NZ Fund Managers

[Snoopy]

Deleted In Error 12/12/2022.

[Snoopy]

Perhaps the biggest flaw about the whole Kiwi Saver / PIE fund scheme is around inflation. As I said before, those who get the most benefit from KS are high income earners in the high tax brackets; they are also in age groups that are most productive - so between 25 - 45? The most they contribute at an early age, the more they lose in compound returns as IRD takes the lion share of the portfolio gains. Recall my post about John Bogle's math where even a 2% take from a portfolio that had 7% return = 5%. This 5% return only sees 1/3rd of the gain of the 7% portfolio over a 50 year time frame. The 2/3rds was robbed by IRD + mgt admin fund fees. You can't dispute the impact this has on KS funds at the individual level. Now imagine the effects inflation has in say 40 or 50 years time? This was one of the leading arguments against the KS scheme where to the average person contributing, the level of inflation would outstrip the buying power KS funds would have at the end.

With the exception of 'inflation adjusted bonds', inflation is the enemy of all savings schemes. This is not just a problem for Kiwisaver. As you have noted before, a share based investment portfolio is probably your best investment vehicle to keep ahead of inflation. You could even argue that the $521.43 that the government contributes on top of your own minimum $1,042.86 Kiwisaver contribution is a pretty good offset against inflation, - provided inflation does not exceed:

$521.43 / $1,042.86 = 50%

SNOOPY

[Snoopy]

Now hop on over to Canada where you have deferred taxation. The effects are naturally going to be a lot less and introducing any policy to change the deferred taxation scheme is extremely unlikely.

Yes clawback applies when you exceed the income at retirement. Keep in mind the clawback only applies on CPP (Canada Pension Plan) scheme and the OAS (Old Age Security) pension you don't lose. The CPP is a deduction off the wage / salary pay and is mandatory. However, there's a key distinction about OAS and CPP and that is around the issue of 'safety nets' for individuals. Everyone is entitled to OAS like your NZ superannuation pension. Where CPP stops is for some reason at retirement if the income is way way too high, then portions of the CPP is clawed back. Why? Because it's around the issue of 'equity' which I find there's not much of in NZ among say the 1%. So you have the wrong incentives where the rich just keep piling on more and more wealth.

Then you have the RRSP (Registered Retirement Savings Plan) which is the deferred taxation I have spoke about. It's entirely voluntary. If the odds are that at retirement if the pensioner makes too much $$ from withdrawing their RRSP, then it's only fair their CPP is clawed back.

OK, so in Canada CPP deductions at 5.7% of your own wage are compulsory, matched by an equal contribution from your employer. But if you are successful enough, -outside of your CPP investing for retirement-, to have an income above a certain threshold, THEN everything you have put into your CCP scheme is confiscated by the Canadian government?

Could you not argue that is the ultimate disincentive for investors? Why bother trying to invest yourself, if you know the result of 'you being successful' is that the supplementary CCP pension into which you have paid your own hard earned money, will just be taken away? I guess if most people are incentivised 'not to bother', that is one way to achieve 'social equity'!

SNOOPY

[SBQ]

With the exception of 'inflation adjusted bonds', inflation is the enemy of all savings schemes. This is not just a problem for Kiwisaver. As you have noted before, a share based investment portfolio is probably your best investment vehicle to keep ahead of inflation. You could even argue that the $521.43 that the government contributes on top of your own minimum $1,042.86 Kiwisaver contribution is a pretty good offset against inflation, - provided inflation does not exceed:

$521.43 / $1,042.86 = 50%

SNOOPY

They're near insignificant amounts that go towards retirement saving. I've mentioned many times the 3% minimum that goes in KS, despite it being matched by the employer's 3% + that $521.43 would not have a chance in offering much buying power at the end of retirement. Because inflation has eaten away the cost of living in NZ so much that 3% would not even address the higher cost of inflation. It's the same view that many believe they're winning with a term deposit at the bank of 3% / year when inflation is 8% / year. To have any meaningful investment at end of retirement, one needs to contribute in far larger sums than $6,000/year. In Canada this would only be chum change and would fit in the TFSA category for the small guy. But in NZ, $100K/year income would be considered a lot of $ in some places, but not so much in Auckland. Hop over in Canada, RRSP individuals can contribute up to 18% of their annual income towards the deferred tax savings plan. With the right company that wants to deduct more expense through higher employee contribution (which lowers their tax pay), individuals have far more of a nest egg than what KS would provide. Not to mention that RRSPs room limits are accumulative and can be carried forward to future years in say like this year in a stock market crash - one can elect on their tax return to use say they accumulated contributions of $100,000 or more. Unlike KS, you're only locked on on a minimum 3% annual contribution basis with no adjustments for going forward or back that would account for market volatility year after year.

