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Fisher Funds TWO KiwiSaver Scheme — Your Monthly Update

March 2018

Trade wars: what next for NZ?

Bruce McLachlan, Chief Executive

Economics 101 is a first year course that many University students have to suffer and endure. The course is a prerequisite for many Business degree courses, whether interested in Economics or not. In my time, the subject matter was mostly very dry, and subsequently many of the concepts have been outdated by the impact of technology and a better understanding of human behaviour. Some economic principles are changing, but some have also endured.

One of the most basic principles that has endured is that free trade lifts the incomes of all participants. If resources are directed to the most efficient producers then everyone wins, notwithstanding some fallout during the change process of reaching that point.

Despite the unequivocal nature of the free trade principle, getting countries around the world to agree and implement free trade policies has been a long drawn out process. Countries have been getting there however, as shown by the continued proliferation of new free trade agreements.

Recent moves by the president of the USA to implement tariffs on steel and aluminium imports into the USA is a significant step against this progress and could be a first step in more significant trade barriers being implemented globally. The first losers will be US consumers who will end up paying a higher price for products containing steel and aluminium. The second losers will be alternative industries in the USA who feel the retaliation from other countries. Already Europe is threatening tariffs on Jim Beam Whiskey and Harley Davidson motorcycles in retaliation! The third losers will be countries more dependent upon trade than the USA.

The interesting fact is that the US produced less than 5% of world steel production in 2016, and less than 2% of world aluminium production. This shows it is not as if the President's actions are designed to protect large volumes of domestic jobs in the USA. This proposal has political motives and potentially far greater ramifications.

The underlying problem is that the US trade deficit widened to $56b in January 2018, the widest this gap has been for 10 years. The US does have a significant structural problem, however there are very few commentators that believe that tariffs on selected products and a potential trade war are the answer to the problem.

Why should we even be bothered by these changes? Exports make up nearly 30% of New Zealand's annual $250b GDP and so for all of us our livelihoods are dependent upon New Zealand being able to trade with the world. Many of our better companies listed on the stock exchange are dependent on exports. In a world of increasing tariffs and reduced trade New Zealanders incomes will fall.

It is way too early to predict where this may all lead to, but let's all hope common sense and reflections on first year university courses prevail.

Chairman

On 5th March Sir John Wells retired as Chairman of Fisher Funds. Sir John has been on the Board a total of 18 years, and has overseen the success of the company over that time. All of us at Fisher Funds wish Sir John well for the future. The new Chairman is existing Non-Executive Director David Clarke. David has been on the Board two years and brings a wealth of experience in financial services in Australia and New Zealand to the position.

Bruce McLachlan
Chief Executive | Fisher Funds

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Managing your KiwiSaver account — Grab the cash for your stash

By Fisher Funds

Grab the cash for your stashDo you know that you can earn some extra cash from the Government for your KiwiSaver account? If the answer is no, then the great news is you could receive a government contribution of up to $521.23 per year!

Member Tax Credit 101

You may have heard the name Member Tax Credit or MTC floating around — don't let the name fool you, despite having the word tax in the name the MTC is an annual contribution from the Government to help you save. Keep reading to work out if you are on track to receive this and find out how you can take action to maximise this benefit.

Eligibility

If you are;

  • 18 years of age or older;
  • Mainly living in NZ; and
  • Not yet eligible to withdraw for retirement

Then you are eligible to receive this benefit if you meet the contribution criteria! That means that for every $1 you save, the Government will contribute 50 cents to your KiwiSaver account, up to $521.43 each KiwiSaver year — which is from 1 July to 30 June.

Not working or Self Employed

So long as you meet all the criteria above you are still eligible! If you haven't contributed to your KiwiSaver account for the current year then you can make a voluntary contribution before 30 June 2018 to receive your subsidy.

Making the most of it?

To maximise this year's full MTC entitlement of $521.43 you need to have contributed at least $1,042.86 (roughly the equivalent of $20 per week) into your KiwiSaver account. That means for every $20 you put in the government will give you $10 — and if that doesn't sound like a lot how about $24,507? That's what $10 per week adds up to over 47 years (joining at 18 and contributing until 65), excluding investment earnings.

What do you need to do to grab the cash?

