Major turning point
We are all guilty of it. Delaying buying or selling something today because we hope it will be cheaper (or dearer) tomorrow. The trend is our friend we hear. These thought processes are what drive many markets, in that many trades are driven by either fear or greed, rather than intrinsic value. “I must buy that house today as it will be more expensive tomorrow”, has been a major driver of the last five year expansion in Auckland house prices — when in effect it is still the same asset. It will be interesting if house prices fall 10% in the next year, whether buyers celebrate because houses are cheaper, or hold off because they think prices might fall further. Markets, you have to love them as an insight into human behaviour.
As investors, the decision to buy or sell is in the forefront of everyone’s minds right now given global share markets are enjoying close to the longest bull run in history. The outcome of the New Zealand election similarly has investors trying to guess whether the time is right to buy or sell. Many will answer that they will wait to see the trend that emerges, and get on the back of it. Others will do nothing, but feel immensely pressured and tense by whatever trend emerges.
The New Zealand election certainly ended up being a far more engaging process than almost all pundits predicted at the beginning of the campaign, and in the end had all of the drama and theatre that only Winston Peters can deliver in forming the new coalition. But what now for investors? What should I do with my KiwiSaver account? Should I stay in growth assets? Should I move my assets offshore?
We believe investors should consider three things when making these decisions.
The first thing to remember is that long term investors should ignore short term market goings on. It is pure luck trying to pick the top or bottom of markets. There are plenty of studies that prove time in the market and making sure you get the full benefit of compounding returns over the course of years is key. The best advice is to ignore all of the noise in between.
The second thing to consider is that markets are quite efficient at processing existing information. However it is the unexpected or the contra view that is often mispriced and drives the major market moves. Don’t think you can beat the market if you get your information from the newspapers — you have the same information as everyone else.
The third thing is that rather than fear the big market swings, embrace them. Make sure your investment selection matches your true risk profile and investment horizon, and view every market move as a real opportunity.
So what should you do as a result of the New Zealand election? With certainty we can say that there is going to be an elevated level of political, social and potentially economic change. That represents risk and this risk is not yet priced into markets, as we still don’t know the exact policy direction of the new government. This risk is most likely to be seen through movements in the value of the New Zealand dollar. For us that means focussing on our currency management and hedging strategies while this uncertainty exists. New Zealand economic growth, long term interest rates and inflation are strongly influenced by global factors and volatility in these is less likely as a result of the election.
The key message though is to resist the natural human bias to act. This is especially important when the newspapers are full of advice about what is going to happen. We know that the future is rarely that clear. Instead, we believe that patience is truly a virtue. Don’t try and predict the future, but prepare for it by having the right long term investment strategy in place. That way as markets go up and down, governments change and the unexpected happens, you can relax knowing that your strategy is right and your investment goals will be met. A clear strategy allows you to enjoy your investing experience rather than live in fear. This is all way easier said than done.
Chief Executive | Fisher Funds
Managing your KiwiSaver account
You might not know that we have a service called GlidePath, that is available both to new and existing members of the Fisher Funds TWO KiwiSaver Scheme. GlidePath automatically allocates and adjusts how your KiwiSaver account is invested to a fund or mix of funds that is appropriate for your age. It’s like having your KiwiSaver account on cruise control — Fisher Funds “changes the gears” for you.
So if you like the idea of a careful eye keeping watch over your KiwiSaver account while you get on with life, read on.
One of the most important decisions you can make about your KiwiSaver account is how it is invested. While we provide an investor profile questionnaire to help people think about their appetite for ups and downs, for many this is new territory. They’ve never had to make such a decision, especially for what is typically a very long time.
It’s not only when joining KiwiSaver that people need help, but we should review how things are tracking along the way and if the fund or mix of funds we’re in remains appropriate. While we all have good intentions, we know that most people don’t review their KiwiSaver account as often as they should, if at all.
That’s where the value of GlidePath really comes into its own. There’s no need to second guess the savings path you’re on or regularly review how your money is invested.
How does GlidePath work?
GlidePath automatically adjusts your savings every year from age 28 to deliver a smoother investing journey over the long term. When you are younger, you are in a position to accept more investment risk in exchange for potentially greater returns, because you have time on your side to make up for any short term declines in the value of your investment.
Younger people can therefore afford to have a higher proportion of growth assets. As you get closer to retirement though, it is sensible for most people to increase the level of income assets and reduce their growth assets, in order to have more stable returns.
GlidePath takes away the hassle of thinking about whether to change tack and by how much.
What’s in it for you?
- You’re always invested in a fund or mix of funds we believe is appropriate for your age
- Fisher Funds research drives your investment mix
- There’s no extra cost to sign up to GlidePath
- You can opt into and out of GlidePath at any time
- Annual confirmation of account changes
Is GlidePath suitable for everyone?
