Market and Economic Review - Milford Asset Management
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Milford Unit Trust PIE Funds Monthly Review
May 2018
Market and Economic Review
April was another positive month for our funds with Trans-Tasman Equity up 2.3%, Active Growth 1.5%,
Diversified Income 1.2%, Australian Absolute Growth Fund 0.9%, Conservative Fund 0.5% and Dynamic
Fund 0.1%. Milford’s bond funds were relatively flat.
Equity fund performances were against a positive global background, particularly the meeting of the North
Korean and South Korean leaders and reduced concerns about a trade war. Economic data also remains
positive in the US and other parts of the world, although there are signs that New Zealand’s economic
growth rate is flattening out.
The best performing NZX 50 stocks were Synlait, Fletcher Building, Kathmandu, Gentrack and Trade Me
while the worst performing were Pushpay, Fisher & Paykel Healthcare, a2 Milk, Scales and the Fonterra
Shareholders’ Fund. The domestic market received a boost from the proposed takeover for Tegel Group
Holdings and expectations that there will be more takeover activity through the remainder of the year.
The best performing ASX 100 companies during April were Heathscope, Santos, South32, Xero and
Macquarie Atlas Roads while the worst were AMP, Perpetual, IOOF, BT Investment Management and
Boral. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services
Industry has had a negative impact on financial stocks, which appreciated only 0.2% during the month.
The ASX Energy sector was the best performer as WTI crude oil prices soared 5.6%. Higher oil prices had
a negative impact on inflation expectations and interest rates, which has resulted in a more difficult month
for bond funds.
US corporate profits have been positive as S&P 500 company earnings are 25% ahead of the March 2017
quarter, with 55% of companies having reported. Nearly 80% of these results were ahead of expectations
with, only 14% below.
Strong corporate earnings are a positive feature for global markets although Trump remains a major risk.
The “Trump Factor” is expected to contribute to market volatility in the months ahead with our portfolio
managers constantly monitoring developments. Our objective is to quickly identify any developments that
could have a negative long-term impact on markets.Milford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Trans-Tasman Bond Fund Actual investment mix1
Portfolio Manager: Paul Morris
April was a challenging month for Australasian bonds as prices fell, mirroring weakness seen globally. This
limited the Fund’s return to 0.1% for the month, a small outperformance against the benchmark. Supported
by a favourable supply/demand backdrop, New Zealand corporate bonds were stronger than both NZ
government and Australasian corporate bonds. With this relative strength we sold more expensive NZD
holdings, while also further reducing subordinated bond holdings. We used this cash to buy more attractively
priced alternatives, including new issues from Bank of Queensland, Brisbane Airport and Ausgrid (an
Australian electricity distributor). Cash and Cash International Fixed
Equivalents 10.88% Interest 47.00%
New Zealand Fixed
Looking forward we anticipate NZD and AUD official cash rates to remain on hold into next year, which Interest 42.11%
should support short dated bonds. Longer dated bonds will be driven by factors including offshore bond
yields and longer term local cash rate expectations. Given the risk for further offshore corporate bond yield
increases and noting recent Australasian market outperformance, we retain lower interest rate exposure
relative to the benchmark. The extent is smaller than earlier in the year as risks are more balanced. However,
these risks are a potential headwind for Fund returns, but one which active management of interest rate and
credit exposure should allow us to navigate.
Global Bond Fund
Portfolio Manager: Paul Morris
In a challenging month for global bonds, the Fund was flat, slightly outperforming its benchmark. Globally,
bond yields rose in April pushing prices lower. Weakness in US treasuries was the primary catalyst and this
weighed on other bond markets. The weakness was largely due to increased market inflation expectations,
underpinned by stronger commodity prices and a drift higher in realised inflation data. To compensate for
this, US treasury yields rose.
Cash and Cash International Fixed
The Fund still retains less interest rate exposure relative to its benchmark, to protect against rising yields. Equivalents 14.61% Interest 79.00%
Relative to its benchmark the Fund will generally hold more corporate bonds. In April corporate bonds New Zealand Fixed
Interest 6.39%
partially recovered recent underperformance relative to governments’, but they remain weaker year to
date. Valuations across several corporate bond markets have become more attractive but we remain
cautious as they remain historically expensive.
