The power of small wins
Last month New Zealand hosted the World Masters Games 2017. It was a massive event with some 25,000 participants competing across a myriad of sports. Participants came from all walks of life, and ordinary folk could find themselves competing with professional athletes and past Olympians, and sometimes winning (like our very own adviser, James Paterson, who won gold for his football skills).
I've spoken to several participants who just loved being part of the event and celebrated their results with disproportionate glee — "it was great, I finished 18th of 24 in the field"!
Markets displayed similarly disproportionate reactions during April, with relief rallies on insubstantial news.
The first round of the French election saw a broadly balanced result with centrist Emmanuel Macron winning 24% of the vote and the far right anti-Euro Marine Le Pen winning 21.3%. The real battle is still to be fought in the May 7 election, but investors were happy to celebrate nevertheless.
Similarly, President Trump announced his much anticipated tax plan, which contained few surprises and is unlikely to survive in its current form; but investors were nevertheless pleased to have something to react to, and react they did (positively).
Along with political developments, the US earnings reporting season and economic data releases in the US, Europe and Asia have been broadly neutral of late, but they've had a positive bias and these 'small wins' have resulted in an optimistic market tone and a return of the 'risk-on' trade.
While the market's optimism might look excessive based on the underlying news, we should not underestimate the power of small wins.
Pulitzer prize-winning journalist and author, Charles Duhigg said, "small wins are exactly what they sound like, and are a part of how keystone habits create widespread changes. A huge body of research has shown that small wins have enormous power, an influence disproportionate to the accomplishments of the victories themselves. Once one small win takes place, forces are set in motion that favour another small win."
Perhaps we should feel optimistic about the markets' optimism; it sure makes a pleasant change from the sense of impending doom that markets have struggled to shake off in recent years. If what we are experiencing is a shift away from the macro focus (interest rates, politics and geo-political issues) towards a bottom-up micro focus (considering the merits of individual investments) we should feel gleeful indeed.
As you know, the Fisher Funds investment team spends little time second-guessing big picture trends. They are almost impossible to pick ahead of time, becoming obvious only with the benefit of hindsight. We know that we can't control macro events, but we can control the construction of your portfolios to ensure that your funds are given every opportunity to perform.
We enjoyed a number of small wins during April, and actually towards the end of the month, we had some rather large wins as several of our international portfolio companies announced earnings results that the market rewarded with price gains. Long may the market remain optimistic and focused on the things that really matter!
Speaking of things that matter, we look forward to seeing many of you during May as the Fisher Funds 2017 Investment Roadshow hits your town. This is my last roadshow and it will be great to catch up with a lot of clients, many of whom have attended all of our roadshows over the past fifteen or so years. I'd like to take this opportunity to thank you for your continued support and for making my time at Fisher Funds a brilliant chapter in my life. I wish you every success for your future. As a fellow Fisher Funds client, I know you are in very good hands.
Director | Fisher Funds
Managing your KiwiSaver account
Find out if you need to do anything to claim your annual Government contribution
One of the great benefits of KiwiSaver that you will not want to miss out on is the annual government contribution of up to $521 — known as the member tax credit or MTC.
Just in case you didn't know, for every $20 you contribute to your KiwiSaver account you'll receive $10 from the Government, up to a maximum of $521.43 per KiwiSaver year, which runs from 1 July to 30 June. In order to get the full amount, you must have saved at least $1,042.86 this year, but even if you haven't contributed this much, you are still eligible to receive some of the $521.
There is still plenty of time to top up your account to get your $521. Read more about how to top up and make sure you do it by Tuesday 27 June 2017.
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 part of the portfolio was down 0.1%, underperforming the market, with the NZX50 continuing its very strong start to the year, rallying a further 2.5% for the month; its strongest rally since the hefty 6.5% rally in July last year. Michael Hill was down 14% and was the largest drag on performance after they released reasonably soft third quarter sales growth, especially for Australia and New Zealand. The threat of Amazon entering Australia has also pushed down retail stocks generally. On the flipside, Fisher & Paykel Healthcare was our top contributor for the month, up 4%.
The Australian part of the portfolio was ahead of the Aussie market over April. Key technology holdings Seek, CarSales.com and Technology One benefited as investors looked at the sector again after a long period of chasing mining stocks. CSL continued its strong run with the share pricing emerging growth opportunities in many of its business lines.
Coca-Cola Amatil downgraded its earnings guidance in response to persistently weak Australian demand for carbonated soft drinks.
Our international companies delivered strong returns in April, rising by 3.3%. In terms of sectors, having less than the benchmark in Energy stocks helped returns, as did our stock selection within Industrial stocks. Stock selection within the Information Technology space, which had a strong month, offset these gains. We were rewarded by being overweight in the Eurozone, but were hurt by our stock selection within the United States.