GlidePath does not take into account your personal circumstances and may not be suitable for everyone. For example, as it assumes you are saving for retirement it may not be right for members saving for their first home.
You can read more about online.
If you think GlidePath sounds like you, you can switch online at any time.
Your KiwiSaver portfolios: Highlights and lowlights
The New Zealand share market shrugged off any uncertainty caused by ongoing post-election negotiations delivering its strongest month of the year, with the headline NZX50 up 2.8%. Our New Zealand portfolio gained 0.5%, underperforming the index principally due to not owning market darling A2 Milk. Leading the way for our portfolio was Fisher & Paykel Healthcare up 3.7% for the month and recent addition, Xero up 11.3%. The cloud accounting software provider held its annual XeroCon London conference during the month and the attendees were up over 80% and they confirmed our expectations that UK subscriber growth continues strongly. Vista was the biggest drag on performance for the month, (down 9.0%), following some insider selling.
A strong month with the Australian portfolio return of 7.0% well ahead of the benchmark ASX 200 Index return of 5.1%. Both at the portfolio and market levels the strong performance was broad-based across sectors. A standout strong performance came from Wisetech Global as investors priced its increasing competitiveness in the third party logistics software space, while NextDC was similarly strong. Technology One however disappointed investors with an earnings downgrade. We visited the company and after spending a morning with the head of R&D we remain confident of the company’s long-term earnings power.
Global share markets were buoyant in October and our International portfolio enjoyed this positivity lifting 7.7% in line with its benchmark. The Information Technology sector was the best performing sector globally, gaining 7% in local currency as firms reported strong earnings and revenue growth. Technology mega-cap Apple led the way. On the back of good reviews and strong demand for its iPhone X, the share price was up over 15% in October. Other significant movers included Microsoft, Amazon and Intel, up 12%, 15% and 20% respectively. The depreciation of the Kiwi Dollar by over 5% against the United States dollar also boosted the portfolio’s returns significantly as the currency exposure is only partially hedged.
On the flip side, the health care sector was negatively impacted by a lack of progress with health care reform in the United States. It was a tough month for biotechnology and pharmaceuticals firms; Celgene was a stand-out poor performer falling 30% on weak reported earnings. Other healthcare stocks Merck, Roche and CVS Health were down 14%, 7% and 15% respectively.
The New Zealand Fixed Interest Fund had another strong month in October. The change of government has introduced a number of policy unknowns and we have made some portfolio adjustments to mitigate against these. Initial indications suggest that the more substantial policy initiatives are likely to cause inflation to move higher over the next year, without seeing the same economic growth. Given the potential for rising inflationary pressure and the impact this could have an on fixed income assets, we have reduced the level of interest rate exposure in the NZ portfolio — at least until further clarity can be gained.
The International fund had a good month, with our international bond managers posting solid results. The most notable drag on performance came from their foreign exchange holdings where returns were impacted the most by their short positions taken on the Euro against the Swedish Krona and the U.S dollar against a basket of emerging nation currencies.
Your KiwiSaver portfolios
A2 Milk has been ripping, up 390% since the start of the year.
The strong share price performance partly reflects a very impressive earnings upgrade cycle on the back of A2's highly successful entry into the Chinese infant milk formula market.
However more recently, the daily volume traded in the stock has exploded, especially the Australian listing. A2 was dual listed in Australia in March 2015. Initially the volumes traded were tiny. More recently the volumes transacted on the Australian bourse have been three times those traded in New Zealand.
This culminated on 1 November when the daily traded volume in Australia was more than six times the volume traded here. More importantly, the value of A2 Milk shares changing hands across both listings was almost NZ$300m. That equates to more than 5% of the company traded in a single day on basically no news flow. CLSA, a Hong Kong based broker, had downgraded the stock to underperform and the NZD rallied a little but apart from that, there was no actual news.
We looked back over history to see if there has ever been another NZ listed company that has traded as much as NZ$300m in a single day. In the absence of some sort of capital raise or placement of a block of shares we couldn’t find one. This is unprecedented.
This was intriguing to us so we dug a little deeper. When we look through which brokers traded the majority of the stock, it is dominated by low cost online or retail stock brokers in Australia and Asia. These brokers are the go to trading houses for day traders, high frequency traders and algorithmic trading. In other words, very fast money traders that are much less focussed on fundamentals than they are on momentum.
The point here is that even in New Zealand hot stocks are increasingly trafficked in by offshore fast money, day traders and algorithms. This significantly heightens risks and volatility both to the upside but also to the downside.
Our response to this type of fast money, hot stock trading, is to stick to understanding the fundamentals of the businesses we invest in. We will continue to invest in high quality companies with high quality management teams and sustainable competitive advantages that are trading at prices we believe are sensible. We’ll leave the day trading to the computers.
