Actress Pamela Anderson famously said "It's great to be a blonde. With low expectations it's very easy to surprise people". I can attest to the fact that brunettes rarely get away with low expectations; neither do redheads or chief executives of listed companies (most of whom are grey haired these days).
At this time of the year, managing expectations is what it's all about for listed companies, and it is always with a little trepidation that we await the profit reporting season. Have our companies done what they said they'd do? Have they communicated openly to the investment community in the past six months to manage expectations and guide profit forecasts to within cooee of actual results? And are their outlook statements positive enough to prompt analysts to raise expectations for the next round of profit results?
Unfortunately, the job of chief executives has become even harder in recent times because a) analysts remain fixated on the bottom line of company results even though earnings often tell only a partial story and b) reactions are often outsized compared to results, such as a 2% profit "miss" against forecasts resulting in a 10% plus share price fall.
It's fair to say that our expectations of our portfolio companies have not been dashed so far in the first two months of the year, but neither have we been blown away by companies over-delivering. We fared well through the recent profit result round and have enjoyed exploiting opportunities when the market either had the wrong expectations or reacted inappropriately to what were actually good results (as Terry discusses later).
Managing expectations is a year-round job for politicians and central bankers. Talk of what we might expect from President Trump and, to a lesser extent, the Federal Reserve has been a significant distraction and pastime for market participants this year. But a distraction is all it is.
The economic and political environment has so far not proven contrary to expectations; the world is rolling along mostly as anticipated, despite all the daily noise suggesting otherwise. Just as company earnings should not be viewed in a vacuum (but in the context of the underlying business fundamentals and long term strategy) economic and political news needs to be considered in the context of the broad economic outlook which, so far this year, remains positive and entirely consistent with expectations.
Introducing Fisher Funds' new CEO: Bruce McLachlan
I was very pleased last week to announce the appointment of Bruce McLachlan as our new Chief Executive Officer, to take over the reins as I retire from my executive role. Bruce will be joining Fisher Funds from 18 April 2017 and I really am delighted as he has a wealth of experience in the financial sector, and importantly, a passion for client service.
When we began our search for a new chief executive, we knew we wanted someone who understood and was excited about maintaining and growing the wealth of New Zealanders. We looked for someone who would continue our longstanding performance record and our commitment to exceptional client service. Bruce was an obvious choice for the role.
Bruce has been CEO of The Co-Operative Bank for the past four years. Under his leadership, the bank has consistently achieved top rankings in customer satisfaction and client service. Previously, Bruce worked for 10 years at Westpac NZ, where his roles included leading both its business banking and retail banking businesses; he was also Westpac NZ's acting CEO during 2008/9.
I know that you will warmly welcome Bruce and we hope you will take the opportunity to meet him during our roadshow in May/June (more details to come).
Managing Director | Fisher Funds
Managing your KiwiSaver account
Bringing back your Aussie Super is easier than you think
By Fisher Funds
If you have lived and worked in Australia at some point in your life, you may have some superannuation that you can bring back to your KiwiSaver account. Over the past couple of years, we helped over 500 KiwiSaver members bring back more than $10m.
Whereas once this may have seemed like too much hard work, we can take care of the process for you. All we need is your authority to kickstart things. Simply complete and return this Aussie super Scheme Transfer Form to us, or give us a call/email to discuss further.
We can think of some pretty compelling reasons for you to bring your Aussie Super over and consolidate it with your KiwiSaver account:
- Lower fees – you are probably paying two sets of administration fees. Consolidating your super into one KiwiSaver account may reduce the total cost of fees
- Visibility – it's so much easier to see all your retirement savings in the one place
- Simplicity – making any changes to your account is much easier when dealing with a local NZ team
- Certainty – having it all in one place gives you a better idea of what you actually have in NZ dollars.
Don't know where your Aussie Super is?
Lots of Kiwis have lost track of which provider their Aussie Super is with. It's estimated that AUS$5 Billion of "lost" super belongs to New Zealanders. Visit this page to find out what to do.
Or if you know your Australian Tax File Number (TFN) — visit the Australian Taxation Office "Super seeker" site.
Or talk to us about finding it for you.
Your KiwiSaver portfolios: Highlights and lowlights
A snapshot of the key factors driving the performance of markets and your portfolios last month.
The New Zealand share market continued its strong run in February, with the S&P/NZX50 up 1.6%. EBOS was our top performer for the month, up 9.5%. The distributor of healthcare and pharmaceutical products delivered strong interim results, driven by good growth in both its Consumer Products and Animal Care businesses. The biggest detractor from performance was Metro Performance Glass (-23%). Metro downgraded its full year profit guidance due to challenges in efficiently scaling up production in the buoyant construction market.
