Your Monthly Update - March 2018
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Fisher Funds TWO KiwiSaver Scheme
Your Monthly Update
March 2018
Trade wars: what next for NZ?
Economics 101 is a first year course that many University threatening tariffs on Jim Beam Whiskey and Harley Davidson
students have to suffer and endure. The course is a motorcycles in retaliation! The third losers will be countries
prerequisite for many Business degree courses, whether more dependent upon trade than the USA.
interested in Economics or not. In my time, the subject matter
was mostly very dry, and subsequently many of the concepts The interesting fact is that the US produced less than 5% of
have been outdated by the impact of technology and a world steel production in 2016, and less than 2% of world
better understanding of human behaviour. Some economic aluminium production. This shows it is not as if the President’s
principles are changing, but some have also endured. actions are designed to protect large volumes of domestic
jobs in the USA. This proposal has political motives and
One of the most basic principles that has endured is that potentially far greater ramifications.
free trade lifts the incomes of all participants. If resources are
directed to the most efficient producers then everyone wins, The underlying problem is that the US trade deficit widened
notwithstanding some fallout during the change process of to $56b in January 2018, the widest this gap has been for
reaching that point. 10 years. The US does have a significant structural problem,
however there are very few commentators that believe that
tariffs on selected products and a potential trade war are the
answer to the problem.
Why should we even be bothered by these changes? Exports
make up nearly 30% of New Zealand’s annual $250b GDP
and so for all of us our livelihoods are dependent upon
New Zealand being able to trade with the world. Many
of our better companies listed on the stock exchange are
dependent on exports. In a world of increasing tariffs and
reduced trade New Zealanders incomes will fall.
It is way too early to predict where this may all lead to, but
let’s all hope common sense and reflections on first year
university courses prevail.
Chairman
On 5th March Sir John Wells retired as Chairman of Fisher
Despite the unequivocal nature of the free trade principle, Funds. Sir John has been on the Board a total of 18 years,
getting countries around the world to agree and implement and has overseen the success of the company over that time.
free trade policies has been a long drawn out process. All of us at Fisher Funds wish Sir John well for the future.
Countries have been getting there however, as shown by the The new Chairman is existing
continued proliferation of new free trade agreements. Non-Executive Director David
Clarke. David has been on the
Recent moves by the president of the USA to implement Board two years and brings
tariffs on steel and aluminium imports into the USA is a a wealth of experience in
significant step against this progress and could be a first step financial services in Australia
in more significant trade barriers being implemented globally. and New Zealand to the
The first losers will be US consumers who will end up paying a position.
higher price for products containing steel and aluminium. The
second losers will be alternative industries in the USA who Bruce McLachlan
feel the retaliation from other countries. Already Europe is Chief Executive
Highlights and lowlights
A snapshot of the key factors driving the performance of markets and your portfolios last month.
NZ was near the top of the equity pack globally for the month, primarily because our correction was
much shallower than most global markets. The NZ Growth fund was down 1.6% underperforming the
benchmark NZSE50G (-0.8%). A driver of fund performance was the recent addition of A2 Milk who rose
43.8% for the month. Other strong performers were Summerset and Fisher & Paykel Healthcare. A
number of changes were made to the portfolio weightings during the month off the back of the technical
market correction which gave the opportunity to add to high quality positions at discounted prices. We
added to our positions in A2 Milk, Auckland International Airport, Fisher & Paykel Healthcare. Fund
performance is not impacted by CBL as we do not hold this company in any portfolios.
Despite volatile markets around the world the Australian share market was broadly unchanged for
the month. The Australia Growth Fund lagged the market slipping 0.8%. Strong results underpinned
the leading performers for the month. Datacentre company NextDC, crushed market expectations
with a very upbeat earnings result. NextDC is benefitting from the accelerating move towards cloud
computing and away from traditional on premise IT infrastructure. CSL and ARB demonstrated
strong profitability, delivering healthy share price gains.
The biggest negative impact for the month was from logistics software provider Wisetech which,
despite posting profit growth of 32%, lagged bullish market expectations. To put this in context,
and even with February’s steep share price fall, Wisetech shares have risen 96.4% in the last twelve
months. We remain confident in the outlook for the firm.
The International Equity Fund marginally lagged the benchmark in February, declining
1.9% versus the S&P Global Large Mid Cap which fell by 1.8% in New Zealand dollar terms.
