NZ Fund Managers

[Snoopy]

So what do I make of all this? That's next.

Is there any reason why the best fund performances seem to come from those targetting the Australian market? Let's do a quick round up of the largest positions of our protagonists that invest in Australia., and see where they are investing.

	Milford Trans Tasman Equity	Harbour Australasian Equity Fund	Harbour Australasian Equity Focus Fund	Fisher Australian Growth Fund
	BHP.ASX (5.62%)	MFT (9.95%)	MFT (10.2%)	CSL.ASX (9.52%)
	FPH (5.48%)	FPH (8.42%)	MQG.ASX (9.06%)	WTC.ASX (6.79%)
	CBA.ASX (4.70%)	EBO (7.64%)	EBO (7.59%)	CAR.ASX (6.31%)
	CSL.ASX (4.45%)	CEN (5.33%)	CSL.ASX (7.53%)	SEK.ASX (5.12%)
	IFT (4.35%)	MEL (4.71%)	BHP.ASX (7.39%)	CBA.ASX (4.84%)
	MFT (3.50%)	SUM (4.53%)	SUM (6.68%)	NXT.ASX (4.58%)
	CEN (3.44%)	PEB (4.05%)	PEB (3.91%)	MQG.ASX (4.40%)
	EBO (3.40%)	IFT (3.87%)	XRO.ASX (3.67%)	BXB.ASX (4.21%)
	NAB (3.33%)	CSL.ASX (3.81%)	GHG.ASX (3.58%)	AUB.ASX (4.04%)
	AIA (2.70%)	AIA (3.46%)	VSL.ASX (3.31%)	RMD.ASX (4.06%)

All of the above funds have had very respectable 5 year returns (post 33). Looking at the top holdings you might be forgiven for thinking that the 'Harbour Australasian Equity Fund', was really an NZ fund with one or two token Australian investments. But the 31-03-2022 Fund summary sheet says that 29.3% of all holdings are on the ASX.

Best performing fund over both 1 and 5 year periods was the 'Harbour Australasian Equity Focus Fund'. I observe that they are the only fund to have a significant holding in Macquarie Bank and BHP over the five year period, over which the MQG and BHP share price doubled. Both have continued to hold their value in the current rising interest rate and rising commodity market, where banks and commodity miners generally do well. Their largest holding back in 31-03-2020 was A2 Milk, making up 14% of the fund's value. By 31-03-2021 this holding had sunk from 13.43% to 5.57% of the funds value as the share price sank from $17 to $9 over the same period. This indicates a net reduction of one quarter of the fund's position in A2, over and above 'index shrinkage'. So some profit taking was likely booked as the outlook of the A2 milk company turned sour.

At the bottom of the larger holdings list in the 'Harbour Australasian Equity Focus Fund' sits Vulcan Steel, which was a very successful float from six months ago (+10% over the ensuing period to now).

Another 'two bagger' over five years has been Australian drug maker CSL, in which the 'Harbour Australasian Equity Focus Fund' had a 7.53% stake at the 30-03-2022 reporting date, verses just 3.81% for the 'less focussed' 'Harbour Australasian Equity Fund'. The 'Harbour Equity Focus Fund' is also by far the smallest fund here at just $35m in size, only one eighth the size the more broadly invested 'Harbour Australasian Equity Fund'. Being so relatively small and so nimble for an investment fund is an asset.

Milford Asset management are the second best performing fund of our quadrio. At the end of March 2020, A2 milk was the funds top holding. One year on and it fell outside the top ten, minimising the A2 share price carnage. In the year to 30-03-2020, an investment in Xero was disclosed. Two years later that investment was gone at what looks like a good profit. This is active investing at its best. The Milford portfolio was cushioned, of late, from rising interest rates by having a couple of decent holdings in Australian banks, and also BHP to take advantage of commodity price hikes. I would like to say this was pre-emptive positioning. But in fact these resource and bank holdings had been in place for some years. Considering this fund is more than three times the size of the next largest fund under consideration, the ability to switch portfolio positions , and overall fund performance is very creditable. It has a slightly lower base fee than the other funds too, which always helps. There is no 'split' given on how much of the fund overall is invested in the NZX or the ASX.

