Meditations for investors
By the time you receive this newsletter, the American election will be done and dusted and life will have returned to semi normal.
It will be semi rather than fully normal because after an ugly campaign focused on the personalities rather than policies of two unpopular candidates, the election aftermath will be like nothing we've seen before.
There will be a semblance of normality because, as we've previously stated, no elected President — whatever their majority or popularity — can make wholesale changes or implement drastic measures that will derail the orderly progression of the US economy. There will be plenty of time for the world to get accustomed to the new American President.
Apart from the US election, investors have had plenty to occupy their minds in recent months, with anticipation of US interest rate hikes providing enough angst to stop markets making any real headway. There's been new news on all manner of things, lots of company goings-on and plenty to keep investors glued to their screens. But little that has been actionable or market moving.
With this market backdrop, I was interested to read a summary of Marcus Aurelius' Meditations. Sometimes in frustrating markets like we're in now, investors can question their investment philosophies and be tempted to take action, any action to get things moving along in the right direction. Nobody likes limbo and prolonged uncertainty, but that's what we've got, and we might continue to have for a few more months yet.
There's a lot in Aurelius' meditations for investors that might be useful right now, to avoid straying from time-tested investment approaches:
- You aren't in control of much. You can't control other people and how they act. All you get to control is how you respond. As an investor, you are in control of very little. You don't decide when and how the Fed raises rates. You don't decide global economic output, profit margins, exchange rates or inflation. You don't get to control how other investors around the world feel about the future or what they think next year's earnings will be for any single company. You are, by and large, at the whim of the markets. Sorry. You get to control how you respond to each of these events. You can make rational or panicked decisions. Count the short list of things you can control and let go of the rest.
- Nothing ever really changes. Markets are made up of people, and despite our best efforts to understand ourselves, we haven't ever changed. We are given to manias and panics, to speculation and greed. We think that what just happened is going to be what happens forever, despite decades of history that shows us otherwise. Markets cycle and economies cycle and that isn't going to change.
- You can endure this (or you won't). This is Aurelius's version of "this too shall pass". Whatever is going on in the markets, the economy, the world, we'll either come out the other side, or we won't and it's all over anyway. These are your two outcomes: the economy and markets recover from the next big thing, or they don't.
- Be indifferent to what makes no difference. This is the best advice any investor can receive. It is simply too easy to get information. Company earnings, revenue projections, economic data, inflation, Fed meeting minutes, opinion polls, name your poison. There is enough data to assemble any conceivable narrative. Bearish? You can support it. Valuations, earnings declines, too-high profit margins, a long-in-the-tooth bull market cycle. Bullish? Sure! Wages are going up, inflation is subdued, interest rates are still low, consumers are feeling good, unemployment is low etc. Whatever you want, you can find it. Of course, none of these things make any difference to you as an investor. This information is interesting, but it's not actionable. It makes no difference. Be indifferent.
Managing Director | Fisher Funds
Highlights and Lowlights
This month we share how each investment portfolio is tracking, including some of the highs and lows direct from our investment team.
A personnel update
As you know, Murray Brown, our New Zealand Portfolio Manager, announced his retirement recently. We are thrilled to have found his successor after a comprehensive search. We are not able to identify him just yet but we can tell you that he is a Kiwi, with extensive market experience and a great investing pedigree. He is excited about continuing (and even improving) the great performance track record of our New Zealand funds and will be returning to New Zealand early in the New Year.
October was a difficult month for New Zealand stocks. The NZX50 fell more than 5% in October and is down 8% from its September high. Although trading updates from New Zealand companies have generally been solid, increasing global interest rates have seen increased caution towards the New Zealand market, particularly by foreign investors who had been attracted to the high dividend yields on offer in New Zealand.
Mainfreight's performance was a highlight in October bucking the prevailing trend with its share price up 4.6%. This strength came on the back of a recent investor day, where they showcased their international growth strategy and provided a solid trading update. The trading update highlighted they are tracking well so far this year, with strong performance in New Zealand and improving results in Europe, Asia and Australia.
October saw a continued rally in mining stocks on stronger commodity prices, and continued weakness in demand for the shares of companies offering reliable earnings and cash flows. New portfolio addition Rio Tinto was among the best performing mining shares, and Nanosonics continued its strong run after a solid earnings report. Wisetech Global similarly remained strong. Previously strong performers like Ramsay Healthcare, our outdoor media names, Bapcor and Dominos were weak as share markets showed increased sensitivity to the share price valuations of growth companies.