In New Zealand monitoring house pricing is virtually a national sport. Even a minor change can create as many media headlines as an All Black match result. The response is equally emotive with rising values and talk of an affordability crisis creating alarm and dismay to those on the sidelines, while having the homeowners watching their net worth soar. Of course any fall results in equal alarm. It’s no surprise given that Kiwi’s love their houses.
You might not know it but at Fisher Funds we enjoy the talk of property as much as you do. As well as having exposure to listed property assets though our Property & Infrastructure Fund, we have direct interests in commercial property. This forms part of the diversified portfolio for our KiwiSaver members.
Like we do when we invest in shares, we take a long term approach investing in property; owning a number of high quality retail, office and industrial properties that are occupied by well-known companies on long term leases. Our in-house team actively manages these properties. While our investment decisions are based heavily on physical factors such as location and quality; we also place great emphasis on quality of earnings from the properties we own. We avoid exposing ourselves to tenants who may not pay their rent dependent on discretionary spending, preferring instead suppliers of essential items such as food and clothing. This is to mitigate against the risk of a consumer spending fall that would impact retail sector, and flow on to industrial (including manufacturing and logistics).
So what’s the current outlook for the commercial property market and how does this relate to our beloved residential properties? Recent releases from Quotable Value have confirmed what those of us living in Auckland can see for ourselves, prices are soft and have fallen over the past year. The same can be said for the commercial sector. In fact we believe the slow down was seen in the commercial sector first. Regardless of which market ran out of steam first, for both markets a slow down changes the focus of the game.
At the height of the market, capital gains were the player of the day. With prices appreciating rapidly, the focus on rental yield tended to take a back seat. So with capital gains likely to hit the bench for a while it is the rental income that will provide the primary return for investors.
This is where it gets interesting as for a time it seemed as though the run on residential property prices was as unstoppable as an All Black forward pack. Of course rents did not rise proportionately to values, meaning yields have suffered.
This is where there is a key difference between the residential and commercial rental markets. Commercial property currently delivers a 5-7% yield depending on the specifics of the property where many residential properties are yielding closer to 2-3%. If we are right and capital values remain flat, that materially changes the outlook for the residential property market. Some caution is warranted.
Within our commercial property portfolio our focus is on ensuring the quality of our tenants and finding ways to add value to our existing portfolio. In a more challenging environment this will help us generate attractive returns. We remain comfortable with our game plan.
Artificial Intelligence: the latest buzzword capturing the imagination of businesses, commentators and future thinkers. It seems as though you can’t escape the term being hailed as the way of the future. One example of the ever trendy concept that is topical right now is robo advice. It has been featured in the news a lot lately, partly due to a proposed regulation change that will allow companies to offer personalised robo advice on investments, insurance and mortgages in New Zealand.
For a start, you may be wondering exactly what robo advice is: simply put you enter your personal financial goals and information into a computer programme and the computer comes up with a plan tailored for you. Make no mistake — the robo revolution is real and it is happening right now, but at the same time, it is somewhat bewildering because it is unknown and evolving so rapidly.
So what’s good about robo advice? Robos are disruptive because they change the speed, accuracy and supply of financial advice processed. This has the potential to make financial advice accessible to a greater number of New Zealanders, which sounds like a pretty good thing.
However, it does beg the question as to why financial advice isn’t accessible to people now?
The reality is it may be more accessible than many people realise and it’s not a process limited for those who have already built wealth. There are misconceptions that firstly to receive financial advice you must have a significant amount already invested before an adviser would take you seriously and secondly, it is expensive. Receiving good quality advice is worth paying for but it doesn’t necessarily need to cost a whole lot.
You see financial advice isn’t just about a full blown financial plan. It can be as simple as finding out what fund or strategy is right for you, finding out if you are saving enough or that you need to increase your contributions to meet your goals. These are all services provided at Fisher Funds at no additional cost.
You will hear more and more about the development of robo advice here in New Zealand over the coming years. Technology will no doubt enhance the delivery of advice and make it more accessible to New Zealanders which we should embrace. At the same time, there will be many who will continue to prefer the traditional face to face model of advice and that will ensure robo advice will complement, not remove the need for human financial advisers.
Don’t feel you have to wait for robo advice to arrive before getting the advice you may need today. We have a great team of advisers here at Fisher Funds that are here to help. You may have a personal relationship with an adviser already but either way, we encourage you to utilise the expertise they offer as I am confident this can add real value to your investment journey.
We can talk you through your options, share our insights based on what other clients just like you might have experienced, and we can suggest solutions to address the financial implications of your investment goals and whatever it is you are working towards. All while doing it with a human personal touch which you certainly can’t get from a robo advice platform.