NZ Fund Managers

[stoploss]

Snoopy you might like this
https://www.fundsmith.co.uk/news/202...n-bank-shares/

[Snoopy]

Fisher funds investment philosophy seems to be to buy high conviction stocks in a relatively concentrated portfolio and hold them through thick and thin.
Investing in banks is, I think, at the trickier end of the spectrum of businesses to understand from a risk perspective. So I think their losses at Signature Bank were to an extent unlucky (interest rates rose much faster than anyone expected, causing the implosion in bond values used to back depositors funds), and not just a question of 'poor stock selection'.

Snoopy you might like this
https://www.fundsmith.co.uk/news/202...n-bank-shares/

Moral summary: "Never yourself (including fund managers) invest in banks "!
Terry Smith is chief executive of Fundsmith LLP. *He was the number 1-rated banking analyst in the Reuters and Institutional Investor surveys 1984-89

I don't agree with that proposition in general, because of the underlying assumption, that banks are overleveraged, -and can be wiped out by falling asset prices-, doesn't apply in the same way to Australian and New Zealand banks. Most bank loans in NZ are set off against valuable secured assets like property. Sure it might be a problem if every property owner was 'mortgaged to the max', but they are not. Sure there is some security for loans set off against bank bonds. But generally the redemption dates of any such bonds are spread.so that not too many need refinancing at the same time.

Looking over the long pond at Signature Bank in Silicon valley, it doesn't sound like Signature had the offsetting supporting asset values to back up their deposit base. The 'strong assets', that they thought were supporting their deposit base were unsalable as the market for those assets turned down. If the same thing happened in New Zealand, there would still be enough housing equity left to ensure those depositors did get paid back in full. And that includes the scenario where highly leveraged property owners have their houses sold out from under them.

Thankfully in NZ we have reserve bank governor Adrian Orr to ensure that banks are building up sufficient assets so that the loan market does not cause their balance sheet to be overstretched.

SNOOPY

[Snoopy]

https://www.youtube.com/watch?v=QWtLt6sIodE

'Setting the scene', Robbie Urquhart, Portfolio Manager, Australian Equities: Looking at data going back to the 1870s, 2022 was the worst year in 150 years for the combination of bonds and shares performing badly together.

Q/ How is the investment team shaping the portfolio to capture the opportunities in this environment?

A/ Ashley Gardyne (Chief Investment Officer): A lot of market concerns are already priced into equity and fixed income prices. High quality US company bonds earlier in 2022 were yielding a 3.5% return. The same companies are now yielding a 7-8% return (all investment grade). Beyond investment grade there are places you can get 10% plus. We are starting to rotate these fixed interest bonds out of government bonds that tend to offer lower yield into more credit (loans to companies). Similar story on the equity side. We have a long list of companies that we really admire but we haven't been able to acquire because the price has been too high. We have been able to acquire some of thes ethis year, 'salesforce.com', 'Microsoft' are great businesses that we think have got really good ling term prospects. We think about 'micro' (individual securities and their own opportunities and risks) rather than 'macro' (the whole economy, where you are distracted by inflation -should I buy now or wait until after the recession/- where there are always thongs to distract you).

Q/ How are you positioning multi asset portfolios (mixture of equities and property and bonds) to get the best returns for our clients?

A/ Ashley Gardyne (Chief Investment Officer) : Current allocation to all three categories (equity, property and bonds) is looking a lot more attractive than last year. We are tilting a little to wards equities to try and take advantage of cheaper prices. In the bond universe we have been tilting more towards high interest rather than government bonds. A new international equity fund is feeding into those portfolios. In the last couple of months we have set up a 'global credit fund' and a 'private debt fund', both new ways to invest money in the bond space.

Q/ 'Adapting and rewiring by companies'. What is an example form a company that you manage?

A/ Robbie Urquhart (Portfolio Manager, Australian Equities): I manage the Australian equity portfolios. We have a company called Audinate, that creates hardware as well as software that is used in audio equipment, and how audio equipment networks with each other., so that microphones can speak to speakers and so on. They have had a challenge sourcing microchips out of South East Asia They have approached this by redesigning a bunch of their circuitry so they can source more abundant chips which there are no shortages of, and put those into their hardware. They have also increased the flexibility of the software componentry so that it can be retrofitted into physical products, to avoid the necessity of some microchips at all."

"Resmed, a company that makes ventilators, a global leader in sleep apnea equipment, is another example of adapting to a microchip component shortage. They have a work around whereby they have gone back to using some of the older 'card' technology. You literally insert these cards into the ventilators to capture the data that is necessary. You can upload that data physically into the card. it is a short term workaround solution. But it is one way they can treat their patients and meet the demand of their customers."

(Oops just realise I have already reviewed this seminar see post 76)

SNOOPY

[Snoopy]

https://www.kiwiwealth.co.nz/product...key-documents/

I click "Kiwiwealth Managed Funds - Other Material Information", I get sent to a pdf. That is a relatively new document issued in December 2022

Page 20 of that document contains the following information on fees

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

Limits on fees and expenses

Under the Trust Deed the maximum fees that we can charge out of each Fund are:
Contribution fee 5% (plus any GST) of the consideration for meeting the issue price of units.
Annual Fees 2% (plus any GST) per annum of the net asset value of the Fund.
Performance fee To be set at the time any performance fee is introduced.
Withdrawal fee 5% (plus any GST) of the amount withdrawn.
Supervisor fee 0.075% (plus any GST) per annum of the net asset value of the Fund.