A top contributor to returns for the International share portfolio was Microsoft (+5.7%) which announced an above-consensus earnings result, with momentum in their Intelligent Cloud revenue. Banco Santander (+12.5%) also outperformed the market's expectations for the third quarter in a row, with strong growth in its interest and fee income while keeping costs relatively flat. As well as Banco Santander the financial sector, and in particular US Banks, were strong in the third quarter with JPMorgan Chase and Bank of America up 5.7% and 7.2% respectively — increasing inflation and economic growth has the market expecting a rate hike by the US Federal Reserve in December which perversely may be good for bank earnings. On the downside, Nestle S.A. had a tough month falling 6.6% after it reduced fiscal year organic growth guidance. AB InBev, the global brewer, slid 11.1% after announcing poor performance from its Brazilian operations. All eyes are on the result of the US Presidential Race and its effects on market volatility across the globe.
A stoking of global inflationary fears caused fixed income markets to fall (yields to rise) last month. Our fixed income funds have been prepared for such an eventuality, so pleasingly they outperformed in this challenging market. Inflation is no friend of fixed income. Should the expectation of consumer price rises continue to build over the coming months it should be expected that central banks will look to both reduce stimulus and in certain cases raise overnight interest rates. This would likely result in a rise in the yield of fixed income investments (bond prices to fall) during this period.
Your KiwiSaver portfolios
A mine of opportunity
By Manuel Greenland, Senior Portfolio Manager, Australia
We like investing in companies with sustainable competitive advantages, or "economic moats". Moats allow a company to earn higher profits in good times, and avoid financial distress when conditions are difficult. Companies with moats can usually determine their own destinies, rather than having their performance dictated by things outside their control.
In the short term, the fortunes of mining companies are tied to changes in the prices of the metals they dig up and sell. So can a mining company have a moat? We think it sometimes can. Those miners with the lowest production costs earn higher profits in the good times, and remain viable when metals prices are weak. Analysing cost advantage is key for the moat investor looking to invest in a mining company.
Size is important. The cost of a mine does not change much with its size, so larger mines produce more for a given cost. The amount of metal per tonne of rock dug up is called the "grade". Higher grades offer greater sales potential. The ease with which miners can extract valuable metals from rocks is referred to as the metallurgy. Simple metallurgy means lower production costs. Finally, having mines close to customers reduces transport costs. The best miners are large, work high grade deposits with simple metallurgy, and are close to key customers.
Australia has a large mining sector, but only a few of the miners meet our quality criteria. During September we added Rio Tinto to our portfolio. The business has among the lowest production costs in the copper and iron ore markets, and has been a great profit generator over the long term. Changes in the global economy have improved the prospects of an upturn in demand for metals going forward, creating an attractive earnings outlook for the best quality miners.
Are property syndicates a reach too far for yield?
By Ashley Gardyne, Portfolio Manager, Property & Infrastructure
With interest rates on term deposits languishing near 3%, many investors are tempted to take extra risk for a little more yield. In late 2007 it was possible to get a 6 month term deposit yielding 8% p.a. Today that sounds pretty good; if you could get 8% p.a. in the bank you would jump at it.
However, back in 2007 many investors felt compelled to reach for a few extra percent by investing in finance company debentures. We now know that the extra yield wasn't worth the risk — an extra 2% interest isn't much help if you ultimately lose your hard-earned savings. While hindsight is 20/20, the same type of risk-taking behaviour is becoming increasingly evident in the current market.
Money is currently flooding into property syndicates, with volumes more than doubling in 2016 compared to last year. Many property syndicates offer what appear to be attractive "forecast" pre-tax yields of 7% or more. They are accessible to the general public, with minimum investments as low as $25,000. While many of these syndicates own quality properties, like large supermarkets or shiny new CBD office buildings, there are risks to be aware of.
Syndicates are typically exposed to a single property and often to only one tenant, creating a vacancy risk when the lease expires. These syndicates often have high debt levels and the yields advertised are based on current low interest rates. If interest rates were to rise, dividend distributions could fall significantly.
A potentially bigger consideration for investors is how to exit if you need liquidity. Many property syndicates have no fixed term and require a vote of 75% of unit holders for the syndicate to be wound up. Even when the syndicate is liquidated, there can be significant costs and no guarantee investors will get their initial capital back.
