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Fisher Funds TWO KiwiSaver Scheme — Your Monthly Update

June 2016

Managing media madness

It's quite nice being in New Zealand where the most significant political debate of recent times centred on an unsurprising and unspectacular Budget. Financial markets barely moved before or after the Budget, and I suspect that in terms of business and consumer confidence, Bill English's announcements made little difference to any of us.

You'd be feeling a lot less sanguine if you were living in Britain ahead of the Brexit vote on June 23, or in the United States ahead of the November presidential election. The British and American media machines are in overdrive as proponents on either side of the political divide stake their often extreme claims to win support. The media noise is so deafening that investors everywhere are left struggling to decipher what a Brexit (Britain's exit from the European Union) or a Trump victory might mean not only for Britain and the US, but for the world at large.

Financial markets don't need an excuse to tread cautiously in coming markets — low economic growth, low interest rates and the perennial discussion about the Fed's next interest rate hike have been sufficient reason for markets to tread water year to date. Add in uncertainty around Brexit and a possible Trump win, and it's hard to imagine a strong market rally happening any time soon.

Brexit hasn't been as widely covered here as the US presidential race, probably because there are fewer personality based sound-bites to be had around Britain's potential exit from the EU. Although Boris Johnson, the former London mayor and leader of the independent Britain campaign, is colourful and eloquent he is opposed in the Stay or Leave debate by a variety of celebrities, economists, politicians and Treasury officials.

While Brexit may not seem as big a deal as a new American president, it would arguably have a far more significant impact on the global economy, with opponents predicting a loss of 820,000 jobs, a sharp rise in inflation and a hit to British GDP of between 3.8% and 7.5% should the nation decide to go it alone. That's not to mention the impact elsewhere — financial instability and a loss of confidence throughout Europe and beyond and a reduction in international trade as the UK is a top three export destination for Germany, Ireland, Spain, Cyprus, the Netherlands and Poland.

But like all news du jour, it is important that we maintain perspective and understand that markets are very good at discounting widely known information. A new market cycle will not immediately kick in following the Brexit vote or on the day after the American election. If anything, markets are likely to be volatile and cautious ahead of these significant votes, but as we get closer to them, markets may well be calm as there tend to be fewer unknowns as voting day approaches.

In the case of the presidential election, the time for market reaction will be when the new President takes action and passes legislation. That won't happen quickly or easily because Presidents don't have the power to act unilaterally, whatever they've promised during their election campaign. For virtually every action, the new President will need the support of Congress. And Congressman will always have in mind their primary goal — to get re-elected.

Carmel Fisher, Managing Director, Fisher FundsAs for Brexit, whether the vote is to Stay or Leave, discussions with Brussels will need to happen. If Britons vote to stay in the EU, David Cameron will no doubt seek to renegotiate the terms of the relationship and get a 'win' in some of the key areas that prompted the Leave campaign. If Britain chooses to leave, there will be two years of exit discussions before anything really happens.

There's plenty of time for markets to understand the ramifications of the story of the day.