There are no limits on the Buy/Sell spreads that we can charge. Subject to the above limitations and the limitation set out under ‘Additional costs, charges, and expenses’ above, there is no limit to the amount of remuneration that we can be paid or on the amount of expenses we can recover

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

While I note that these are 'maximum fees', they do seem high by industry standards. Annual management fees for the funds look to be:

(2% + 0.075%) x 1.15 (GST) = 3.1625%, with performance fees to be added to that.

I believe that this fee update is a direct result of Kiwiwealth being acquired by Fisher Funds. By way of comparison, the total Kiwiwealth Growth Fund annual fee for YE30-06-2022 (before the Fisher Funds takeover) was a mere 0.96%!

It does seem there is now a clear intent to introduce performance fees on top of management fees, something that was in the past a clear point of difference between Kiwiwealth and most other fund managers. Buy/Sell spreads are in effect another layer of fees on top of the standard contribution fees. Suddenly Kiwiwealth is looking very expensive indeed to be getting in and out of!

Fishers have reported for their own label 'growth' and 'balanced' managed funds, they will be dropping performance fees from July.

https://fisherfunds.co.nz/investment...-managed-funds

"From 1 July 2023 the Growth Fund and Balanced Strategy will no longer incur a performance fee."

Recently acquired Kiwiwealth have a 'growth' and 'balanced' strategy with no performance fees. So it looks like bringing the two into line has resulted in Fishers losing their performance fee rather than Kiwiwealth gaining such fees.

The historical Fisher Balanced Fund fee including GST (with zero performance fees) was 1.21% + 0.19% = 1.40%
The historical Fisher Growth Fund fee including GST (with zero performance fees) was 1.27% + 0.18% = 1.45%

Those fees look to be less than the 3.165% fees charged by the now sister fund at Kiwiwealth. But further investigation suggests that I may have been wrong about GST being imposed at 15% at Kiwiwealth. From https://www.taxpolicy.ird.govt.nz/-/...aged-funds.pdf

"Treating 90% of their services as exempt and effectively charging 1.5% GST on their fees (15% GST on 10% of their fees). This practice is applied by most retail managed funds and wholesale funds that other funds such as retirement schemes invest into."
"(because they consider their services are mostly “arranging” the buying and selling of investment products and so should qualify for the GST exemption for financial services)."

If this is true then the annual Kiwiwealth Growth Fund fee is projected to be (2% + 0.075%) x 1.015 (GST) = 2.106%, an overall fee that is nevertheless higher than the Fisher Funds branded sister funds.

Reading the fine print, it looks like the more specialised growth funds, Fishers Property & Infrastructure Fund, New Zealand Growth Fund, Australian Growth Fund, and International Growth Fund are NOT going to be exempt from future performance fees (albeit such fees will be capped at a maximum of 2% of the value of each fund per year).

This is contrary to the report here:
https://www.goodreturns.co.nz/articl...ison-fees.html

which, (erroneously?) suggests all Fisher Funds performance fees will be jettisoned.

SNOOPY

[Snoopy]

Here are my notes taken from the seminar linked to below "The Fisher Funds Smart Investor Webinar: 4 May 2023"

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

https://www.youtube.com/watch?v=6xdMCq4vpj4

Ashley Gardyne (Chief Investment Officer)/ (On Context) We have come through a period of unprecedented surprises that has left investors in all market segments, be they aggressive, balanced or conservative, with nowhere to hide. Over 2022 Bonds had the biggest fall in over 150 years of recorded data,. Rampant inflation has been largely caused by constraints in the supply side. Once production starts to normalise (e.g. semiconductors, lumber), then the cost pressures start to ease. Bond yields are now materially higher (which means less scope for capital loss as there is a smaller chance of interest rates going higher) and the global PE ratios are now below the 10 year average (albeit just sitting at 15 - with the ten year average at 16).

Harry Smiith (Portfolio Manager International Equities)/ (On opportunities Fisher sees internationally) Half of all the gains in the S&P500 over the last 15 years have been delivered by just a handful of companies. 20 companies have delivered as much gain as the next 480 companies combined. Fisher aims to identify the next 'best 20 companies' for the next 15 years. Selection criteria are:

1/ Wide economic moats (intellectual property, scale or a brand): e.g. Mastercard, Resmed, Xero
2/ Talented and Aligned Management (managers with ownership skin in the game): e.g. Edwards Life Sciences (make non-surgically invasive heart valves, competitors face regulatory hurdles to compete, CEO has big stake in the company, and other heart valve designs waiting in the wings), Mainfreight, 'PWR Advanced cooling technology' (ASX).
3/ Underappreciated earnings growth: e.g. Fisher & Paykel Healthcare, Floor & Decor (a US headquartered specialty retailer of 'hard floors': tile, wood, laminate, vinyl, and natural stone flooring), AUB Group (insurance brokers and underwriters) (ASX)

A more detailed dive into one example: Floor & Decor is a US chain of mega warehouses that generally compete with much smaller local operators that cannot compete on price or service. Inventory is bought directly from the source. This allows Floor & Decor to sell inventory 30% cheaper than their competitors can, by cutting out the middle man. Large store means much better in stock availability, and the company can offer free storage of product until the builder needs it delivered to their building site. Furthermore, Floor & Decor can offer goods on credit. There are 200 stores across the USA at the moment. Fisher sees potential for 500 stores longer term.

Q/ Will rapidly rising mortgage rates cause a recession?
A (Harry Smith)/ Rising mortgage rates threatens consumption that affects 60% of the economy. All mortgages reset to the two year rate today would be a 2.5% headwind to the NZ economy. BUT unemployment at 3.4% is still very very low, it looks like inflation is starting to abate, the tourism tap is turned back on, and lastly immigration numbers are up. All good news for NZ's economy.

