop a range of premium products. Johnnie Walker is just one of many great examples. The Johnnie Walker colour range starts with the Red label which costs $NZ49 a bottle and from there the options are almost endless. The colour range includes the more premium quality Blue which you can pick up for $NZ260 a bottle. Then we move onto the Explorers Club Collection, but it doesn't stop there. Their exclusive blend 'The John Walker' you can pick up for a mere NZ$4600 a bottle. I’ll drink to that.

And it's not just alcohol. The trend also extends to consumer staples. No longer does the milk fridge offer just full cream or light. Shoppers are spoilt for choice as companies such as Anchor and Lewis Road Creamery fight for your dollar with premium brands which claim better taste, better for kids, your bones, you name it.

The changing media landscape in New Zealand

By Murray Brown, Senior Portfolio Manager, New Zealand

The changing media landscape in New Zealand

NZ media heavyweights are joining forces to compete in a market that's changed drastically in the last decade. Last month SKY TV announced its plans to merge with Vodafone NZ — who in late 2012 spent $840 million buying Telstra Clear. Earlier this year media giant New Zealand Media and Entertainment (NZME) who own the likes of NZ Herald and ZM Radio, split from their Australian owner APN News & Media, and are now seeking to merge with Fairfax New Zealand (Stuff and various publications).

It's not often we see such sweeping changes in our media landscape. Previously the NZ Commerce Commission would have almost certainly declined both proposed transactions on monopoly grounds. However, the fast and ever changing digital landscape means these traditional media and entertainment companies now have new and powerful competition from a range of companies that in some cases were formed only in the last few years.

No longer is SKY TV the dominant player with competition from Netflix and consumers' ability to download just about anything online. The age-old tradition of perusing the morning paper has been replaced for many, with access to online networks like Google and Facebook. These changes, we believe, will see the Commerce Commission likely approve the mergers.

Our view is that SKY TV, NZME, Fairfax NZ and to a lesser extent Vodafone NZ are 'challenged' companies. Sky TV is under competitive pressure from 'over-the-top' content providers like Netflix and is facing programming cost increases to retain its lead in content offerings in New Zealand.

NZME and Fairfax are also faced with a storm of competitive pressure from digital media companies like Google, which capture most of the growing on-line advertising revenue in New Zealand. Vodafone NZ is the only company forecasting an increase in profits next year; however, that growth is off the back of two years in decline.

The proposed mergers are seen as a way to reduce costs and, to a lesser extent, increase revenue through 'synergy benefits'. The opportunity of merging for these 'challenged' businesses is that they can better compete against well-resourced international competitors. Our view is that, although there will be short term synergy benefits, in the long term these companies' business models will still be under competitive threat and remain challenged. Given that our STEEPP investment process favors growth companies with sustainable competitive advantages, we tend to avoid such challenged businesses.

New Zealand leads wind of change

By Ashley Gardyne, Portfolio Manager, Property and Infrastructure

New Zealand leads wind of change

New Zealand experienced the warmest first six months in 2016 since records began. While most of us enjoyed the balmier temperatures, climate experts are concerned and have been pushing for urgent action globally to cut carbon emissions.

The Paris agreement commits over 180 countries to cut carbon emissions and limit the rise in global temperatures to less than 2°C. This will drive growth in renewable electricity generation (hydro, wind, solar), which is expected to make up over 70% of new power generation capacity between now and 2030.

New Zealand has always punched above its weight on green power, with 80% of our electricity coming from renewables. Across the Tasman, Australia is heavily dependent on coal and gas, desperately needing new sources of renewable generation to meet its emissions targets.

Australia currently produces only 14% of its electricity from renewables and its government has recently set a target of 23% renewable production by 2020. This sees them needing to build new renewable capacity at nearly three times their current rate. This presents a large growth opportunity and the potential for attractive investment opportunities for companies able to develop and operate wind farms.

Trustpower, New Zealand's own renewable electricity generator and developer, is a leading player in this space. Already it's one of the largest wind generators in Australia with over 380 megawatts (MW) of wind generation. It also has a further 507MW of consented wind projects in Australia, enough to more than double its wind generation capacity over the next five years.

Trustpower is currently working on splitting its wind business into a new listed company, which will provide a unique business leveraged to the development of renewables in Australasia.

Managing your KiwiSaver account

We'll take care of it

We’ll take care of it

Each year KiwiSaver clients may be entitled to receive a government contribution to their KiwiSaver account. Earlier this week we started the process to claim the annual government contribution on behalf of all eligible members for the year ending 30 June 2016.

The great news is these claims are already being processed and we'll be allocating them to your KiwiSaver accounts soon. This is a great incentive to be with KiwiSaver.

Happy 9th birthday KiwiSaver!

Happy 9th birthday KiwiSaver!

Nine years ago KiwiSaver was introduced creating a new way for New Zealanders to save for their retirement. On 1 July, KiwiSaver blew out the candles for its 9th birthday, while its age is still a single digit its other numbers shine:

  • Over 2.6 million Kiwis are enrolled in KiwiSaver — well ahead of expectations.
  • Collectively with the help of our employers and the government we've saved over $33 billion.
  • $250M was withdrawn by 16,000 Kiwis to help them buy their first home last year.

KiwiSaver is a great way to save for your retirement or your first home. It's simple and makes saving accessible for almost everyone. Thanks to all of our clients for choosing to take your KiwiSaver journey with Fisher Funds. We really appreciate your support!

Positive change to second chance home buyer eligibility criteria

Positive change to second chance home buyer eligibility criteria

It just got easier to qualify as a second chance home buyer. On 1 July 2016, the income cap for previous homeowners wanting to access their KiwiSaver contributions to purchase a new home was removed, so they no longer need to meet the income caps of $80,000 for sole purchasers or $120,000 for two or more purchasers.

Other criteria remains the same, including being able to meet the test of having releasable assets less than 20% of the regional house price for their area. Applicants will also need to complete a KiwiSaver first-home withdrawal determination application form, prior to contacting their KiwiSaver provider.

For those applying for a KiwiSaver HomeStart grant, the income caps are still in place.

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