What KS needs to be done is contributions amounts need to be 'indexed to inflation'. Canada does this for pretty much everything from teacher's pay to OAS pension annuities, welfare payments, personal tax exemption limits, basically when you do this, you avoid less disputes on gov't pay that I see too often in NZ (ie teachers go back to the union to fight for higher pay because their pay has not been reflected to inflation over the many years etc.). But overall how much will KS serve to the middle class saver? Probably not a lot. It might have a chance if the gains were not taxed and no FIF so the returns can grow more exponentially. But somehow with this high inflation we are experiencing, $5,000 or $6,000 a year is not a lot of money and basically does not buy much.

OK, so in Canada CPP deductions at 5.7% of your own wage are compulsory, matched by an equal contribution from your employer. But if you are successful enough, -outside of your CPP investing for retirement-, to have an income above a certain threshold, THEN everything you have put into your CCP scheme is confiscated by the Canadian government?

Could you not argue that is the ultimate disincentive for investors? Why bother trying to invest yourself, if you know the result of 'you being successful' is that the supplementary CCP pension into which you have paid your own hard earned money, will just be taken away? I guess if most people are incentivised 'not to bother', that is one way to achieve 'social equity'!

Regarding CPP, that is correct because the ultimate goal for CPP is 'safety net'. If everyone receives OAS (like your NZ Super), then what is the CPP for? What it provides is a safety net for those that rolled the dice wrong. But what it's not intended for is to make those on already extremely high incomes at retirement, to benefit more.

And to explain this situation more... NZ really only has 2 forms of gov't pension income streams. Compared that to a teacher in Canada that receives 3 and it's not uncommon for some retirees receiving 4 or 5 pension stream incomes. So there comes to a point that at retirement, if you're drawing down on your multi-million $ portfolio, the CPP is really an insult to the taking. In a different way, the CPP is just the insurance scheme in case your investment bets did not work out at retirement (and they often do when say we have multi-year bear market). Whereas in NZ, 2 or 3 bad years really hurts those that want to withdraw from their KS fund. There is no deferment on tax as the entire fund paper gains are taxed year after year. You're taxed again at the KS when on recovery from a negative year. (ie fund loses 20% this year, in 2023 when it recovers back to par, you pay tax again on that recovered portion ; so like paying tax on it again in the previous year). This scheme reminds me of ICBC (BC, Canada's provincial auto insurance scheme) where changing hands of 2nd hand cars net the gov't to pay tax on the sale of the car (paid when changing the rego). The more times the car changes hands, the more the PST applies.

[Snoopy]

I thought I would jot down a few notes from Fishers September 2022 Webinar.

https://www.youtube.com/watch?v=0R9a01PGrhY

Ashley Gardyne (Chief Investment Officer): Opening remark:
"When investors are at their most worried, that is also the time that a lot of that worry is already in the price."

Quin Casey: (Portfolio Manager – Fixed Interest Investment): On how high interest rates will go:
"Inflation is the highest it has been on 30 years. Inflation impacts on interest rates. When inflation moves up, interest rates move up - because people want to be compensated for their lack of purchasing power. I think inflation will likely fall over the next twelve months. Commodity prices (oils, metals) have now come down from their high levels, including a few food commodity prices (wheat, corn). Housing markets are slowing as well (both prices and transaction volumes). We have also seen improvements in the supply chain (freight rates are down and delivery times for fruit are down). For the companies we follow, production processes are a bit easier (especially durable goods), and there is more inventory around. This should all take some of the pressure off the fixed interest market."

Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure): On recession prospects:
"I think it is fairly certain that New Zealand and the globe will fall into a recession 'at some stage'. But whether it is in one year or five years I do not know. Warren Buffett once said:

"If you can tell me with certainty that there is going to be a recession next year, I would still be buying and selling the same stocks as I am today."

We are long term investors who invest on a five, ten, or twenty year plus time-frame. Recessions are part of the normal course of doing business for long term equality investors. When something is on the front page of the newspaper and has been talked about a lot, we can say it is at least partially baked into stock prices"

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) Comments on investment strategy:
"We look for companies with a strong competitive advantage for a product or service that is very important for customers and that it is hard for customers to shift away from. For example, Xero has accounting software that is used by many small and medium sized businesses here in NZ. Once those businesses have embedded Xero into their business operations, and they use it for all accounting purposes, it is very unlikely they are going to switch away from that 'month in' or 'month out', and find an alternative accounting platform provider. It means Xero customers tend to be really sticky."

'"A company with a good growth runway in front of it that is providing goods and services that customers need means that, over time, that growth runway underpins earnings growth. In the end share prices follow earnings growth."

