Much ado about nothing
What an odd month we've just had. The markets were meandering along minding their own business when all of a sudden China burst onto the stage and said "BOO!" World markets got such a fright that they sold off for a few days, prompting media to reach into the archives and dust off fear-inducing headlines such as "Black Monday", "Markets in billion dollar bloodbath" and "Panic Selling Returns". The headlines, combined with breathless commentaries and images of anxious investors had the desired effect. Before long, investors were watching every blip and red arrow on screens around the world, wondering if this was a repeat of 2008 and 1987. Of course it wasn't, but it made for a horrible end to an otherwise ordinary month.
For me, the odd thing about August was that we already had a tumultuous July during which the volatile Chinese share market hogged the limelight. By the end of July, most reasonable people had realised that trading patterns on the Chinese share market are unfathomable and that Chinese shares are not at all an indicator of what is happening in the more important Chinese economy. So when the US share market reacted dramatically to an 8.5% fall in the Chinese share market and other markets followed suit, I thought: "What's going on!"
Commentators immediately blamed "concerns about China's slowing growth", citing poor manufacturing data as the catalyst. This was not new news — we've known that China's growth has been slowing for some time — and it was certainly not important or surprising enough news to prompt the market reaction that ensued. Rather, the wild last days of the month were sentiment driven and were not based on any negative fundamental news or developments.
As one analyst said, "At times the whole market became circular and reflexive in its response to events, creating a lead weighted spiral that saw markets haul each other lower as one responded to the performance of the other."
So what are we to make of it all? Firstly, this has been a correction not a crisis. Corrections tend to be short, sentiment-driven drops of 10% or more in a relatively short space of time. That's what we've had. Corrections are not particularly pleasant, but this is the sixth correction we've had since the bull market began in 2009, so we shouldn't be unnerved by it. In some ways it is good to get it out of the way because there has been a sense that investors have been waiting for a pullback as markets had reached the higher bounds of reasonable valuation.
Secondly, the volatility of recent weeks has been a brilliant reminder of the merits of buy-and-hold investing. Those who tried to trade this correction by selling high and buying low would have needed nerves of steel and perfect foresight. The market turning points were not at all obvious, and traders could easily have found themselves selling at precisely the worst time and then missing the best buying opportunities completely.
Thirdly, the market correction is not the only story of the last month. Other things have been going on that all long-term investors should be interested in. Consumers are still spending, jobs are being created and filled, and companies are growing their profits and paying dividends. We are in the final stages of earnings season and while few results have been stellar there haven't been any bombshells either. There is a bit of noise about slowing economic growth with some GDP forecasts being revised down, but it is growth nevertheless, and that's what we need if you are to meet your financial goals.
We look forward to seeing many of you during our Roadshow in coming weeks. I'm sorry that we can't visit every city centre, but we are always happy to chat by phone or email, especially when markets behave as they have in recent weeks!
Managing Director | Fisher Funds
Your KiwiSaver Portfolios
Highlights and Lowlights
- Chinese currency weakness and share market volatility had a negative impact on global share markets. The surprise devaluation of the Chinese yuan this month serves as yet another reminder that the world's second largest economy continues to slow its growth. The international share component of our portfolio performed better than the benchmark we track due to lower exposure to China and positive stock selection.
- Our New Zealand companies generally came through the results season in good shape with no major negative surprises. EBOS and Trade Me results were mostly stronger than expected. Trade Me has been spending money on upgrading its trading platforms and there are early signs that this spend is yielding results especially in its general items division. Weaker than expected subscriber numbers, although at the margin, hurt the Sky TV share price.
- The NZ gentailers were also front of mind during the month, with a sequence of major events keeping everyone on their toes. NZ's biggest electricity consumer, NZAS (Tiwai), revised its contract terms removing short-term risk to the sector, Origin sold its stake in Contact Energy for NZ$1.8b providing great value to buying shareholders (including ourselves), Contact Energy and Genesis Energy each announced intentions to close thermal power plants which dramatically removes the oversupply dynamics of sector, and finally results season saw Meridian Energy and Mighty River Power announce increased cash to shareholders via special dividends.
