Patience and intelligence ...
A handful of patience is worth more than a bushel of brains - Dutch proverb
I had to pull out one of my favourite Warren Buffett quotes last month; the one about investing on the assumption the market would be closed for five years. It is closely aligned to another favourite - "if you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."
These oldies but goodies can be really helpful in times of uncertainty and market noise. And noise there is. Over many months now we have mentioned the growing chorus of pundits proclaiming the end of markets as we know them. If you followed financial media closely and believed everything you read, you'd believe that all assets are overvalued, share markets are being propped up by artificially low interest rates and once interest rates start their imminent rise, well, goodness only knows what lies ahead. Thankfully our team members don't believe everything they read but some of the well-reasoned arguments, based on what has happened in markets before, can be persuasive. If you start to believe that everything is overvalued and that a correction lies ahead, it is easy to hesitate and put off buying or holding what might otherwise be an ideal investment. Hence my reference to Buffett's strategy of buying quality assets and buying them for the long-term.
We are into the sixth month of the year and despite all the chatter, markets haven't really done a lot. Given the strong performances of share markets in recent years, they were probably due a breather, and they are having one. Well, except for the Chinese share markets which are a law unto themselves (see Roger's summary China shenanigans). This year was supposed to be all about interest rates - a change in the bond cycle which would bring volatility and uncertainty. In January, it was easy to believe that 2015 was indeed going to be about bonds - in a matter of weeks, 10-year US Treasury bond yields fell 0.53% (from 2.17% to 1.64%), UK 10-year rates fell 0.42%, German yields fell 0.27% and even Japanese bond yields fell slightly. This prompted the New York Times to talk of "flashing warning signs" and many an investor sat on the edge of their seat wondering what havoc would ensue once interest rates started moving in earnest.
Yet here we are in June and nothing much has happened. In fact by historical standards, 2015's interest rate movements have been below average. Without a clear steer from interest rates, share market movements have also been relatively tame. We haven't had any significant corrections and we haven't had any major rallies either. What we have instead is a market poised for what might come next and the expectation is that what comes next will more likely be negative than positive. Shares may prove to be overvalued so we won't buy them, bonds may prove overvalued so we won't buy them either and property is very likely overvalued so we won't go there. Instead, we'll fixate on every bit of news, just in case it's the big one.
Every investor can benefit from a long-term perspective. Whatever happens in markets next shouldn't have a significant or lasting impact on the value of a quality asset. Over time, the value of a business changes only slowly; certainly less than its daily market price would suggest. If you choose well, you shouldn't have to worry about what the next month or year holds. As Buffett suggests, if you find a company with bright prospects that has a sustainable competitive advantage and a track record of success over a reasonable period, then you can relax knowing that its value will likely remain intact for some time. No need to fret the unknown, punt on interest rates or predict the market's direction. Apply a handful of intelligence and bushel of patience and you'll be right.
Managing Director | Fisher Funds
More tinkering to KiwiSaver and financial advice. Carmel Fisher discusses the impact on clients.
Your KiwiSaver Portfolios
Highlights and Lowlights
- In New Zealand, Infratil's share price performed strongly on the back of robust full year results and positive dividend announcements. EBOS' share price rebounded from last month's fall once uncertainty ahead of the Australian Budget dissipated and Contact Energy's share price surged after a u-turn on its international plans (see Murray's article Keeping in Contact). Although Metro Performance Glass exceeded its prospectus earnings forecasts, revenue was below forecast and the share price declined as a result.
- A positive month in Australia with the portfolio outperforming a flat market. Carsales.com staged a strong rally confirming our decision to add to the position over the preceding months. Flight Centre performed well on encouraging travel data, while Burson lagged after a very strong showing year-to-date.
- On the International front, our share portfolio tracked in line with positive global markets. Bond markets remained volatile during the month as Greek default concerns intensified and economic data releases remained mixed. Both the Reserve Bank of Australia and the People's Bank of China cut interest rates in an attempt to combat deteriorating economic conditions. We continue to prefer New Zealand bonds over more volatile international bonds.
- The New Zealand dollar came under pressure against all major currencies during May with the Trade Weighted Index falling 4.99%.
Listed property companies - buyer beware
By Zoie Regan, Senior Investment Analyst, Property & Infrastructure
Commercial property assets have benefited from low interest rates, with the difference between property yields and the declining cost of funding helping to drive up asset values and the share prices of listed property vehicles. As with residential properties, valuations of listed property companies are backward looking. The reported net asset values (NTA) of listed property vehicles are typically assessed by independent valuations which are determined by reference to historic transactions of similar assets.