Quin Casey: (Portfolio Manager – Fixed Interest Investments) On fixed interest opportunities:
"I am particularly excited about corporate bonds, and especially corporate bonds in overseas markets which have been marked down more than local bonds. We are starting to get to historically high yield levels. The Fisher Funds income fund, for example, now yields over 7%, a multi year high and within that fund we do have corporate bonds. We pick those using our credit research process: solid business models, robust balance sheets and good people at the helm. We have an investment in Sanniikos Group, who own resorts throughout the Mediterranean. The company was established in the 1970s, and they have a great track record for exceptional customer service. They target high income families right throughout Europe. That bond is yielding just over 9% in NZD terms. attractive for a business with that track record and quality asset base."
.
Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure) On shares exposed to the 'rough ride' of the NZ housing market:
"More that 60% of Fisher Funds NZ share portfolio's revenue is coming from offshore. For example, F&P Healthcare has 96% of their revenue coming from offshore. But Summerset and Ryman, for example, absolutely have links to the housing market. If a new resident wants to enter a retirement village, they probably have to sell a house in this prevailing fairly weak (housing) market to fund that new retirement village unit,. But that is where the linkages stop."

"In my opinion, whether a resident enters a retirement village or not is driven by their own circumstances. To give you an example of that, my grandmother went to a Ryman village in Whanganui a few years ago. She didn't do this because of anything to do with the housing market. It was because she was living in a large house alone. She didn't want the hassle of looking after that house. She wanted the camaraderie on the bowling green and of the happy hour. She wanted the security of living in a retirement village. She had owned her house in Whanganui for about 35 years. She couldn't have really cared less about the prevailing Whanganui housing market dynamics at the time when she entered her village."

"On Summerset in particular, current sales and business stress indicators are near all time highs. So really retirement villages have their own supply/demand dynamic, independent of the housing market."

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) On the Fisher Australian portfolio:
"The domestic economy in Australia is performing quite well. Consumers are spending, the job market is very tight, and the post pandemic return to freer life is well in train, much as in New Zealand. Inflation is happening, but many companies in the Fisher portfolio are able to increase prices and offset those inflationary pressures. Domestic supply chain pressures are easing (including import of goods rates). On a cautious note, they are concerned about low cost fixed mortgage interest rates 'rolling off'. The banks in particular are cautious about what that will mean for mortgages and households into 2023. Prudent steps are being taken,and company managers are staying alert."

Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure) On war and the European energy shortage:
"Europe is NZ's third biggest trading partner. But NZ itself is in a very good energy position. NZ relies on natural gas for around 20% of our energy needs, but this is harnessed locally mostly from the Taranaki region. Natural gas needs to be liquefied to be economically transported - a very expensive process that needs bespoke shipping terminals for international trade. So the NZ price of $7/MMBtu is not connected to the war shocked European price of $50/MMBtu.

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) On repositioning of portfolios:
"Shares are being sold off indiscriminately in response to macro pressures. So Fishers have been beefing up positions in the 25 or so ASX shares we have in our portfolio that have long growth runways. One such example is Dominos, the pizza franchisor for Australia, New Zealand, Japan ,(and now) South East Asia and some of Europe. Concerns about what is happening in Europe has seen the share price fall back to 2019 levels. Yet between 2019 and now, its earnings are up 30%. Allied to this, we see this business doubling their store footprint over the next 6-8 years."

"We are using as a funding source some cash as well as reducing our weightings in some more defensive companies that have done really well for us in this environment and have hung in there but aren't necessarily as cheap as some of these businesses that have been severely punished. We are tilting capital within the book."

on other Australian investments with a growth bent
"CSL, a large healthcare business that collects plasma, makes plasma bag products for people with blood related deficiencies, have spent over $US1b this last year in R&D and have gone out and acquired an adjacent business in the kidney market, providing kidney treatments for people with chronic kidney disease. They haven't held back because of rising interest rates, they have moved forward."

"We invest in "Wisetech", a leader in the software logistics services market that has spent $180m in R&D over the last year, which adds to their ability to keep growing over the next 5-10 years."

Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure) On managing a business in a recession:
"Mainfreight has learned a lot from previous downturns. The NZ business, back in the global financial crisis, was a more mature business and profitability and margins actually improved during the GFC because the company was very quick to cut costs. With 300 branches across the world, imagine the maintenance that is normally outsourced to third parties. When things slow down, Mainfreight switch to doing their own maintenance internally. Every single person in the 10,000 strong work-force around the world shares in the profit of their local branch. So they all think like business owners."

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) 'On alternative investment categories':
"Bitcoin is down more than 60% year to date. it has been touted as a digital alternative to gold in turbulent times but it has been anything but. It's volatility has been a lot more than share-markets, not less. It hasn't protected investors to the downside when economic times have got tough. It will be interesting to see how these markets evolve. But for now I would steer clear of Crypto, because these markets don't have the characteristics that people say they should have in times like these. In addition Crypto doesn't earn any income. So there is no cash flow metric upon which we can base the valuation. We tend to steer clear of assets that have those characteristics."