The Fund remains defensively positioned, holding more cash and reduced credit exposure. We were active
selling more expensive holdings to buy better value alternatives. The latter included a new Nufarm US
Dollar bond (Agricultural Chemicals) and a WDC US Dollar loan (computer storage). Corporate bonds may
face ongoing rising interest rates and reduced monetary policy support, but active management should
provide an offset to protect returns.
*Other may include interest rate derivatives and currency contracts.Milford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Conservative Fund Actual investment mix1
Portfolio Manager: Paul Morris
Despite the notable headwind of rising bond yields the Fund returned 0.5% in April, contributing to a one
year return of 5.7%. It was a challenging month for fixed interest, which represents around 80% of the
Fund's exposure, contributing to a minimal return as global and Australasian bond yields rose, pushing
prices lower. Weakness in US treasuries was the primary catalyst, largely due to increased market inflation
expectations, and this weighed on other bond markets. As inflation recovers and monetary policy support
wanes, the risk remains for a further drift higher in bond yields. To protect against this, we will continue to
limit interest rate exposure. Cash and Cash Australian Equities
Equivalents 12.65% 1.70%
New Zealand Fixed International Equities
The Fund's exposure to Australasian income and property shares has been increased on increasingly Interest 27.87% 5.21%
attractive valuations. In April this exposure contributed positively, an impressive performance given rising International Fixed Listed Property 4.96%
Interest 45.20%
bond yields typically drag on their prices. Global shares also contributed positively during the month as New Zealand Equities
earnings generally delivered. The Fund also benefited from a small foreign currency exposure as the NZD 2.41%
was weaker. Looking forward, rising bond yields, elevated valuations across many asset classes and
geopolitical risks mean volatility may remain elevated. Cognisant of the Fund's conservative risk profile we
will therefore retain cautious positioning; favouring fixed interest and cash versus shares.
Diversified Income Fund
Portfolio Manager: David Lewis
April was a solid month returning 1.2%, giving a one-year return of 7.0%. Performance was driven by the
Fund's shareholdings with the ASX 200 Accumulation Index (+3.9%) performing well. Global bond markets
were weak as US interest rates touched fresh highs for the year. These higher interest rates reduce the
attractiveness of existing fixed income holdings, leading to lower bond prices in the short term. Positively,
the Fund's strategy has been to limit its exposure to these interest rate increases, this boosted returns in
April. Currency also had a positive impact, as the Fund was positioned to benefit from a stronger USD.
Cash and Cash Australian Equities
Equivalents 6.89% 6.07%
Among the Fund's share holdings, toll road operator Macquarie Atlas Roads (+13.7%) was the strongest New Zealand Fixed International Equities
Interest 14.92% 3.77%
contributor this month. It rebounded following weakness earlier this year, and after a simplification of its International Fixed Listed Property
management structure. Sydney Airport (+6.3%) and retail landlord Scentre Group were also strong, having Interest 41.35% 17.99%
New Zealand Equities
reached attractive valuation levels previously.
9.00%
The Fund continued its active strategy with additions to holdings in Argosy Property, EBOS, and Summerset,
among others. Looking ahead, the Fund retains a modestly cautious outlook, although we remain confident
that we can deliver a return in excess of cash over the recommended three-year investment timeframe.
*Other may include interest rate derivatives and currency contracts.Milford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Balanced Fund Actual investment mix1
Portfolio Manager: Mark Riggall
The Fund returned 1.5% in April bringing the one year return to 8.7%. April saw interest rates moving higher
on the back of rising oil prices and increasing US inflation data. This was a headwind for the bond portfolio
(bond prices fall when interest rates rise) but despite this, the bond funds maintained a flat return for the
month. Income shares performed relatively well, outperforming corporate bond investments.