Q/ How to manage inflation risk?
A/ (Laura O'Reilly, Senior Wealth Management Advisor)/ An allocation to Growth assets and high yielding bonds are the best hedge against inflation for retirees.

Q/ Markets have been stronger in the last few months. What has been driving that and how have our portfolios gone?
A/ (Ashley Gardyne)/ Inflation has started to change direction,. The Fisher portfolios have been outperforming their benchmarks. Growth businesses that Fisher tend to invest in, have outperformed. Interest rates going up allows banks as a category to expand their margins. But if interest rates go up too quickly, then this tailwind for banks can become a headwind. US bank failures unwound the good performance of banks from a year earlier. Likewise energy investments, that had a good year last year with the oil price spike. Such a spike in price can cause a pull back in consumption of oil (ends up being bad for energy companies.) Most of the positive return in the US in 2023 has come from a handful of growth companies. Last year the Googles and Amazons 'overhired' expecting more growth than there was. The tech companies reacted by taking costs out of their businesses. With revenue re-accelerating, profit growth has returned.

Q/ What effect will the upcoming election have on New Zealand and the market?
A/ (Harry Smith)/ Politicians create the foundations for success. The key is a democratic system having clear property rights. Otherwise politicians do not have a massive effect on the stock market. The NZ sharemarket has done relatively well under both Labour and National. So whoever wins the election is not a huge consideration.

Q/ Have central banks got inflation under control?
A/ (Ashley Gardyne)/ We think the action central banks have taken already has done enough. It is usually 9, 12, 15 months out that the real effect of interest rates on inflation is seen to work. That is how long hikes in interest rates get to be reflected in people's mortgage rates. Also the supply side inflation, which was a major factor, is already well on the way to being resolved. If anything the reserve bank in NZ risks going too far with interest rate rises, given how much debt we have in the economy.

Q/ Is it a good time now to invest cash?
A/ (Laura O'Reilly)/ Peter Lynch quote: "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." Successful investors are much more focussed on sticking to a strategy, rather than successfully timing their entries and exits. Investing in stages can be a good way to spread out your market risks over a longer time period.

Q/ What is Fishers ESG (Envirionment, Social and Governance) investment policy and how is it executed?
A/ (Ashley Gardyne)/ We don't invest in weapons manufacturers, and we do take into account the environmental factors around individual companies. 'Excluding things' is not enough. We embed responsible investing into our entire process and engage with the managers in companies we invest in. There is an ESG debate among our investment team on each new investment. Losing their social licence , getting regulated out of existence, and receiving big fines are the possible fiscal downsides of poor ESG company policy. Simply 'selling shares' means a manager does not have the opportunity to meet the company executives, and lobby. Being invested and having discussions is the only way for investors to influence change. For example, Mainfreight is fundamentally a polluting trucking company. But all 300 facilities around the world are self sustaining from an energy and water perspective, and they are looking at ways of making their trucks greener, potentially having electric powered trucks and hydrogen powered trucks at some point. Real change requires engagement.

Q/ With higher interest rates at the bank, are term deposits a better option than shares?
A/ (Laura O'Reilly)/ Term deposits have their place for investors close to their goal, or needing to access funds in a short period of time. But returns on term deposits do not do the best job of providing long term inflation protection. There is a risk that as term high term deposit rates today roll off, future rates could be lower. Complementing term deposits with higher yielding shares can be a good retirement strategy to stretch out that nest egg in the retirement years.

Q/ Are tech stocks now stretched, or still looking attractive?
A/ (Harry Smith)/ Many tech companies over-invested coming out of Covid-19. Subsequently taking costs out of their business has been a boost to profitability. The NASDAQ, which is tech heavy, is up 17% year to date. So are valuations overstretched now? Look at Google (which dominates search, has exposure to 'car computing' and 'artificial intelligence' as well) as an example.

Google currently trades on 17 times past earnings, below the S&P 500 average PE right now. This is the first time this has happened in ten years. Household product companies also did well in 2022 - companies associated with products you find in the middle of supermarket aisles: like cleaning products, Coke and Pepsi. These companies trade at around 27 x PE ratios at the moment, a significant premium to the likes of Google. Given the outlook four to five years down the track, we favour Google (and their like).

Q/ What good investment opportunities have you seen in the market with examples?
A/ (Harry Smith)/ We like companies that have seen significant growth in the wake of Covid-19, are cutting their costs, and have reset expectations. Part of this 'like' is that their share prices are below here they were at the start of 2022. I like Amazon. Significant demand was brought forward with Covid-19. Amazon really ramped up investment in their fulfillment infrastructure, and then found they had to unwind some of that. As a result their share price has come back a long way.. But fundamentally Amazon represents e-commerce (which will continue to take market share off physical retail, and Amazon has 40% of US e-commerce), cloud computing (in early stage but Amazon is the dominant provider of cloud computing services), and a rapidly growing and highly profitable advertising business (the ad slot they serve me as an on-line committed and targetted buyer is incredible valuable for a manufacturer.)

Switching to healthcare, I like 'Icon' listed in Ireland. Icon runs medical trials for biotech firms and pharmaceutical companies. Shares have been under pressure recently because there has been concern around start up biotech companies funding, and their ability to continue to grow. We think these concerns are relatively unfounded for Icon, because unprofitable start up companies are a relatively small proportion of Icon's client base. This company is an integral part of R&D into new drugs, and we think they will do well over five to ten years.

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

SNOOPY

[Snoopy]

Fishers have reported for their own label 'growth' and 'balanced' managed funds, they will be dropping performance fees from July.

https://fisherfunds.co.nz/investment...-managed-funds

"From 1 July 2023 the Growth Fund and Balanced Strategy will no longer incur a performance fee."

