The one constant
If I told every potential client that the one constant they should expect in our investing relationship is the risk of loss, I doubt they would become clients. Yet it is probably the most important message that I could deliver, in order that their expectations are appropriate from the outset.
Markets can play mind games and as investors we spend a lot of time in a state of frustration and doubt, asking ourselves how we "coulda, woulda, shoulda" taken action to avoid loss. We would be far better to accept that we're going to spend a big chunk of our investing lifetime in a loss situation. And as bleak as that sounds, it is okay because over time, the good times prevail.
A presentation by former hedge fund manager and quantitative analyst Robert Frey charted 180 years of US stock market data and concluded that losses have been consistent over each and every decade and economic environment. Losses really have been the one constant across all market cycles. Frey concluded that in share market investing "you are usually in a drawdown state" (a drawdown is a decline from a historical peak).
Another analyst considered data on the S&P500 Index going back to 1927 and reached a similar conclusion.
This analysis found that an investor would have been sitting in a "loss situation" (with prices down from a prior peak) over 70% of the time. Not only that, but over the past 90 years, the market has been in a bear market (down 20% or more) almost a quarter of the time; and half the time, investors have been down 5% or worse.
S&P 500: 1927-2016
|Drawdowns||% of the Time|
|5% to 10%||12.8%|
|10% to 20%||13.1%|
|20% or Worse||23.1%|
*Monthly Total Returns
No wonder investors are seldom happy campers!
The problem is that while markets generally go up, they don't go up every day, week, month or year. Markets have historically been positive more than half the time (when considered on a daily basis) but there are a lot of negative days in between the positive ones.
Nobody can predict what future returns might be in the market, but it seems predicting future risk is relatively easy. There's always going to be some! Markets are going to fluctuate and we will experience losses (at least on paper, and for different periods — sometimes long, sometimes short). The more we can understand this phenomenon, the better prepared we'll be.
Big, positive returns are harder to achieve in this environment of low inflation and low interest rates. The scarcity of investments that offer 'reasonable' returns is leading investors the world over to accept more risk, ignore poor fundamentals, and overreact when things don't quite go to plan. Risk might be a constant, but we can choose how much we're prepared to accept.
Of course, none of this seems important this month because all our funds finished April ahead of their March closing prices. But this is precisely the time we should think about the potential risk and losses that we will experience in the future. It's easier to prepare for a cold winter when the sun is shining!
Managing Director | Fisher Funds
Highlights and Lowlights
- In New Zealand, Michael Hill International achieved sales growth across all its geographic divisions, with its fledgling Emma & Roe brand showing real early promise. Abano Healthcare gave better than expected guidance for full year earnings and late in the month received an indicative bid for its 50% share of Bay Audio at a price significantly above its book value. Having risen strongly in 2016, the EBOS share price took a breather this month.
- Our Australian portfolio again kept pace with the buoyant Australian market during the month. After we added to our position in Ansell last month, its price rallied a convincing 14%. Similarly CSG was up 11%, again following an increased weighting earlier in the year. Nanosonics was up 9% after reporting strong sales in the United States. Flight Centre (-10%) was weak after Qantas told investors that it expected route growth to slow in the future. Our research indicates that the areas affected are not relevant to Flight Centre. Toxfree Solutions (-7%) pulled back after a strong performance in February and March.
- On the international front, markets ended the month in positive territory and our international portfolio performed slightly ahead of its benchmark despite the impact of a stronger kiwi dollar. April heralds the start of the first quarter earnings season and a number of portfolio companies delivered good results. Expedia's share price reacted positively to strong growth in hotel bookings and a positive operating environment. PayPal's results reinforced the company's strong position in the payments area. On the negative side, Alphabet's share price fell slightly, despite reporting what we thought were strong results, as investors became pre-occupied with a very small revenue miss.