Top contributors to returns included Alphabet (Google and YouTube) rising by 9.2%, reporting better than expected revenues and profits. Microsoft rose 5.8% during the month reaching an all-time high after announcing earnings which beat expectations. Detractors to returns included technology heavyweight IBM which reported another quarter of revenue declines, causing its share price to fall by 6.2%. Verizon Communications, Telstra Corp and United Rentals also had poor returns in a strong market falling by 4.1%, 9.6% and 10.7% respectively.
Fixed income markets posted another strong month of performance in April. Safe-haven assets, such as developed world government bonds, continue to see strong demand. However, it was our holdings in corporate bonds that were the star performers of the month. As prices of these assets march higher (and their yields fall) we have continued to reduce our holdings in them.
Our managers continue to be positioned for bond yields to rise (and therefore bond prices to fall). So when fixed income markets are strong, as they were last month, they will tend to perform worse than "the market". On the positive side, they too continue to benefit handsomely from the strong performance of corporate bonds — allowing them to still post strong returns for the month.
Your KiwiSaver portfolios
Driving change in the automotive industry
By Mark Brighouse, Chief Investment Officer
We are at a significant point of change in the role of automobiles in our lives. After 120 years of steady development, centred on an internal combustion engine and a skilled human driver, we are on the verge of sweeping change in both these aspects. Plug-in electric vehicles will replace petrol power and autonomous driving technology (cars that drive themselves — please also read Ashley's article on this) will render the human driver superfluous.
The first is with us now, and while the latter may take longer to arrive, many of the driver aids that improve safety are already available. The potential benefits to society are enormous and include greater use of renewable energy sources, not to mention a reduction in the 1.25 million global road traffic deaths each year.
Share market investors have recognised this sea change and have largely chosen to invest in this theme via listed US electric car company Tesla. Buying interest has this month driven (no pun intended) the market value of Tesla above those of traditional car makers like Ford and prompted fresh comparisons of new versus old.
The financial comparisons are very much one sided:
|Ford Motor Company||Tesla, Inc|
|Market Capitalisation||$45 billion||$52 billion|
|Years in Business||113 years||13 years|
|Number of vehicles sold in past year||6,633,000||86,000|
|Revenue||$151 billion||$7 billion|
|Pre-tax profit||$4.6 billion||-$674 million|
Tesla has lost money for every one of the past five years while Ford has been steadily profitable over that time. Clearly, when investors buy a share in Ford they are doing so on the basis of the company's track record, established capabilities, assets and profits. In the case of Tesla they can only be buying based on the hopes and dreams promoted by the company.
It might well turn out that traditional car companies are unable to adapt but even then, it can't be guaranteed that Tesla will be the one dominating the new world. It is hard to be objective because new gadgets are exciting. Tesla makes sure customers know about their amazing features via frequent software updates that tell drivers what is new each time they turn their key!
At Fisher Funds we try to look beyond the excitement and look at second order effects to consider what these trends mean for other industries surrounding innovation. The scope of those affected, either positively or negatively, by changes in the auto industry is wide: electricity utilities, service station chains, toll road operators, rural pubs, insurance companies, emergency services, spare part suppliers, parking providers and public transport infrastructure to name just a few.
In any event, it is an exciting time of change, but the investment considerations go way beyond just whether to buy into the hottest new trend or development.
And while we're talking about cars ...
By Ashley Gardyne, Senior Portfolio Manager, International Shares
Much has been made of the development of self-driving vehicles, as much because few can really believe the idea of being driven to and fro with no human intervention. We have a keener interest than most because our portfolio company, Alphabet is joining the rush to commercialise self-driving technology in competition with the likes of Uber and Tesla.
Alphabet has been quietly working away on self-driving cars for about a decade, and has just announced plans to scale up its on-road testing — it has already logged over 3 million driverless miles on US roads — with real customers. Alphabet's self-driving division, Waymo, is putting 500 Chrysler minivans on the streets of Phoenix and inviting locals to join a trial that would give them free rides to and from work, or anywhere else in the city.
While there are lots of hurdles to clear before self-driving cars hit the road en masse, the technology is progressing quickly. With this rapid progress, automobile manufacturers like BMW, Toyota and Fiat Chrysler are taking an increasing interest and self-driving cars may appear on our roads sooner than many think.
The implications of self-driving cars are vast. Who needs a car park close to work if your car can drive you there, park itself miles away, and pick you up later? The average motor vehicle is used only 5-10% of the time. Self-driving taxi fleets could materially increase car utilisation and significantly reduce the number of cars in each city. Why own a car when you can just order one, at a fraction of the cost of a traditional taxi, and it will appear at your door?
Transportation in the US accounts for over 15% of the average household budget, for an asset that is used only 5% of the time. Freeing up the household budget from the cost of owning and running a car would allow consumers to spend more in other areas, like entertainment and travel. It would also free-up daily commute time which would positively impact productivity, not to mention quality of life.
Inflation — a false signal
By David McLeish, Senior Portfolio Manager, Fixed Interest
I'd hazard a guess that inflation isn't something most people spend a lot of time thinking about.
