Protecting your portfolio
Over the past year we have suggested that caution was the right tone to adopt in this market. This caution meant that we have been positioned for rising interest rates and, where we have discretion, we have been holding less in shares than we typically would. We have been focussing on two main things to give us a sense of just how cautious to be; the pace of economic growth in the United States and on how other investor’s attitudes to risk are unfolding. Developments, both in the strength of the United States economy and investor behaviour, continue to suggest that caution is warranted. Before delving into these developments our cautious tone might seem strange given the performance of your investments in 2018. It has been a great year so far.
While performance has been superb, and I hate to be a party pooper, all is not exactly as rosy as it seems.
1. Without the US and New Zealand share markets being so strong things would look very different.
It is only a small handful of markets that have posted positive returns over the year with the shining lights being United States (admittedly a big component of both the global share market and your portfolio) and New Zealand. Most other markets are down for the year, and in the case of the emerging markets, 2018 has been very challenging with the market in countries like China, down 19.3%, and Turkey and Argentina down 45.3% and 48.6% respectively.
2. A weak New Zealand dollar has boosted returns for New Zealand based investors.
Over the year the New Zealand dollar has fallen against the major global currency blocs, 6.8% down versus a resurgent USD (more on that later), 3.6% against the Euro, 6.0% against the Japanese yen and even against the Brexiting UK we are down 3.3%. The fall in the value of the New Zealand dollar has not only boosted the returns of international shares for Kiwi investors, it has also been beneficial for New Zealand companies that are either exporters or have significant offshore operations. This has boosted the return of New Zealand shares. The weak Kiwi has both protected and enhanced returns so far this year.
3. Value added by Fisher Funds has cushioned returns.
Our job as an active investment manager is to deliver better returns than just investing in the market. We have been able to do that across the board in 2018 with every strategy either matching or beating the market and, in some cases, by a wide margin. Like the falling Kiwi dollar this has helped mitigate the impact of the more challenging market environment.
So while we should be smiling about the returns this year it is not cause for rampant celebration. Nor is it reason for us to throw caution to the wind. In our view the catch cry of moving forward with patience and caution should be redoubled.
There are two factors we have focussed on to help gauge the appropriate level of caution when building portfolios – the strength of the US economy and investor risk appetites. There is no doubt that the US economy has been strong this year, and while a strong economy is good, an overheating one is not. Economic growth last quarter, admittedly flattered by President Trump’s tax cuts, was a lofty 4.2% (real quarter on quarter). Unemployment has fallen to a cycle low of 3.7% and wage pressures are beginning to build. The US Federal Reserve is conscious of this strength and is normalising short term interest rates having increased them 3 times this year to 2.25%, now a full 0.5% higher than New Zealand’s.
The financial markets have responded to this, pushing up the value of the US dollar. Similarly US long term interest rates, which tend to reflect concerns of higher inflation, are now at seven year highs, a whole 1.9% above the level reached in July 2016. The price of money, which is what interest rates are, is the most important variable in financial markets. Rising rates are rarely good for investors particularly if they continue to climb too high and for too long. While this has yet to have had a major impact in the United States, the canary in the coal mine, the Emerging Markets, have suffered a sharp bear market correction this year. These less stable economies are often poorly positioned to absorb higher borrowing costs and this, coupled with a stronger US dollar, have led to precipitous falls.
Caution is warranted.
Chief Investment Officer | Fisher Funds
4 Tips for Saving Big on Little Things
By Fisher Funds
We think you deserve to get your full KiwiSaver Bonus this year. The good news is if you meet the eligibility criteria, all you have to do is contribute $20 each week to be on track for the max $521.43 boost from the government.
To help you out, here are some simple tips and tricks for household savings that can quickly add up to that magic $20 number each week.
Pump Up Your Tyres
Did you know you can save heaps by simply keeping the tyres on your car properly inflated? Tyres lose around 1-2 PSI per month, and most people’s tyres are 5-10 PSI below the recommended level. By just topping up the air pressure next time you’re at the petrol station, you could boost your fuel efficiency by up to 5% for an average savings of $9/month.