- A comparatively quieter month for news flow allowed fixed income markets to consolidate further in April. Yield-hungry investors, who have been starved of new corporate bond issues this year, returned to fixed income markets in their droves resulting in higher prices which benefited a range of investments in our fixed income portfolios. The Reserve Bank of New Zealand decided to keep the Official Cash Rate unchanged this month. This was a mild disappointment to fixed income investors who were hoping the recent rise in the NZ$ and a persistently weak inflation outlook would force the Bank to reduce the rate further. Our holdings in certain New Zealand government-issued bonds gave up some of their recent strong gains.
Your KiwiSaver portfolios
The greater fool
By David McLeish, Portfolio Manager, Fixed Interest
A negative yielding bond is a very strange thing. It is a bond that if held until its term matures, will return you less money than you paid. The result? A guaranteed loss. Now who in the world would make such an investment?
Funnily enough, a number of notable asset managers have recently been quoted saying they've been buying negative yielding bonds, and those who choose not to are the foolish ones. Make no mistake, these are not the (poor) investors who simply have to own these assets, like central banks who must hold such bonds as part of their foreign exchange reserves; or banks who need them to meet their liquidity requirements. These are asset managers who have a wide choice of investments to hold, the majority of which do not have negative yields.
There are a range of reasons, these managers say, as to why they expect to profit from such investments. But in essence they all rely on one thing — finding a greater fool who will buy their bonds from them at a higher price. We all know investing is about buying low and selling higher. But you really have to question an investment strategy that is based on buying an asset with a guaranteed negative return, in the hope that someone else is going to come along and accept an even more negative return from it.
These managers may be hoping that central banks will keep pushing interest rates further below zero. Or they may expect that everything else is going to be more negative (the sky falling scenario) so a little negative is a good trade. Hmmm.
Bloomberg now estimates that over 30% of all government bonds on the planet (more than $10 trillion in all) are trading with a negative yield. With this number growing by the day, you have to wonder just how many fools these asset managers think are out there.
Time for Think Big round two?
By Ashley Gardyne, Senior Investment Analyst, International
Many New Zealanders remember the Think Big infrastructure programmes kicked off by our government in the early-1980s. The aim was to create jobs and help pull our floundering economy out of the doldrums. While the merits of these programmes are still hotly debated by some, Think Big did create a hive of activity and employment opportunities.
Fast forward 35 years and economic commentators and the International Monetary Fund are increasingly urging western governments to turn on the infrastructure spending tap to revitalise economic growth. With ever-increasing question marks around the ability of quantitative easing and zero interest rates to jump start economic growth, infrastructure may again be part of the solution.
Recent research by the Federal Reserve shows that US highway spending doesn't just increase GDP dollar-for-dollar, but there is also a multiplier effect, with GDP typically increasing by $1.5-$3 for every dollar spent on roading. The multiplier effect results from the new infrastructure lifting the productive capacity of the rest of the economy. Importantly, the research showed that the multiplier effect is even stronger during periods of low economic growth.
Across the ditch, Australian politicians are already enthusiastic about the potential for infrastructure spending to help spur growth and offset economic weakness emanating from the mining sector. While the Australian government is directly funding a significant number of infrastructure projects in areas like roading and rail, they are also looking to the private sector to fund and deliver this development.
An uplift in global infrastructure investment would provide a nice tailwind for a number of companies in our Property & Infrastructure Fund, but even with the status-quo, there are still good growth opportunities in infrastructure. Examples in our portfolio include toll road operator Transurban, which has a solid pipeline of roading projects in Melbourne and Sydney, or water distribution company Aqua America, with a long runway of water mains replacement work needed to repair ageing US water infrastructure. In a low growth world, there is a surprising amount of growth in infrastructure.
Airports or airlines?
By Murray Brown, Senior Portfolio Manager, NZ Equities
With the strong growth in tourists coming into New Zealand recently (not to mention healthy net migration as well), what is the best way to capture this growth in a portfolio — through owning shares in the airport, or in the airlines themselves? Auckland Airport or Air New Zealand?