Nevertheless if you are looking for a pure 'Australian' investment, the only choice here is the 'Fisher Australian Growth Fund'. Names on the top ten holding list will be a bit less familiar to kiwis. CSL is Australia's largest drug manufacturer. Further down the list there are a couple of familiar banks (Commonwealth & MacQuarie). All good holds for present times.

Next we have a series of leading tech businesses, with the extraordinary connecting factor that they all make a profit! 'Wisetech' is a software for supply chain businesses worldwide. 'Carsales.com.au' and 'seek.com.au' are, respectively, leading web based motor vehicle and job seeking website based businesses. NextDC is an Australian data centre operator.

To finish off the top ten, we have Brambles as the Aussie equivalent of Mainfreight. AUB is an insurance broker and underwriting business. Resmed is the principal Australian competitor to our own Fisher & Paykel healthcare.

I would like to say this Fisher fund has repositioned themselves for the new business environment going forwards. But looking at the change in holdings year to year, the addition of NextDC apart, all the right building blocks were already in place. Well done Fisher Funds management!

So quite a high tech modern look to the 'Fisher Australian Growth Fund' then. And CSL holding apart, very different to the others in terms of fund constituents.

Decision time Which of the above four funds to choose? I have to go with the top performer in both the long term (5 year) and agility (1 year) contest. And that is the 'Harbour Australasian Equity Focus Fund'. Yet that fund is closed to new investors :-(. But if I wanted to diversify my trans-tasman portfolio adding either the Milford Trans Tasman Equity Fund or the Fisher Australian Growth fund would be good options. And both have complimentary investments to my first choice.

SNOOPY

P.S. What about the question I posed right at the beginning at the start of this post? Australia looks to be the place for profitable banks, in demand and quality resources and mature and profitable tech. That adds up to quite a sweet spot for investing in 2022.

[Snoopy]

So what do I make of all this? That's next.

'Internationally' in the New Zealand investment context means outside of Australia and New Zealand. If we look through all of the funds offered by our protagonists, there are just three that fit into this category. Let's see where they are invested.

Holdings @ 31-03-2022	Milford Global Equity	KiwiWealth Growth Fund	Fisher International Growth Fund
	MSFT.NASDAQ (4.53%)	AAPL.NASDAQ (4.6%)	FB.NASDAQ (8.98%)
	GOOGL.NASDAQ (4.34%)	MSFT.NASDAQ (4.4%)	GOOGL.NASDAQ (7.28%)
	Cash NZD (4.03%)	GOOGL.NASDAQ (3.1%)	PYPL.NASDAQ (7.20%)
	AAPL.NASDAQ (3.40%)	AMZN.NASDAQ (2.7%)	BABA.NASDAQ (5.80%)
	MA.NYSE (3.13%)	UNH.NYSE (1.4%)	AMZN.NASDAQ (5.78%)
	COST.NASDAQ (3.12%)	ASML.AMS (1.3%)	Tencent.HKG (5.44%)
	ICE.NYSE (2.69%)	TSLA.NASDAQ (1.2%)	ICLR.NASDAQ (5.09%)
	EOG.NYSE (2.68%)	V.NYSE (1.2%)	FND.NYSE (4.57%)
	AON.NYSE (2.48%)	MC.EPA (1.1%)	BSX.NYSE (4.55%)
	ACN.NYSE (2.26%)	Two Trees Hedge Fund (1.0%)	SBNY.NASDAQ (4.37%)

Those 'stock tickers' I have listed above may not mean much to our NZ based readers. So for clarity I will use the names of the 'invested in companies' in my round up of the three fund protagonists investment results and philosophies below.

KiwiWealth has had the best one year 'market shock' performance. So how was it they manged to 'calm the bear'? The NASDAQ fell by 10.2% over the first three months of this year. By contrast, the four largest KiwiWealth holdings -also part of the NASDAQ- fell by -4.1 % (Apple), -7.9% (Microsoft) , -4.1% (Alphabet) and -4.4% (Amazon). Absent from the top ten KiwiWealth holdings was Meta (Facebook) (-34.3%). KiwiWealth were also relatively underweight holding the NASDAQ number 4 ranked company Tesla (-10.2%).