The Australian Equity Fund had a good month, up 3.3%, bouncing back from a weaker March. Global
shares have been slow to recover their poise from the sell-off in February, with ongoing concerns over Cash and Cash Australian Equities
rising interest rates, trade war rhetoric, slowing pace of global economic growth and tech sector Equivalents 13.21% 10.03%
New Zealand Fixed International Equities
regulation. Nonetheless, the Global Equity Fund was up 1.8% in April. Interest 7.87% 28.39%
International Fixed Listed Property 8.49%
Interest 21.00%
Finally, the USD had a strong April and the Funds offshore currency exposure was a boost to performance. New Zealand
On the positive side, company earnings have been strong, share valuations are more attractive and the global Equities† 11.01%
economy remains in good shape. Further volatility is expected (potentially driven by rising interest rates)
but sentiment has turned more negative and therefore, we remain cautiously optimistic on the outlook for
shares.
Active Growth Fund
Portfolio Manager: Jonathan Windust
The Fund rose 1.5% in April benefiting from positive returns from the Global, NZ and Australian share
markets, despite rising long-term interest rates. Shares continue to benefit from good economic growth
and company earnings.
Key company contributors during the month were oil companies, EOG Resources in the US (+12.4%) and
Woodside Petroleum in Australia (+10.2%), benefiting from the higher oil price. Xero shares also performed
strongly (+13.7%), benefiting from a more optimistic view taken by Australian investors and analysts. The
Fund also benefited from the fall in the NZD during the month which boosted the returns from unhedged Cash and Cash Australian Equities
Equivalents 12.11% 19.39%
global shares. New Zealand Fixed International Equities
Interest 3.04% 22.06%
International Fixed Listed Property 5.25%
During the month we reduced our holdings in airlines, Qantas and Air New Zealand, following good Interest 11.28%
performance and rising oil prices. The outlook for shares remains generally positive supported by good New Zealand
Equities‡ 26.87%
economic growth, company earnings and reasonable company valuations. The key risk for shares remains
that interest rates rise faster than expected, which may cause continued short-term volatility. The Fund
remains active to take advantage of opportunities and to identify the companies which we believe will deliver
good future returns relative to their risk.
†Includes unlisted equity holdings of 0.26% ‡Includes unlisted equity holdings of 2.38% *Other may include interest rate derivatives and currency contracts.Milford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Australian Absolute Growth Fund Actual investment mix1
Portfolio Manager: William Curtayne & Wayne Gentle
The Fund returned 0.9% in April. Equity markets were more stable during the month, but we had a mixed
performance from our investments. On the negative side, Boral and Experience Co downgraded earnings
as poor weather in Queensland impacted their respective building products and sky diving operations. As
weather-related earnings downgrades don’t concern us, we used the share price weakness in both
companies as an opportunity to increase our positions.
On the positive side, our energy companies were strong as the oil price continued to rally. The Brent oil Cash and Cash Australian Equities
price was up 7% for the month. Our investments in Origin Energy, Sundance Energy, Woodside Petroleum Equivalents 28.10% 53.67%
New Zealand Fixed International Equities
and Senex Energy were up 12.1%, 8.8%, 10.2% and 3.8% respectively. Aristocrat Leisure and Xero also Interest 0.82% 2.56%
performed strongly heading into their result releases in May. International Fixed Listed Property 5.47%
Interest 0.95%
New Zealand Equities
During the month, we increased our position in the a2 Milk Company following a research trip to China. We 8.42%
believe that a2 Milk’s infant formula product will continue to gain traction in the Chinese market. However,
market expectations for a2 Milk’s June result are very high, which means any disappointment will result in
a significant share price decline. So, despite our positive view, we manage this risk with a prudent position
size.
Global Equity Fund
Portfolio Manager: Felix Fok
The Fund rose 1.8% in April. Global share markets stabilised after a turbulent period. A calmer geopolitical
backdrop helped, particularly on the Korean Peninsula. While global growth has moderated from a very strong
start, the backdrop remains supportive for earnings.
In Direct stocks, long-time holding Visa (+6.1%, in local currency) rallied on the back of results. The number
of transactions handled by the network grew by double-digits. UK budget hotel chain Whitbread (+15.7%)
woke from its slumber! The company has been trading cheap on the back of weak high street consumption Cash and Cash International Equities
Equivalents 7.19% 91.19%
which impacted its smaller coffee business, Costa. The coffee chain will now split from the hotel business, Australian Equities Listed Property 1.08%
which is attracting value investors. Negatives included Taiwan Semiconductor (-12.1%) as a weaker outlook 0.55%
for smartphone shipments dented short-term trading. We reduced the holding but continue to have a
favourable medium-term view.