If you have not put in at least $1042.86, you can top up your KiwiSaver account for the current KiwiSaver year before Friday 29 June 2018. Read more here online about who is eligible for a MTC, how it is calculated, and how to make a payment — more here on topping up.

To confirm how much you may need to top up your account by, please call Inland Revenue on 0800 549 472 and make sure you have your IRD number on you and they should be able to confirm how much you have contributed via your employer to date.

And then…

If you would like to make a payment into your KiwiSaver account, please make sure you do this by Friday 29 June 2018.

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* If you turn 18, or reach retirement age part way through a KiwiSaver year (1 July to 30 June), your entitlement to MTCs in that year will be pro-rated for the portion of the year you were entitled to MTCs  e.g. if you turn 18 on 1 January, you will be entitled to a maximum of $260.


Your KiwiSaver portfolios: Highlights and lowlights

New Zealand

Highlights and LowlightsNZ was near the top of the equity pack globally for the month, primarily because our correction was much shallower than most global markets. The NZ Growth fund was down 1.6% underperforming the benchmark NZSE50G (-0.8%). A driver of fund performance was the recent addition of A2 Milk who rose 43.8% for the month. Other strong performers were Summerset and Fisher & Paykel Healthcare. A number of changes were made to the portfolio weightings during the month off the back of the technical market correction which gave the opportunity to add to high quality positions at discounted prices. We added to our positions in A2 Milk, Auckland International Airport, Fisher & Paykel Healthcare. Fund performance is not impacted by CBL as we do not hold this company in any portfolios.


Australia

Despite volatile markets around the world the Australian share market was broadly unchanged for the month. The Australia Growth Fund lagged the market slipping 0.8%. Strong results underpinned the leading performers for the month. Datacentre company NextDC, crushed market expectations with a very upbeat earnings result. NextDC is benefitting from the accelerating move towards cloud computing and away from traditional on premise IT infrastructure. CSL and ARB demonstrated strong profitability, delivering healthy share price gains.

The biggest negative impact for the month was from logistics software provider Wisetech which, despite posting profit growth of 32%, lagged bullish market expectations. To put this in context, and even with February's steep share price fall, Wisetech shares have risen 96.4% in the last twelve months. We remain confident in the outlook for the firm.


International

The International Equity Fund marginally lagged the benchmark in February, declining 1.9% versus the S&P Global Large Mid Cap which fell by 1.8% in New Zealand dollar terms. Information Technology was the only sector to post positive performance for the month as volatility staged a temporary resurgence. Energy, Real Estate and Consumer Staples sectors posted the biggest losses in the month, falling 6.9%, 6.4% and 5.6% respectively in local terms. As the fund has a higher exposure to Energy stocks than the benchmark, this was a detractor to performance. A significant positive contributor to returns was stock selection within the Information Technology and Consumer Staples sectors.

Sky Plc was the biggest contributor to benchmark-relative returns (+ 27%) after a takeover announcement by US cable giant Comcast. Cisco Systems exceeded earnings expectations, causing its share price to rise by 8%. Drags on performance were mainly telecommunications firms including Verizon Communications, Lowe's Companies and Vodafone Group which fell by 9.5%, 12% and 10% respectively.


Fixed income

The New Zealand fixed income strategy continued its strong run relative to benchmark this month. The decision to maintain core investments across certain corporate, bank, and asset backed investments allowed the portfolio to continue its strong run. We remain cautious towards corporate bonds in general yet believe certain pockets of the New Zealand fixed income market continue to offer attractive return profiles both on an absolute basis and compared with offshore markets. We believe the Fund is ideally positioned to benefit from this, as our team of analysts scour markets looking for anomalies and inefficiencies such as these in which to advantage from.

Continued underperformance of U.S fixed income assets relative to other major developed interest rate markets dragged down the portfolio's performance this month. The portfolio continues to maintain an underweight duration bias which means it has less interest rate exposure than the benchmark. This will protect the portfolio should interest rates continue to rise more than the market is pricing which is what we expect. Our preference for U.S fixed income assets is offset with underweight positions in some European and Asian bond markets.