By contrast, Fisher funds were relatively overweight for the quarter in Meta (-34.3%) and Paypal (-40.7%). For the full year overweight Alibaba was 50% down too. It is clear that the Fisher NASDAQ investments, over the last year, have released a lot more 'hot air' than the KiwiWealth ones. The Fisher International Growth Fund has had what can only be described as a 'disastrous investment performance' over one year: 16.7% in total of fund value was lost. Despite this, the five year performance of the Fisher International Fund was quite acceptable, or even 'good' (+11.3% per year, compounding for five years).

Other significant KiwiWealth investments over the first three months of the year like United Health +1.6% and Visa (no change) helped steady the KiwiWealth ship.

There is a different class of asset called 'Hedge Funds' that KiwiWealth invests in. These, like Two Tree Systematic Global Macro Fund, are targetting superior returns uncorrelated to traditional asset classes, and can help smooth returns. The other two comparative international funds have not declared any hedge fund assets.

Apple and Microsoft make up around 22% of the NASDAQ top 100 index. From that, you might argue that Fishers are showing more 'independent thinking' (check out Fisher's lack of a position in these two companies in the list above), whereas KiwiWealth and Milford are more in the 'me too' investor box. KiwiWealth has reduced their position in Meta over the last few months while Fishers have increased their holding. Short term KiwiWealth are looking smarter. But Fisher claim a trend of more video content on Facebook will increase time spent on the platform and advertising revenue in the future.

KiwiWealth has selected 'United Health', which is the top non pharmaceutical healthcare company on the NYSE by capitalisation. Likewise KiwiWealth's Visa investment is the top NYSE fintech listing. My impression is that KiwiWealth's portfolio has more of an 'index look'. But it also has the lowest base fee structure, complete with no return eroding 'bonus fees'.

Milford are unusual in declaring a large (4.03%) cash holding. Normally I would mark a fund down for that. If I want to keep a bit of cash on hand I can do that myself! I don't need a fund manager to do it for me. However, cash also represents opportunity. In a turbulent market, I am pleased to see that Milford have some cash on hand to take advantage of investment opportunities as undoubtedly will arise. I note that Milford favours 'Mastercard' as their number one fintech investment, ahead of the more well known and larger 'Visa'. Milford also have a share of 'Intercontinental Exchange' (no. 142 on the NYSE), which owns the 'New York Stock Exchange' itself! Milford's other high conviction positions include low cost retailing (Costco), Oil exploration (EOG Resources), Accenture (Infotech) and AON (Insurance). These share selection themes are consistent with a rising interest rate, rising commodity price, high tech economy. My impression is that Milford are not trying to do anything radical with their share selections. But they are trying to pick out 'best in class' operators, to colour a quite conventional share selection picture.

Decision Time I am going for the KiwiWealth growth fund as my international fund manager pick for the following reasons.

1/ They offer a chance to acquire some big NASDAQ names at a somewhat beaten down price.
2/ They hold some hedged investments which they are using to damp down the NASDAQ volatility.
3/ They have the lowest fees by some measure (around 30% less than the others as a minimum).
4/ KiwiWealth have just been gifted a large lump of default Kiwisaver cash (being just named as a default provider). That should give them the scale to keep running a relatively low cost operation.
5/ This is the only growth fund in shares that KiwiWealth run. If they stuff it up the whole KiwiWealth operation will go in the punishment bin. They did this before in 2017. But since you learn more from your mistakes than your successes I am picking that KiwiWealth has learned not to make those same mistakes again.

I find myself agreeing with the Fisher philosophy of buying good companies and hanging on to them. But I have that sinking feeling that Fishers may have paid too much for their 'good ideas' in their international investment fund. It would be a useful diversification to add Fishers as a complimentary international investment manager. But my gut feeling is to wait for a year to see what if anything Fishers learn from their heavy FY2022 investment write-downs. And that just leaves Milford.

Milford looks like an index+ high fee manager, that nevertheless has delivered the worst (albeit still adequate 9.80%) five year fund performance of all funds in all market classes looked at. Milford appear to deliver their best results closer to home. Maybe that fine edge of 'Brian Gaynor magic' has departed this fund with Brian's own departure for 'other worlds' yesterday? I am leaving the Milford 'Global Equity Fund' outside of my recommendations.

SNOOPY

[Snoopy]

The revenue item 'Customer and Client Fees'......