Carmel Fisher
Managing Director | Fisher Funds

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Highlights and Lowlights

  • Highlights and LowlightsAll our New Zealand portfolio companies reporting March full year profit results performed well, with most exceeding analysts' earnings forecasts. Fisher & Paykel Healthcare continues to perform exceptionally well, and after a poor first half, Mainfreight delivered a much improved second half result and said momentum has continued into the current financial year. Although Metro Performance Glass delivered a full year result in line with forecast, it has yet to reap all the benefits of the strong new housing market and record orders for new commercial building work. Now that it's new Auckland plant is running well and new commercial work is about to start, earnings should be much improved going forward.
  • A solid return for our Australian portfolio over the month was well ahead of the broader Australian market. Technology One again reported strong sales growth and great progress on its cloud distribution platform. Portfolio heavyweight Ramsay Healthcare was up on indications of promising cost savings, and smaller healthcare holding Nanosonics also rallied as changing regulations governing hospital disinfection practices favoured its Trophon solution. Credit Corp's share price responded positively to upgraded guidance for debt ledger purchases that will benefit earnings in future years. We exited Flight Centre as the increased share of low-cost airlines in the travel market is negatively affecting the company's profitability. Toxfree Solutions shares were weak after it announced that key customer Chevron is potentially retendering its waste services contract in Western Australia.
  • International shares posted solid gains in May despite earnings trends that suggest that corporations are struggling to maintain growth in what is now a very mature economic recovery. Markets were lead higher by strong gains in the healthcare and information technology sectors with the portfolio benefiting from gains in Apple Co (up 10.6%), Microsoft (up 10.4%) and Novartis (+7.4%). Exchange rate movements also boosted returns as the New Zealand dollar retraced from the US 70 cent level as Fonterra updated its payout forecast and reminded markets of the continuing struggles of the New Zealand dairy sector. Emerging sharemarkets lagged developed markets after strong gains earlier this year. The emerging market manager Somerset has quite concentrated security selection and their holdings in the financial and information technology sectors trailed the broader market over the month. Emerging markets have become relatively cheap compared to developed markets and offer potential for gains even if the environment for developed markets remains challenging.
  • Fixed interest markets in Australasia were the stand-out global performers last month, driven by a surprise rate cut from 'across the ditch'. Our portfolios, which currently favour New Zealand and Australian fixed income assets, benefited strongly from the move. We continue to favour these higher yielding fixed interest markets over most of their global peers. The only thing holding back our fixed interest portfolios in May were our holdings in cash and other similar short-dated investments. In strong markets, these low returning investments can be a drag on performance. But in just the same way, the stability of these assets can help protect the portfolios in weak months.


Your KiwiSaver portfolios

Another win in Fixed Interest

By Fisher Funds

Another win in Fixed Interest

We are very proud to acknowledge the efforts and achievement of our fixed income team — Portfolio Manager David McLeish, Senior Analyst Matt Logan, Senior Analyst Quin Casey, and Investment Analyst Lyle McNee — in winning the Bonds gong at the 2016 INFINZ Awards.

Fisher Funds was named INFINZ Fund Manager of the Year, Bonds at last month's awards, the second win of its kind for the fixed interest team in three years.

In today's low interest rate environment, fixed interest investing seldom grabs the headlines but it plays an integral role in providing a layer of protection for your portfolios. As David suggested at last year's roadshow, "bonds are your financial umbrella; you never know when you are going to need cover from economic storm clouds".

The INFINZ awards acknowledge the quality of our investing process, people and performance, and are testament to the hard work put in by the team in what has been a challenging investing environment. Our international bond fund returns to 31 December 2015 had us in first place over one year and three years, relative to competing funds.

The results of this performance have been enjoyed by clients across our range of managed funds and KiwiSaver ... long may it continue! Congratulations to the team.


Abano — a parting of the ways

By Murray Brown, Senior Portfolio Manager, New Zealand

Abano — a parting of the ways

Some readers will be aware that one of our New Zealand portfolio companies, Abano Healthcare, has had ongoing battles with a small group of dissident shareholders. To recap: shareholder Peter Hutson was once on the board of Abano Healthcare and he ran its 50%/50% audiology joint venture Bay International, which has operations in Australia and Asia.

In 2013, Peter Hutson and associates teamed up with Archer Capital to make a non-binding, conditional bid to buy 100% of Abano Healthcare at an indicative value of $6.97 to $7.14 per share (although no formal bid was actually made). If the indicative bid was successful, Peter Hutson would have bought the other 50% of Bay International for 'a nominal sum'. The conflict of interest was obvious. Following a unanimous request by the Abano board, Peter Hutson subsequently tendered his resignation as a director of Abano and was removed as an executive director of Bay International.

Fast forward to today and Peter Hutson has recently bought Abano's 50% share of Bay International for $32m, using his pre-emptive rights following an unsolicited bid for Abano's stake by an international hearing device manufacturer. As large shareholders in Abano, we are delighted with this outcome. The price compares favourably to Abano's $11.9m book value of its stake in Bay International, and was higher than analysts' valuations. Abano can use the proceeds to advance its dental business by adding to its 180+ dental clinics acquired in Australasia, and focus its efforts on this side of the business.

