The big unknown and what does it mean for us?
Ever wondered why many so called experts have been getting forward looking predictions so wrong in recent times? It’s because most predictions and forecasts rely on learnings or analysis of our collective experiences from the past. And the world has never been in a phase like it is right now, which means much of this analysis and past experience is, well......useless.
There has been technology impacts, quantitative easing, sub-zero interest rates, all at an eye watering rate of change....there are lots of reasons why predicting the future has become difficult. Yet it remains popular as humans are innately programmed to make sense of the world around us.
But then there is China. Even the most accomplished experts have very little genuine understanding of the intricacies of the Chinese economy, and it’s precise impact on the world. Decoding China could provide insight into the future for global markets due the sheer scale of the China influence. You see size is at the heart of what makes China so different, their differing political and economic models are merely red herrings. China is the clear second largest economy in the world, and since introducing market reforms in 1978 has grown at an average 10% since that time, and 7% pa in more recent times. The China economy is bigger than Germany, Japan and the UK combined, which are the third to fifth largest economies in the world. Bloomberg reports that total capital outflows from China in a single year over 2015/2016 amounted to $1.7 trillion US dollars. These dollars have poured into equity markets, property and direct acquisition of companies in every sphere of the world economy. This has distorted traditional valuation methodology and markets almost everywhere. And very few other than the Chinese themselves really understand what is happening, or whether it will endure.
In New Zealand the commentary of what a change in levels of investment from China in New Zealand property and equities might mean is laden with fear. So what is the reality for New Zealand investors? First, there is added competition to buy assets, particularly those deemed to be strategic. Second, the Chinese have proven in many instances to take very long term perspectives, and therefore will value these strategic assets in a way not replicated by many westerners. Thirdly, the New Zealand Overseas Investment Office reports that in the first 8 months of this year foreigners acquired a total of $2.7b of New Zealand assets. This is from all countries and confirms that New Zealand represents the proverbial drop in the bucket to the $1.7 trillion USD annual capital outflows emanating from China. Therefore investors, rather than worrying what a reduction in Chinese investment might mean for markets, should be conscious that a slight redirection of additional capital towards New Zealand could have dramatically more impact than what we have witnessed to date.
The lesson here is to not try and second guess the Chinese impact, the political response, nor try to get rich quick. Investment fundamentals do not require a prediction of the future, nor a following of that which is fashionable. That is called speculation. Buying quality assets at fair prices and holding for the longer term may not sound exciting, but is bound to minimise disappointments in the future. And do be careful who you get your expert advice from.
Chief Executive | Fisher Funds
Managing your KiwiSaver account
It’s generally accepted that one of the most important decisions you can make about your KiwiSaver account, or any long term savings plan for that matter, is how your money is invested. The mix of cash, fixed interest, property, infrastructure and shares has a direct influence on the risk and reward you’re likely to experience in years ahead, and of course, your retirement pot.
This mix of investments should align with your investing horizon, appetite for ups and downs along the way and your goals. Sounds logical but from our own experience we know many members are not in the most appropriate fund for them. Typically, KiwiSaver members are invested too conservatively which means they are potentially missing out on thousands of dollars in retirement.
There can be many reasons for this. Some people are naturally risk averse so err on the side of caution. For people who have never invested before, choosing a fund is something they’ve never had to do before so it may be daunting. There’s also another group of people who have simply been defaulted into KiwiSaver (their money is regulated to be invested conservatively) and not actively sought out the most appropriate fund for them.
So what’s the cost of being invested too conservatively? Quite simply, a lot. And this is particularly evident over the longer term.
Over the long term, the power of compounding returns really works for you. This is where you not only earn money on what you have saved but also on your investment earnings along the way. Even a small increase in the average annual return on your savings makes a significant difference to the value of those savings when you retire.
In the following example, employee, employer and government contributions are the same but the annual difference in return is 2%. Now, over one year 2% may not sound like a lot or worth worrying about but it’s over the long term through the power of compounding returns that 2% turns into some serious moolah; in this case more than $100K. $100K goes a long way and can make a big difference to your retirement plans.
Of course, it’s important you are comfortable taking on some extra risk in order to be rewarded with higher returns. The longer your investment timeframe, the more you may be comfortable with an investment strategy that consists of more growth assets, such as shares. We think growth assets are important, as most KiwiSaver members have a long time to save for their retirement. Historically, investing in growth assets has produced better long term returns than investing in other asset classes, minimising the impact of inflation over time on your savings.
However, if you are nearing retirement or saving for a first home, you may want to have a more conservative investment approach. Income assets such as cash and fixed interest typically produce more stable returns in the short term.
If you haven’t revisited how your KiwiSaver account is invested recently, there’s no better time than now. Take the first step and complete our investor profile questionnaire.
