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Fisher Funds TWO KiwiSaver Scheme — Your Monthly Update

November 2015

Feelings, nothing more than feelings

Are you feeling good after October's market rally? You should be, because it was a decent bounce and it was pretty much across the board. Mind you, investors badly needed it after the bruising August and September endured by all. Those two months were so bad for global share markets that the September quarter earned the title of "worst quarter since the global financial crisis".

Global markets climbed to near record highs in October as central banks again worked to allay concerns about the health of the global economy. While the U.S. Federal Reserve had been heading towards a rate hike, it held off in September which helped markets regain their poise after a horrible August. Mario Draghi, the head of the European Central Bank, also helped to bolster sentiment by hinting at more quantitative easing to come, and the People's Bank of China cut interest rates for a sixth time in just 12 months which helped brace the critical Chinese economy.

In stark contrast to earlier months, it was hard to ignore the joie de vivre that took hold of markets in October. European markets enjoyed their strongest gain since July 2009, lifting around 8% in October, and Japan's Nikkei rose nearly 10% which was its best showing for a couple of years. October was the best month for US shares in four years, and the buoyancy was even felt down under with both Australasian markets bouncing from their lows (albeit slightly behind other markets).

Other positive drivers in October included a US profit reporting season with few negative surprises. Excluding the energy sector, 341 companies in the S&P500 Index reported an average profit growth of 6.1% and revenue growth of 1.5% — not stellar, but not scary either. October was also a big month for deal-making with $US544 billion worth of mergers and acquisitions announced during the month, excluding the potential merger of Pfizer and Allergan which in itself could be worth $US125 billion.

So, a good month and probably an overdue bounce given that sentiment and confidence had plummeted to rock bottom levels.

It may well be though, that a lot of the euphoria has gone straight over the heads of many investors, who are still smarting over the volatility of recent months. This is not unusual; as humans we are conditioned to react in precisely the wrong ways following extreme experiences. The September quarter was certainly extreme in terms of testing the mettle of most investors.

One commentator recently wrote of some investors' tendency towards "breakevenitis". This phenomenon occurs following a period of fear or pain (such as falling markets) where the pain becomes etched in our minds, leading us to expect more to come. When the fear or pain ends (e.g. when the market rebounds) we breathe a sigh of relief, sell as soon as prices get back to where they were before the pain, and thank our lucky stars that we "didn't lose anything".

But of course, in investing, it is dangerous to make such forward-looking decisions based on backward looking experiences or information. It is almost guaranteed to lead to missed opportunities, and in investing, missed opportunities often lead to money lost.

Regardless of how we feel about October's bounce, there is bound to be another period of volatility like we experienced in the September quarter. While all investors like to believe that we react rationally in our investment decisions, feelings do play a big role.

Carmel Fisher

It is important to understand the effect that our own emotions (particularly fear and greed) can have on our investment choices. If we are relieved to have had the opportunity to sell in October, we might have allowed ourselves to become too fearful. If we regret not buying in early September, should we kick ourselves for not buying when prices were at their lowest before they rebounded? If after October's rebound we are feeling "pleased-but-not-ecstatic", in the realisation that more negative times might lie ahead, we've probably got it about right.

Carmel Fisher
Managing Director | Fisher Funds

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Your KiwiSaver portfolios

Highlights and lowlights

Highlights and Lowlights

  • In New Zealand, Summerset again upgraded its earnings forecasts for the 2015 year on the back of stronger than expected third quarter sales of new and existing occupation rights to units at its retirement villages. Fisher & Paykel Healthcare had an investor day where it reiterated the strong growth in its addressable markets for its innovative respiratory and sleep apnea products. The share prices of both companies were up strongly during the month. Sky TV downgraded earnings expectations for the 2016 year on the back of increased costs of delivery of its new services, increased programming costs and the likelihood of increased churn of subscribers after the Rugby World Cup.
  • A positive month for the Australian portfolio as the broader share market followed commodity prices upwards. Nick Scali showed strong same store growth and solid progress on new store openings, while Domino's Pizza upgraded their targeted number of European stores when they acquired Sprint in France. ResMed's run of healthy constant currency sales growth continued with a first quarter increase of 15% but the headwind of adverse foreign exchange movements reduced its bottom line earnings by 3% on a year ago. Investors took a dim view of Credit Corp's outlook as a global competitor entered the Australian debt-ledger market, and peer Collection House started showing some signs of stress.
  • Our international portfolio enjoyed the broad based market bounce in October performing in line with its benchmark. After a sustained period of out performance, our emerging markets exposure underperformed over the month due to stock selection across several sectors.
  • The corporate bond market rebounded strongly in October, providing a solid boost to the returns of our global.