We have been supportive shareholders in Abano for some time. We were active in voting against the proposal to remove Chairman Trevor Janes as a director of the company and were vocal in our view that the Archer Capital indicative bid undervalued the company at the time. One wonders if Peter Hutson will sell his ~15% stake in Abano Healthcare now that there are no longer any ties between Abano and Bay International. This would represent a complete and final parting of the ways.


The machines are coming

By Frank Jasper, Director Fisher Funds

The machines are coming

There is a new battle being waged in the technology space featuring some big names, big money and potentially a big impact on the player who crosses the line last. It is the battle for leadership in the Artificial Intelligence (AI) or machine learning space.

Marco Arment, the co-founder of social media site Tumblr, recently stirred controversy by suggesting AI could make Apple the next BlackBerry. To explain, before the iPhone was launched in 2007, the Blackberry was the king of smartphones, keenly sought after by business people the world over. It had taken leadership position from companies like Nokia by providing phones with fully featured email support, perfect for busy executives. But then the world changed. Apple developed a device that put not just your email inbox in your hand but delivered the power of the internet and serious computing grunt. The Blackberry was dead.

Arment suggests that like the iPhone launch, AI is the next big thing that will change what our devices are used for.

Amazon, Facebook, Alphabet (formerly Google) and countless others have invested heavily for years in AI and big data services. If they are right, AI based assistants (think Siri, only much smarter), voice interfaces, smart locators, and other tools that allow our devices to do our thinking for us before we think it, are the next big, big thing and we'll all be clamouring for them.

Arment suggests Apple is a long way behind the AI curve, and like the Blackberry, is vulnerable to being left behind as the company that makes nice devices that we used to use in a certain way.

The machines are coming and time will tell whether AI indeed becomes the new game-changer, and which players get to the finishing line first. We remain happy investors in Alphabet (formerly Google) and are pleased to be on the right side of this particular battle!


Japanese experiments

By Mark Brighouse, Chief Investment Officer

Japanese experiments

Japan has been more aggressive in its attempts to kick start economic growth than any other nation. Since Prime Minster Shinzo Abe took office in December 2012 and nominated Haruhiko Kuroda to head the Bank of Japan, markets have watched to see whether their experiments might be successful in turning Japan around.

They have certainly given it a good go! Kuroda has been prepared to use the central bank's cheque book to buy all the bonds that the government has chosen to issue (as much as 80 trillion yen a month). This massive debt hasn't cost the Government anything since interest rates have now been close to zero for several years.

Has it worked? A bit. Share and property prices initially rose very strongly and trends in corporate earnings were among the strongest in the world.

Earlier this year Kuroda stepped it up a notch. With the weakness in global growth and wobbly share markets, the Bank of Japan took the fresh step of buying government bonds at negative interest rates. So now the Japanese government gets to borrow and pay back less than 10 years later!

Now the only tool left is to move from lending money for nothing to giving it away. The Bank of Japan could consider printing money and handing it out to people, making it the first economy to actually deploy so called "helicopter money".

Unfortunately there is a historical precedent which may cause Mr Kuroda to think twice. A similar strategy was used in the 1930s by the Bank of Japan head Takahashi and views on its success are mixed. While Abe credits Takahashi with saving Japan from the great depression, others point to the rampant inflation that followed (and Takahashi's untimely assassination!).

Our view is that as Japan continues to experiment, things will get messier before they get better. We have only a small exposure to Japanese companies, very little in Japanese bonds and any exchange rate risk is largely hedged.


Wide moats can narrow

By Manuel Greenland, Senior Portfolio Manager, Australia

Wide moats can narrow

Over the last ten years the Australian share market has generated an average 4.4% annual return and the official interest rate has fallen from 5.5% to 1.75%. As a result, savers have found it difficult to generate meaningful returns from their savings.

Aussie company Challenger has sought to solve this problem. It offers annuity products, which provide a defined set of cash returns in the future in exchange for an upfront payment. As Australia's growing base of retirees seeks saving solutions in a low-return environment, Challenger has grown at a handsome clip, expanding its leading role in this small but growing market.