After a strong performance in March when markets were weak, Managers lagged in the April rebound.
Antipodes Global (+3.3%) and GMO (+3.1%) were outperformers, but these were offset by Wellington
Strategic European (+1.5%) and MTX Sustainable Emerging Markets (-0.7%).
Overall, the backdrop for shares remains supportive, with steady global economic growth, moderate interest
rates, and solid corporate earnings. However, concerns over inflation and protectionism are likely to lead to
a bumpier road ahead.
*Other may include interest rate derivatives and currency contracts.Milford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Trans-Tasman Equity Fund Actual investment mix1
Portfolio Manager: Sam Trethewey & Wayne Gentle
The Fund had a strong month, returning +2.3% and has now returned +14.8% over the past year. The ASX 200
Accumulation Index rallied 3.9%, bouncing back from last month's weakness. The NZX 50 Gross Index rose
1.5% but it was quiet on limited stock specific news and low volumes.
However, Fletcher Building was the notable exception. Takeover offer rumours and a capital raising
surrounded the stock. Despite the dilution associated with the capital raising, the stock has traded positively
since, reflecting several new positives. In Australia, Macquarie Atlas and Origin Energy were standout Cash and Cash Australian Equities
performers each returning over 12%. Macquarie Atlas will internalise its management. On a relative basis, Equivalents 4.06% 47.63%
New Zealand Equities Listed Property 5.11%
a2 Milk (-2.0%) and Boral (-7.5%) were headwinds while Xero (+13.7%) and Aristocrat (11.5%) contributed 43.19%
positively. Sentiment towards a2 Milk remained mixed following the launch of ‘Illuma Atwo’ by Nestle. Xero
continued to be well supported following its ASX listing and possible inclusion in the Australian MSCI
index.
The Fund participated in the Fletcher Building capital raising. Profit was taken on Xero, Air New Zealand
and South32 following share price strength. A new position in Bluescope Steel was added as steel margins
have improved. Looking ahead, the focus will continue to be on stock selection and we will begin to position
for the May reporting season.
Dynamic Fund
Portfolio Manager: William Curtayne & Michael Higgins
Following a volatile few months, equity markets returned to a period of stability and the Fund returned 0.1%
in April. Winners for the month included accounting software company Xero (+13.7%) which rallied on
continued positive feedback about progress across Europe; Aristocrat (+11.5%) rose on anticipation of a good
result in May; and wealth platform HUB24 (+10.4%) posted its second strongest ever quarter for fund flows.
HUB24 has been a stalwart in the Fund for over two years now and we continue to like its exposure to the
growth of independent advisors. Cash and Cash Listed Property 6.70%
Equivalents 6.80%
New Zealand Equities Other* 0.93%
Detractors include Experience Co (-17.6%) which downgraded earnings as poor weather in Queensland 5.83%
Australian Equities
impacted their sky diving operations, we took the opportunity to acquire more stock; AMA group (-10.4%) 79.75%
which agreed to an asset sale disappointing the market; and AFG (-9.2%) which is suffering from the fallout
from the Royal Commission. During the month we increased our position in the a2 Milk Company following
a research trip to China, and Seven Group which is leveraged to the returning demand for mining services
equipment across Western Australia and Queensland. Attendance at several conferences in May should
present some opportunities to deploy capital into new ideas.
*Other may include interest rate derivatives and currency contracts.
Upcoming Distributions Target Payment Date
Trans-Tasman Bond Fund 0.75 cents (Quarterly) 20/06/2018
Global Bond Fund 0.75 cents (Quarterly) 20/06/2018
Conservative Fund 0.75 cents (Quarterly) 19/07/2018
Diversified Income Fund 1.6 cents (Quarterly) 23/05/2018
Trans-Tasman Equity Fund 1.5 cents (Biannually) 20/09/2018
1The actual investment mix incorporates the notional exposure value of equity derivatives and credit default swaps, where applicable.Milford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Fund Performance
Since Fund
Past month 1 year 3 years (p.a.) 5 years (p.a.) Unit price $ Fund size $
inception (p.a.)