Successful recipes for fast food operators

By Murray Brown, Senior Portfolio Manager, New Zealand Equities and Manuel Greenland, Senior Portfolio Manager, Australian Equities

Successful recipes for fast food operators

Over the last year we've added Restaurant Brands and Domino's Pizza to our New Zealand and Australian share portfolios. While both have performed well, the fact that they operate in the challenging fast food sector is where the similarities end. The companies are pursuing quite different strategies to grow their businesses.

For some time Restaurant Brands was heavily reliant on its KFC store transformation process and other divisions (Pizza Hut, Starbucks and Carl's Jr) were struggling. However, through strong and experienced management we identified that Pizza Hut and Starbucks were being navigated towards a strong and sustainable lift in margins. The purchase of the sole competing Carl's Jr operator in New Zealand last year meant that it had a realistic chance of turning this operation around as well.

Last month the company announced profit growth of 14% for the half year, with all four divisions making a positive contribution. Having transformed its current stable of brands, the company is also examining other potential profit streams including Taco Bell, Asian fusion foods and possibly other coffee chains to add to its portfolio over time.

In contrast, technology is the key to Domino's Pizza success. One example is Domino's new mobile app that allows consumers to monitor the status of their online order as their pizza is prepared and delivered. Engaging consumers with information helps them to make purchase decisions, so the app has increased sales volumes. In addition, the app allows Domino's management to monitor every step of the order-to-delivery process, and to identify opportunities to improve service levels and reduce wasteful expenses. This will enable Domino's to deliver pizzas more quickly in the future, which will likely result in improved sales. While one might view Domino's as a simple pizza business, technology is increasingly the core strength that is driving higher sales and lower expenses, setting this successful company apart from its peers.


What’s all the worry about?

By David McLeish, Senior Portfolio Manager — Fixed Interest

What’s all the worry about?

We all know that stories of doom and gloom sell newspapers. But at the risk of registering my lowest readership on record, I'm going to swim against the tide and suggest that if all we have to worry about is whether the U.S. Federal Reserve (Fed) is going to raise its cash rate by 0.25%, then things really can't be all that bad.

Admittedly, it has been a while since the Fed embarked on a hiking cycle. Truth be told, the last time they did, the smartphone was still years from being invented, John Paul II was the Pope, and England held the Rugby World Cup!

This new cycle should not be frightening. In fact, history tells us that financial markets are adept at taking these events in their stride. In the year following the start of four of the last five Fed hiking cycles, every major global asset class registered strongly positive returns. The only exception was in 1994 when an over-eager Fed caught investors off guard with a premature move — something the Fed's new forward guidance specifically aims to avoid.

One small step back towards normality should be seen as a leap in the right direction. The Fed's decision to keep lending rates at near zero in the aftermath of the financial crisis did its job — it helped save the U.S. economy from collapse. But that economy is now growing at a respectable 2.2% and there is simply no longer a need for this emergency interest rate policy.

Those in favour of postponing a hike argue it is too risky to forge ahead while the U.S. economy is still finding its feet and that recent emerging market turmoil has offered us a glimpse into the future should higher U.S. borrowing costs become a reality. But the truth is there is no such thing as the perfect time for the Fed to act and setting policy for someone else's economy has never proved to be a wise decision.

Embrace the now immortal words of All Blacks coach Steve Hansen — worry is a wasted emotion.


Population growth or productivity? China’s dilemma

By Mark Brighouse, Chief Investment Officer

Population growth or productivity? China’s dilemma

Last week Chinese officials announced the impending removal of the one child policy which was introduced as a temporary measure back in 1979. While China is the world's most populous country, its population is forecast to decline from 2030 onwards.

This might seem a long way off but the composition of China's population is already creating challenges. Due to low birth rates over the past 35 years the number of people in the 25 to 49 year old category is also forecast to decline from next year, placing greater pressure on income earners.

In 2013 the government partially relaxed the one child policy by allowing two children per family if one of the parents is an only child. The jury is still out on whether a change in behaviour has resulted and the reasons why remain relevant.

It appears that as incomes rise the cost of staying at home goes up. It is not uncommon for three generations of families to live together supported by the youngest. When one partner stops work to raise children there is an effect on lifestyle and Chinese couples are in no hurry to do that. The country might get some population growth but it might come with a reduction in the workforce and lower household incomes.