"Gold similarly doesn't earn an income, so sitting there trying to value it and trying to find the right time to invest in gold is quite tough. But gold does have a long history of being a store of value and there is an argument that gold should form part of peoples diversified portfolios because over centuries it has proven to be a bellweather in times where countries have mismanaged themselves. In the era of FIAT currencies that is the argument that is often put forward. However, in a climate of rising interest rates there is a strong argument for gold going lower because the costs to store gold and the costs to protect it, they go up relative to what you can earn with that money by putting it in a term deposit. For me, studying gold is unproductive use of time, relative to the time I would much rather spend studying share-markets with productive assets"

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So what do I make of the above? It is pretty much 'same old. same old'. Fishers keep on buying 'good' companies whatever the price 'because price follows earnings growth'. One problem I have which such an approach is that I think it is a bit lazy from a value investors' perspective. What ultimate projected yield are Fishers buying at? And how long will these 'expensive but good' investments take to grow into that projected yield? Maybe Fishers do know the answers to these questions and they are just not telling us? Time horizons and quantifiable returns do matter and my impression is that Fishers obfuscate both. Just saying your investment horizon is 'long term' and increasing the length of that term if your investment performance isn't cutting it doesn't wash with me.

Where some 'shift in thought' is happening was the shifting of some 'defensive money' that had done well in recent months into more growth assets. Also the highlighting of the comparative worth of some good fixed interest rate deals. These shifts in strategy make good sense if interest rates are truly peaking and are set to fall back.

SNOOPY

[Snoopy]

My notes on this webinar are below

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

Robbie Urquhart – Senior Portfolio Manager, Australian Equities: Outlook for 2023
"Markets are forward looking. This is what gives us optimism about 2023 and beyond."

Ashley Gardyne – Chief Investment Officer :On shaping current investment opportunities
"This time last year, putting money into investment grade bonds in the US we would have got a 3.5% return. The same companies now yield 7-8%. And there are places where you can get 10%+ yield. So we are rotating these fixed interest portfolios out of government bonds that tend to offer lower yields into more credit. On the equity side too, our portfolio managers have been looking through lists of companies that we truly admire, but we have not been able to buy because the price is too high. Companies like 'Salesforce.com' and 'Microsoft' are great businesses that we think have got really good long term prospects. We think about the micro, companies and individual securities, rather than the macro picture."

"With our multi asset portfolios (balanced and conservative funds), the bond return component is looking more attractive going forwards. But we have been increasing our equity weighting as markets are falling, to take advantage of buying shares at lower prices. A new international equity fund and a new global credit fund and a private debt fund are providing a wider range of input constituents in our multi-asset funds.

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On company adaptation
"Audinate Group Limited creates hardware as well as software that is used in audio equipment to help components network with each other. So microphones can speak to speakers and so on. They have had a challenge in 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."

Ashley Gardyne – Chief Investment Officer :On NZ equity reaction to RBNZ slowing the NZ economy.
"Consumers will come under more pressure due to the globally high proportion of mortgage debt that Kiwis have. Offsetting this is NZ's extremely low unemployment, and so far the economy is operating resiliently despite the hikes we have already. if it does start to slow too much the central bank can back off. Markets are already pricing some difficult times ahead. A decision to sell NZ stocks will depend on what they are and how resilient they will be to the coming economic environment. A large proportion of our NZX investments get most of their income from offshore. F&P Healthcare is really an international company with a head office in NZ. Same for Xero, same for A2 milk, same for Mainfreight."

Laura O’Reilly – Senior Wealth Management Advisor :On taking advantage of those higher term deposit rates.
"Term deposits are good for investors with shorter term investment needs and for those that have other reasons for being very conservative. But they are not optimal for long term savings growth. Inflation will eat away at the real value."

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On ESG and the evolving investing landscape
"Investors are more interested in engaging with companies to see that they will be match fit, rather than putting them into a box of being 'good' or 'bad'. In the short term we are still reliant on hydrocarbons and there is a trade off that needs to be balanced."

Ashley Gardyne – Chief Investment Officer :On the outlook for property
"One advantage of buying property has been the ability to leverage it. You don't want to be borrowing money to invest in the share-market. But it is very different geography by geography. The last 10 years in the USA, Ireland and the UK haven't been that great in the property market. There are places there and in Europe where property prices are still below where they were 15 years ago. It really does depend on the characteristics of each market. In New Zealand our property is really quite expensive relative to income. So if I had to guess which market, shares or property, would do better over the next ten years I would probably guess shares. But I am reasonably positive on both."

"On commercial property, we do see some real challenges for office in some parts of the world. if you look at some data in New York, vacancies are really quite high and people just haven't come back from lock-downs. They are still working from home. Retail perhaps a little bit the same, as people bought on-line. But people are still gravitating towards the biggest and best malls. We have direct ownership of commercial property in our Kiwisaver funds. We are leaning towards industrial at the moment, often warehousing and logistics facilities that are benefitting from a range of different factors, one being e-commerce and the need to move parcels around. We have been tilting that portfolio towards commercial and industrial property recently."