If we look in Kiwi Wealth Annual Report 2021 on p2 this figure is $51.908m. If we look at the Kiwi Wealth Managed Funds Annual Report 2021 on page 3, the listed management expenses paid include $117.546m for the Conservative Fund, $257.838m for the Balanced Fund and $218.214m. Adding those three totals up, I get $593.598m, which is more than ten times the figure in the Kiwi Wealth books. Even with the balance date mismatch, something is not adding up here.

A thought occurred to me that maybe the Kiwi Wealth accounts referred to only the much smaller managed fund side of the business, and the Kiwisaver fees were accounted for elsewhere in a separate company structure. However, if I look under note 4 in the Kiwi Wealth accounts, that shows two separate management fee entries for 'KS' (Kiwisaver) and 'MF' (Managed Fund) accounts. So it appears this is not the explanation.

Anyone else got a theory to explain this 10:1 fee mismatch?

No-one else has bitten to answer this question, so I have come up with a new theory of my own.

The page below:

https://www.kiwiinvest.co.nz/our-approach#our-funds

tells us of the KiwiWealth fund structures. Ordinary plebs, like me, have only the choice of investing in the KiwiWealth 'Growth Fund'. But if you are a 'wholesale investor', then you have a choice of 'Global Thematic' (Total funds under management $1,992m), 'Global Quantitative' (Tfum $1,502m) and 'Core Global' (Tfum $986m). That adds to a total of $4,480m.

Go back to the Kiwi Wealth fund documentation:

https://www.kiwiwealth.co.nz/assets/...ments-2021.pdf

On page 5, I add up the net assets attributable to unit-holders as follows:

$24m+$64m+$50m=$138m

If $138m represents the 'client' portfolio and $4,480m represents the 'customer' portfolio, that represents a huge mismatch in relative size of assets under management.

If you take the 'customer and client ' fees from the income statement in the reference below

https://app.companiesoffice.govt.nz/...4E226E1FFDC7AA

That is $51.908m. Spread across all funds under management, this represents a management fee rate of:

$51.908m / ($138m + $4,480m) = 1.12%

I would suggest that wholesale investors will pay a lesser percentage management fee than retail investors. So the information on the wholesale funds which I can combine with information on the retail funds makes the management fees declared as earned by KiwiWealth ballpark believable.

SNOOPY

[Snoopy]

I thought I would jot down a few notes from Fishers May Webinar.

https://fisherfunds.co.nz/newsroom/v...st-volatility/

They sound unrepentant. An "If you are feeling bad, we are sorry about that" kind of apology for their market performance.
If the story has not changed and the share price is down keep buying is the mantra. They are buying Xero , Amazon, Microsoft, CSL, Fisher and Paykel Healthcare and Cochlear.

Sam Dickie (Senior Portfolio Manager, NZ shares and infrastructure)
"It is critical we do not get knocked off our path by fear."
"We are more excited than we have been for some time and we are buying."
"Volatility is very normal."

"During peak Covid fear, F&P were keeping their prices steady on their life saving equipment to help save lives. But now, F&P are lifting the prices of their products across the board at the fastest rate they have for a long time."
"Not all companies have pricing power like this."

"We are super long term investors (in the context of long term being ten years)"

"Look for companies run by high quality management teams, companies with wide economic moats around their business (only one Auckland Airport and there is no sign of an alternative being built), and long runways for growth (Xero - global cloud accounting penetration is less than 10% global, (Fishers expect 100% in due course))"

"Divorce long term view from market volatility of equities."

"Re derogatory comments made by CEO of DGL. Not invested in DGL. If a broad cultural problem appeared in a company they would sell. If it was just one person making derogatory comments, they would try to force that person out."

"Hand pick investments to no more than 100 companies across all funds." So plenty of other investments to choose from if one of their own breaks the ESG standards.