- The recent spike in share market volatility has again led investors to seek refuge in the relative safety of developed-world government bonds. The relative outperformance of such "safe-haven" assets this year is again proving many pundits wrong on their dire predictions for fixed income assets in 2015.
- With both reporting season and Chinese fears driving market volatility, our Aussie portfolio outperformed a weak Aussie market. Medibank Private distinguished itself with a solid maiden result, as did new portfolio addition MYOB. We've taken advantage of weak market conditions to increase portfolio weightings in both stocks over the month. Flight Centre surprised positively, proving its resilience in a difficult consumer environment. Seek and Veda both delivered on this year's promises, but disappointed investor expectations for next year, with subsequent share price falls.
Buffett’s latest acquisition
By Mark Brighouse, Chief Investment Officer
Last month legendary investor Warren Buffett celebrated his 85th birthday by making the largest ever acquisition for his investment company Berkshire Hathaway, paying $US37 billion for aeronautical parts company, Precision Castparts.
The acquisition provided an interesting glimpse into what, if anything, of Buffett's iconic investment style has changed as he has begun handing over the portfolio reins.
It is encouraging that new investment ideas are not the sole preserve of Buffett. Precision Castparts was 'discovered', researched and recommended as an investment by Buffett's likely successor, Todd Combs.
Precision Castparts is a somewhat uncharacteristic purchase as Buffett typically focuses on insurance, food, railroad and energy businesses. Precision manufactures parts for the aircraft industry such as turbine blades, as well as components for equipment used in the oil and gas industry. While Precision operates in an atypical sector, it nevertheless has a strong competitive "moat". Customers such as Boeing and Airbus have orders with Precision for thousands of planes for years ahead, and are unlikely to change suppliers of such critical parts.
Buffett is still buying great companies at reasonable prices. Precision's share price has languished this year because of concerns about currency headwinds for US manufacturers and a weaker oil price potentially leading to softer customer demand. Buffett has taken advantage of the market's lack of understanding and is purchasing the company at an attractive price given the quality of the company's earnings.
He still insists on buying companies with outstanding management. Warren Buffett needed only 30 minutes with CEO Mark Donegan to decide, in his words, that "the guy is fantastic." Buffett described his meeting as "seeing the girl across the room", and particularly liked Donegan's knowledge, passion and the fact that "he's as in love with his company as I am with mine."
Buffet gives credit for this acquisition to Todd Combs. History will tell if the Buffett approach will continue to live on at Berkshire Hathaway after he has fully handed over the reins, but early signs are promising.
Will Australia be lucky again?
By Manuel Greenland, Senior Portfolio Manager, Australian Equities
In 2011 Australia looked like its luck had finally run out. Both its economy and share market were stressed by fears of weaker prices for the commodities it sells. But in keeping with its long record of success, Australia defied sceptics and made its own luck, growing its economy and delivering positive share market returns. 2015 has seen a return of the same concerns of four years ago: softer commodity prices and fears of a weaker China. Is Australia as strong and adaptable this time around?
Resources companies are the most vulnerable because China is their major customer. Resources shares now comprise only 15% of the Australian share market as compared to more than double that in 2011. Globally competitive resource heavyweights, BHP Billiton and Rio Tinto, dominate today's resources sector. So exposure to the most vulnerable sector is lower than it was, and is in strong companies.
In many countries, low interest rates have tempted companies into taking on more debt. Australian management teams however have kept debt well below pre-GFC levels. Less debt leaves Aussie companies better positioned to weather difficult periods.
The Australian government is in a stronger position to support the economy than many of its global peers. Australia's government debt is five times lower than comparable countries, so Aussies can borrow and spend to stimulate their economy. With official interest rates at 2%, Australia's central bank also has more room to cut rates than any other large developed economy.