Ashley Gardyne – Chief Investment Officer :On Ryman and the retirement sector, portfolio adjustments
"Ryman has been a great NZ success story for over 20 years, and we have held it right from the start of the Fisher Growth fund, At one point the original investment had increased 100 fold over that period of time. It has been a phenomenal NZ success story. But it is also an interesting NZ investment lesson because you have to remember that some things do well for a long period of time but it doesn't mean they always will. So it is important to be constantly reviewing your positions. We took the weight down in our portfolio pretty significantly over the last couple of years and it is actually a very small weight at the moment. It has gone from a period of great success, this growth story, to a period where they got so large that it became harder to grow. So they moved into Australia, they bought quite a bit of land over there. But Australia is a market that is harder to break into - there are more regulatory issues there. And in New Zealand they started building denser units, multi-level rather than building individual retirement units. The new ones have a lot of care facilities in there as well, so they became very capital intensive, and you also could not just build a village 'unit by unit' and recycle your capital as you sell each individual unit. They have a lot more capital tied up in the business now and as a result their debt levels have moved up and the business has come under quite a bit of pressure. So these are some of the reasons we have become a little bit cautious."

"It is also linked somewhat to the property market which is another area of concern for us. But we think these are temporary issues. There is still a lot of growth ahead in the retirement sector. We really still have a positive view on Summerset, But for now Ryman is a lower weight for us."

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On Crypto and Gold
"Gold traditionally does well in a high interest rate environment. But this year it is down a few percent, simply because the cost of owning and storing gold is going up relative to other assets."

"Crypto is largely an experiment and it is not one that has worked out really well. Financial parts of the sharemarkets could have some contagion spread from the rapid melt down of crypto assets, as the crypto markets unwind. To date that looks relatively contained. But in our international portfolio we have one bank that has lent to the companies involved in blockchain and in the crypto world: 'Signature Bank'. But Signature bank seems to have come through pretty well thus far."

Ashley Gardyne – Chief Investment Officer :On Signature Bank
"Signature Bank" takes deposits from some of the crypto exchanges. But it is a very small part of its business. It doesn't do any lending or anything like that. It really is just a service provider to some of those businesses. Given it was a new market, they have essentially ring fenced those deposits so that if they desire to they can wind that part of the business down without having too much of an impact. That is the only company that has an exposure to Crypto in any of our portfolios."

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On the twelve month underperformance of the Australian Growth Fund
"The ASX200 recovery has been driven by a very strong skew to materials and mining companies, commodities as well as energy. These are not companies that have strong pricing power that can drive growth under their own steam. So commodity companies don't fit the Fisher investment criteria that well, We don't expect such companies to outperform long term, so long term we believe we can generate greater returns by not investing in them."

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My own reflections on what was said. The 'mea culpa' from CIO Ashley Gardyne on the recent performance Ryman was quite refreshing, as you don't often hear managers say they got it wrong. This deserves a whole 'response post' in itself, which I have done in post 77.

No real excuse was offered in ignoring the current commodity boom. The message was if you want to invest in commodities, best to do so somewhere else. I applaud the clear communication from Fishers on this issue, and I think their position is fair enough given their previously stated 'modus operandi'.

On Crypto, they pretty much put the boot in, as Crypto in general and Bitcoin in particular trended down. That is a change from their 'wait and see while the market evolves' position of old. The main problem seems to be Crypto doesn't follow any investment rules so 'we can't analyze it'. Do it yourself if you want some!

SNOOPY

[Snoopy]

Ashley Gardyne – Chief Investment Officer :On Ryman and the retirement sector, portfolio adjustments
"Ryman has been a great NZ success story for over 20 years, and we have held it right from the start of the Fisher Growth fund, At one point the original investment had increased 100 fold over that period of time. It has been a phenomenal NZ success story. But it is also an interesting NZ investment lesson because you have to remember that some things do well for a long period of time but it doesn't mean they always will. So it is important to be constantly reviewing your positions. We took the weight down in our portfolio pretty significantly over the last couple of years and it is actually a very small weight at the moment. It has gone from a period of great success, this growth story, to a period where they got so large that it became harder to grow. So they moved into Australia, they bought quite a bit of land over there. But Australia is a market that is harder to break into - there are more regulatory issues there. And in New Zealand they started building denser units, multi-level rather than building individual retirement units. The new ones have a lot of care facilities in there as well, so they became very capital intensive, and you also could not just build a village 'unit by unit' and recycle your capital as you sell each individual unit. They have a lot more capital tied up in the business now and as a result their debt levels have moved up and the business has come under quite a bit of pressure. So these are some of the reasons we have become a little bit cautious."

"It is also linked somewhat to the property market which is another area of concern for us. But we think these are temporary issues. There is still a lot of growth ahead in the retirement sector. We really still have a positive view on Summerset, But for now Ryman is a lower weight for us."