Ashley Gardyne (Chief Investment Officer)
"The inflation crisis is a once in every couple of years opportunity"
"Provided fighting in Ukraine does not escalate to other countries, there will be little further effect on the world economic situation. Taken together Ukraine and Russia only make up 2% of global GDP."
"Indifferent to dividend yield as want to invest in companies that hang onto their dividends and grow." (e.g Amazon, keeps investing in more data centres and more distribution networks)

SNOOPY

[Snoopy]

Would appreciate thoughts / recommendations on NZ Fund managers. Was thinking of Milford but open to helpful comments etc.
Cheers

I want to broaden my review of the performance of NZ fund managers, this time looking at the fixed interest/bond market. I am going to concentrate on the local bond market. That is because when NZ fund managers invest in global bonds, they tend to use overseas organisations as subcontractors to do that for them. So by sticking to the local market, I am getting a better feel for the expertise of 'the local investment team' .

To keep the review manageable, I am once again going to look at four protagonists to try and understand any nuances of differing approaches of managing fixed interest funds. The four protagonists are: Milford Asset Management, Fisher Funds, Harbour Asset Management and KiwiWealth. I should note that Fisher funds acquired KiwiWealth on 15th August 2022. However the review period of the last year and further back does not encompass any portfolio management influence by Fisher Funds that may or may not change the future course of KiwiWealth's management style.

The performance of fixed interest markets has been particularly difficult over the last year. So what better time to put some scrutiny on our local fund managers to see how they have navigated the fixed interest market in 'tough times'?

A common concern on the performance of the bond markets was expressed as a question from twenty minutes into the Fisher Funds seminar that I have referenced below: The following video seminar is dated 11th August 2022.

https://fisherfunds.co.nz/newsroom/v...ent-questions/

Robbie Urquhart, Senior Portfolio Manager for Fisher Funds, speaks (from 20 minutes into the seminar):

"It has been a really tricky period for conservative portfolios over the last six months because of volatility. If we think about normal economic crises, conservative funds tend to have a higher proportion of their assets in lower risk assets classes, namely fixed interest or bonds, and a smaller proportion of growth assets like shares and property. The reason for this is that normally these lower risk assets act as an insulation against big economic crises. So when the world is going into recession and people are worried about financial crises emerging, typically we see bond prices go up (i.e. interest rates fall) and that protects the value of the portfolio and so conservative portfolios tend to hold up reasonably well.

But what we have had in the last six months is quote different. It is quite an unusual set up where the cause of the economic turmoil across the globe this year has been driven by sky rocketing inflation, which has sent goods prices and services prices, travel, restaurant services and all of those prices up. The cost of living crisis is on everybody's lips at the moment and with the rise of inflation, central banks have tried to combat that by increasing interest rates, and they have done that quite sharply. In so doing, not only have sharemarkets been sold off this year and property prices have started falling, but it has also lead to bonds and fixed interest prices falling as their yields have gone higher.

We have had this pretty tricky environment where the 'insurance contract' (the fixed interest portion) has fallen as much as we have seen from shares. That is what has been negatively affecting conservative portfolios. But as much as the journey has been quite rough for conservative portfolios over the last six months, given where fixed interest assets are priced today, our view is that they are really attractively priced. We have also seen some nascent signs that some of the worst parts of this inflationary pressure may be starting to ease. US CPI data has been high but less than expected. Companies we invest in have told us that their supply chain constraints are starting to ease. If we get more data points like that we should see a stability return to where interest rates are and that should be quite constructive for fixed interest assets and consequently conservative portfolios.

So in a nutshell it has been a tough journey, but in a nutshell I think the outlook from here is a lot better."

Robbie has set the background scene. Now how did Fisher funds - and the other protagonists - measure up over this 'really tricky' period?

SNOOPY

[SBQ]

@Snoopy:

What Robbie Urquhart has mentioned is of no surprise. But I would say his statement of recent events and uncertainty is nothing more than an 'excuse' ploy to the shareholders. These fund managers are what I call "the helpers" and Buffet always says, "they help themselves".

Take the individual investor whom may have little understanding of economics, finance, or the world market variables.. consistently leave their $ to guys like Robbie Urquhart to manage their money? One report card earnings after another, the general public doesn't get the message.

Take the example of a garage mechanic. Word of mouth has it that if that guy does a good job, he attracts more customers. But in Finance, it's a funny industry where one portfolio manager after another that provides sub-par returns by not beating the market index returns, gets away with time after time. They will say "perhaps we will have better results next year and so on.." The marketing of these funds to as Buffet says "The helpers help themselves".