Recently acquired Kiwiwealth have a 'growth' and 'balanced' strategy with no performance fees. So it looks like bringing the two into line has resulted in Fishers losing their performance fee rather than Kiwiwealth gaining such fees.

The historical Fisher Balanced Fund fee including GST (with zero performance fees) was 1.21% + 0.19% = 1.40%
The historical Fisher Growth Fund fee including GST (with zero performance fees) was 1.27% + 0.18% = 1.45%

Reading the fine print, it looks like the more specialised growth funds, Fishers Property & Infrastructure Fund, New Zealand Growth Fund, Australian Growth Fund, and International Growth Fund are NOT going to be exempt from future performance fees (albeit such fees will be capped at a maximum of 2% of the value of each fund per year).

This is contrary to the report here:
https://www.goodreturns.co.nz/articl...ison-fees.html

which, (erroneously?) suggests all Fisher Funds performance fees will be jettisoned.

I rang Fisher Funds this morning. They confirmed to me that only the "(Envelope) Growth Fund" and "Balanced Strategy" will no longer incur a performance fee from 01/07/2023. For all of the other more prescriptive funds, e.g. NZ Growth Fund, Australian Growth Fund and International Growth Fund, and the Property and Infrastructure fund, performance fees remain.

The Goodreturns article I quoted above was sub-headlined:

"Fisher Funds has announced it will remove performance fees across all its KiwiSaver and managed funds’ multi asset portfolios on July 1."

The key phrase in that headline is 'multi asset portfolios'. In 'Fisher speak' this means 'fund of funds' type investments, the balanced and growth strategies that are built up from the building blocks of more prescriptive specialized Fisher funds. Not any fund that includes multiple assets of any kind.

However the first line in that goodreturns article
"Fisher clients were told performance fees will go in their monthly performance update."

gives the impression that all performance fees are going. Unfortunately for Fisher clients the Property and Infrastructure Fund, NZ Growth Fund, Australian Growth Fund and International Growth funds will still be charging performance fees going forwards. IMO the benchmarks used for 'outperformance' in these funds are spurious:

https://fisherfunds.co.nz/investment...erformance-fee

For the growth funds the 'bonus hurdle rate' is the NZ Official cash rate plus 5% (or plus 3% for the property infrastructure fund). This strikes me as being structured towards 'what the market will bear in a good year', rather than bearing any relation to the selection of assets allowed under each fund management directive. That would be a true measure of fund manager skill. IMO the performance fee, as structured, is a very poor management incentive tool.

SNOOPY

[Snoopy]

One thing you can't fault the 'ANZ NZ growth fund' for is 'full disclosure'. All 4,410 of the investments held are listed!
https://www.anz.co.nz/content/dam/an...ent-Growth.pdf

The ANZ Oneanswer Properties Securities Fund is a bit less forthcoming, with only the top ten holdings disclosed. However these top ten holdings do make up 94% of the total value of the fund.
https://www.anz.co.nz/content/dam/an...Securities.pdf


Property Securities Top Ten Holdings

	Oneanswer Property Securities Top Ten holding fund percentage (30/09/2022)	Oneanswer Property Securities Top Ten relative percentage (30/09/2022)	Oneanswer Property Securities Top Eight relative percentage (30/09/2022)	ANZ Property Securities Top ten percentage (30/09/2022)	ANZ Property Securities Top ten NZ holdings relative percentage (30/09/2022)	NZX50 capitalisation (30-09-2022)	NZX50 Top Eight relative percentage (30-09-2022)
Precinct Properties	15.59%	16.5%	17.1%	0.38%	14.0%	$2,062m	17.7%
Stride Stapled Group	12.85%	13.6%	14.1%	0.35%	12.9%	$902m	7.7%
Property for Industry	14.06%	14.9%	15.4%	0.34%	12.5%	$1,225m	10.5%
Summerset Group Holdings	1.76%	1.9%	n.a.	0.33%	12.2%	$2,502m (2)	n.a.
Kiwi Income Property Trust	14.22%	15.0%	15.5%	0.33%	12.2%	$1,438m	12.3%
Goodman Property Trust	17.00%	18.0%	18.7%	0.30%	11.1%	$2,779m	23.8%
Charter Hall Group (Aus)	1.65%	1.7%	n.a.	0.28%	10.3%	$18,469m (1)	n.a.
Vital Healthcare Property Trust	9.21%	9.7%	10.1%	0.23%	8.5%	$1,677m	14.4%
Investore Property	5.64%	6.0%	6.2%	0.17%	6.3%	$558.6m	4.8%
Argosy Property	2.61%	2.8%	2.9%	0.00%	0%	$1,016m	8.7%
Total	94.59%	100%	100%	2.71%	100%	n.a.	100%

Notes

1/ Charter Hall Group (CHC.ASX) is an Australian listed property company. On 30th September 2022, the exchange rate was NZD1.13379 = AUD1. This is the exchange rate that i have used when converting the market capitalisation of CHC to New Zealand dollars on the date of analysis. However Charter Hall is such a large entity it is worth as much as the entire New Zealand property sector combined. Given it is not even a New Zealand company, it is hard to justify its inclusion as part of any New Zealand Property sector investment analysis. Consequently I believe it would be an artificial construct to include Charter Hall Group in any asset allocation analysis for this fund.

2/ Summerset Group is a New Zealand retirement village operator. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, they are not property owning companies in the conventional sense. And if we include Summerset in a property sector analysis, are we not obliged to include the other listed retirement village operators as well? Consequently I have decided to omit Summerset from any property sector proportional analysis.