February was a busy month for Australian companies with reporting season. While average earnings for the Aussie market were strong, the average disguised two very different stories. Mining companies were very strong on the back of commodity price rallies, and banks looked a little more positive. Other sectors of the market were not nearly as strong. In this environment, 72% of our portfolio companies met or beat profit expectations. The biggest contributors to the Australian part of the portfolio this month were Seek and CSL both of which delivered better than anticipated first half earnings. Tox Free Solutions was the laggard as its earnings from resources-related capital expenditure continued to decline.
The International part of the portfolio had a strong return of 4.5% in February, outperforming its benchmark by 20bps. Most of this outperformance came from stock selection within a) the United States and b) the Financial sector both of which rallied to new highs during the month.
Top contributors to returns included Apple Inc. which was up 13% for the month, continuing its strong run. The healthcare conglomerate Johnson & Johnson rose 8% in line with US pharmaceutical stocks being strong after rebounding from a weak January. Unilever shares rose, fell, then stabilised to close the month up 20% after Kraft Heinz abandoned its takeover bid to purchase the company which was flatly rejected by Unilever.
The S&P 500 returning 4%, was one of the best performing indexes globally in February. This is in comparison to the Developed World Index which rose 3.1% and Emerging Markets which lagged, rising 1.75%.
Demand for fixed income assets continued to recover in February. This improving appetite has meant that in order to secure an investment in these assets, investors have become more willing to accept a lower level of future income from them. The result is bond yields falling (and their price rising). Such is the optimism surrounding future growth at present we saw particularly strong interest in many of our holdings in corporate-issued bonds. Bonds like these typically perform best in periods of strong economic activity.
Inflation-protected fixed income assets gave back a small amount of their recent strong performance this month. Despite this, our managers remain constructive on this asset class, maintaining an overweight bias to them in our portfolios.
Your KiwiSaver portfolios
By Mark Brighouse, Chief Investment Officer
What does US$24 billion buy you on the stock market these days? Based on Snap Inc.'s upcoming initial public offering, $24b buys you a company that specialises in disappearing photos, disappearing cash, and most concerning: disappearing shareholder rights.
Snap Inc. is the company behind photo messaging app Snapchat — set up for users to share photos that are self-deleting.
Snap has never made a profit; the company is burning through cash at a rate of around $2 million per day. For every $1 it makes, it spends around $1.14 in cash. The company's revenue is improving as user numbers increase but costs are rising even faster. In 2015, the company lost $372 million; in 2016 it was up to $514 million.
We acknowledge that some companies with a poor profit history turn this around and become great investments — Amazon.com is a fine example of this. What we really object to in this float are Snap's nonexistent shareholder rights. This is the first time in US history that a company has listed shares with no voting rights. When we say no voting rights we mean none; no single right to influence the future direction of the company in any way.
Founders Evan Spiegel and Bobby Murphy will maintain total control of the company through a unique share class structure. This gives them control over "all matters submitted to our stockholders".
The ability of all shareholders to have some influence over the executives and direction of a firm is fundamental in ensuring that companies are run for the interests of all owners, not just a select few. Snap has disregarded this basic tenet of how public companies have been, and in our view, should be run.
This is a dark day for corporate governance. We will not be buying Snap shares.
A Game of Thrones for Sky TV
By Ashley Gardyne, Senior Portfolio Manager
As Game of Thrones fans eagerly await the release of the seventh season later this year, we are witnessing our own epic battle — Sky Television vs. Netflix.
More than two decades ago, Sky TV revolutionised TV by introducing satellite technology and offering us a huge range of content compared to TV1, TV2 and TV3. But fast broadband, combined with new 'Subscription Video on Demand' (SVoD) platforms like Netflix, threaten to swamp Sky TV.
This battle raises two pertinent questions for investors: How do we expect management teams to react to changing industry environments? And, how should we react as investors?
Because technology is disrupting an increasing number of traditional industries, it is right to expect management to continuously review their strategy in response to emerging threats. This means extra vigilance is required from investors also. Discussions with management regarding their intended responses are critical — along with close monitoring of delivery against these promises.
In the TV industry, the ownership of compelling content has become critical. Netflix and Amazon are increasingly creating their own Oscar-winning content, and production companies can stream shows directly to viewers for just $15 a month. These trends have been playing out for a number of years and in this context, Sky TV's response has been disappointing.