No Spend Day
Once a week, give your debit card the day off by adopting an official “No Spend Day”. It’s simple. For meals, just plan ahead the day before by cooking extra for a leftovers lunch and then raid the pantry for a dinner using regularly overlooked items (Pasta Puttanesca anyone?). We like the sound of “No Spend Wednesdays”, but any day works just as well — especially if you can manage to forgo a spendy Friday or Saturday night out and about. Part of the magic of adopting a “No Spend Day” is the way it forces you to be more conscious about your overall spending habits and random little impulse purchases that have a way of adding up.
Clean Your Air Filter
Another great way to save with your car is by giving your air filter a little TLC. A dirty air filter can cost you up to 7% of your petrol consumption. For the average Kiwi driver, that adds up to a savings of $161 each year. If you’ve never done it before, cleaning your air filter is surprisingly easy to do. Just follow the instructions in your vehicle’s manual and you’re sorted.
Seal Your Fridge
The rubber seals running around the edge of your refrigerator and freezer doors are what keep the cool air from escaping. Sadly, they don’t last forever and even tiny cracks can cause leaks that lead to extra energy costs. To check if they need replacing, try this simple test: Open the door, place a five dollar note halfway inside and the close the door. If you can easily pull the note out, odds are you’ve got a leaky seal. Repeat at different spots all the way around the door to see if your seal needs replacing.
Remember, each week when you contribute $20 to your KiwiSaver, the Government will give you a free $10 bonus (up to a maximum of $521.43 each KiwiSaver year if you meet the eligibility criteria). Get started now!
Your KiwiSaver portfolios: Highlights and lowlights
Our New Zealand portfolio was down -0.5% for the month. This was a mild underperformance of the New Zealand Sharemarket, which gained 0.4% driven by the utilities and telecommunications sectors - generally not our favoured sectors. Portfolio performance was driven by our logistics companies with both Mainfreight (+7.8%) and Freightways (+5.1%) having good months. Notable drags on performance were Vista Group (-6.4%), Summerset (-8.2%) and a2 milk (-10.8%).
We increased our positions in a number of companies. The Xero holding was increased given we continue to be impressed, as we get to know the company more closely and meet more personnel. We also increased in Fletcher Building and A2 Milk. We reduced our position slightly in Ryman.
Our portfolio was down 1.6% for the month of September. One of the biggest drags on performance was CSL, which is one of our largest company holdings in the Australian portfolio. After a strong run year to date, CSL was down -11% in the month. There was no specific catalyst for this although the company was sued late in the month by competitor Shire for patent royalties relating to the sales of one of their products. We will be watching this closely, however our initial assessment is that this is not materially problematic to CSL. Datacentre company NextDC was down -8.3% during the month. Despite an initial positive response to the earnings result delivered on the last day of August, the market then reacted to the lack of progress in contracting more of its recently constructed data centre capacity. Management put this down to timing delays rather than a lack of demand and in fact have bought forward the expansion of its second data centre in Sydney because of the strength of the underlying demand for capacity. We remain confident in this investment and increased our investment in the company during the month.
Performance was driven by resource companies Rio Tinto and BHP, returning +8.3% and +7.2% respectively, due to resilient bulk commodity prices. Following on from a strong performance in August, Wisetech rose +3.5% in the month. Resmed (+2.5%) also contributed meaningfully to the month’s returns after hosting an investor day in San Diego in September where it shed further light on its investments in software and data analytics functionality and updated the market on new product releases.
The International Equity Fund returned 0.6% in September, performing in line with the rest of the market. The Energy sector was the best performer, up 3.7%. As the fund is overweight Energy stocks, this added to the benchmark-relative performance. Real Estate was the worst performing slice of the market, as the fund is neutral these stocks, it had a minimal impact on relative benchmark returns.
The New Zealand Dollar ended the month with effectively no change versus the US Dollar, even though it reached multi-year lows during the month as the US Federal Reserve once again raised interest rates by 0.25%. Solid macroeconomic numbers released in the US showed that unemployment remains at record lows and an increase in average hourly earnings.
The top contributors to benchmark-relative returns were two stocks that the fund has lower exposure to than the rest of the market. DowDuPont fell 8% after expectations fell for commodity earnings during the second half of the year and GE Company fell 12% after it announced issues with its newer gas turbines in its power division.