Over the last two years, the share prices of both Auckland Airport and Air New Zealand have been buoyant, matching the surge in tourist flows. Auckland Airport has recorded 24 straight months of increases in international passenger numbers, with double-digit increases in tourists from many markets. Air New Zealand has expanded its route network and seat capacity over this same period, and has been able to fill these seats with additional passengers. The profitability of both Auckland Airport and Air New Zealand are at record highs.
The share price of Auckland Airport has outperformed Air New Zealand over this time frame and in fact, over almost any 3-5 year period (our investment time horizon). We believe most of this comes down to business models and is reflected in our STEEPP scores for each. Airports tend to have little competition, and earn revenue from multiple sources (airport charges, parking, retail and property rentals). Generally, the more airlines that travel to and within New Zealand, the better.
The converse is true for Air New Zealand — it earns its revenue predominantly from one source (airfares) and the fewer number of competing airlines that fly into and within New Zealand, the better it is for the company's profitability.
While airlines can be very good short term share price performers, our preference is to own shares in the airport (the same goes for our Property & Infrastructure Fund). Our view is that they have superior business models, their earnings tend to be less volatile and forecasting earnings is easier — resulting in a higher STEEPP score. Auckland Airport wins in our view.
King Kong vs Godzilla — coming to a screen near you
By Roger Garrett, Senior Portfolio Manager, International
Like the many giants that have graced our screens over the years, Netflix has well-articulated plans to take over the world (well — the online streaming world). From humble origins as a mail order DVD company, Netflix is now an internet giant with over 75 million global subscribers on its streaming television platform and plans to expand into 130 more countries.
Television is gradually shifting away from the traditional format and more towards streaming services that can be watched on any device — anywhere, anytime. Netflix has been at the forefront of this change and is now synonymous with streaming television. However Amazon, the world's largest online retailer has entered the fray, announcing its own monthly subscription service in the US. Amazon's service will be cheaper than Netflix and Amazon will be pitching this to its very large user base.
While lower price is one thing, in television, content is king. Good programmes and movies attract new customers; and companies are spending large. Last year Netflix spent $4 billion (or close to 70% of revenue) on content. Many in the industry have started producing their own content, such as Netflix's House of Cards, further increasing costs.
But as Amazon has shown in the past, it is not afraid to spend money to win market share.
So can Netflix prevail or will it be another business flattened by the Godzilla that is Amazon? We think it is still too early to pick a winner here, but continue to keep a very close eye on both companies. Less than half of US consumers subscribe to a streaming video service and the rest of the globe is yet to be conquered. With the average American watching almost five hours of television per day, there may be room for more than one winner.
However it plays out, this battle between these two giants will be worthy of the silver screen.
Even bad strategies will perform well
An abridged article by Corey Hoffstein, Newfound Research
Asset management can be a frustrating business. What is supposed to work in the long run can often go wildly against you in the short run. Worse: what is supposed to not work in the long run can go through periods of exceptional performance, adding insult to injury when you're underperforming.
Even deeply entrenched strategies, like "buy cheap and sell expensive" can go through periods like the dot-com bubble that can make the most devout follower question his religion.
We believe that knowing you will have to stomach short term volatility is a pre-requisite for achieving long term excess returns. Volatility in short term performance is necessary for the long run outperformance opportunity to exist.
Just as a strategy that seems sure to outperform in the long term (like buying cheap stocks) must sometimes underperform, a strategy that looks certain to fail in the long term (like buying expensive stocks) must sometimes outperform.
Our hypothesis is simple: if any investment approach is viewed as an easy way to outperform, then more investors will do it. More investors using the same approach means more capital will chase the same opportunities, which will drive up valuations. As valuations increase, future expected returns will decrease, causing the opportunity to disappear.