When lots of money is flowing into any asset class, it pays to heed Warren Buffett's advice: "be fearful when others are greedy". Is reaching for that extra bit of yield really worth the risk?
Plan for tomorrow (not for today)
By David McLeish, Senior Portfolio Manager, Fixed Interest
According to figures recently released by Westpac Institutional Bank, New Zealand households are now more indebted (as a share of disposable income) than they have ever been.
This won't come as a huge surprise to those of you who have been following the rapid rise of property prices here in New Zealand though. After all, falling interest rates have made greater levels of debt more accessible to us all allowing us to pay higher prices for all kinds of assets.
Statistics highlighting our indebtedness are eye-catching, and also a little alarming. But as the Westpac report pointed out, this does not necessarily mean a day of reckoning must soon be upon us. In fact, as long as this debt can continue to be serviced (interest and principal paid back when due) there is nothing to say this new debt record cannot be sustained or even grown.
Debt serviceability is where the rubber really meets the road. If this larger debt burden was only possible because of lower interest rates, as is our suspicion, then it stands to reason that rising rates could make things uncomfortable for those who have been doing this extra borrowing.
If you're wondering what on the horizon might cause mortgage rates to rise, you would be advised to keep a close eye on the inflation rate. This is because interest rates are simply a function of economic growth and inflation.
At just 0.2% over the last year, it might seem hard to imagine that inflation running too hot should be of any concern at this point. But adopting this backward-looking approach would be foolhardy in our opinion.
It is now highly likely that we have seen the lows in inflation for this cycle and looking further ahead we see tighter labour conditions, solid consumption, and surging construction helping to boost domestic inflation. The recent impressive rebound in factory prices in China also tells us we should now be preparing for a shift in the low inflation environment that New Zealanders have got so accustomed to. Now is not the time for complacency.
Are savers finally going to get a break?
Credit Suisse's Sean Keane and others consider a possible rethink by central banks
ECB Board member Yves Mersch delivered a very thoughtful speech in Germany last week which was titled "Low interest rate environment — an economic, legal and social analysis." The speech was strongest in its commentary around the impact that low rates of interest are having on parts of European society.
Mersch said that the ECB are "… aware that our measures are having side effects and we are keeping this in mind. We are keeping a very close eye on the effects that the low or negative interest rate environment has on banks, insurers and savers."
In saying this Mersch is echoing some of the concerns that the Bank of Japan has started to focus upon. In Britain also, Prime Minister Theresa May's recent speech to the Conservative Party conference appeared to criticise the Bank of England's policies.
"While super-low interest rates and quantitative easing provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects," the Prime Minister said. "A change has got to come."
Mersch also acknowledged the "current social dislocation" that is being caused by factors such as low growth and high unemployment. He observed that societal insecurity about things like the value of savings, the certainty of pension provisions and the economic outlook for the years ahead "are a breeding ground for populist parties and movements."
Mersch said that the longer they continued, "... it will be more difficult for us, as a central bank, to explain our monetary policy decisions, particularly if some groups feel discriminated against by our decisions, such as savers in Germany. We must take these feelings seriously."
A great many central bankers around the world will no doubt share Mersch's perspective on the current environment. As time passes and the negative impact of low and negative interest rates on sections of the community become more apparent, it seems likely that central banks will increasingly recognise these issues and become ever more reluctant to push rates lower.
Balance — our approach to responsible investment
By Frank Jasper, Director, Fisher Funds
The best businesses in the world are balanced. They balance the present with the future, the interests of their customers with the needs of shareholders and the pursuit of growth while maintaining good governance and sustainability.
We have always sought portfolio companies that understand and demonstrate a commitment to balance in how they've grown their business. We have encapsulated these principles as a formal policy of Fisher Funds, and in so doing, have made a firm commitment to only invest in companies that we believe are truly sustainable over time.
Our "Responsible Investing Policy" has been formally adopted and acts as a road map for the type of investments you can expect us to make in the future. You can read a copy of the policy on our website.
The policy contains two elements.
The first of these outlines sectors that we will not invest in at all. We will not invest in any company involved in the manufacture of military armaments or tobacco. This rule is rigorously applied, so even $1 of earnings from either source disqualifies a company from consideration for Fisher Funds' portfolios.
The second element is the integration of analysis of environmental, social, and corporate governance (ESG) factors into our investment process when we research a particular investment. This puts the onus on our investment team to consider ESG risks in an investment and to highlight where we believe that these risks exceed generally accepted standards of behaviour.