Results are simulated in this chart. This analysis assumes an investor starts saving on 1 June 2016 at age 23 with an annual salary of $35,000. Their salary rises steadily at 3.5%pa until at age 65 they retire. Of this salary they contribute an after-tax 3% to their KiwiSaver scheme and their employer contributes a before-tax 3%. The employer’s contributions remain subject to contribution tax at current rates (see ird.govt.nz). KiwiSaver Member Tax Credits of $521.43 per year are received throughout each period. No withdrawals are made.
Two investment return assumptions are presented. One is an assumed return of 4% after tax and fees each year. The other is an assumed return of an additional 2%, making a total return of 6% after tax and fees each year. All portfolio amounts are shown in today’s dollar terms.
By presenting portfolio amounts in today’s dollar terms, we have stripped out the impact of inflation from the results, so as to compare purchasing power at retirement with today’s prices for goods and services. Inflation is assumed to average 2%.
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 share market delivered another strong month in September, making it nine months in a row of positive performance, adding 1.8% and taking its gain to 15.0% for the year. The New Zealand portfolio returned 1.5%. Once again Fisher & Paykel Healthcare led the way with strong support from Vista Group International, whose share price was up 9.2% for the month. The stock was sold down heavily into the end of August as it fell out of the NZX50 index and we took advantage of the weakened share price to add to our position. Michael Hill was the biggest drag on performance for the month, (down 7.0%), after the company fell out of the ASX300 (Michael Hill is also listed on the Australian share market). Similar to Vista we took advantage of the reduced share price to add to our position.
The Australian portfolio was essentially flat for the month but ahead of the market which was down 0.6%. The portfolio’s out performance was broad across most major sectors of the Australian sharemarket. Wisetech Global was particularly strong as investors digested the long term growth potential of the business. The portfolio benefited from not owning low growth telecommunication heavyweight Telstra which was weak after it cut its dividend. Long-time holding Tox Free Solutions was strong as management outlined a medium term growth plan for the stronger and more diversified group. Ramsay Healthcare remained weak as investors struggled to find a front on which the business was not facing a threat to earnings.
The International portfolio performed in line with the benchmark during September, returning 1.04% versus 0.98%. The slight outperformance came from stock selection within the Industrials and Materials sectors.
The top contributor to returns during the month was biopharmaceutical company AbbVie Inc. Energy stocks Exxon Mobil and BASF SE performed well with the rebound in oil prices, up 7.4% and 10.7% respectively. The largest detractor to performance was Apple Inc after the market was disappointed post the launch of the new iPhone X; the stock was down 6%.
Global fixed income markets took a breather this month, following a period of strong returns since the start of the year. Both the broader market and our portfolio registered small negative returns in September. We saw a shift back to growth assets and away from safe havens in response to renewed optimism of tax reform in the U.S. and geopolitical tension fatigue.
The renewed sense of the optimism surrounding the U.S growth outlook helped propel our corporate bond holdings higher this month, allowing our international fixed income portfolios to outperform. Despite a steady reduction in our holdings of corporate bonds over the past quarter we remain overweight in such assets for the time being.
Your KiwiSaver portfolios
“I see your XYZ Growth fund has been the best performing fund over the past year so I want to invest all my funds in this please. Then when that slows I will move over to another fund”. Sound familiar?
I couldn’t tell you how many times I have heard this over the years but it would be a lot. I can even put my own hand up and say I have done this as well It’s only natural isn’t it?
It’s human nature to look at an investment that’s been running hot and think that the out performance can continue into the future. Buying an investment that had an outstanding year and selling an investment that underperformed the market sounds like a smart move. Unfortunately, doing the complete opposite of what I just described is actually the better move. We’ve all heard the saying “Buy low and sell high,” but why do most of us buy high and sell low?
The truth is that the market, especially over the short term, can be random and unpredictable. Research* has shown that the average investor is missing out on 3.5% every year because they have a tendency to react to the latest moves of the market, rather than holding tight. A great example of this was last year around the US Presidential elections. As soon as Donald Trump was elected President, we witnessed a small number of investors jumping out of growth funds and into more conservative options driven by fear markets were going to crash. As we know, the crash never eventuated. In fact share markets did the opposite and performed strongly so those investors who panicked or thought they could predict the market missed out on this run.
At Fisher Funds we are passionate on getting our investors into the right strategy. Understanding your goals the timeframe you have to meet them and your appetite for risk us provides us with an appropriate starting point to create your investment strategy. This normally means an investment portfolio made up of a range of funds covering the main asset classes, providing a mix between growth and conservative investments and sensible diversification. Not only that, we will do our best to make sure you stay committed to your chosen strategy, regardless of any volatility or uncertainty that we know will exist from time to time.
So next time you find yourself wanting to buy yesterday’s winners or trying to predict the markets next move, stop and remember that while chasing returns can feel good in the short term, more often than not it is a strategy that will not pay off over the long term. So stay true to your strategy and we’re here if you need us.
