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Fisher Funds TWO KiwiSaver Scheme — Your Monthly Update

June 2017

To the Finance Department, with love ...

Bruce McLachlan, Chief Executive Officer

It was great meeting so many Fisher Funds clients around the country at the recent investment roadshows. As your new Chief Executive, it's been an excellent introduction to the business; and everyone I have met so far has been very supportive and welcoming. Less welcome, however, were the scammers that kicked into gear within my first two weeks in the role! Realistic looking, but fictitious, emails and invoices were supposedly sent by me, as Chief Executive, to the Fisher Funds Finance team authorising all kinds of payments for all kinds of services. Fortunately, our team were onto the scammers quickly and both our reputation and bank accounts remain intact.

In 2016, the US Federal Bureau of Investigation (FBI) warned about a dramatic increase in these so-called "CEO fraud" email scams — in which the attacker spoofs a message from the boss and tricks someone at the organisation into wiring funds to the fraudsters. At the time, the FBI estimated these scams had cost US organisations more than $2.3 billion in the previous three years.

Typically in the US, after a company discovers that the wire fraud was not a legitimate request from the real CEO, the finance employee who wired the funds is often dismissed and the financial losses are reported internally. Investigations to identify the attackers are conducted, officials contacted, and boards informed. Many companies are required to publicly disclose their losses, and the revelations lead to damage in brand reputation.

This serves as a reminder that there are whole industries employed to try and convince us all to part with our hard-earned cash, by legitimate means or foul, but most often not with our own best interests at heart. Unfortunately, the investment world is also littered with such people and industries.

The Financial Markets Authority (FMA) provides an excellent investor service by publishing warning notices, international regulator alerts, businesses to be wary of and also a list of unregistered businesses. You can find these prominently displayed on the fma.govt.nz website under WARNINGS! These are obvious businesses to avoid.

But not all opportunities to avoid are either illegal or scams. Of as much concern is the legitimate, but risky, "investment opportunities" that always appear in certain market circumstances. Currently, the world is in a sustained historically low interest rate environment and that has driven many investors on fixed incomes to chase yield. These so-called opportunities are everywhere and are typically accompanied by words like Guaranteed or Secured. Having worked through quite a number of disastrous periods in the past of investors getting burnt, it always amazes me that the basic fundamentals of investing (like understanding risk) are quickly forgotten in the search for apparent higher returns.

In this context I am very proud to be leading a reputable, responsible and successful funds management company that genuinely has the best interests of clients at the heart of everything we do. It is very important to me that we are active fund managers that make well-researched investment decisions not only based on the inherent quality of companies, but also screening via a thorough environmental, social and corporate governance lens. The Fisher Funds model established by Carmel, that will live on into the future, doesn't blindly and passively follow a notional index, but rather backs investing your money into investments with strong inherent value. And we are particularly careful at checking the validity of emails from the Chief Executive. You cannot be too careful these days!

Bruce McLachlan
Chief Executive Officer | Fisher Funds

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Managing your KiwiSaver account

Last few weeks to get your $521!

Last few weeks to get your $521!

There's still time to get your hands on the annual government contribution (member tax credit or MTC) for your KiwiSaver account. In order to get the full amount of $521.23, you must have contributed at least $1,042.86 into your account during the KiwiSaver year (1 July to 30 June).

Even if you aren't able to contribute the full $1042.86, you will still be rewarded for what you can save as for every dollar saved, you'll receive 50c up to $521.43.

There is still plenty of time to top up your account. Read more here about how to top up and make sure you do it by Tuesday 27 June 2017.

Last year, only 43% of eligible members received the full $521 payment; 29% received a partial payment; but 28% missed out entirely — make sure you don't miss out this year!

(The MTC is paid into your KiwiSaver account and is not a cash or personal bank account payment.)


Highlights and Lowlights

Your KiwiSaver portfolios: Highlights and lowlights

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

New Zealand

The NZX50 continued its uninterrupted 5 month rally with a +0.5% move in May. The market has regained almost all the ground it lost in September and October of last year. Our New Zealand part of the portfolio was up 1.5%; outperforming the market. Fisher & Paykel Healthcare was again our top contributor for the month, up 6.0%. The portfolio's best performing stock, Port of Tauranga, was up 9% due to a strong rebound in log volumes through the port (+21% year to date) and rising container volumes. Summerset was the largest drag on portfolio performance, down 6%, as the market remains concerned about a possible peak in house prices and the impact to earnings.


Australia

The Australian part of the portfolio was down 2.9% for the month, comparing favourably with the Australian share market which fell 6.5% in New Zealand Dollars; the worst month for the market since August 2015. With the exception of the Industrials sector, which was buoyed by a small number of shares rallying on very specific issues, all other sectors were down. Stock selection, reducing exposure to mining and banking positions earlier in the year, and currency hedging contributed to the outperformance of the market. Wisetech announced a development partnership with global freight leader UPS, and AUB Group continued a strong rally on expectations of rising insurance premiums.