Sky TV's plan to latch onto Vodafone, as a potential lifeline, was clever, albeit defensive and last-ditch. The proposed merger would have allowed them to offer attractively priced mobile, broadband and TV packages and slow the pace of subscriber losses. The Commerce Commission's rejection of the merger took away this lifeline. While Sky TV may have a plan B, investors are left pondering what this might be. This reinforces the importance of investors (even long term investors like ourselves) responding quickly when industry dynamics deteriorate.
Note, we have owned Sky TV in the past but chose to exit our holding in our active funds in 2015.
Helping ourselves to another slice of Domino's
Terry Tolich, Senior Investment Analyst
You might think that share prices for large, well-followed companies would be relatively stable over a short period of time like a year, as investors would have a good idea of what the businesses are worth. However, nothing could be further from the truth. Over the past year, we have seen a swing of up to 55% between the highest and the lowest prices of the stocks on the ASX300 index.
In most instances, the underlying values of companies will have changed by a far smaller amount. Much of the volatility in share prices is due to investors focusing on short term factors that will ultimately have little impact on the long term value of a business. This means investors, like us, who take a long term view, can take advantage of these price swings.
Earnings reporting seasons are a rich source of short term noise that can set share prices swinging. In the recent Australian reporting round, portfolio holding Domino's Pizza provides a stunning example. With a 14% share price drop on result day you would be excused for thinking a disaster had befallen the company rather than it reporting a 31% jump in first half earnings and raising its full year profit guidance to 32.5% growth.
In the weeks leading up to the result, concerns about the impact on Domino's franchisees of a pending new wage agreement and allegations of franchisees underpaying staff had weighed on the share price. In our view, however, Domino's largely allayed these fears with information accompanying the result. We believe a lower than expected European sales growth rate, versus their full year guidance, was the likely culprit for the share price slump.
Domino's European team had a lot on its plate during the half including conversion of the acquired Pizza Sprint and Joey's Pizza chains and the ongoing roll-out of Domino's IT systems that have been integral to its Australian and New Zealand success. Consequently, we see the latest European sales result as nothing more than a blip in what remains a great long term European growth opportunity.
Our long term view of Domino's value remains largely unchanged — we were happy to take advantage of the market's short term focus and weakened price.
Furry children — the multibillion dollar pet industry
Chris Waters, Senior Investment Analyst
Pets are now wholeheartedly considered part of the family leading us to spend more on our furry family members to ensure they live better and longer.
In Japan, the average life expectancy for pets is up nearly 100% in the past 25 years; while Americans spent $61 billion on their pets in 2015, an increase of 25% from five years earlier. Back then our pets probably ate cheap canned food and slept outside — now they dine on filet mignon and sleep in bespoke beds. We are certainly spending more on our pets' health, as owners want healthcare for their pets that is almost as good as their own. It is now not uncommon for pet owners to spend thousands of dollars on their sick pet, even up to $10,000 for a hip implant.
Global pet ownership is increasing as both urban and middle class populations grow and age. Again in Japan, the number of cats and dogs now exceeds the population aged under 15. This growth in spend, as well as ownership, creates a great opportunity for companies catering to animal health. One such company in our international portfolio is Zoetis.
Zoetis is the world's largest producer of medicine and vaccines for pets — ranging from flea treatments to products for chronic pain and skin conditions. As it continues to invest in research and development, this pipeline of medicines should continue to grow.
Zoetis is also well placed to take advantage of another growth trend; a rising middle class and changing diets, especially in emerging markets, has increased demand for animal protein. Limited usable land and water means it is getting harder to meet this growing demand. Zoetis helps to improve the health of farmed animals and thereby increase the productivity of these farms that are the source of this dietary staple.
So while we may not all be buying $2,000 gem studded catflaps, we are spending more money on our animals so that companies like Zoetis will remain an investor's best friend.
LiveChat — talk to us without picking up the phone
By Fisher Funds
If you're in a hurry or have a simple question regarding your Fisher Funds investment, a quick and easy way to get help from us is to jump online and start up a LiveChat.
In the bottom right hand corner on any page of our website is a "Hello How Can I Help You" message — click on this and hey presto you will be connected with someone from our client services team.
Rest assured, you won't be talking with a "robot"– you will be chatting with one of our helpful client advisers (Johnny, Miles, Sophie or Sam) who will look after you over a keyboard chat. Whether you want to check your tax rate, ask about your investment options or update your details, we can cater for all types of questions — we can help you with anything about your Fisher Funds account.
We are always trying to improve our client service — the more you use LiveChat, the faster and better we will be at helping!
LiveChat is available on your laptop, desktop, phone or tablet. If you don't see this message on your screen, it means all of our LiveChat advisers are busy.
LiveChat next time you have a question for us. We look forward to chatting with you.