Trans-Tasman Bond Fund*^ 0.05% 4.44% 4.47% — 5.64% 1.1128 356.8 M
Global Bond Fund*^ -0.01% 3.70% — — 5.14% 1.0266 298.4 M
Conservative Fund* 0.48% 5.67% — — 6.75% 1.1053 189.5 M
Diversified Income Fund* 1.21% 6.96% 9.30% 10.71% 11.82% 1.6672 1801.9 M
Balanced Fund 1.48% 8.71% 8.36% 10.13% 10.25% 2.1278 518.5 M
Active Growth Fund 1.48% 14.39% 10.93% 12.25% 13.00% 3.4246 923.7 M
Australian Absolute Growth
0.93% — — — — .9999 24.3 M
Fund
Global Equity Fund 1.79% 9.74% 6.52% 8.30% 8.39% 1.4931 415.6 M
Trans-Tasman Equity Fund 2.30% 14.80% 13.35% 11.77% 11.15% 2.5570 332.3 M
Dynamic Fund 0.14% 18.44% 10.38% — 13.33% 1.7586 204.9 M
For details of how investment performance is calculated, and returns at each PIR please see www.milfordasset.com/funds-performance/view-performance#tab-performance
Performance figures are after total Fund charges have been deducted and at 0% PIR. Please note past performance is not a guarantee of future returns. *Performance figures include
the reinvestment of the Funds' distribution. Inception dates for the Funds: Active Growth Fund: 1 October 2007, Trans-Tasman Equity Fund: 1 October 2007, Balanced Fund: 1 April
2010, Diversified Income Fund: 1 April 2010, Global Equity Fund: 12 April 2013, Dynamic Fund: 1 October 2013, Trans-Tasman Bond Fund: 3 December 2013, Conservative Fund: 1
September 2015, Global Bond Fund: 1 February 2017, Australian Absolute Growth Fund: 1 March 2018.
^Returns prior to 1 March 2018 are from when the Fund was previously offered to wholesale investors only and have been adjusted for current Fund charges.
Key Market Indices
Past month 1 year 3 years (p.a.) 5 years (p.a.) 7 years (p.a.)
S&P/NZX 50 Gross Index (with imputation credits) 1.51% 15.78% 14.81% 14.26% 14.80%
S&P/ASX 200 Accumulation Index (AUD) 3.91% 5.46% 5.70% 7.53% 7.87%
S&P/ASX 200 Accumulation Index (NZD) 4.62% 3.75% 6.88% 4.93% 4.30%
MSCI World Index (local currency)* 1.94% 10.75% 7.44% 10.51% 9.77%
MSCI World Index (NZD)* 3.56% 10.32% 10.36% 13.66% 10.31%
S&P/NZX 90-Day Bank Bill Rate 0.16% 1.96% 2.45% 2.74% 2.73%
*With net dividends reinvestedMilford Unit Trust PIE Funds Monthly Review as at 30 April 2018
Top Security Holdings (as a percentage of the Fund’s Net Asset Value)
Trans-Tasman Bond Fund Global Bond Fund Conservative Fund Diversified Income Fund Balanced Fund
ANZ Term Deposit 3.08% Citigroup 5.95% 2049 1.76% Investore Property 4.40% 2024 ASB Bank 5.25% 2026 2.30% Vanguard Intl Select Excl
06/18 2.55% 1.92% Index Fund 3.73%
NAB Float 2023 2.48% Microsoft 2.875% 2024 1.64% Westpac 4.695% 2026 1.79% Charter Hall Group 2.27% iShares MSCI EAFE Index
Fund 3.68%
ASB Bank 6.65% 2024 2.11% HSBC Float 2024 1.62% ASB Bank 6.65% 2024 1.53% Aventus Retail Property Fund Spark New Zealand 1.28%
2.00%
Westpac 3.795% 2021 2.00% Sprint Spectrum 4.738% 2025 Precinct Properties 4.42% 2024 Westpac 4.695% 2026 1.87% a2 Milk Company 1.20%
1.52% 1.26%