So what does Warren Buffet do that is consistently different than all these fund managers? Have a simple observation for 2022 and what has Berkshire done? Well they've acquired a major stake in Occidental Petroleum (last I recall over 20%). What as your typical NZ fund manager done during the same period? They've just bought over diversification by buying lots and lots of shares or corporate junk bonds on various different companies.

John Bogle (RIP) founder of Vanguard says, if these fund managers are only trying to replicate the market index return (either in bonds or equities), the more shares they buy in that index, the more they are likely to have the same average return of the index. However they will not win because they need to charge their management fees. Why should they be rewarded for not being exceptional ; because buying more and more of the shares of the index gets you the similar average returns.

Buffet doesn't float in that boat. If you want to consistently beat say the S&P500 index return, you need to be able to concentrate on specific companies that have far higher returns than the average. Much like at the roulette table; bet 1/2 of the #s and you get 1/3rd return. Bet 1 chip on 1 # of the 36 on the table and you get 36 times.

Well there's an easier way to beat this game. Just go and own Berkshire shares and forget the rest. No need to worry about timing when to be in or out of bonds, when to be in this sector or that industry. Just buy BRKB and come back in 50 years time. BTW, in 1964 1 share of BRKA was $19. In 2020 March that same share was $268K. Today it's $400K

Now you tell me, would you be far happier to own a portion of bonds or the capital gain that BRKA has done? I would say in around 2 years going from $268K to $400K is mighty impressive than to worry about buying bonds in NZ or abroad.

[Snoopy]

"So in a nutshell it has been a tough journey, but in a nutshell I think the outlook from here is a lot better."

Robbie has set the background scene. Now how did Fisher funds - and the other protagonists - measure up over this 'really tricky' period?

First fund to be reviewed 'out of the blocks' is Fishers "New Zealand Fixed Income Trust."

Information in this post is derived from these two respective 3 month quarterly statements:

https://fisherfunds.co.nz/assets/fun...und-Update.pdf

https://fisherfunds.co.nz/assets/fun...und-Update.pdf


Key Bullet Points

1/ Fund goal is to be 100% invested in 'NZ market fixed interest'.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $126.7m of fixed interest funds and bonds under management.
4/ 'Management fee's are set at 0.96% of the funds asset value, comprising a managers base fee of 0.86% and an 'other management and administration charges' deduction of 0.10% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -7.13% (-1.80%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 0.69% (2.21%).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)	Fund Return YE Mar(xxxx) {A}	Index Return YE Mar(xxinnocentxx)	After Tax Index Return YE Mar(xxxx) (x0.72) {B}	{A}-{B}
2022	-5.16%	-6.28%	-4.52%	-0.64%
2021	-0.19%	-0.78%	-0.56%	+0.37%
2020	3.15%	4.82%	3.47%	-0.32%
2019	5.58%	7.38%	5.31%	+0.27%
2018	3.15%	4.54%	3.27%	-0.12%

A positive number in the {A}-{B} column indicates that Fisher's management has 'added value', whereas a negative value indicates the reverse. No-one likes to lose money. But it looks like, over FY2021 Fishers have 'added value' by not losing as much money as an index tracker invested in the same asset class. Conversely, in the other four years I have considered , any 'under-performance' of Fishers can be explained away by management fees alone. (The management fee is a tax deductible expense. So a management fee of 0.96% equates to a profit margin reduction of 0.72x 0.96% = 0.69%. But 0.64% is the largest amount that the fund has undershot the index). So if the Fisher fund managers had decided to forgo their fees, they would have added value to the fund in those years after all.

What can we learn about how Fisher fund managers have operated over the last reported twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us a clue.