To date Challenger has had the market much to itself, as their annuity business has been too small to attract attention from potential competitors.

Changing regulation may see the annuity market become larger and more complex. Annuities may be made more tax efficient, mandatory in retirement portfolios and could pay out over longer periods than they currently do. Competition from well resourced financial institutions may well follow.

Challenger currently sells annuities to the members of super fund giant QSuper. In May QSuper obtained a life insurance licence, enabling it to offer annuity products of its own to its members. Challenger now relies on a potential competitor to sell its products. For all its technical smarts in producing annuities, and the first mover advantage in the space, Challenger lacks direct relationships with the ultimate buyers of its products.

While we don't own Challenger shares, it is an interesting case study. For many years, Challenger's competitive advantage, or moat, has been its leading role in a niche market. Ironically, growth in this market is likely to attract competitors, narrowing Challenger's moat. If these competitors have the advantage of directly owning customer relationships, then Challenger's moat probably narrows further. Challenger may soon itself be challenged.


It's May ... time to sell?

By Roger Garrett, Senior Portfolio Manager, International

It's May ... time to sell?

'Sell in May and go away' is one of the best known and most often cited market wisdoms with origins stretching back to 17th century England. The Americans often refer to it as the Halloween indicator, alluding to the good sense of being invested in the stock market for the six month period following Halloween.

Furthermore, the mere fact that it has been so enduring suggests it is more than just a myth, and 300 years of data confirms that stock markets in the November to April period have outperformed by 3-4% the May to October period. While the data is strongest for Northern Hemisphere stock markets, many in the Southern Hemisphere also exhibit a similar trend (although funnily enough New Zealand is not one of them).

Many explanations for this phenomenon have been offered over the years, some are plausible but none really provide a satisfying solution to the puzzle. Probably the most common is that money managers take their summer holidays over this period and this leads to lower volumes and less buying pressure. But that doesn't explain the phenomena also working in the Southern Hemisphere, and nor does it consider that money managers nowadays remain connected to markets even while on holiday. Another explanation is that the tendency for stronger economic activity in the winter drives up investors' earnings expectations, while some point to the notion of an optimism cycle which is strongest in the New Year before reality dawns a few months later.

Despite evidence showing that there can be some seasonality in share market returns, the 'Sell in May' strategy can be fraught with risk. While some may argue that it doesn't matter why it works as long as it works, ultimately it is easier sticking to a strategy if you understand the rationale behind it. Furthermore, successful investing is a long term game and another well known market wisdom suggests that 'time in the market is more important than timing the market'.


Managing your KiwiSaver account

See where your KiwiSaver money goes

In last month's newsletter we discussed recent research that found a worryingly high number of KiwiSaver members don't know what is happening with their KiwiSaver account. This month, we're going to show you where your KiwiSaver money goes.

Every quarter we publish reports online about each of our KiwiSaver funds. These reports cover performance, fees and where your money is actually invested.

You can view the latest set of reports for March 2016 here.

As you'll see, the reports compare the actual mix of investments with their target weightings. There will always be differences between the two that reflect our current views on where investment opportunity lies and any tactical adjustments needed.

In addition, we detail the top 10 investments and how much they make up of the fund overall.

As you'll see, your money is invested around the world and in a range of different industries, resulting in a widely diversified nest egg. You'll recognise many of the companies you invest in – there are household names in New Zealand such as Auckland International Airport and Fisher & Paykel Healthcare, there are also global brands like Alphabet (formerly Google) and Facebook, and there are some names that won't be so familiar but they have been chosen because they are market leaders in their industry or have strong prospects for future growth.

As a specialist investment manager, we're passionate about our investments and we love nothing more than talking about them and sharing them with you.

See where your KiwiSaver money goes


$521 — yours for the taking!

$521 — yours for the taking

It's now less than a month until the end of the KiwiSaver year, so time is running out to ensure you get your annual Government contribution of $521.

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 - this generous KiwiSaver incentive is known as the member tax credit (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 have not put in at least this amount, you can top up your KiwiSaver account for the current KiwiSaver year, but make sure you do it by Tuesday 28 June 2016.

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


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