While this second element is somewhat subjective, we have established a benchmark for behaviours we believe are acceptable. These benchmarks are informed not only by our judgment but also by the views of our clients and will vary over time.
We are aware that everyone has different views on what sustainability means. Like a good company needs balance we are looking for balance in how we implement a sustainable investing approach. This policy is a start, we are sure it will continue to evolve over time and we'll keep you informed along the way.
Performing on the international stage
By David McLeish, Senior Portfolio Manager, Fixed Interest
A casual media observer could be forgiven for thinking that New Zealand businesses only ever fail when seeking to expand overseas. New Zealand companies are lauded when they sell part or all of their businesses to offshore interests (who can supposedly give them access to bigger markets and spearhead their growth) but companies that choose to go it alone and open offices and branches offshore are viewed with scepticism. Last week the sceptics seemed justified with Pumpkin Patch placed in voluntary administration and its hasty international expansion being at least partially to blame.
But it's not black and white. New Zealand is a small market and it is hard to imagine that large New Zealand companies can deliver long term growth for shareholders without an international strategy. Many of New Zealand's best growth stories, like portfolio holdings Fisher & Paykel Healthcare, Vista Group, Mainfreight and Ryman Healthcare, are becoming increasingly dependent on their international operations for growth.
Without the willingness to launch themselves onto the global stage, some of these stories may have played out differently.
Many of the failed international exploits of New Zealand's listed companies have resulted from acquisition-led expansion (The Warehouse), rapid debt-fuelled growth (Pumpkin Patch), or attempting to compete in competitive and cyclical industries with insufficient scale (Rakon). As shareholders, our focus should not just be on whether a company is expanding beyond its home borders, but rather, whether they have the right product, strategy and management team to compete.
We recently attended Mainfreight's investor day in Melbourne. We heard from management, inspected their new logistics facility in Epping, and took the opportunity to talk with the heads of their international divisions. As usual, we were impressed with the depth of talent in the business and their well-articulated strategic plans for growth in each market. Importantly, Mainfreight's disciplined and long-term approach provides us with confidence that they can grow their international operations profitably for many years to come.
Managing your KiwiSaver account
KiwiSaver — the Melbourne Cup of investing
The first Tuesday of November is associated with the race that stops two nations — the Melbourne Cup. This event holds magnetic appeal. Office sweepstakes are popular, spirits are high and many people place their yearly bet on a horse as we converge around TV screens to watch 24 of the finest equine specimens do battle over 3200m.
Horse races cover many distances and the 3200m is considered a true test of staying ability. Not all horses can go the distance; it's a race of patience, skill, hard work with a little bit of luck thrown in.
Just like the Melbourne Cup, KiwiSaver is a marathon, not a sprint.
How you jump out of the gates and race over the first 1200m really isn't that important. You want to time your run to reach the finish line and to do that you need to be in the best shape possible.
As the owner you've chosen us to prepare and nurture your KiwiSaver account. We are experienced, have a good track record of "finishing" and keep you in the loop as the race unfolds. It's a two way relationship though. You give us guidelines for how your money is to be invested and then we set about making it happen.
Our investment team performs the role of trainer. We set the strategy for how your money is invested over the long term and constantly monitor the underlying investments along the way tending them to bring out their best. Sometimes we may have to change tactics if conditions change. If the track firms up, then we can pin our ears back while at others times we might find the ground muddy and tough going, so patience is the key.
Investing, like training a horse, is about discipline. You have to put in the hard yards, do your homework and be consistent. We pride ourselves on preparation and our focus is very much on helping you go the distance!
Managing your KiwiSaver account
Fisher Funds TWO KiwiSaver Scheme awarded "Best value for money rating"
For the fourth year running, SuperRatings — Australia’s first and most respected superannuation research company — undertook a comprehensive analysis of all 25 of New Zealand’s KiwiSaver products covering in excess of $30 billion in savings on behalf of over 2.6 million member accounts. SuperRatings’ methodology has been designed to reflect each scheme’s “value for money” to accurately identify value for consumers. We are pleased to tell you that the Fisher Funds TWO KiwiSaver Scheme has been awarded the highest rating, Platinum.
The Platinum rating is described as the “best value for money” KiwiSaver scheme that is well balanced across all key assessment criteria — investment returns, investment methodology, fees, administration and advisory services in a robust, secure and proven governance/risk framework.