Downer Group 5.75% 2018 Aviva 3.875% 2044 1.46% ANZ Term Deposit 3.08% Mirvac Group 1.81% Contact Energy 1.16%
1.99% 06/18 1.23%
United Energy 3.85% 2024 JPMorgan 5.15% 2023 1.45% NAB Float 2023 1.20% Contact Energy 1.68% Wellington Strategic Euro^
1.98% 1.07%
NZLGFA 6% 2021 1.90% Bank of America 6.10% 2025 BNZ 3.375% 2021 1.19% Spark New Zealand 1.66% ASB Bank 5.25% 2026 0.97%
1.44%
Investore Property 4.40% 2024 Nationwide Bldg Society 2% Genesis 5.7% 2022 1.16% Argosy Property Trust 1.61% Aventus Retail Property Fund
1.89% 2029 1.44% 0.93%
BNZ 3.375% 2021 1.85% Westpac 4.695% 2026 1.43% United Energy 3.85% 2024 Meridian Energy 1.48% Charter Hall Group 0.93%
1.08%
Suncorp-Metway 3.75% 2019 Swiss Re 5.75% 2050 1.38% Sydney Airport 3.76% 2020 Scentre Group 1.45% Antipodes Global Fund^
1.83% 1.04% 0.91%
Top Security Holdings (as a percentage of the Fund’s Net Asset Value)
Australian Absolute Trans-Tasman Equity
Active Growth Fund Global Equity Fund Dynamic Fund
Growth Fund Fund
Vanguard Intl Select Excl Orora 3.77% Wellington Strategic Euro^ a2 Milk Company 6.97% Coporate Travel Mgmt 4.05%
Index Fund 3.75% 5.29%
iShares MSCI EAFE Min Vol Sydney Airport 3.02% Antipodes Global Fund^ BHP Billiton 3.98% Bingo Industries 2.90%
ETF 3.74% 4.51%
Spark New Zealand 2.44% Transurban Group 2.87% Wellington Wolf Creek Commonwealth Bank of Eclipx Group 2.87%
Shares^ 4.27% Australia 3.58%
a2 Milk Company 2.17% Origin Energy 2.84% Magellan Infrastructure^ Westpac Banking Corp 3.24% Smartgroup Corp 2.61%
4.24%
Contact Energy 2.14% Smartgroup Corp 2.80% GMO Systematic Global National Australia Bank 3.14% HUB24 2.60%
Macro^ 4.23%
CYBG 8% 2049 1.55% Eclipx Group 2.67% Hawkes Bay Investors^ 4.16% Fisher & Paykel Healthcare Collins Food 2.57%
3.03%
Delegat Group 1.40% Mirvac Group 2.42% Energy Select SPDR 4.02% Spark New Zealand 2.98% Aristocrat Leisure 2.54%
Sydney Airport 1.36% a2 Milk Company 2.28% SPDR Euro Stoxx 50 ETF 3.34% Auckland Airport 2.73% 3P Learning 2.48%
Tourism Holdings 1.23% Collins Food 2.27% Vontobel Sust. EM Leaders^ Contact Energy 2.62% MNF Group 2.46%
3.26%
JPMorgan 5.15% 2023 1.18% Boral 2.27% iShares Russell 2000 3.19% Summerset Group Holdings a2 Milk Company 2.45%
2.37%
^Externally managed fund.
Milford and Milford staff have approximately $33.0 million invested across our Unit Trust PIE Funds as at the end of April 2018.
Level 17, 41 Shortland Street, Auckland
PO Box 960, Shortland Street, Auckland 1140
Free phone 0800 662 345
milfordasset.com
Disclaimer: The Milford Monthly Review has been prepared by Milford Funds Limited. It is based on information believed to be accurate and reliable although no guarantee can be
given that this is the case. No reproduction of any material either in part or in full is permitted without prior permission. For more information abut the Funds please refer to the Product
Disclosure Statement or the latest Quarterly Fund Update.You can also read