It is not uncommon during periods of strong investment markets for the share prices of listed property companies to trade at a premium to their NTA. In fact, ever since mid-2012 the share prices of listed property companies in NZ and Australia have been trading at premiums to their reported NTAs - with the NZ listed property sector currently trading at an average 14% premium to NTA and Australia a whopping 39% premium.
As investors in listed property companies we are wary of large Price/NTA premiums as there is little margin for safety in share prices should the property cycle turn down. At current premiums, companies are more likely to capitalise on their ability to raise capital relatively "cheaply" (e.g. raise equity at a discount to share prices but at a premium to NTA).
In recent weeks we've had one of our portfolio companies (Kiwi Property Group) announce an equity raising to reduce their gearing, while two others (Goodman Property and DNZ Property) have reiterated their intentions to recycle (or sell) non-core assets instead. Given the large P/NTA premium for many companies, we wouldn't be surprised to see further capital raisings from the sector.
It is timely to remind investors that the ability of listed property companies to deliver shareholder value is as much to do with capital management as it is about managing their assets/portfolio (e.g. driving rental growth, maintaining occupancy, achieving diversification etc). The listed property sector both in NZ and overseas has historically had a poor track record of capital management, hence our preference for companies that opt to sell non-core assets into strength over those that use NTA premiums to raise more money.
Keeping in Contact
By Murray Brown, Senior Portfolio Manager, NZ Equities
We wrote about Contact Energy in our March Newsletter under the title "Who's Money Is It" discussing the Directors' decision to invest up to $1 billion of shareholders' money in offshore geothermal operations, rather than pay out those funds as dividends as had been previously indicated by the company (on numerous occasions). Fortunately Contact reconsidered their decision and backed down last month. The company announced that, following a review, they had found "there are no material investment opportunities available at this time that would sufficiently reward shareholders" and decided to pay out $367m by way of a special dividend. Additionally, they committed to thereafter paying ongoing dividends equivalent to 100% of underlying profits. The news was greeted favourably with the share price increasing 11% on the day of the announcement.
There is no doubt that Contact's back-down was influenced by the media and a shareholder backlash, and we are encouraged that the company heeded investors' concerns. We joined other shareholders in engaging with the company and we suspect that Contact's 52% shareholder, Origin Energy, was equally happy with increased dividends rather than an offshore investment programme given Origin's indebtedness and recent credit downgrade. We hope that the Contact Board of Directors learned some lessons from this episode - notably, check in with shareholders before planning large capital investment programmes, given that it is shareholders' capital you will be investing.
Secondly, manage your communications and public relations. If you are going to announce something that will potentially surprise the market (and in these days of continuous disclosure, this shouldn't happen that often) be prepared to provide full and comprehensive answers and explanations. To announce that you are going to invest $1 billion offshore, without giving any indication of likely return on investment or rationale, leaves you vulnerable to criticism especially having had $450m wiped off the company's value on the day of the announcement. The Contact share price has gained ground since the dividend announcement and hopefully the Board will think twice about surprising shareholders in future.
By Roger Garrett, Senior Portfolio Manager, International Equities
Chinese stocks have soared over the last year, with the Shanghai Composite index rising 135% and the Shenzen Index up 171%, adding a staggering $US6 trillion dollars to the value of the combined indices. To put this in context, the total value of the NZ stock exchange is around $US50 bln, meaning that the "paper wealth" created in the Chinese stock markets is more than 100 times the total value of the NZ market.
What makes this rally even more astonishing is that it is occurring under the backdrop of a weakening Chinese economy, which raises major questions about its sustainability. The Government's role cannot be understated, having done everything within its power to facilitate and even cajole locals into buying shares.
While the government improved foreign access to the local share market it is the domestic initiatives that have had the most telling impact. The Government has allowed individuals to have up to 20 separate share accounts (previously just one), eased monetary conditions to allow locals to debt-fund their share purchases and run advertising campaigns encouraging locals to make share market investments. The Chinese people are typically very conservative with their savings but the combination of easy access and Government promotion of share market investments is having an astonishing and somewhat concerning impact on local investment behaviour.
There is now a speculative aspect to this rally which is all the more worrying when you consider that the majority of the millions of new accounts that have been established are for individuals who haven't completed secondary school and have no previous experience in the share market. An often quoted Wall Street saying from the Great Depression warns that it is time to sell "when the shoeshine boy offers stock tips". It appears that the great majority of the $US6 trillion in share market appreciation, which has taken valuations of many shares to nose-bleed levels, comes from these types of tips.