Information Technology was the only sector to post positive performance for the month as
volatility staged a temporary resurgence. Energy, Real Estate and Consumer Staples sectors
posted the biggest losses in the month, falling 6.9%, 6.4% and 5.6% respectively in local terms.
As the fund has a higher exposure to Energy stocks than the benchmark, this was a detractor
to performance. A significant positive contributor to returns was stock selection within the
Information Technology and Consumer Staples sectors.
Sky Plc was the biggest contributor to benchmark-relative returns (+ 27%) after a takeover
announcement by US cable giant Comcast. Cisco Systems exceeded earnings expectations,
causing its share price to rise by 8%. Drags on performance were mainly telecommunications
firms including Verizon Communications, Lowe’s Companies and Vodafone Group which fell
by 9.5%, 12% and 10% respectively.
The New Zealand fixed income strategy continued its strong run relative to benchmark this
month. The decision to maintain core investments across certain corporate, bank, and asset
backed investments allowed the portfolio to continue its strong run. We remain cautious
towards corporate bonds in general yet believe certain pockets of the New Zealand fixed
income market continue to offer attractive return profiles both on an absolute basis and
compared with offshore markets. We believe the Fund is ideally positioned to benefit from this,
as our team of analysts scour markets looking for anomalies and inefficiencies such as these in
which to advantage from.
Continued underperformance of U.S fixed income assets relative to other major developed
interest rate markets dragged down the portfolio’s performance this month. The portfolio
continues to maintain an underweight duration bias which means it has less interest rate
exposure than the benchmark. This will protect the portfolio should interest rates continue
to rise more than the market is pricing which is what we expect. Our preference for U.S fixed
income assets is offset with underweight positions in some European and Asian bond markets.
Fisher Funds TWO KiwiSaver Scheme
2 Monthly Update
Managing your KiwiSaver account
GRAB THE
CASH
FOR YOUR
STASH
Do you know that you can earn some extra cash from the Not working or Self Employed
Government for your KiwiSaver account? If the answer is So long as you meet all the criteria above you are still
no, then the great news is you could receive a government eligible! If you haven’t contributed to your KiwiSaver
contribution of up to $521.23 per year! account for the current year then you can make a voluntary
contribution before 30 June 2018 to receive your subsidy.
Member Tax Credit 101
You may have heard the name Member Tax Credit or MTC Making the most of it?
floating around — don’t let the name fool you, despite To maximise this year’s full MTC entitlement of $521.43 you
having the word tax in the name the MTC is an annual need to have contributed at least $1,042.86 (roughly the
contribution from the Government to help you save. Keep equivalent of $20 per week) into your KiwiSaver account.
reading to work out if you are on track to receive this and That means for every $20 you put in the government will
find out how you can take action to maximise this benefit. give you $10 — and if that doesn’t sound like a lot how
about $24,507? That’s what $10 per week adds up to over
Eligibility
47 years (joining at 18 and contributing until 65), excluding
If you are; investment earnings.
What do you need to do to grab the cash?
18 years of age or older; If you have not put in at least $1042.86, you can top up
your KiwiSaver account for the current KiwiSaver year
before Friday 29 June 2018. Read more here online about
who is eligible for a MTC, how it is calculated, and how to
Mainly living in NZ; and make a payment — more here on topping up.
To confirm how much you may need to top up your account
by, please call Inland Revenue on 0800 549 472 and make
Not yet eligible to sure you have your IRD number on you and they should
withdraw for retirement be able to confirm how much you have contributed via your
employer to date.
And then…
Then you are eligible to receive this benefit if you meet the
contribution criteria! That means that for every $1 you save, If you would like to make a payment into your
the Government will contribute 50 cents to your KiwiSaver KiwiSaver account, please make sure you do this by
account, up to $521.43 each KiwiSaver year — which runs Friday 29 June 2018.
from 1 July to 30 June*.