*DALBAR Annual Quantitative Analysis of Investor Behaviour Report 2015
Ecommerce is causing tectonic shifts in the retail sector — squeezing the profitability of traditional retailers, while driving growth for others. Before our recent trip to Europe we spent a lot of time researching successful European retailers like H&M and Inditex (owner of Zara) and leading online players like Zalando and ASOS (who now do free delivery and returns in New Zealand). On our trip we met a number of online and offline retailers, gaining some new perspectives and getting a better understanding of who the winners and losers may be.
Only a few years ago retailers argued that clothes shopping was an experience people enjoyed; so much so that the need to try clothes on and get the right fit would provide protection from online competition. We now know this isn’t true. First, free delivery and now more enticingly free returns, means your home can become the fitting room. This has driven the rapid growth of European online retailers like Zalando and ASOS. If online retailers can take care of delivery and returns for less than it costs to operate a store infrastructure (leases, store fitout, staff costs etc), then it is profitable for them and more convenient for customers. Fashion chain H&M already makes more than 25% of its sales from ecommerce in some of its mature markets. People will increasingly buy apparel online and retailers need to adapt.
Our portfolio company adidas is doing well, with on-trend product that is highly desired by consumers and a rapidly growing ecommerce platform. If you have product customers want, you can choose where you sell it — potentially keeping your best product to sell on your own website, and selling the rest to department stores. This creates a challenge for traditional department store chains who essentially retail products made by others. As most of this product is now available on websites like ASOS, Zalando or Amazon, the margin for simply being a retailer is under pressure.
Even in this changing world, clothing retailers can do well if they are nimble and embrace technology. Zara is a great example of this. Unlike traditional retailers that design and manufacture most of their merchandise at the start of the season, Zara make a fraction of what they expect to sell. They wait to see what is selling well in store, what competitors are selling, and what is popular on social media platforms. Zara then designs, manufactures and ships this product to store within six weeks. This speed and responsiveness to trends results in much less discounting of unsold stock at the end of season and a higher margin on each garment. Being fast and flexible is becoming a requirement for many apparel retailers.
As consumers increasingly look online to shop for clothes, it is the online malls like Zalando, ASOS and Amazon that are attracting the most eyeballs. Consumers value the ability to access multiple brands in one place, with a wide range, fast delivery and free returns.
While the world of retail is changing, there can still be attractive investment opportunities among companies that embrace this new environment. Portfolio company adidas is well positioned, with a strong product line-up and a rapidly growing ecommerce business. Amazon is the largest online apparel retailer in the US, and we are increasingly seeing brands turn to them to expand their online reach. While not currently in the portfolio, we also see both H&M and Zara as potential investment candidates in the physical retail world.
“Kicking the can down the road.” “Never put off for tomorrow, what you can do today.” “You may delay but time will not.” “When there is a hill to climb, don’t think that waiting will make it smaller.” And my new favourite. “Stop talking. Start walking.”
A quick google on procrastination will bring up hundreds of quotes imploring us to deal with the hard things today and stop putting them off. The aging of the New Zealand population and our ability, as a nation, to afford New Zealand Superannuation is one of those hard things. And it is hard. It is requires difficult trade-offs that affect people’s lives but just because it’s hard it doesn’t mean we can put off thinking about it.
Unfortunately putting off thinking about it seems to the policy that has been universally adopted by our politicians. The recent election gave us the chance to reassess each party’s position on superannuation.
Labour and New Zealand First support the status quo — no change to the entitlement age for New Zealand Superannuation. This means that New Zealand Superannuation, as a per cent of Gross Domestic Product (GDP), will rise from 4.8% in 2016 to a projected 8.4% of GDP by 2060. To put this in context we currently spend about 6.2% of GDP on healthcare. When you factor in that over the same timeframe we’ll be moving from four tax payers for every superannuitant to two tax payers for every superannuitant, more tax or reduced services are on their way. There’s only so many ways you can cut the cake!
National’s policy is similarly anaemic with the age of New Zealand Superannuation entitlement beginning to slowly lift from 2037. This reduces the scale of the problem but is hardly a transformational solution.
The problem with not dealing with the looming superannuation challenge is that it is unsustainable for the New Zealand economy. And the problem with unsustainable things is that they are unsustainable. One day the rules on New Zealand Superannuation will be changed. The longer it’s left in limbo the more disruptive that change will be for us all.
What can we do as Kiwis, tax payers and voters? Unfortunately, there are only two things we can do. Firstly, we can, and should, talk about superannuation and engage in the political process to ensure our voice is heard.
Ultimately, though, it’s the decisions each of us take today with our own savings that will determine the quality of life we will have as we get older. By regularly saving into our KiwiSaver accounts or other managed funds we can be much better prepared should there be changes to New Zealand Superannuation. The politicians may procrastinate. We don’t have to. “Stop talking. Start walking.”
Our team makes the podium
We are proud to say our Client Services team were a Finalist in the recent CRM Contact Centre Awards in the Banking and Financial Services category. One of our team Sarah Langton took out one of the Most Outstanding Customer Services Representative awards. Our team also received a silver award in the Live Chat category.
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