Outperformance is not about choosing the right strategy, like "buy cheap stocks". It is about having the discipline required to continue to follow the strategy in the face of short term underperformance. Many investors can buy cheap stocks, but it takes discipline to hold them long enough to enjoy the gains, especially when the cheap stocks are becoming cheaper in the short term.
For an investment approach to have long term expected outperformance, it has to be hard to stick with. The phrase, "if it were easy, everyone would do it" rings true.
By Manuel Greenland, Senior Portfolio Manager, Australia
The acronym "IPO" refers to an Initial Public Offering, the process by which shares in a company are sold to investors for the very first time. Conceptually there are two parties in an IPO; the issuer, being the company selling new shares, and the investors who buy the new shares. However, because issuers do not know how to best market their shares, an important intermediary emerges in the form of the investment banker, who ultimately profits by taking a fee for selling the company to investors.
As investors we recently considered buying shares in an Australian IPO. An investment banker explained to us that as we don't buy shares in every IPO, we had a slimmer chance of getting the shares we wanted in "the good IPO's". Our investment process is disciplined; companies must meet our investment criteria; and we don't seek to buy shares in new companies just because investment bankers ask us to. While our investors have profited from those IPO's in which we have participated, we were surprised at the idea that there could be "good" and "bad" IPO's, which prompted us to do some research.
We analysed all the Australian IPO's from the beginning of 2014 to late April. Around 40% of these had delivered a greater than 15% annual rate of return from their IPO offer price. So it seems that on average IPO's have been, well, rather average. In contrast 70% of the IPO's in which we have invested have delivered annualised returns above 15%, with particularly pleasing performances from portfolio holdings Medibank (37%) and Link (52%).
Upon reflection we are pleased to be known as choosy investors who participate only in IPO's which suit our investment approach. Recent experience suggests that IPO may in fact now stand for "It's Probably Over-priced"!
Managing your KiwiSaver account
Do you know where your KiwiSaver money goes?
You may have read several articles last month about the large number of KiwiSaver members who don't know what is happening with their hard-earned savings. Research found that:
- 77% of KiwiSaver members didn't know what their KiwiSaver account would be worth when they retired
- 27% didn't know what type of fund their KiwiSaver account was invested in (cash, conservative, balanced, growth, etc)
- 31% had never reviewed the type of fund they had invested in to see if it was appropriate
- 14% didn't know who their KiwiSaver provider was
It's not the first time these types of statistics have been published and unfortunately they're not too surprising. We only have to look across the Tasman to see why playing detective with your KiwiSaver account matters.
It is estimated that there is $17 billion of "lost super" in Australia. That is a staggering amount of wealth without a home. Some of that belongs to New Zealanders who've lived and worked over there but it still begs the question, why would you not care about money you've worked so hard to earn?
Sure, retirement may seem like a long way off, but it pays to devote a little bit of time and interest now, as mistakes now can be costly over time:
Lax tax — Are you on the correct tax rate? No one likes paying more tax than you need to. You can double check your tax rate on our website. If your current tax rate is incorrect, you can amend it at any time by completing this form.
Pick up your $521 — For every $20 you contribute, the Government will give you $10 up to a maximum of $521.43 — this is known as the member tax credit. Too many people don't maximize this. It's the closest thing to "free money" so don't leave yours lying on the ground. If $10 a week doesn't motivate you, perhaps $24,507 will. That's what $10 per week adds up to over 47 years (joining at 18 and contributing until 65).
Lazy money — We all picture a lifestyle in retirement where we can attack our bucket list. But retirement can be more expensive that many retirees expect, reinforcing the importance of making your savings work for you. Have you reviewed how your money is being invested? Take five minutes and run through our questionnaire to see if you're on the right path.
Our team is here to help you to make the most of KiwiSaver. We're only a phone call or an email away.
$521 — yours for the taking!
It's now less than two months until the end of the KiwiSaver year so it's a good time to see if you are on track to make sure 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). Now that's free stuff worth having!
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.