I had a favourable impression of how ANZ have run their dedicated property investment fund last year. So I thought it was worthwhile having another snapshot look at how ANZ is managing their property investments, 9 months further into this period of property market turmoil.

This file on the total 'ANZ Growth Fund' holdings as at 30th June 2023 is not yet released as I write this (ANZIF-FU-300623-Growth.pdf).

The comparative 'ANZ Oneanswer Properties Securities Fund' only discloses the top ten holdings in their quarterly reporting releases. However these top ten holdings do make up 94% of the total value of the fund.

https://www.anz.co.nz/content/dam/an...Securities.pdf

The total value of the ANZ Oneanswer Property Securities fund on our reference date was $93.565m. However, the actual total funds in this sector managed by ANZ is much higher. That $93.565m does not include property investments made from ANZ's other broader based managed funds.


Property Securities Top Ten Holdings

	Oneanswer Property Securities Top Ten holding fund percentage (30/06/2023)	Oneanswer Property Securities Top Ten relative percentage (30/06/2023)	Oneanswer Property Securities Top Eight relative percentage (30/06/2023)	ANZ Property Securities Top ten percentage (30/09/2022)	ANZ Property Securities Top ten NZ holdings relative percentage (30/09/2022)	NZX50 capitalisation (30-06-2023)	NZX50 Top Eight relative percentage (30-06-2023)
Precinct Properties	16.45%	17.57%	18.22%	0.38%	14.0%	$2,046m	17.7%
Stride Stapled Group	11.85%	12.65%	13.11%	0.35%	12.9%	$765m	6.6%
Property for Industry	13.79%	14.73%	15.28%	0.34%	12.5%	$1,188m	10.3%
Summerset Group Holdings	1.82%	1.94%	n.a.	0.33%	12.2%	$2,237m (1)	n.a.
Kiwi Property Group	13.27%	14.17%	14.70%	0.33%	12.4%	$1,439m	12.3%
Goodman Property Trust	19.41%	20.73%	21.50%	0.30%	11.1%	$3,115m	26.9%
Oceania Healthcare	1.54%	1.64%	n.a.	?	?%	$558m (1)	n.a.
Vital Healthcare Property Trust	9.31%	9.94%	10.31%	0.23%	8.5%	$1,544m	13.4%
Investore Property	4.35%	4.65%	4.82%	0.17%	6.3%	$522m	4.6%
Argosy Property	1.85%	1.98%	2.05%	0.00%	0%	$945m	8.2%
Total	93.64%	100%	100%	?%	100%	$11,564m (2)	100%

Notes

1/ Summerset Group and Oceania Holdings are New Zealand retirement village operators. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, they are not property owning companies in the conventional sense. Consequently I have decided to omit Summerset and Oceania from any property sector proportional analyses.

2/ $11,564m represents $11,564m/ ($11,564m+$2,237m+$558m) = 80.53% by market value of the NZX50 derived fund top ten.

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

Lots of numbers, so what is the best way to make sense of them? The figures to look at are those columns that add up to 100%. These give a normalised view of the proportion of shares held. I would expect the:

a/ Oneanswer Property Portfolio AND
b/ The ANZ Growth Fund (Property Constituents only) Portfolio

to be very similar. These two funds are run by the same managers (ANZ). (As I write this the contents of ANZ's growth fund at our 30-06-2023 reference date have not been released. I will update columns 4 & 5 when these figures become available). The 'property' investment picture has become distorted by the inclusion of Summerset and Oceania, which are not normally on the list for those seeking investment in the NZ property sector. Token holdings representing 1.82% (SUM) and 1.54% (OCA) have been included in the NZ property fund, which are nevertheless in a much smaller proportion to those that exist in the much more widely invested growth fund. ANZ do not comment on these inclusions. So we are forced to speculate on why this might be. My guess is that it is 'liquidity issues' within the NZ property sector, which contains only eight significant players in the whole NZX50, that is the reason (ANZ is a relatively large player in the managed fund and kiwisaver investment sector).

Leaving aside Summerset and Oceania, ANZ have continued, relative to the property index, to be significantly underweight in both the Goodman Property Trust (gross yield 3.87%, c.f. PFI at 4.54%) and Vital Healthcare Property Trust (Gross yield 4.4%). We are told industrial property in key areas of Auckland is in short supply and consequently double digit rent rises are on the cards for landlords in this sector as rental contracts roll over. But even so, PFI (where 'ANZ Oneanswer' are overweight) looks like a much better bet yield wise than GMT. Meanwhile 'Vital Healthcare' are somewhat unique in that healthcare landlord space, a fact that seems to have market investors willing to pay a premium that 'ANZ Oneanswer' are unwilling to mimic. Even with expected rent reviews factored in, GMT and VHP are producing returns well below what an investor might expect from a term deposit. Despite being too big to sell out of one of the big eight property sector players entirely, the portfolio under-weighting of both GMT and VHP continues looks to look like a sound strategic move by 'ANZ Oneanswer'.

Argosy continues to be very much out of favour. Gross yield is good at 8.38% (PIE tax rate 28%). The Kaikoura earthquake damage to 7 Waterloo key in Wellington, resulted in facade repairs of $14.5m. These were booked in FY2022. Removing this cost should have improved FY2023 AFFO earnings by the same amount. Yet the increase in FY2023 earnings was only $10m. A National lead government, come election time, may torpedo future demand for government department office space, which is a key market for Argosy's office portfolio. Could it be the shunning of Argosy is a reflection of those Auckland based fund managers not liking the prospects for Wellington property in general and government based tenants in particular? I note the Ministry of Business Innovation and Employment, tenanted at 15-21 Stout St Wellington, has a lease that expires on March 2027. That one lease is nearly 10% of Argosy's total property portfolio!