Fisher's standard call on volatility in their investment performance is to say they are investing in quality companies for the long term so volatility does not matter. I therefore thought it was interesting for once to see an alternative tack. CIO Ashley Gardyne outlining in detailed terms, on why the NZ Growth Fund has de-rated Ryman from its investment darling position. Ryman started falling from their most recent peak share price of just under $16 at the end of September 2021. But when was it that Fishers set about reducing their holding? Did they get their market timing right? Or is Ashley's explanation an 'after the event' excuse? Salient points in the Ryman sell down saga are as follows:

Figures are taken from the respective period fund reports found at the web address below.
https://fisherfunds.co.nz/funds-and-...e#fund-updates

1/ On 30th September 2021, Ryman (priced at $15.10 per share ) was 3.86% (or $12.53m worth, or 0.830m shares) of Fishers NZ growth fund s total, compared with 7.61% of the same fund in Summerset.
2/ If we go back to March 2020, the percentage of the fund held in Ryman and Summerset was almost equal, at 4.62% and 4.64% respectively. This would indicate that prior to that September 2021 share price peak, Fishers were already pivoting away from Ryman towards Summerset as their preferred Retirement Sector investment.
3/ At the most recent fund reporting date, 30th September 2022, Summerset now makes up 10.04% of the NZ growth fund, while Ryman has dropped out of the top ten. So when was it that Ryman last appeared on the Fishers NZ Growth Fund top ten list?
4/ In December 2021 Ryman (priced at $12.25/share) made up 3.12% ($9.984m worth, or 0.817m shares) of the NZ Growth Fund, their last appearance as a 'top ten' Fisher NZ Growth Fund holding.

There were no substantial security holder sales reported to the NZX over that September 2021 to December 2021 time.

The total number of RYM shares sold by Fishers NZ Growth fund over that time (refer to notes 1 and 4 above) was: 830,000-817,000= 13,000 shares. If those shares were sold at an average price of $13.50 per share over the period, those share sales would have netted Fishers cash of: 13,000 x $13.50 = $0.176m.

Over the quarter the total value of Ryman shares in the portfolio dropped from: $12.53m -$9.98m = $2.55m. That $2.55m represents both

a/ A drop in value, representing the number of shares held. AND
b/ A drop in the total value of the shares remaining in the portfolio that were not sold.

By simple subtraction, the drop in value of the shares retained was: $2.55m - $0.176m = $2.37m

This means that

c/ 93% of the market value of RYM shares lost came from share price depreciation AND
d/ only 7% came from share sales.

I don't know exactly when Fishers came to a realisation that their shareholding in RYM should reduce. But this calculation is telling us that most of the sell down must have occurred after 31st December 2021. More likely than not, this would have been at a price closer to $9 than $12 - with both of those figure well down on September 2021 highs.

Of course if Fishers had continued to hold those 'excess' RYM shares, they would now only be worth $6.60 each.

Scorecard for Fishers on de-favouritising Ryman

There is both a 'glass half full' and a 'glass half empty' way to review this outcome. The glass half full way is to say that Fishers have saved unit holders a loss of: 1-($.6.60/$9.00) =27% of their capital (a good thing). The glass half empty way is to say that by 'selling late' Fishers managed to lose: 1-($9.00/$15.00)=40% of their previously accumulated unit holders Ryman capital (a bad thing).

I am not a student of Ryman. So I don't know when, on a 'fundamental basis', the outlook for Ryman at Fishers started changing from 'hold forever' to 'let's sell down'. I am certainly not saying that I could have done better in the circumstances. But for a self professed 'seeker and keeper' of 'excellent shares', I would have hoped that Fishers would have been on top of the situation a little earlier. It looks like Fishers did not understand the drivers of this business as well as they thought they did, although I do give them some credit for reversing their long held 'never sell' opinion and selling down. My scorecard on Fishers handling of this situation: C+. Satisfactory, but had the potential to do much better.

SNOOPY

[Snoopy]

Finding Opportunities Amongst the Volatility

https://milfordasset.com.au/insights...he-volatility/

Notes I have made from the above webinar are below:

How Macro Views Influence Portfolio Positioning William Curtayne, Co-Portfolio Manager of the Milford Australian Absolute Growth Fund

1/ We are the most cautious we have been on USA and NZ equities. Australia is somewhat cushioned by strong commodity prices (wheat, coal, iron ore (prices on iron ore higher in the cycle than other commodities) , LNG, oil) copper lithium). In the US those in the bottom quintile of earnings have lost by far the highest proportion of their purchasing power, due to interest rates rising, and the loss of stimulus cheque payments. Wage increases are not compensating for this. The purchasing power of consumers has begun to weaken around the world and this will eventually flow into equity prices over the next 12 to 18 months.

2/ Companies will be paying more for labour and cost inputs. Given the pressure on consumers it is going to be hard to pass these costs on. Inflation is increasing the cost of necessities (energy prices and food in supermarkets)

3/ We talk about the USA because they are probably at the forefront of facing these pressures. Australian consumers are relatively better placed.

4/ Auckland New Zealand is at the forefront of the world in the housing market, because interest rates started to go up earlier in New Zealand than in any other developed nation. We believe house prices will go down at least 20% in Auckland. (House prices would have to decline 30% to get back to where they were pre-Covid. We believe there would be some kind of government policy intervention if things got that bad.) At the 20% equity lost point, the wealthier parts of the economy are going to feel a bit of 'negative equity effects' and tighten their belts. The NZ economy is our 'crash dummy' for what may occur in the rest of the world.