One development we like less is sensitivity to the housing market. Australians have borrowed heavily to buy ever more expensive houses, and the banking sector holds these same houses as collateral against huge loan books. A weaker housing market clearly presents risk.
So will Australia need to get lucky to face current challenges? Well, a little luck is always welcome, but Australia is better positioned to face these uncertainties than it was, and continues to prove its capacity to evolve and become stronger over the long term.
What we're reading: A large number of New Zealanders are ill prepared for retirement
This month we were interested in the results of a survey conducted by the Financial Markets Authority and the Commission for Financial Capability on New Zealanders 50+ and their expectations and experiences of retirement.
While KiwiSaver has helped raise awareness of the need to save for retirement, the results of this survey highlights this hasn't translated into more people actually making a plan for retirement.
Only 54% of non-retirees have a financial plan for retirement and of those that do only 28% have planned thoroughly. 42% have calculated what their expenses will be in retirement and 34% have worked out how much income they will need on top of NZ Superannuation. While most include basic costs like food, transport and utilities, fewer factor in travel, personal care or leisure expenses.
This low level of planning and detailed number crunching is further accentuated as only 11% of non-retirees say they have enough savings/investments to have the retirement lifestyle they want. A further 30% of non-retirees say they may have enough.
The experience of those already in retirement reinforces the reality of what it actually costs to live the lifestyle you want in retirement. While 28% of retirees have enough money to do all the things they want in retirement, 25% are only just getting by. The people struggling tend to be those who didn't have a plan and had no savings or investments to supplement NZ Super when they retired.
Of further concern to us was the mismatch between appetite for risk and expectations of return. While virtually all understood an investment with a higher than average return is likely to have higher than average risk, and know a chosen level of risk should align with your own circumstances and goals, 71% believe "most people" should choose lower risk investments. Despite this, only 24% had completed a risk profile questionnaire to understand the appropriate level of risk for them. New Zealanders 50+ also seem to have lofty return expectations, generally viewing a 5% return to be fairly low, 9% to be medium and 15% to be fairly high.
|Fisher Funds view: The survey is a wake-up call that many people still don't give retirement planning enough attention. It's never too late to start planning or to make changes to your current plan. As they say, "Forewarned is forearmed!"
Answering a few basic questions can be a good starting point. How long do you intend to continue to work for? How long do you expect to need your savings to last for? What do you want your retirement lifestyle to look like? What is your appetite for risk?
Our team is happy to chat with you about how we can help you answer these questions and get your planning underway.
A bird's eye view: Introducing Auckland International Airport
Senior Portfolio Manager Murray Brown explains what we like about New Zealand portfolio holding Auckland International Airport.
Auckland Airport will celebrate its 50th birthday later this year, having grown up alongside the city of Auckland on 1,500 hectares of freehold land in Mangere gifted to the company on its formation. This land was a gift indeed, allowing unrestricted growth over the last 50 years, with plenty of land still left over for many more years of growth. Beginning its life in what was once a remote part of Auckland; it is also not subject to noise restrictions that many airports around the world are faced with.
Today, Auckland Airport is by far the major gateway for visitors entering or leaving New Zealand. More recently, these visitors are arriving in increasing numbers with visitor arrivals for the year ended June 2015 up 6% on last year, compared to 4% over the previous five years. The mix of visitors is also changing. Chinese arrivals grew by almost 30% last year, and now surpass arrivals from more traditional markets like the USA and the UK. Moreover, the increase in passenger numbers looks sustainable to us with New Zealand becoming an increasingly desirable tourist destination and more airlines putting in more seat capacity from more distant cities to meet this demand.
The strong and sustainable growth in passenger numbers is the major reason we have Auckland Airport in our New Zealand share portfolios. Airports typically have many revenue sources: aeronautical charges, retail, car parking and property rent. Of these sources, the biggest driver of profitability is international passenger numbers. International passengers pay higher aeronautical charges than domestic passengers and also spend more on retail opportunities within the terminals. Asian tourists in particular spend more than twice the average of other travellers. These factors helped drive earnings per share up by 12.9% in the 2015 financial year.