'ANZ Oneanswer' continue to be very overweight on Stride Property, which is working towards the goal of becoming the 'on the ground manager' of other people's property portfolios. In the past this has meant Stride building up their own property portfolio before floating/selling those assets off to third party investors. Stride is the parent company of Investore, the listed big box retailer with a heavy presence in the supermarket sector. I like Investore for its defensive tenant nature. Nevertheless I do note it is saddled with some rather onerous management contracts from parent company Stride on one hand, while negotiating constrained rent deals from powerful Countdown supermarket parent Woolworths of Australia on the other. IOW Investore, which has a fairly 'neutral rating' in 'ANZ Oneanswer's portfolio overview has a constrained income stream and little leverage in being able to control their own expenses. Having an overweight shareholding in Stride would be a way for 'ANZ Oneanswer' to claw back any potential 'management contract overspending' at Stride's 'strategic investment' (18.83% shareholding) in Investore.

ANZ's investment arm has been in the news -post these tabulated results- reducing their shareholding in the Kiwi Property Group. However the number of shares sold down 'so far' are more in line with bringing the KPG shareholding back to a 'neutral portfolio position', rather than expressing any deep disgust at the prospects of KPG looking out into the future.

The low 'ANZ Oneanswer' nz property fund return for the year ended 30-06-2023 of -1.23%, did not compare well with the market benchmark loss of -0.09%. But when you consider that management fees 1.10% have been stripped from the fund result as was tax paid, the underlying fund performance was near enough to line ball with the ANZ reference index.

In conclusion, I like the 'allocation skew' that 'ANZ Oneanswer' has put on this property investment fund. But that small skew isn't enough to get them too far away from falling into the general basket of being an 'index tracker plus' property fund.

SNOOPY

[Snoopy]

Harbour Real Estate Investment Fund:

Invrestment Themes	As well as holding listed Property Sector funds, the Fund may also hold securities which are not included in listed property security or Real Estate Investment Trusts (REITS) benchmark indices. To be included, underlying profit certainty needs to be high. Examples include property management, sea ports, toll roads, airports, cell-phone towers, aged care & retirement villages, waste management facilities and data centres industries.
Top ten holdings	GMT, PCT, KPG, VHP, PFI, ARG, SPG, IPL, Goodman Group (Australia) (this company owns develops and manages logistic building spaces) , Charter Hall Group Australia (invests and develops office, retail, industrial & logistics and social infrastructure). These top ten businesses make up 76.9% of the asset value of the fund.
Distribution over FY2022	2.01cpu (based on a unit price of 1.2476 and a tax rate of 28%, this is a gross yield of 2.24%)
Total management annual charge	= 0.88%
Fund Size	$110.4m @31-03-2022
Fund risk rating	5

I have just looked at ANZ bank's Oneanswer property portfolio management skills (one of the larger fund managers in the industry) in post 97. Now let's see how Harbour Asset Management's more 'boutique management style' compares:

The 30th June 2023 fund update is here:
https://www.harbourasset.co.nz/asset...tment-Fund.pdf

	Harbour Real Estate Top Ten holding fund percentage (30/06/2023)	Harbour Real Estate Top Ten relative percentage (30/06/2023)	Harbour Real Estate Top Seven relative percentage (30/06/2023)			NZX50 capitalisation (30-06-2023)	NZX50 Top Seven relative percentage (30-06-2023)
Precinct Properties	12.61%	16.04%	18.02%			$2,046m	18.5%
Stride Stapled Group	3.79%	4.82%	5.42%			$765m	6.92%
Property for Industry	8.15%	10.37%	11.65%			$1,188m	10.8%
Ryman Healthcare	2.94%	3.74%	n.a.			$2,840m (1)	n.a.
Kiwi Property Group	10.04%	12.77%	14.35%			$1,439m	13.0%
Goodman Property Trust	19.05%	24.23%	27.22%			$3,115m	28.2%
Goodman Group (AUS)	3.00%	3.82%	n.a.			$41,695m (1)	n.a.
Vital Healthcare Property Trust	8.94%	11.37%	12.78%			$1,544m	14.0%
Infratil	2.72%	3.46%	n.a.			$2,813m (1)	n.a.
Argosy Property	7.39%	9.40%	10.56%			$945m	8.56%
Total	78.63%	100%	100%			$11,042m	100%

Notes

1/ Ryman healthcare is a New Zealand retirement village operator. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, retirement village operators are not property owning companies in the conventional sense. Infratil is a global owner of global infrastructure assets. It is a reputable and well run company, but is not known as an owner of buildings, as such. Goodman Group is a global property manager based out of Australia running a co-investment property ownership model (The Goodman Property Trust in New Zealand, GMT, is just one of these co-investment partners).
All three of these companies, despite their merits, are not really NZ property investments in any majorative sense. This is why I have left them out of my 'relative ranking' calculations

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

Looking at the 'relative percentage ownership' compared to the property index composition, the Harbour Property Fund property constituents are within one percentage point of their relative index rating - with two exceptions. Harbour are overweight in Argosy Property and underweight in Stride Property. This is a reverse of the position espoused by 'ANZ Oneanswer' at the same snapshot in time. The rest of the property portfolio is pretty much index tracking.

Harbour have taken what I would term a 'broad view' of real estate, with the shares they have added outside of those core 'top eight' holdings (I include Investore in that core grouping). Are the three companies in the top ten outside of the 'core group of eight' good places to have your money invested outside of conventional property? - Probably. Are they what you would expect to find in a property investment fund? - Probably not.