VIEW YOUR PAYMENT OPTIONS »
* If you turn 18, or reach retirement age part way through a KiwiSaver year (1 July to 30 June),
your entitlement to MTCs in that year will be pro-rated for the portion of the year you were Fisher Funds TWO KiwiSaver Scheme
entitled to MTCs e.g. if you turn 18 on 1 January, you will be entitled to a maximum of $260. Monthly Update 3
Your KiwiSaver portfolios
Five quick investing must knows
Frank Jasper, Chief Investment Officer
One feature of market psychology is that investors have a tendency to think things will continue along their current trajectory
forever. In recent years markets have been remarkably stable. This is measured in financial market terms by the volatility or
variability of returns. Many investors started to believe the market would continue to stay stable and/or that volatility would even
fall. After a long period of stability some were taken by surprise by stronger than the market expected US payroll data released
on Jan 26 which triggered a sharp sell off. This was exacerbated by the pressure of forced selling from highly geared investors
who had been betting things would stay stable. This activity, which shocked many, is really just a natural feature of markets.
There are five things you should remember about markets:
Moves like this in markets happen
1 We may not remember at this point, but stocks fell more than 12% in the US summer of 2015 and
13% in early 2016. These corrections are all but forgotten because stocks recovered relatively
quickly. Volatility is a normal feature of markets and we should never assume that periods of low
volatility will last forever.
Your response to the recent moves tells you a lot about you DNA as a risk taker
2 If you feel really nervous, can’t sleep and feel the need the check the value of your investment
daily it might be a sign you are taking too much risk. It might be time to rethink your investment
strategy. The right strategy is one you can live with in difficult as well as buoyant times. Fisher
Funds is here to help with this.
Where you are at in your investment journey makes all the difference
3 Many of our KiwiSaver and investors who make regular contributions should embrace falling
prices. Falling prices means the investment you make today will likely reap better rewards over the
long run. You are invariably richly rewarded for embracing risk at the right times. If you are nearer
the time you need access to your money your investment strategy ought to embrace less risk.
Active investors use volatility to their advantage
4 Fisher Funds is an active investor. We have the ability to use volatile markets to make changes
to portfolios that we believe will add value over time. For instance our fixed interest portfolio
manager David McLeish has been positioned in shorter maturity bonds so protected clients
during the rise in interest rates. Similarly Sam Dickie our New Zealand equity portfolio manager
has been using weaker prices to build our position in new portfolio investment A2 Milk.
Fundamentals are all that count in the long run
5 For me personally this is what I fall back on in tough market environments. Just because a bunch
of investors lost money beating the markets would be stable and were forced to sell shares, the
demand for Fisher and Paykel Healthcare’s infant Optiflow nasal hi flow oxygen canula did not
change one iota. Luckily for mums worried about their babies, hospitals don’t look at whether the
Dow was up or down before purchasing life saving equipment like this. Similarly Americans are still
getting CSL’s flu medication regardless of the share market. These companies, as well as the others
in Fisher Funds’ portfolios, are fundamentally sound, high quality and are growing. The chance to
buy shares in world leaders like these at lower prices is one we should all embrace.
Fisher Funds TWO KiwiSaver Scheme
4 Monthly Update
The a2 Milk success story
Sam Dickie, Senior Portfolio Manager
New Zealand Shares and Property & Infrastructure
The a2 Milk Company cracked another major milestone
in February, eclipsing a range of well-known businesses
to become the largest listed company in New Zealand
by value.
The result announcement that catapulted it to the top of
the heap contained just about everything a shareholder
could want — revenue and earnings beating expectations,
strong growth in market share in the lucrative US$20 billion
Chinese infant milk formula market, and progress in newly-
entered markets.
The cherry on top was a brand new agreement with dairy
heavyweight Fonterra, allowing a2 to accelerate entry into
new global markets and launch new products. On the back
of the result and the Fonterra deal announcement alone,
the share price jumped, almost 40%, from $9.29 to over $13
at the time of writing.
But what exactly is the a2 Milk Company and how has it
grown so quickly?
In a nutshell, the company currently sells ‘a2’-branded fresh Where the company grew in leaps and bounds was infant
milk and infant milk formula internationally. Its products formula. It launched its a2 Platinum brand in Australia in
contain only A2 beta-casein protein. This is believed to late 2013 and quickly gained share, courtesy of its strong
be more comfortably digested than normal milk (which position in fresh milk.
contains a mix of both A1 and A2 proteins). The company From there, growth exploded as ‘daigou’ (personal
has developed and patented a range of IP which tests shoppers) latched on to this new desirable brand and began
whether cows produce A1-free milk. More importantly the re-exporting it for consumption in China.
science behind a2 the company has developed a leading,
highly trusted brand in Australia and China in particular. a2’s management have done an excellent job of managing
the nuances of this channel, where others, like Australian
firm Bellamys, have failed. They have also successfully grown
What exactly is the a2 Milk Chinese distribution into conventional channels including
key eCommerce websites and 6700 physical stores.