So achieving population growth can sometimes come at the expense of productivity and may not be the panacea that policy makers hope. Nevertheless, share market investors have been looking ahead at least nine months and thinking about companies that stand to benefit from this change. The share prices of property development companies and companies providing any of the various paraphernalia of raising children have seen their share prices rise.

Only time will tell whether this policy change addresses the decline in population as desired; however, it should mean some improvement in the outlook for New Zealand's key exports: dairy and tourism. China is our largest trading partner and we know that small changes in their demand can have a big effect on New Zealand exporters.


What we're reading

What we’re reading ...

Rather than sharing what we have been reading, we've gone to the Oracle himself and listed 10 must-read books as recommended by Warren Buffett.


When Warren Buffett started his investing career, he would read up to 1,000 pages a day. Even now, he still spends about 80% of his day reading.

He once said in an interview that "My job is essentially just corralling more and more facts and information, and occasionally seeing whether that leads to some action. We don't read other people's opinions. We want to get the facts, and then think."

To give an inkling of some of Buffett's reading highlights, we've listed 10 of his book recommendations over 20 years of interviews and shareholder letters.

  1. The Intelligent Investor by Benjamin Graham.
    When Buffett was 19 years old, he picked up a copy of this book and said it was one of the luckiest moments of his life, because it gave him the intellectual framework for investing.
  2. Security Analysis by Benjamin Graham and David L. Dodd.
    Buffett said this book gave him "a road map for investing that I have now been following for 57 years."
  3. Common Stocks and Uncommon Profits by Philip Fisher.
    Buffett liked that in this book Fisher emphasises that fixating on financial statements isn't enough — you also need to evaluate a company's management.
  4. Stress Test: Reflections on Financial Crises by Tim Geithner.
    Buffett says that the former Secretary of the Treasury's book about the financial crisis is a must-read for any investor.
  5. Jack: Straight from the Gut by Jack Welch.
    In his 2001 shareholder letter, Buffett endorsed this memoir of longtime General Electric executive Jack Welch.
  6. The Outsiders by William Thorndike Jr.
    In his 2012 shareholder letter Buffett praises this "outstanding book about CEOs who excelled at capital allocation."
  7. Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks.
    Buffett sent Microsoft founder, Bill Gates his personal copy of this "favourite book", a collection of New Yorker stories by John Brooks.
  8. Where are the Customers' Yachts? by Fred Schwed.
    In 2006, Buffett described this as "the funniest book ever written about investing. It lightly delivers many truly important messages on the subject."
  9. The Little Book of Common Sense Investing by Jack Bogle.
    In his 2014 shareholder letter, Buffett recommended reading this book over listening to the advice of most financial advisors.
  10. Poor Charlie's Almanack edited by Peter Kaufman.
    This collection of advice from Charlie Munger, vice-chairman of Berkshire Hathaway Corporation, got the ultimate shout-out in Buffett's 2004 shareholder letter.


Managing your KiwiSaver account

$1,000: the magic number?

$1,000: the magic number?

Over the years when we've asked people how much money they think they need to live on in retirement the most common answer we hear is $1,000 per week. It's a nice, round number. It feels like a good amount of money to have at your disposal. But have you stopped and thought about what it actually takes to achieve that?

If we consider the example of someone retiring today who is single and living alone, they will receive $355.68 per week (after paying tax of 17.5%) from NZ Super. That leaves a shortfall of $644.32 to fund from their savings and investments.

At today's interest rates (we've assumed a flat 4% which is at the high end of what's currently available) they would need approximately $1,015,000 of savings in the bank to generate income of $644.32 per week.

Not only does this example reinforce just how much of a difference the regular, guaranteed pension payment makes to our income in retirement, it highlights how much you may need to save for the retirement lifestyle you desire. We're obviously at a low point in the interest rate cycle so this will move around over time.

Saving a million dollars may sound daunting at first but as the table below illustrates, from a little comes a lot. You can change your contribution rate at any time by simply notifying your employer.

Age Income (before tax) Savings at 65 (in today's dollars) based on contributions of
    3% 4% 8%
20 $45,000 $341,154 $392,835 $619,348
30 $100,000 $407,404 $480,714 $788,899
40 $125,000 $287,633 $339,503 $558,418

These examples are simulated. Employer contributions of 3% are made and subject to contribution tax at current rates. Member tax credit contributions of $521.43 per year are received throughout the saving period and no withdrawals are made. Returns of 5% after fees and tax each year are assumed. Inflation of 2% is assumed.


2015 Investment Roadshow highlights

2015 Investment Roadshow highlights

For those of you who couldn't make it along to one of our roadshows, or you enjoyed it so much you want to watch again, highlights of the key topical segments are now available to view online.


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