The 'Harbour Real Estate Fund' had $99,565,724 of assets under management as at 30th June 2023. The annual return to that date after deductions of fees and tax was 1.61%. Harbour give scant commentary on any Real Estate Fund strategy. But we can get some hint of their thinking from a remark by lead manager Shane Solly in April 2022 from a review article.
https://www.harbourasset.co.nz/resea...-real-returns/

"REIT investment universe is more diversified than was the case even five years ago with REITS now including investments in sectors such as logistics, healthcare and education which have structural tail winds."

One year on, how did the Harbour Real Estate Fund look in the shadow of this vision by Solly? The largest logistic company property managers in the portfolio are GMT (Harbour holding -1%ge point below index rating) and PFI (Harbour holding +1%ge point above index rating). That adds up to the fund having a neutral rating on logistics property. The only healthcare property company, Vital, is underweight by 1%ge point compared to the index rating. Furthermore, Harbour have not declared any real estate assets in the education sector, although with none listed in NZ, we can't blame Solly and his team for that.

The SIPO or Statement of Investment Policy Objective for this fund can be found here, from page 28:
https://www.harbourasset.co.nz/asset...Objectives.pdf

Nevertheless it is extremely disappointing that Solly has not followed through on his vision and is leaving the 'property sectors with structural tail winds' to be exploited by others.

I favour investment funds that are 'true to their label', but are willing to take some well reasoned bets outside of the index norm. The Harbour Property Fund fails on both these scores. But it is economically run, with a total annual management fee of just 0.78% of the value of the portfolio.

SNOOPY

[Snoopy]

This is the lowest cost NZ Property investment fund I have found. It aims to mimic the market performance of the leading property market listed entities (mostly PIEs) and nothing more. NPF in itself is also a PIE. The mandate for the fund is to invest in the eight largest property companies listed on the NZX (actually all listed property investment entities with a market capitalisation > $300m, and an average daily volume trading (ADVT) of $200k over six months) ), as listed in the table below. There is no mandate to invest in any other entities, although the fund is allowed to hold up to 10% of its invested capital in cash. The NPF fund was valued at a total of approximately $150m on the 30-06-2023 balance date. (source https://smartshares.co.nz/types-of-f...zpropertytrust). This is a not insignificant 11% of the capitalisation of the whole addressable market sector of NZ listed real estate.

	Smartshares NPF Top Ten holding fund percentage (30/06/2023)	Smartsahres NPF Top Ten relative percentage (30/06/2023)	Smartshares Top Eight relative percentage (30/06/2023)	NZX50 capitalisation (30-06-2023) (key stakeholders removed) (1)	NZX50 Top Eight relative percentage (30-06-2023) (key stakeholders removed)	NZX50 capitalisation (30-06-2023)	NZX50 Top Eight relative percentage (30-06-2023)
Precinct Properties	17.37%	17.37%	17.54%	$2,046m	20.0%	$2,046m	17.7%
Stride Stapled Group	8.24%	8.24%	8.32%	$765m	7.47%	$765m	6.62%
Property for Industry	12.85%	12.85%	12.98%	$1,188m	11.6%	$1,188m	10.3%
ANZ NZD Current Account	0.23%	0.23%	n.a.	n.a.	n.a.	n.a.	n.a.
Kiwi Property Group	15.48%	15.48%	15.64%	$1,439m	14.1%	$1,439m	12.4%
Goodman Property Trust	18.34%	18.34%	18.53%	$2,330m	22.8%	$3,115m	26.9%
Current Assets & Liabilities	0.77%	0.77%	n.a.	n.a.	n.a.	n.a.	n.a.
Vital Healthcare Property Trust	12.02%	12.02%	12.14%	$1,101m	10.7%	$1,544m	13.4%
Investore Property	4.58%	4.58%	4.63%	$424m	4.14%	$522m	4.51%
Argosy Property	10.22%	10.22%	10.32%	$945m	9.23%	$945m	8.17%
Total	100.0%	100%	100%	$10,238m	100%	$11,564m	100%

Notes

1/ Key stakeholder shareholdings are:
1a/ Goodman Property Trust: Goodman Investment Holdings 19.82%, Goodman Funds Management 5.37% (Total 25.19%)
1b/ Investore: Stride Property Group 18.83%
1c/ Vital Healthcare Properties: Northwest Healthcare Properties 28.72%

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

The return on this fund for the year ended 30-06-2023 was -1.31%. (from Fund update for the quarter ended 30 June 2023.) This is after the deduction of fund management fees (0.54% annually, spread out over the year) and tax. This management fee accrues daily as at each Net Asset Determination Time, and is deducted from the Net Asset Value of the Fund at the time each day that it accrues.

I was troubled analyzing this fund, because I thought it mimiced the defined S&P/NZX real estate index (this follows the eight companies in the table). But it is clear from the table above that it does not. Then I had a brainwave. I knew the NZX50 index considers just the free float of the index constituents, when defining the fraction of shares to be included. So maybe that methodology applied here too? I recalculated each company's market capitalisation, taking out those locked up key stakes where appropriate (see Note 1 above). The result looked better. But it wasn't giving me the actual proportional composition for NPF as declared. Further research:
https://www.spglobal.com/spdji/en/ed...n-new-zealand/

lead me to discover that the S&P/NZX real estate index was a 'capped' index.
"To reduce single stock concentration, the index employs a stock cap of 17.5%,"

At this point I would excuse any reader for 'scratching their head' as they note that the tabulated percentage holding of the Goodman Property Trust and Precinct Properties at at 30-06-2023 are both above that 17.5% cap figure. The solution to this quandary is that the 'cap' is only applied 'semi-annually', - at the end of March and the end of September. So any 'overgrowth' of a particular share, whether that be caused by the out-performance of the share in question, (or the under-performance of its comparative contemporaries), will be sorted out at the next forthcoming re-balancing date.