Our fixed income portfolios again outperformed their relative benchmarks in September. However the outperformance was more muted than in recent months. Again it was the diverse positioning of each manager and their ability to source returns from a diverse range of opportunities that aided the strategy most.
Strongly rising interest rate expectations, particularly those in the United States, are pressuring bond valuations lower. A major of our portfolios hold an overweight stance to U.S Treasuries at present, this was the most notable drag on performance in September.
Your KiwiSaver portfolios
I lived in London for five years, between 2008 and 2013. It was a time that I thoroughly enjoyed and I made the most of what the UK had to offer, including great pubs and easy access to Europe. While the pubs haven’t changed, the UK’s relationship with other European countries certainly has with Brexit.
I was recently back in London meeting with the management of a number of UK companies. A couple of things stood out. Firstly, the amount of construction underway in London. The skyline at Liverpool St, where I previously worked, has completely changed and is now dominated by glass covered skyscrapers. The number of cranes in the skies is not dissimilar to Auckland, and certainly not representative of a country meant to be facing economic hardship upon exit from the EU as numerous economists predict.
Secondly, the topic of Brexit was missing from conversation. In my opinion, the average Brit seems bored by the subject, worn down by the complexity, political bickering, and the lack of a clear path forward even as the March 2019 deadline quickly approaches.
On my trip, I met a wide range of British companies like food delivery platform Just Eat, share broking platform Hargraves Lansdowne and video game service provider, Keyword Studios. While we don’t currently own any companies in the UK, we are taking a closer look at firms with strong and durable business models, which should continue to deliver growth over the long term, even in the face of sluggish economic growth, and that are currently being offered at attractive prices because of uncertainty created by Brexit.
One company I met with, where Brexit is particularly relevant, is Whitbread. The company owns the Costa Coffee chain, which has just been acquired by Coca-Cola for £3.9 billion, and Premier Inn Hotels. Premier Inn consists of 800 odd hotels across the UK and one in Germany, largely catering to British business and domestic tourists. The hotel is well positioned with its prime locations, consistent offering and excellent value. Premier Inn has identified four things that hotel guests really care about: cleanliness; a comfortable bed; big TV; and a good breakfast. Speaking from experience, the company excels in each area, especially the breakfast! As Premier Inn is so well known for quality, consistency and value they don't have to rely on intermediaries, like Booking.com and Expedia for hotel bookings. By not paying a commission for bookings, Premier Inn makes more profit per room, which they reinvest to ensure a superior quality versus competition, which drives market share gains.
Premier Inn has a decent growth runway ahead. The company has increased its market share in the UK from 6% in 2010 to 9% currently and has laid out a pathway to 12% market share by 2020. Even though the company only has one hotel in Germany, early results have been promising and the German hotel market has similar characteristics to the UK hotel market.
We are now just starting more detailed research on Whitbread and other businesses I met on the trip to see if any of them meet the high bar we have for the portfolio. My initial feeling is that following a few years of underperforming the US market, the UK market is starting to throw up some opportunities that are being neglected as investors fret about politics.
Its time ladies, young and old, to take ownership of your money and future savings. For too long we have left this decision to our men folk to deal with, but times they are a changing and it’s now up to us to make the move to educate ourselves and our children on the importance of having a backup plan, a don’t ask plan, or simply an escape plan.
- The first step is understanding your money and how the small difference of not having that coffee today can make to your future.
- Next check your KiwiSaver, where is it, what strategy are you on and when did you last review it? If you don’t know ask, there are a number of great independent websites out there that can help. If you don’t know who your KiwiSaver is with then contact the IRD and ask them then take control and call your provider for a review. Most of them will happily talk you through your options and help you with making the right choices for you.
- Then look at a savings plan, not a in the bank where you can move it online to cover that round of drinks on a Friday night. Rather a set and forget investment that works quietly in the background creating better wealth for your future. For as little as $100 a month or $3.30 a day, you can invest in a Managed fund. This gives you access to a number of investment options locally and internationally from high risk to low risk and everything in between.
You don’t need to understand share markets or talk the jargon, you don’t need a university degree or a six figure income to take control of your future. You just have to acquire the necessary information, take control of your money and then take action.