Rest assured, Fisher Fund's disciplined investment approach, targeting high quality growth companies with a proven track record and strong fundamentals, means we can avoid the sort of speculative rally that we are now seeing in Chinese shares. Rather than invest in the local Chinese share market, we gain our exposure to Chinese companies through the bigger, more established international share markets that provide us with greater transparency and regulatory oversight.
A bird's eye view: Biotech investing - a risk worth taking?
Senior Portfolio Manager Manuel Greenland tells us how we approach investing in biotechnology companies.
A good company is one whose key strengths, such as brands, scale or technology, raise barriers to competition, allowing it to earn superior profits over time. A great company can reinvest these profits into the development of new growth opportunities; a great retailer may roll out new stores, or a great manufacturer may build new production facilities. For biotechnology companies, growth often involves developing new drugs or medical devices, or finding new uses for old ones. Finding growth opportunities can be hard enough, but in the case of biotechnology companies, they have to do so while proving that their drugs or devices are both safe for use, and effective in treating ailments. Public health is at stake after all. Investors in biotechnology firms have to manage the risk that accompanies these efforts to prove new therapies.
Australian portfolio company Nanosonics' Trophon device disinfects ultrasound probes. Nanosonics recently announced results of a study that showed Trophon was the only disinfection system in its class that has been proven to kill human papilloma virus, high risk strains of which are the leading cause of several cancers. Nanosonics' announcement came as regulators in the United States began reviewing disinfection practices following an outbreak of a superbug in a California hospital, which is believed to have been spread by poor disinfection practices within the hospital itself. Nanosonics demonstrated its medical technology can solve a pressing healthcare challenge, causing the share price to rally 20% on the expectation of additional demand for its products.
In contrast, fellow portfolio company ResMed found that a therapy it was hoping would help patients who suffered from a combination of complex sleep apnoea and heart failure, in fact increased risk for these patients. Clearly this is about as negative a result a trial can deliver. "Losing heart", pouted sceptics, "Disaster" cried the press, and the share price fell 18% on the day. The only disaster we could see was for those people who had hoped the trial might present a safe and effective therapy for their medical condition. We knew that less than 2% of the company's sales were affected by the unsuccessful trial, and that the core business continued to perform exceptionally well. Over the balance of the month the ResMed share price rallied 14%, substantially recovering the bulk of its initial fall.
Companies we own in this sector have proven technologies and trusted reputations. We expect these companies to use their strengths to explore new growth opportunities and we appreciate that not every effort will be successful. We do not see Nanosonics as a better company because one study went well, nor do we see ResMed as a worse company because one trial went poorly. By virtue of their strengths, both are growing sales and profits, and have positive long-run prospects.
Benjamin Graham pioneered modern investment analysis long before the advent of biotechnology as we know it, but his advice remains relevant. "In the short run, the market is a voting machine but in the long run it is a weighing machine". We look through volatile investor sentiment around individual trials, and rely on the fundamental quality of our biotechnology holdings to deliver profitable growth over the long-term.
Managing your KiwiSaver account
Who doesn't love free stuff?
It's now less than a month until the end of the KiwiSaver year - time is running out to ensure you get your annual Government contribution of $521.
As a reminder, for every $1 you contribute to your KiwiSaver account you'll receive 50 cents from the Government, up to a maximum of $521.43 - this generous KiwiSaver incentive is known as the member tax credit (MTC). Now that's free stuff worth having!
To maximise your full MTC entitlement of $521.43 you need to have contributed at least $1,042.86 (the equivalent of $20 per week) into your KiwiSaver account. If you have not put in at least this amount, you can top up your KiwiSaver account for the current KiwiSaver year but make sure you do it Friday 26 June 2015.
You can read more online about who is eligible for a MTC, how it is calculated and how to make a payment.
Does enroling kids in KiwiSaver still make sense?
Like you, we were surprised at the Government's decision to discontinue the $1,000 kick-start. It hadn't been signaled and we heard from a lot of people in the days after the Budget saying "darn, I was meaning to sign up, now I've missed out".
In our view, KiwiSaver still remains an attractive, viable and successful retirement savings solution. Yes, the $1,000 kick-start was a nice incentive, but the other benefits of KiwiSaver were always so much more important - like the long-term impact of your ongoing contributions, contributions from your employer and the Government contribution of $521 each and every year.