Your KiwiSaver portfolios

Frank Jasper

Five quick investing must knows

By Frank Jasper, Chief Investment Officer

One feature of market psychology is that investors have a tendency to think things will continue along their current trajectory forever. In recent years markets have been remarkably stable. This is measured in financial market terms by the volatility or variability of returns. Many investors started to believe the market would continue to stay stable and/or that volatility would even fall. After a long period of stability some were taken by surprise by stronger than the market expected US payroll data released on Jan 26 which triggered a sharp sell off. This was exacerbated by the pressure of forced selling from highly geared investors who had been betting things would stay stable. This activity, which shocked many, is really just a natural feature of markets. There are five things you should remember about markets:

 

Moves like this in markets happen

Moves like this in markets happen

We may not remember at this point, but stocks fell more than 12% in the US summer of 2015 and 13% in early 2016. These corrections are all but forgotten because stocks recovered relatively quickly. Volatility is a normal feature of markets and we should never assume that periods of low volatility will last forever.

Your response to the recent moves tells you a lot about you DNA as a risk taker

Your response to the recent moves tells you a lot about you DNA as a risk taker

If you feel really nervous, can't sleep and feel the need the check the value of your investment daily it might be a sign you are taking too much risk. It might be time to rethink your investment strategy. The right strategy is one you can live with in difficult as well as buoyant times. Fisher Funds is here to help with this.

Where you are at in your investment journey makes all the difference

Where you are at in your investment journey makes all the difference

Many of our KiwiSaver and investors who make regular contributions should embrace falling prices. Falling prices means the investment you make today will likely reap better rewards over the long run. You are invariably richly rewarded for embracing risk at the right times. If you are nearer the time you need access to your money your investment strategy ought to embrace less risk.

Active investors use volatility to their advantage

Active investors use volatility to their advantage

Fisher Funds is an active investor. We have the ability to use volatile markets to make changes to portfolios that we believe will add value over time. For instance our fixed interest portfolio manager David McLeish has been positioned in shorter maturity bonds so protected clients during the rise in interest rates. Similarly Sam Dickie our New Zealand equity portfolio manager has been using weaker prices to build our position in new portfolio investment A2 Milk.

Fundamentals are all that count in the long run

Fundamentals are all that count in the long run

For me personally this is what I fall back on in tough market environments. Just because a bunch of investors lost money beating the markets would be stable and were forced to sell shares, the demand for Fisher and Paykel Healthcare's infant Optiflow nasal hi flow oxygen canula did not change one iota. Luckily for mums worried about their babies, hospitals don't look at whether the Dow was up or down before purchasing life saving equipment like this. Similarly Americans are still getting CSL's flu medication regardless of the share market. These companies, as well as the others in Fisher Funds' portfolios, are fundamentally sound, high quality and are growing. The chance to buy shares in world leaders like these at lower prices is one we should all embrace.


Sam Dickie

The a2 Milk success story

By Sam Dickie, Senior Portfolio Manager — New Zealand Shares and Property & Infrastructure

The a2 Milk success storyThe a2 Milk Company cracked another major milestone in February, eclipsing a range of well-known businesses to become the largest listed company in New Zealand by value.

The result announcement that catapulted it to the top of the heap contained just about everything a shareholder could want — revenue and earnings beating expectations, strong growth in market share in the lucrative US$20 billion Chinese infant milk formula market, and progress in newly-entered markets.

The cherry on top was a brand new agreement with dairy heavyweight Fonterra, allowing a2 to accelerate entry into new global markets and launch new products. On the back of the result and the Fonterra deal announcement alone, the share price jumped, almost 40%, from $9.29 to over $13 at the time of writing.

But what exactly is the a2 Milk Company and how has it grown so quickly?

In a nutshell, the company currently sells 'a2'-branded fresh milk and infant milk formula internationally. Its products contain only A2 beta-casein protein. This is believed to be more comfortably digested than normal milk (which contains a mix of both A1 and A2 proteins). The company has developed and patented a range of IP which tests whether cows produce A1-free milk. More importantly the science behind a2 the company has developed a leading, highly trusted brand in Australia and China in particular.

Despite the recent success, it has been a long rags-to-riches story for early shareholders. The company has been listed since 2004 and with limited ability to commercialise its IP made losses until 2011. From there, the company started gaining traction selling fresh milk through the supermarket and food service channels in Australia, with brand strength and awareness growing from a small base. Over the next few years a2 Milk grew share and became the leading branded fresh milk in Australia. This in itself was not highly profitable — the company only made $9 million in operating profit before tax on $94 million of sales in fiscal 2013.