Company and how has it
This move to grow distribution and a2 growing brand
grown so quickly? strength in China have led to the latest step-up in market
share and earnings. Annual sales are now approaching $1
Despite the recent success, it has been a long rags-to-riches billion. This is an incredible story of recognising opportunity
story for early shareholders. The company has been listed and having the strategic vision and operational smarts to
since 2004 and with limited ability to commercialise its IP take advantage of it.
made losses until 2011. From there, the company started The Fonterra deal is the first step in the next phase of a2’s
gaining traction selling fresh milk through the supermarket global growth story — New Zealand’s global dairy giant
and food service channels in Australia, with brand strength has acknowledged a2’s global potential and is now on
and awareness growing from a small base. Over the next few board. As Kiwis, it also means we can expect to see local
years a2 Milk grew share and became the leading branded supermarket shelves well stocked with a2 milk in the future!
fresh milk in Australia. This in itself was not highly profitable
— the company only made $9 million in operating profit The a2 Milk Company is owned in all Fisher Funds NZ based
before tax on $94 million of sales in fiscal 2013. portfolios.
Fisher Funds TWO KiwiSaver Scheme
Monthly Update 5
Electronic Arts and the art of investing
Ashley Gardyne, Senior Portfolio Manager — International Shares
I can remember when I was a teenager playing Need for While this may not seem like a big deal, it has a huge impact
Speed on my PlayStation for countless hours (after I had on Electronic Arts’ profitability. Selling a game at full price
finished my homework...) trying to get a new best lap time. for download on the online PlayStation Store rather than via
Funnily enough — 20 years later — investing can feel the a physical retailer allows them to capture the profit margin
same at times! Investing is a race that never ends, constantly a retailer like Noel Leeming would have made on the sale.
going round and round in circles looking at new investment Electronic Arts also saves the cost of printing the games onto
ideas — hoping to find just a handful of good ideas that will a CD, boxing them up and shipping them to stores. Based on
keep you at the top of the leader board. our numbers EA earns more than double the profit on each
game they sell digitally.
Over the years in financial markets it has become harder to
achieve this objective, partly due to increased competition In 2013, EA was barely profitable. Revenues from its game
from hedge funds and computer algorithms making the sales only just covered its large team of game developers,
market more efficient. Today active manager’s need to be salesmen and administrators. Since then, while the company
more creative in identifying situations where others in the has only grown its sales at 6% per annum, this digital
market (particularly short term orientated funds) may be transition has helped magnify its earnings almost 10-fold.
missing a trick. With thousands of potential investment Not surprisingly its share price is up over 700% since the start
candidates globally and lots of competitors looking at of 2013!
the same investments, it is very important for us to spend
our time looking in spots that are more likely to be rich in While it is futile trying to outfox hedge funds attempting
misunderstood opportunities. to forecast Wal-Mart’s the next quarterly earnings number
to 2 decimal places (they use satellites to count the cars in
Wal-Mart carparks to help them), the Electronic Arts example
highlights how subtle but important changes in the business
models of specific companies can be missed by short term
investors.
Though the Electronic Arts opportunity is now largely
understood by the market, we are constantly looking for
opportunities that may not be. One company that sits in this
camp is Walt Disney, another company we met on our US
trip. Fast broadband has allowed Netflix to build a highly
successful business distributing TV content directly customers
— circumventing TV networks, cable and satellite TV
operators. Eventually content creators like Disney will more
aggressively distribute their shows directly to viewers and
capture the profits made by TV networks for simply providing
a distribution service.
Another candidate would be L’Oreal, whose augmented
reality app ‘Makeup Genius’ allows customers to try on new
looks from their phone and then simply click ‘buy’ and have
Harry Smith, our Senior Investment Analyst deep
undercover at Electronic Arts. them delivered. While it’s still early days, online sales for
L’Oreal would allow them to capture at least part of the profit
pool currently taken by department stores and make up
Our recent trip to the US, and meeting with Electronic specialists like Sephora.