Fund Constituent Holding Name	Top Ten Holdings 30-06-2022	Top Ten Holdings 30-06-2021
GOVERNMENT OF NEW ZEALAND 3.5% 14-APR-2033	6.37%	7.08%
GOVERNMENT OF NEW ZEALAND 3.0% 20-APR-2029	5.70%	5.49%
GOVERNMENT OF NEW ZEALAND 2.75% 15-APR2025	4.15%	3.75%
GOVERNMENT OF NEW ZEALAND 2.75% 15-APR2037	4.08%	4.79%
GOVERNMENT OF NEW ZEALAND 4.5% 15-APR-2027	3.54%	3.35%
GOVERNMENT OF NEW ZEALAND 1.5% 15-MAY-2031	3.08%	3.02%
ANZ 10 A/C - CURRENT ACCOUNTS	2.90%	6.54%
GOVERNMENT OF NEW ZEALAND 0.5% 15-MAY-2026	2.86%	2.59%
HOUSING NEW ZEALAND LTD. 3.36% 12-JUN-2025	2.84%	?%
ANZ BANK NEW ZEALAND LTD. 3.03% 20-MAR-2024	2.80%	?%
GOVERNMENT OF NEW ZEALAND 1.75% 15-MAY2041	?%	2.87%
GOVERNMENT OF NEW ZEALAND 2.0% 15-MAY-2032	?%	3.16%
Total Top Ten	38.32%	42.64%
Top Nine Investment Average Coupon Rate	Coupon 2.77%	Coupon 2.47%
Top Nine Investment Average Years to Maturity	6.2 years	10.3 years

I have to be careful here attributing actions to Fisher fund managers. For a start, I don't have enough combined information (see above table) to see even 50% of the constituency of the fund on either comparative date (30-06-2022 or 30-06-2021). To my knowledge, Fishers have made no commentary on what they did over the 'difficult year in question'. Furthermore I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'.

IMO it does appear that 'on average', Fishers dramatically shortened the maturity profile of their bond holdings over the year. This is a sensible move, because long dated bonds do very poorly in a climate of rising interest rates. Notice that the two additions to the 'top ten holdings' (Housing NZ and ANZ bank bonds) are both 'short dated', maturing in two and three years time respectively. It is almost impossible to make money from a bond portfolio in a climate of rising interest rates. But it does appear that Fishers active bond managers have 'limited the damage' with some pro-active bond portfolio adjustments. Well done to the Fishers team for that. The increasing annual coupon yield is possibly a function of new bonds being able to be bought, on average, at higher rates of return than in the previous year

SNOOPY

[Snoopy]

The second fund to be reviewed is Milford Asset Management's "Trans Tasman Bond Fund."

Information in this post is derived from these two respective 3 month quarterly statements:

https://milfordasset.com/wp-content/...Fund_Jun22.pdf

https://milfordasset.com/wp-content/...Fund_Jun21.pdf

Key Bullet Points

1/ The Fund's objective is to generate a positive, low volatility return after the base fund fee but before tax, that exceeds the relevant benchmark over the minimum recommended investment timeframe of three years.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly reported date), had $1,152.3m of fixed interest funds and bonds under management.
4/ 'Management fee's are set at 0.65% of the funds asset value, comprising a managers base fee of 0.64% and an 'other management and administration charges' deduction of 0.01% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -5.94% (+2.12%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 1.29% (4.27%).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)	Fund Return YE Mar(xxxx) {A}	Index Return YE Mar(xxxx)	After Tax Index Return YE Mar(xxxx) (x0.72) {B}	{A}-{B}
2022	-3.81%	-4.75%	-3.42%	-0.39%
2021	3.26%	2.73%	1.97%	+1.29%
2020	2.73%	4.43%	3.19%	-0.46%
2019	3.61%	5.63%	4.05%	-0.44%
2018	3.54%	4.55%	3.28%	+0.26%

A positive number in the {A}-{B} column indicates that Milford's management has 'added value', whereas a negative value indicates the reverse. No-one likes to lose money. But it looks like, over the last year Milford have 'subtracted value' by losing even more money than an index tracker invested in the same asset class. Conversely, in the four years of quoted positive market returns, there is a mixed picture. A good result over both FY2018 and FY2021, was largely neutralised over FY2019 and FY2020. Milford have a lower fund management fee than Fishers. But despite this, investment performance from FY2018 to FY2020:

Milford: (1.0354)(1.0361)(1.0273)= 1.10
Fisher: (1.0315)(1.0558)(1.0315)= 1.12

was noticeably worse. The difference would be more pronounced if you took the higher level of fees charged by Fishers into account (I didn't do that because as a fund investor you have to pay the fees) pointing to a lower level of bond fund manager skill at Milford prior to the Covid-19 pandemic.

What can we learn from the way that Milford bond fund managers have operated over the last twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us some clues.