For kids though, the loss of the $1,000 kick-start makes a big difference. Prior to this law change, the main reason most parents signed their kids up to KiwiSaver was to take advantage of this free $1,000 from the Government.
We've always encouraged parents to get their children into the savings habit early and learn about investments. KiwiSaver was a great way to do this.
Our view now is that people should not sign children up to KiwiSaver.
Without the kick-start incentive, member tax credits or compulsory employer contributions, KiwiSaver no longer makes sense for kids. Here's why:
- KiwiSaver is inflexible compared to other savings options. You can only use it for retirement or to purchase a first home. Other savings products (like managed funds and "online saver" type accounts) can be used for multiple purposes. And if your kids' plans change (which they might!) managed funds can be very flexible.
- KiwiSaver accounts need feeding! Without the $1,000 kick-start, the administration and management fees can mount up and eat into your kids' balance, unless they keep topping it up. Managed funds do not have administration fees like KiwiSaver, so they can still make sense for smaller balances.
If you still want to start up an investment or savings plan for your kids, we can help you through our range of managed funds. You can set up a regular investment from as little as $50 per month or invest a lump sum from $500. If this is something you'd like to explore, please give our team a call and we'll talk you through the options.
What we're reading
This month we enjoyed a paper from Motley Fool entitled The Priceless Art of Not Caring.
Jiddu Krishnamurti spent his life giving spiritual talks. In one famous moment, he asked the audience if they wanted to know his secret.
He whispered, "You see, I don't mind what happens."
Caring gives a false impression that what you're thinking about is important.. So I stopped caring about a few things.
1. Finding the perfect portfolio
Investors crunch numbers to find the perfect number of international stocks they should own at a certain age, and the precise amount they should allocate to bonds.
Here's the truth: None of these models are perfect, so "good enough" estimations will usually do just fine.
Harry Markowitz created modern portfolio theory, a formula that precisely calculates the optimal asset allocation. With his own money, he found this too complicated.
"I visualized my grief if the stock market went way up and I wasn't in it - or if it went way down and I was completely in it," Markowitz once said "So I split my contributions 50/50 between stocks and bonds."
2. Quarterly earnings
The median company in the S&P 500 was founded in 1949. So it's 66 years old. The odds that groundbreaking developments will have occurred in the last ninety days are slim, and they approach zero as time goes on.
Amazon.com CEO Jeff Bezos says he runs his life on a "regret minimization" framework. His goal is to look back at age 80 and regret as few things as possible.
What are the odds that I'll be 80 years old and say, "Man, I wish I paid more attention to Microsoft's last quarterly revenue forecast"? Pretty low. So I choose not to care.
3. Wondering why the market fell
The Dow fell 0.4% on Wednesday. Why?
Lots of reasons were given. One article blamed fluctuating interest rates. Another cited "Greece worries."
"Random, unidentified sellers were a little bit more motivated than random, unidentified buyers" wasn't mentioned. But it's the best explanation for why stocks fell.
4. Getting other investors to agree with me
Money is an emotional subject. So many investors get offended when others disagree with them. But once you realize that A) your views are just as biased as everyone else's and B) there's a good chance you're both wrong, you stop seeing any reason to argue.
Investing is so much more fun when you come to terms with these things. Set up a portfolio that suits you - one that lets you sleep at night and gives you a reasonable chance of meeting your financial goals. It's the best you can do.
After that, you see, I don't mind what happens.
Getting to know ... Alpha and Beta
Alpha and beta are important tools for investors to measure whether their investments are doing well.
Alpha is a measure of an investment's performance compared to a benchmark, such as the NZ50 Gross Index. A positive alpha of 1.0 means the fund or stock beat the benchmark return by one percent. A negative alpha of 1.0 would indicate an underperformance of one percent.
Alpha is perceived as a measurement of a portfolio manager's aptitude. For example, an 8% return on a growth fund is impressive when equity markets overall are returning 4%, but it is less impressive when other equities are earning 15%. In the first case, the portfolio manager would have a relatively high alpha, but not so in the second.
Beta, on the other hand, is based on the volatility of the stock or fund compared to the benchmark. You can think of beta as the tendency of a share or fund to respond to swings in the market.
A beta of less than one means that the share or fund will be less volatile than the market and a beta of greater than one indicates greater volatility. If a share's beta is 1.2, theoretically it is 20% more volatile than the market and therefore subject to bigger price swings than other shares.
Both alpha and beta are backward-looking risk ratios and cannot accurately predict future results. They can however help to differentiate between relatively good and relatively poor investments over a given period of time.