Arts, the global gaming giant, provided a good example
of one such area — industries where the traditional means As with video games, where the next level you unlock may not
of distribution have been disrupted. Ten years ago if you be as you expected, the situations that will provide us with
wanted to play Madden NFL you had to bike to your nearest opportunities will vary considerably from year to year. That
video game store and buy the game off the shelf (packaged said, we believe an investment process structured around
in a DVD case). However, in the last five years, with faster identifying businesses with a misunderstood medium term
broadband speeds it is easier to simply download the game. story can provide ripe opportunities that others may miss.
Fisher Funds TWO KiwiSaver Scheme
6 Monthly Update
Fund facts
Fund performance to 28 February 2018
Fund after fees & Since
Unit price ($) 1 month 3 months 12 months 2 years* 3 years* 5 years* 7 years*
before-tax returns launch*
Preservation Fund 2,873.5962 0.2% 0.6% 2.5% 2.4% 2.6% 2.9% 3.0% 3.7%
Conservative Fund 1.7851 -0.3% 0.2% 5.6% 5.8% 4.9% 5.9% 6.1% 5.5%
Balanced Fund 4,967.2265 -0.9% 0.4% 9.1% 9.3% 6.7% 8.2% 7.6% 6.0%
Growth Fund 1.7788 -1.3% 0.4% 11.5% 11.8% 7.8% 9.8% 8.9% 5.6%
Equity Fund 4,557.3242 -2.0% 0.5% 15.4% 15.4% 9.1% 11.3% 8.8% 4.3%
Cash Enhanced Fund 1.7152 -0.2% 0.3% 5.2% 5.3% 4.8% 5.6% 5.8% 5.4%
* Annualised return before tax and after fees
The above returns are based on the percentage change in the unit price of the fund for the period specified, they are not the returns individual investors will receive as this
will depend on the prices at which units are purchased on the date of each individual contribution. Changes in the unit prices reflect changes in the market value of the assets
of the fund. The above returns exclude government contributions and no allowance has been made for monthly administration fees. Returns displayed are after management
fees but before tax.
Biggest holdings as at 31 January 2018
Percentage of Percentage of
Preservation Fund Conservative Fund
fund net assets fund net assets
Fonterra Cooperative Grp 09/11/2020 FRN 6.6% Wpac Bank Deposit AC - Deposit Accounts 10.9%
ASB Bank Ltd. Frn 06-mar-2018 6.1% Cash Deposit (ANZ Bank) 3.4%
Wpac Bank Deposit AC - Deposit Accounts 5.9% Bayfair Mall 3.0%
Top 10 Holdings 44.4% Top 10 Holdings 32.6%
Percentage of Percentage of
Balanced Fund Growth Fund
fund net assets fund net assets
Cash Deposit (ANZ Bank) 8.1% Cash Deposit (ANZ Bank) 7.1%
Wpac Bank Deposit AC - Deposit Accounts 6.4% Wpac Bank Deposit AC - Deposit Accounts 5.1%
Bayfair Mall 3.0% Bayfair Mall 2.4%
Top 10 Holdings 27.3% Top 10 Holdings 23.8%
Percentage of Percentage of
Equity Fund Cash Enhanced Fund
fund net assets fund net assets
Cash Deposit (ANZ Bank) 4.8% Wpac Bank Deposit AC - Deposit Accounts 11.8%
Mainfreight Limited 2.6% BNZ Bank Deposit A/C - Deposit Accounts 3.1%
Fisher & Paykel Healthcare Corporation Limited 2.4% Government Of New Zealand 5.5% 15-apr-2023 2.7%
Top 10 Holdings 19.9% Top 10 Holdings 32.7%
Further information about your KiwiSaver portfolios (including a full breakdown of the portfolio holdings and investment
team profiles) can be found at www.ff2kiwisaver.co.nz.
The information and any opinions herein are based upon sources believed reliable, but the Company, its officers and directors make no representations as to its accuracy or
completeness. All opinions reflect our judgement on the date of this report and are subject to change without notice. The information contained in this publication should
not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment. Past
performance is not a reliable guide to future performance. For a product disclosure statement for any of our funds, please go to our website or call us on 0800 20 40 60.
To find out more about us or the Fisher Funds TWO KiwiSaver Scheme, contact us at:
Phone: 0800 20 40 60 | Fax: 09 489 7139 | Email: kiwisavertwo@fisherfunds.co.nz | Web: www.ff2kiwisaver.co.nz
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