Fund Constituent Holding Name	Top Ten Holdings 30-06-2022	Top Ten Holdings 30-06-2021
NZ Local Government Funding 2.25% 15/05/2028	3.54%	?%
NZ Local Government Funding 1.5% 15/04/2026	3.15%	4.47%
NZ Local Government Funding 2.25% 15/04/2024	2.92%	?%
NZ Local Government Funding 4.5% 15/04/2027	2.21%	?%
NZ Local Government Funding 2.25% 15/05/2031	2.04%	?%
Monash University 4.05% 06/04/2029	1.95%	?%
Genesis Energy 5.66% 09/06/2027	1.72%	?%
Housing New Zealand 3.36% 12/06/2025	1.56%	2.21%
NZ Local Government Funding 1.5% 20/04/2029	1.45%	2.16%
Spark 4.37% 29/09/2028	1.45%	?%
NZ Local Government Funding 3.5% 2033	?%	1.98%
Transpower 1.735% 2025	?%	1.83%
ANZ Bank Float 2024	?%	1.79%
Macquarie Float 2025	?%	1.69%
Westpac 1.439% 2026	?%	1.65%
Bendigo & Adelaide Bank Float 2025	?%	1.55%
Ausgrid Finance Pty Ltd. 1.814% 2027	?%	1.54%
Total Top Ten	21.99%	20.87%
Top Ten (Seven) Investment Average Coupon Rate	Coupon 3.17%	Coupon 2.12%
Top Ten Investment Average Years to Maturity	5.4 years	5.5 years

Notes

1/ The average coupon rate for YE June 2021 has been calculated from just seven investments, not ten. This is because for three of the top ten investments, the coupon rates were not disclosed.

--------------------

Once again the fund composition is not fully disclosed, with only the top ten positions, making up 21.99% of the fund, as at 30-06-2022 made public. If this were a share fund, then that would be a real problem. However, in a bond fund, interest rates tend to move in tandem across all parts of the portfolio. This means sampling the behaviour of just 22% of a fund can still offer insight into the behaviour of the whole fund. Milford have not given us a running commentary on why their fund was adjusted in content over the year. So I am just using the end of year positions, as disclosed by Milford, to intimate what I can.

In contrast to Fishers, there has been no significant change in the the overall profile of maturity dates held by the Milford Trams Tasman bond fund. Although I do note that the relative maturity dates were short, in comparison with Fishers, anyway. In general, keeping your average bond maturity short in times of rising interest rates is good policy. So kudos to Milford for apparently having this policy in place for some time. But this 'early transition to shorter maturity times' could explain the fund under-performance over the June 2021 to June 2022 year.

One thing that has changed is that many of the former top ten 'Australian' holdings have 'come home'. The headline constituents disclosed are now, with one exception (Monash University), all New Zealand entities. The NZD:AUD exchange rate has moved against us over the year (down from 93c to 91c June to June). This means that any Australian funds repatriated would likely have been worth more in NZ Dollar terms. However this change has not been enough to boost fund performance significantly.

SNOOPY

[SBQ]

Are these fund figure returns net of all taxes and mgt / administration fees?
A more meaningful analysis is to do a cumulative % return of ALL the years in question. Also why stop at taking the top 10% of the holdings? I'm sure they have a full disclosure of the entire fund returns. Deduct all taxes and fund fees they take off each year returns and compare what the individual could do by directly buying into the index ETF market return.

The 5 years from 2018 to 2022 year end shows they've under performed the index by -3.26%. Compound that through 10 or 20 years and then you will see the helpers have really helped themselves.

But if you ask me, in times of high inflation the last thing I would want to hold are bonds, especially corporate bonds where profit margins are normally squeezed out during recessionary times. Your best protection against the eroding power of inflation is to own companies that have the ability to raise prices without hurting their profit margins. Now if fixed term rates on cash holdings were around 10% a year, ok then things stack up as you really need cash rates above the inflation rate. But anything less than the inflation rate is a waste of time - net after paying taxes.

[Entrep]

Hi Snoopy, you seem to spend a lot of time creating very detailed analysis and reports. It might be a good idea for you to start your own website and post them all there, where they can be more readily accessed, archived, search, found by Google, and read. I would if I were you. You could also keep posting them here at the same time. Just a suggestion. Cheers