That's probably because on a daily basis inflation in New Zealand is quite hard to spot. For example, at the mid-point of the Reserve Bank's inflation target, a $5 coffee should see its price rise less than 1 cent each month — something even the most frugal of us would struggle to pick up.
Inflation, however, plays a far bigger role in our lives than its daily impact on the cost of goods and services might suggest. This is because rising inflation, and economic growth, typically drives up the interest rate at which we borrow (i.e. mortgage rates) therefore impacting on our disposable incomes to a far greater extent.
So should you be concerned that rising 'headline' inflation, which reached a six year high of 2.2% last quarter, might soon cause mortgage rates to jump? We think not and here's why.
Taking a look under the hood of the current inflation rise, it's evident that almost all of the increase over last quarter's numbers came from outsized contributions in two sub-groups — transport and food — both of which were impacted by one-off and temporary factors.
The well documented recovery of the oil price is now behind us, and should its price remain unchanged from here, its effect will likely reverse course and become deflationary (the opposite of inflation) next quarter. As for food, this notoriously volatile sub-group was affected by weather and supply issues in certain vegetable categories — something we'd expect to naturally unwind over the next quarter or two.
More broadly, we see little reason to believe that inflation in New Zealand can be sustained at or above current levels. Wage growth remains low, excess capacity across the labour market is still evident, and it looks as though the consumer and housing markets are again slowing.
As we see it, inflation is unlikely to push up the cost of borrowing any time soon.
The king of the mountain cometh
By Terry Tolich, Senior Investment Analyst, Australian Shares
Amazon is a phenomenal company. Since its founding in 1994 it has transformed the retail landscape and is now the fastest growing retailer in the US while traditional retailers are closing stores. Outside of the US, the company has progressed from shipping goods from its US website to having a direct presence in 11 countries.
Recently, after months of speculation, Amazon confirmed it will launch in Australia. Its direct introduction into Australia will be via Amazon Marketplace. This is an e-commerce platform that anyone can use to retail their products, with Amazon charging a commission or service fee.
Amazon's likely strategy will be to use Marketplace to learn which product categories are popular with Australian online shoppers. It will then provide its own competitively priced offering in these categories. Once it has its logistics infrastructure in place, we'd expect the launch of Amazon Prime to quickly follow. This is a subscription service (US$99 per year) that gives Amazon's shoppers free one or two day shipping on most items and other perks (notably video streaming). Prime customers become very loyal to Amazon and spend far more than other customers. About half of US households have a Prime membership.
What does this mean for Australian retailers? Initially, probably not much. Ultimately, however, price competition will increase as Amazon Marketplace grows and Amazon introduces its own product offerings. Amazon founder Jeff Bezos sees the profits of traditional retailers as an opportunity to take market share and has famously said, "Your margin is my opportunity". Once Prime is available in Australia, traditional retailers will need their own online shopping capability with quick delivery and/or convenient pick-up or else they will be forced to adopt Amazon Marketplace or die.
We are very cognisant of the longer term threat posed by Amazon's imminent Australian arrival. But despite media assertions that Amazon will be the death knell for all Australian retailers we believe there will be some survivors who we expect may perversely become stronger as a result of Amazon. Those retailers whose competitive advantage takes them out of Amazon's target range will be able to maintain largely unassailable positions. The two largest consumer-related positions in our Australian portfolio, Domino's Pizza and Carsales.com, are outside Amazon's field of fire and we remain confident in their future performance.
* B-side of T-Rex's first UK #1 single, "Hot Love", released February 1971
The skewedness of stock returns
An excerpt from a New York Post article by Ryan Vlasteclica
Stock picking is notoriously difficult, with almost no investors able to develop portfolios that can outperform the market over the long term. But few may realise just how hard it is to find a winner.
While the overall stock market tends to rise over the long term — posting better gains than both bonds and cash, albeit with greater volatility — the bulk of this move is driven by a few names that do very well, essentially lifting the overall market.
The average stock, when taken individually, not only underperforms when compared to the overall market, but also may even lose out to Treasuries (bonds).
That assessment comes care of Alpha Architect, an investment firm that looked at research by Hendrik Bessembinder, a professor at Arizona State University.
According to the data, which spanned the time period between 1926 and 2015, only 47.7% of all monthly stock returns were larger than the one-month Treasury rate. A mere 42.1% of stocks beat the return of T-bills.
According to Bessembinder's data, a very limited number of stocks do the heavy lifting for the market overall, and only one in 10 stocks posted a return that is twice as strong as the overall market. Bessembinder claims a mere 10 companies account for 16.26% of all the wealth that has been created in the stock market. As in, ever.
Fisher Funds comment: As dedicated stock pickers for nearly twenty years, we are not at all surprised at the results of this research. Obviously we don't pick stocks at random, and research can improve our odds of picking winners; but in all our portfolios we have experienced the phenomenon of a handful of stocks contributing the lion's share of returns. Unfortunately, it is rarely obvious at the beginning of a period which of the portfolio are going to be the best performers over time. Hence our insistence on diversification and constant monitoring of every portfolio position!