Where the company grew in leaps and bounds was infant formula. It launched its a2 Platinum brand in Australia in late 2013 and quickly gained share, courtesy of its strong position in fresh milk.

From there, growth exploded as 'daigou' (personal shoppers) latched on to this new desirable brand and began re-exporting it for consumption in China.

a2's management have done an excellent job of managing the nuances of this channel, where others, like Australian firm Bellamys, have failed. They have also successfully grown Chinese distribution into conventional channels including key eCommerce websites and 6700 physical stores.

This move to grow distribution and a2 growing brand strength in China have led to the latest step-up in market share and earnings. Annual sales are now approaching $1 billion. This is an incredible story of recognising opportunity and having the strategic vision and operational smarts to take advantage of it.

The Fonterra deal is the first step in the next phase of a2's global growth story — New Zealand's global dairy giant has acknowledged a2's global potential and is now on board. As Kiwis, it also means we can expect to see local supermarket shelves well stocked with a2 milk in the future!

The a2 Milk Company is owned in all Fisher Funds NZ based portfolios.


Ashley Gardyne

Electronic Arts and the art of investing

By Ashley Gardyne, Senior Portfolio Manager — International Shares

Electronic Arts and the art of investingI can remember when I was a teenager playing Need for Speed on my PlayStation for countless hours (after I had finished my homework...) trying to get a new best lap time. Funnily enough — 20 years later — investing can feel the same at times! Investing is a race that never ends, constantly going round and round in circles looking at new investment ideas — hoping to find just a handful of good ideas that will keep you at the top of the leader board.

Over the years in financial markets it has become harder to achieve this objective, partly due to increased competition from hedge funds and computer algorithms making the market more efficient. Today active manager's need to be more creative in identifying situations where others in the market (particularly short term orientated funds) may be missing a trick. With thousands of potential investment candidates globally and lots of competitors looking at the same investments, it is very important for us to spend our time looking in spots that are more likely to be rich in misunderstood opportunities.

Our recent trip to the US, and meeting with Electronic Arts, the global gaming giant, provided a good example of one such area — industries where the traditional means of distribution have been disrupted. Ten years ago if you wanted to play Madden NFL you had to bike to your nearest video game store and buy the game off the shelf (packaged in a DVD case). However, in the last five years, with faster broadband speeds it is easier to simply download the game.

While this may not seem like a big deal, it has a huge impact on Electronic Arts' profitability. Selling a game at full price for download on the online PlayStation Store rather than via a physical retailer allows them to capture the profit margin a retailer like Noel Leeming would have made on the sale. Electronic Arts also saves the cost of printing the games onto a CD, boxing them up and shipping them to stores. Based on our numbers EA earns more than double the profit on each game they sell digitally.

In 2013, EA was barely profitable. Revenues from its game sales only just covered its large team of game developers, salesmen and administrators. Since then, while the company has only grown its sales at 6% per annum, this digital transition has helped magnify its earnings almost 10-fold. Not surprisingly its share price is up over 700% since the start of 2013!

While it is futile trying to outfox hedge funds attempting to forecast Wal-Mart's the next quarterly earnings number to 2 decimal places (they use satellites to count the cars in Wal-Mart carparks to help them), the Electronic Arts example highlights how subtle but important changes in the business models of specific companies can be missed by short term investors.

Though the Electronic Arts opportunity is now largely understood by the market, we are constantly looking for opportunities that may not be. One company that sits in this camp is Walt Disney, another company we met on our US trip. Fast broadband has allowed Netflix to build a highly successful business distributing TV content directly customers — circumventing TV networks, cable and satellite TV operators. Eventually content creators like Disney will more aggressively distribute their shows directly to viewers and capture the profits made by TV networks for simply providing a distribution service.

Another candidate would be L'Oreal, whose augmented reality app 'Makeup Genius' allows customers to try on new looks from their phone and then simply click 'buy' and have them delivered. While it's still early days, online sales for L'Oreal would allow them to capture at least part of the profit pool currently taken by department stores and make up specialists like Sephora.

As with video games, where the next level you unlock may not be as you expected, the situations that will provide us with opportunities will vary considerably from year to year. That said, we believe an investment process structured around identifying businesses with a misunderstood medium term story can provide ripe opportunities that others may miss.

Pictured: Harry Smith, our Senior Investment Analyst deep undercover at Electronic Arts.


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