Why Australia Looks better than NZ or the USA Regan van Berlo - Head of Distribution -Milford Australia,

5/ The Russian crisis is creating a safe haven status for Australian equities (CBA bank and BHP being prime examples). We ourselves have bought more energy positions (Santos a key pick) and miners, particularly gold miners, and have stuck with them. We believe the Russian crisis will play out for a bit longer than expected (simply because three out of the five military commentators we have talked to say that - we are not geopolitical experts ourselves). We think a lot of the energy companies and gold miners are well priced even without the war.

6/ Australia is delayed with inflation w.r.t. the rest of the world. The labour market in Australia is not quite as tight as in NZ and the USA. Good crop yields and lots of rainfall has made fresh food prices weaker. There is also a delay in forcing through imported food price rises because of contract structures.

7/ Lagging inflation has allowed the Reserve Bank of Australia to be the most dovish central bank in the world. That flows thorough to property prices not falling as they are in NZ, and the consequent wealth effects on the consumer.

8/ We have avoided a lot of the pain in the IT sector, and also trimmed quality growth stocks that are not necessarily IT. like 'James Hardie', REA, Carsales.com and Goodman Group on the assumption that interest rates would be stickier and go up. But we have remained defensive by maintaining big supermarket exposures (a big inflation beneficiary with margins expanding because of inflation). We are investing in Metcash, Coles and Woolworths to varying degrees.

9/ Earnings strength seen in financials. Have trimmed the big banks somewhat, but are into 'Virgin Money, ticker VUK' (should do well as UK interest rates spike). NAB is our key banking stock as it adopts technology, catching up with CBA in this space. Technology means quick approval of mortgages. if you don't have that, you have to compete on price - which is not good for margins, or you compete on asset quality by giving looser credit terms (not good either). NAB sets the standard on SME lending as well.

10/ Healthcare company valuations are improving a bit (CSL).

11/ Valuation of Real Estate Investment Trusts REITs. Over 6% dividend yield is attractive like charter hall (CQR), and they also offer inflation protection.

12/ Favorite in the supermarket sector is 'Metcash'. Wholesaler to independent grocery retailers and now 50% of business is tools and hardware. High fixed cost base but inflation allows one to leverage this. More people working from home after Covid-19 means more people shopping locally at small independent supermarkets. At 15x earnings verses Woolworths on 28 and Coles on 22, Metcash looks like the value investors choice.

13/ The relative underinvestment in iron ore. China, the biggest market for commodities has some positives and negatives. China is determined not to go back to the old world of stimulating property. Demographics mean property construction is in decline anyway. China wants better technology and to be less reliant on overseas goods, and less reliance on Australian iron ore in the future. Consequently we expect iron ore prices to decline in the medium term, and we have been taking profits while the iron ore futures price has been bid up by speculators. Omicron in China and the associated lock downs cools the short term demand picture for construction and iron ore.

Nevertheless the remilitarization of the world's forces does require steel (raw material iron ore) and 3% of the world's iron ore supply does come out of the Ukraine. But the market is more positive for other metals, Nickel, Copper , Energy (LNG, Oil and coal).

14/ BHP and Rio Tinto are the go to investments for global fund managers who find themselves short on exposure to commodities.

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My comments

This investment management style at Milford is very different to Fishers. There is a clear aim to 'catch the mood of the market' at Milford, with less attachment to their long term favourites. it is interesting that from a more international perspective that these guys based in Australia take, they don't fancy investment in New Zealand at all (the one exception being Contact Energy which falls under their energy sector preference and has a superior dividend yield). The NZ market is seen as a 'crash dummy' for the rest of the world's bourses. Is it time to tighten our seat belts?

SNOOPY

[Snoopy]

I have just noticed that one of my like with like comparisons is not as 'like with like' as it could have been.

I was looking at the "Kiwi Wealth KiwiSaver Scheme - Growth Fund"
https://www.kiwiwealth.co.nz/assets/...-June-2021.pdf

When I might have been better to consider the "Kiwi Wealth Managed Funds - Growth Fund"
https://www.kiwiwealth.co.nz/assets/...-June-2021.pdf

What is the difference between the two? Apart from the first being part of the Kiwisaver scheme and the other not (meaning you can withdraw your funds from that second entity at any time)? The top ten constituents (as at 30th June 2021) line up alongside each other as follows:

	Kiwiwealth Kiwisaver Scheme Growth Fund	KiwiiWealth Growth Fund
Microsoft Corp	2.78%	3.31%
Apple Inc	2.50%	2.95%
Westpac NZD cash account	2.37%	2.07%
Alphabet Inc	1.89%	2.26%
Amazon.com Inc	1.86%	2.22%
Two Trees Global Macro UCITS	1.52%	?%
GMO Systematic Global macro Trust	1.50%	?%
facebook Inc	1.20%	1.45%
ISAM Systematic Trend Q-Sep19	0.98%	?%
ASML Holding NV	0.91%	1.11%
Nestle SA	?%	0.98%
Visa Inc	?%	0.92%
United Health Group	?%	0.91%

Observations

1/ If we follow down each list top to bottom, then the individual international stocks held rank in the same order (from higher percentage held to lower percentage held).
2/ The Kiwiwealth Kiwisaver Growth Fund held a slightly higher holding of cash at the comparison date.
3/ The Kiwiwealth Kiwisaver Growth Fund held three hedge funds in their top ten holdings, while the straight 'Growth Fund' held none in their top ten holdings.