What I have found interesting about how NPF works is that the comparative Harbour Asset Real Estate fund (post 98, not strictly an index tracker, but targetting 87.5% NZ equities and 12.5% Australian equities) actually tracks the 'big 8' property investments better than NPF, because the Harbour Asset Real Estate fund does not cap any index constituents. Who would have imagined the official NZX sanctioned NZ property index fund NPF is 'out tracked' by another market player!

Ironically it is the NPF 'cap' that has resulted in a lower than expected holding in GMT. I see that as a good thing, but not because I don't like the company's business model. I see that Auckland will continue to be the logistics capital of New Zealand and that space in the right place, -which GMT has-, will continue to be a bankable commodity. My concern is that even with the 'superior touted rent increases' as 'under-rented contracts roll over', GMT is already very fully priced. PCT, an office tower owner, -with NPF being underweight- suits me too. I think the trend of working some days at home is entrenched and that government department offices will shrink over the next few years. This will reduce the growth pressure on office tower space, and also the pressure on the PCT share price to rise. So full marks to NPF for taking a below index exposure to GMT and PCT, even if it took a 'mechanical portfolio rule', rather than 'superior executive prowess' to see that adjustment done.

Despite my discovery of that 'cap' adjustment, this is fundamentally a large fund with a straightforward structure with managers 'doing what they say they will do'. It all sounds a bit boring. But in some investment circles 'being boring' is actually a badge of honour.

SNOOPY

[Snoopy]

I have talked about the idea of an 'index plus' fund manager before. To reprise, this is someone who advertises themselves as an an 'active fund manager', but behaves in a somewhat timid way. Our arch-typical active fund manager is a 'middle aged white guy' (my apologies to the ethnics and the ladies reading, but this is how the story goes) tall, and handsome, with swagger. This is a guy that digs deep into research and makes the bold calls. He is ahead of the market and he has a 99% hit rate for making the right call at the right time. His biggest mistake made to date is ordering the wrong pie for lunch. EXCEPT

....when you dial down into the research, and start looking at longer time frames, there is no such person. In fact, as time goes on, our 'active manager' has a better and better chance of being beaten by, horror of horrors, an index fund: a brainless robot that does nothing more than track a particular stock index. Most fund managers know this tale, even if they don't admit it publicly. Yes they still want to dazzle investors with their bold calls, But they don't want to deviate too far from the index as they know how successful 'index man', sorry 'index bot', can be. This way if they end up a little bit above or a little bit below 'index bot', then they can still spin a good story, to you the investor. Hence you get our 'active fund manager' exhibiting what I call 'index plus' behavior.

An extreme version of this behaviour may be found amongst the NZ Property Fund managers who have a total constituent universe of just eight listed property entities to choose from. That is right, just eight. Not even enough to make a 'top ten'. I picture our group of 'NZ Fund Top Property Managers' like this.....

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

Somewhere in downtown Auckland there is a faceless tower. On one floor of that tower is a long corridor. You get out of a lift and the corridor seems to stretch to infinity, except, right at the end you can see a tea room. The floor in front of you is a cloudy lino grey. The two walls on either side are painted white. Along each wall is a series of doors, each with a brass door handle, but all the doors are white as well. Behind each of those doors is an office. Inside each of those offices is a pristine white desk, and a brown leather office chair. Sitting at each of those desks is 'NZ Property Fund Manager man'. This is the guy I have described before.: tall, dapper, with a hint of grey flecking through his hair - not enough to allow an observer to question his virility, but enough for the fund unit holders to know that he wasn't plucked out of business school last week.

Now you might expect our man to have filing cabinets full of historical research and computer screens where he can follow the nuances of trading in his portfolio in real time . But you would be wrong. This is the 'head man', 'the big kahoona', He has underlings to take care of all that day to day stuff. Our man sits at his desk, with an old fashioned writing pad on it, staring at the white wall in front of him and clutching a pen. He sits there silent and motionless. What is he dreaming about? The 'executive express' in the underground car park downstairs, which he is waiting to unleash on the homeward run to the leafy suburbs where his wife and 2.1 children a gleefully awaiting his arrival for a communal hot dinner? Or is it which golf course he will be tackling on Saturday? No, it is neither of these things, which would be obvious if there really was an observer in his office. He has reached the level where he knows that all of that FA and TA on the stocks he must manage is BS. 'Index plus' is the plan and there is no finance tech needed to execute that. No, his face is stiff and white, as he knows morning tea time is approaching. He knows he must soon make the long trek down to the tea room at the end of the corridor to share a cuppa with all those other NZ property fund managers. He has a face that is struck by abject terror. He will soon have to speak to 'the others'. And this picture of visual terror has been framed by the agonizing thought that has just crossed his mind. That one of those deep thinking managers, with nothing to do all day but hold a pen above a blank paper pad and stare at a white wall might come up with - an original thought!

Can you imagine the downstream effect of that! It would mean our man might have to react. He might have to adjust his own investment strategy. Move his investment model an extra anxious step away from market index comfort. A fractional incremental return would be good, yes. But what if he got it wrong? What if his change lead to to fractional decrease in return! How would he ever face his unit holders!? Yikes! And he is in a modern sealed glass tower with no windows. No place to jump from, if all turns to custard....

SNOOPY