Another one of the things we like most about Auckland Airport is its willingness to provide its stakeholders with aspirational goals as a guide to where it is focussing its efforts. In 2014 it forecast stretch targets for Chinese arrivals to reach 400,000 visitors by 2017 and for total international passengers to reach 10 million passengers by 2018. At this stage the company is on-target to meet these goals.
Just under half of Auckland Airport's revenues are deemed aeronautical and are subject to relatively loose rate of return regulations. Aeronautical charges are reset every five years and are designed to entice the company to re-invest back into runway and terminal facilities to match freight and passenger growth. The current regulatory regime is unchanged from when the company first listed in 1998 and we note the improved relationships it has with key customers (e.g. Air New Zealand), which should provide support when the next charges are reset in 2017.
Overall, a quality company with good growth prospects and a core holding in our New Zealand share portfolios.
Managing your KiwiSaver account
Making sense of market volatility
There is no doubt about it — August was unpleasant for share market investors and the media had a field day with scary headlines about global share markets plummeting because of concerns about China's slowing growth. When there is a broad market selloff, based more on fear than on any fundamental issues, there is nowhere to hide. If you have checked your KiwiSaver account balance in recent days it will very likely be lower than it was a month ago (unless you have made a large contribution).
While it's important to be aware of what is happening in financial markets, we need to be careful about how we react. A volatile market should not lead to panic. Ups and downs are a normal part of investing and over the life of your KiwiSaver investment, you will likely experience multiple periods where markets are volatile. Don't forget, since KiwiSaver began in 2007, we've already lived through the Global Financial Crisis and all sorts of political and economic "crises", yet your KiwiSaver account has taken it all in its stride. This is not the time for knee jerk reactions to a few sensationalist newspaper headlines.
The extent to which your KiwiSaver account balance has been affected in the short-term will largely be determined by how your money is invested.
For example, the Cash Enhanced Fund has weathered the storm relatively well as only 21% of its assets can be invested in higher risk assets such as shares. When shares drop in value as they have recently, "safe haven" assets, such as cash and fixed interest, often increase in value and provide a layer of protection. In contrast, the Growth Fund, which is predominantly invested in shares, felt more of the impact of the selloff.
If you are a younger investor, then you have time on your side to earn back the recent losses; the month of August 2015 will have a relatively small impact on your KiwiSaver balance at 65. If you are making regular contributions to your KiwiSaver account, then you will be able to take advantage of falling prices — with a long-term investing horizon you want to be buying shares whenever they are cheap. One way of looking at it is that shares are currently on sale!
The below graph illustrates the performance of the Growth and Cash Enhanced Funds in the Fisher Funds TWO KiwiSaver Scheme. If we look more closely at the Growth Fund, we can see periods of short-term volatility (e.g. in 2008 - 2009 as a result of the Global Financial Crisis and again in mid 2011 when the Fed postponed stimulus for the US economy) but over the long-term the Fund has trended upward and regularly has periods where it outperforms the Cash Enhanced Fund (as evidenced by the lines coming together over time).
If you are approaching retirement, then recent events will be of concern but again, it's important to retain perspective and to understand your options. As you get older, it does make sense to reduce your level of risk. No one knows for sure how long the current market volatility will last (how long is a piece of string?), but if you're tempted to change your investment strategy, bear in mind that moving to a more conservative fund now would crystallise losses. You may run the risk of missing out when the market turns upward again.
Markets generally rise over time, however, investing over the long-term is never completely smooth and we should all expect bumps along the way. If your investing timeframe is fairly long (at least 10 years) then what happen in between doesn't matter very much as long as your portfolio is worth more than you paid for it. On the other hand, if you're losing sleep about your investments then maybe it is time to review how your money is invested. Our team can help you with that and we'd love the opportunity to chat. Investing doesn't need to be scary or unpleasant — even if the media suggests otherwise!