International

The International part of the portfolio fell 1% in May which was in line with benchmark returns during the period. Stock selection within the Real Estate sector was the largest detracting factor from the portfolio's performance. Positive returns were primarily due to stock selection within the Healthcare Industry and having less Energy stocks than the benchmark in our portfolio. We were rewarded by overweighting Europe and hurt slightly by underweighting the United States.

Top contributors included healthcare companies, GlaxoSmithKline Plc and AstraZeneca Plc which rose 10% and 12.6% respectively. Tech giant Apple reached a new one year high and ended the month up 6.3%. Financial stocks had a tough month with Westpac, JPMorgan and Bank of America down 13.4%, 5.6%, and 4% respectively.


Fixed income

We have positioned our New Zealand fixed income portfolios to benefit from a lowering of interest rates as we have long believed that acceleration in economic activity, both here and abroad, was unlikely at this stage. This positioning again provided the greatest boost to our portfolio's outperformance this month, as it has done since the start of the year.

Our global managers remain underweight in interest rate exposure in their portfolios. As interest rates have fallen, this has been a drag on performance relative to the market. However, strong performances elsewhere in their portfolios have offset this, leaving overall returns broadly in line with that of their benchmark.


Your KiwiSaver portfolios

Investing responsibly by investing wisely

By Frank Jasper, Director

Imagine a company that dumps 200,000 tons of waste into its local rivers every day, systematically bribes local police forces, and shows utter disregard for the lives of the indigenous people who live near it.

Not only is this a bad investment — abusing your stakeholders is rarely profitable in the long term — you wouldn't even want to be associated with it.

Responsible investing involves avoiding these sorts of companies — selecting investments that generate sound returns in a way that does not cause widespread harm to society or the environment.

Fisher Funds is committed to investing your money responsibly — ensuring we all feel comfortable with the investments you own.

We look at responsible investing in two ways — avoiding the bad and embracing the good.


"Avoiding the bad" ensures we don't invest in companies that are poor performers from an environmental, social or corporate governance (ESG) perspective.

We have, for some time, not invested in the tobacco industry or in companies that manufacture weapons that cause indiscriminate and disproportionate harm. The rationale for these exclusions is simple: these industries cause only harm and have no redeeming benefits. This includes not having investments in companies like Textron which makes land mines, but also more well-known companies like Boeing, which makes components used to produce nuclear weapons.

We have decided to add thermal coal producers to our list of product exclusions. This is because of the impact of thermal coal on man-made climate change.

The second group of exclusions is for those companies that have exhibited widespread and severe corporate misbehavior.

Freeport McMoran, the company referred to in the introduction, is an example of a company on our conduct exclusion list. Freeport has faced serious criticism over its environmental practices at its Grasberg gold and copper mine in West Papua, Indonesia. The company has also been involved in widespread human rights abuses of the local indigenous populations.

For us, responsible investing is more than just excluding the worst companies. Whenever we look at a company, we look at its financial performance, its strategy and the experience of its management team. We also explicitly consider its performance through a responsible investing lens. This involves looking at its treatment of stakeholders, the environment and the sustainability of its business model.

Considering these factors in addition to the traditional financial ones gives us a greater insight into the quality of a company and makes us better investors. You will be hearing more from us about our responsible investing policy and how we're applying it. In the meantime, know that we are committed to investing your money responsibly; and therefore wisely.

Read more on our responsible investing approach.


Three cheers for Simon Challies

By Sam Dickie, Senior Portfolio Manager, New Zealand

Three cheers for Simon Challies

At last month's annual results briefing, Ryman Healthcare Managing Director Simon Challies announced he'd be standing down on June 30 for health reasons. Simon was diagnosed with Parkinson's disease in 2011 but has continued in the CEO role since then with the full support of the board.

Simon joined Ryman as Chief Financial Officer in 1999, and took over as Chief Executive in 2006 from Ryman co-founder Kevin Hickman.

As many of you will know, Ryman Healthcare has been a cornerstone investment for Fisher Funds and we've enjoyed being shareholders of this extraordinarily successful New Zealand company.

Under Simon's leadership, Ryman's portfolio of retirement villages has grown from 12 to 31 and the company has won the Most Trusted Brand in the retirement village industry accolade three years in a row. Simon led the company through the Global Financial Crisis, the Christchurch earthquakes (which destroyed their offices) and oversaw its expansion into Melbourne. The company has been a consistently high performer on the NZ Stock Exchange and was recognised for its growth strategy in the 2011 Management Magazine Top 200 Awards, with Simon also being recognised as an outstanding leader in 2014, winning the Deloitte top 200 CEO award.

We want to pay tribute to Simon, a CEO who we admire, respect and have very much enjoyed working with over the years. As our team recently discussed Simon's tenure as Ryman CEO, words like passion, honesty, good humour and dedication came to mind. Such qualities are consistent with the attributes Warren Buffett looks for when hiring CEOs to run his portfolio companies. We'll leave the last word to him, quoting a 'sermon' that Buffett often gives to MBA students who are heading out into the workforce.