Discussion

New Zealand managed investments are rated on a 1 to 7 scale. A fund rated '1' carries the least risk while a fund rated '7' carries the most. A hedge fund on its own would normally be seen as the most risky class of investment of all (class 7). 'Cash in the bank' gives an entirely predictable return (class 1). Superficially then, it seems odd that the fund with the highest declared holdings of hedge funds (Kiwisaver) has a lower risk profile of 'Class 4', compared to the fund with no declared hedge fund holdings (Managed Growth) with a 'Class 5' risk profile. One explanation of this could be hedge funds and ordinary share funds tend to operate in negatively correlated cycles. This means it can be good news for a hedge fund when markets go down, whereas clearly this is not good news for a fund that holds only company stocks. That in turn means that 'taken together', the volatility of a managed fund that includes hedge fund components may be less than the volatility of a fund that holds only shares.

What actually happened to returns over the years ended 30th June 2021 and 30th June 2022?:

Returns	Year Ended 30th June 2021	Year Ended 30th June 2022
KiwiWealth Kiwisaver Growth (after tax & fees)	23.91%	-10.80%
KiwiWealth Kiwisaver Growth fees	1.11%	1.12%
KiwiWealth Managed Growth (after tax & fees)	28.10%	-11.10%
KiwiWealth Managed Growth fees	0.95%	0.96%

This is pretty much as expected. The fund with the most hedging produced a moderated annual return in good times. But when market conditions turned sharply negative, the losses on the annual return were also moderated.

SNOOPY

[Snoopy]

There is a price to pay for 'excitement'.

	Share Price 28-04-2022	PE ratio	Price Change 01-012022 to 28-04-2022
Microsoft	$282.33	30.13	-15.4%
Alphabet	$2,285.89	20.37	-21.2%
Apple	$156.57	25.99	-14.0%

These are big hits for three of the four largest investments in the Milford Global Equity Fund, representing 12.27% of the fund. as at 31-03-2021. Although I do note that the whole NASDAQ index is down 21.12% from the start of the year. I don't follow any of these shares. But those PE ratios are historical, and forward forecast PEs are likely higher. So I don't see Microsoft, Alphabet or Apple as 'cheap' - even now.

Annual return to 31-03-2022 was 5.66% after fees and taxes, down from 24.14% just 3 months earlier! Clearly the first quarter has been unkind to Milford Global Equities! Rising interest rates can deal a double blow to growth stocks, firstly due to a present day reduction of earnings, and secondly due to a rising discount rate affecting the present value of future earnings.

The fund rocketed by 37.36% over YE31-03-2021, against a long term average growth rate of 10.88% p.a.. So I don't think it is out of line to say that a correction is overdue. But is the correction finished?

The 'excitement' continues.

	Share Price 09-12-2022	PE ratio	Price Change 01-012022 to 09-12-2022
Microsoft	$247.40	26.77	-26.1%
Alphabet	$93.71	18.97	-35.4%
Apple	$156.57	23.33	-21.6%

Notes

1/ Alphabet underwent a 20:1 share split on 18th July 2022. The beginning of year share price was adjusted accordingly for comparison purposes.
2/ Those PE ratios are historical,

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The hits for two of the five largest investments in the Milford Global Equity Fund (Microsoft and Alphabet) have got bigger. Apple, the largest company on the NASDAQ has fallen out of Milford's top ten holdings. To give a sense of context, the entire NASDAQ has fallen by 30.01% year to date as I write this.

The top three constituents of the Milford Global Equity Fund are now Elevance Health Inc (a US based NYSE listed medical insurance provider), Boston Scientific (a US based NYSE listed manufacturer of medical devices) and HCA Holdings (a US based NYSE listed owner of hospitals)

"Technology stocks have been weak this year and our decision to reduce exposure to companies such as Amazon (-9.3%) and Alphabet (-1.5%) was validated as earnings released from these companies in the month disappointed expectations."

For the active growth fund the unit price at the start of the year was $5.26. As at the end of October it was $4.75. This represents a unit price loss of 10%.

Annual return for the fund to 31-10-2022 was -7.32% after fees and taxes.

It is never good to lose money on the markets. But in relative terms, looking at what has happened in other markets, this result doesn't look too bad!

SNOOPY