"We look for three things when we hire people. Interestingly enough these things are a bunch of qualities that are self-made. We look for intelligence, initiative or energy, and we look for integrity. If they don't have the latter, the first two won't be enough.

It's not about whether you have the ability — lots of people do. It's not about how tall you are. It's not whether you can run the 100 yard dash in 10 seconds. It's not whether you're the best looking person in the room. It's about how you're wired; it's integrity, it's honesty, it's generosity, it's being willing to do more than your share, taking the initiative and making things happen. That's the person we'd hire."

Simon, we think Buffett would quite like you!

Gordon MacLeod, Ryman's Deputy Chief Executive and CFO, will take over as Chief Executive on June 30.

Simon will continue as an advisor to the Ryman board until December 2018.


Big bank tax is a tax on all Australians

By Manuel Greenland, Senior Portfolio Manager, Australia

Big bank tax is a tax on all Australians

The biggest news on the back of Australian Treasurer Scott Morrison's latest Budget was an unexpected tax on the big Australian banks. The market value of the banks fell by A$14 billion as sharemarket investors anticipated the negative effect of the tax on banks' profits.

The banks themselves cried foul. Head of Australia's largest bank, the Commonwealth Bank of Australia (CBA), said "this is bad policy"; while NAB's chief executive moaned it was "very unfortunate"; and Westpac's boss declared the move "disappointing". The Treasurer remained unsympathetic, saying the interest rates at which the banks borrow depends on the financial strength of Australia, so it was only right they should pay up to support the Budget.

Earlier in the year we had noted increasing headwinds to bank profits. In addition to the cost of their deposits rising, interest rates in foreign markets — where the Australian banks borrow — had also gone up. In an effort to strengthen the banks' financial positions regulators were pushing them to take on expensive long-term debt and to hold higher levels of even more expensive share capital. So the series of mortgage rate increases that banks had recently implemented was not at all surprising; they were seeking to recover rising costs through higher lending rates to borrowers. This extra tax will now add more pressure on profits, and will likely be another reason to raise interest rates.

What does it mean for Aussies?

Rising mortgages and weak income growth have left Australian households with high levels of debt. Over the decade to 2016, Australian housing debt almost tripled to A$1.4 trillion. Borrowers have taken on this debt because of rising house prices and falling interest rates; not because they are earning more. High debt levels and weak incomes mean that household budgets will quickly feel the impact of any increase in interest rates. An important implication of this is that companies that sell products and services to Australian consumers will suffer if households have to use more of their income to service debt.

At the moment electoral polls in Australia are very close. As this tax is pretty popular with voters, it is likely to be approved by the major political parties. The tax is therefore a reality, and for all their grumbling, the Australian banks are going to have to pay it in addition to their other rising costs. In our view they will do so in part by raising interest rates on borrowers, in part by reducing service levels to customers to cut costs, and in part by reducing profits and returns to shareholders. Borrowers, customers and shareholders will all share the pain; many ordinary Australians are all three.


There's never been an easier time to travel

By Ashley Gardyne, Senior Portfolio Manager, International

There’s never been an easier time to travel

If you've ever tried to travel with a group of friends, or like me with young children (heaven forbid!), you've probably realised the shortcomings of many hotels. Rooms that are too small for port-a-cots and prams and have no shared space to relax in — or if they do they can cost an arm and a leg. Thankfully, yet again, the internet has saved the day by providing a solution to this problem through online villa and apartment booking platforms like Airbnb and HomeAway (owner of NZ's Bookabach).

HomeAway owned by our portfolio company, Expedia, is a prominent example of the "sharing economy" in which people rent beds, cars and boats from each other through a mobile app. Finding a house to borrow for a holiday used to be more trouble than it was worth (particularly in a foreign location), but technology has made this much easier, and possible, on a much greater scale. But it's not just families with kids that are increasingly flocking to HomeAway for accommodation, recent data shows that over 30% of US travellers now stay in this type of alternative accommodation, up from less than 10% in 2010.

It is not just where we stay that is changing, the way we book our travel is also evolving and gradually moving online with about half of travel now being booked online rather than via offline travel agents like Flight Centre or by phone. This shift provides another leg of growth for Expedia as travellers embrace the more seamless booking experience and the broad choice of properties on its platforms (Expedia, HomeAway, Hotels.com, Wotif.com and Trivago).

These changes aren't good for everyone however, and hotel chains are coming under increasing pressure from these trends. Travellers used to book at chain hotels like the Hilton or Holiday Inn because they knew the level of service they were going to get. When you can review hotel photos, amenities and maps online, and read countless user generated reviews, the value and appeal of a hotel's brand is reduced.

Humans will always prefer having more choice and flexibility than less. Regardless of how the sharing economy and online shift impacts hotel chains and high street travel agents, we believe the level of choice that Expedia provides customers positions them well to benefit from a growing travel market. Expedia's revenue model of clipping the ticket on every night booked by travellers, combined with strong growth drivers and a business that requires limited fixed assets (they manage websites, not properties) creates what we believe is a compelling investment opportunity.


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