REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND
FOR THE MONTH ENDED 29 FEBRUARY 2008
The Unit Price as at 1st March 2008 was 1.1217 after all expenses.
The performance for the month of February was 0.66% after all expenses.
Our asset allocation at the end of the month was approximately:
| Cash |
32% |
| NZ Equities |
47% |
| Overseas Equities |
21% |
PERFORMANCE
In the month of February in the Aspiring Fund returned 0.66% after fees and tax. The NZX 50 Gross index returned -2.4% for the month.
The Australian market was down 0.4% in its local currency, but up 2.1% in New Zealand dollar terms due to the strength of the Australian dollar.
It was pleasing to get a positive return in what was another difficult month, characterised by significant volatility and extreme negative price reactions to any disappointment during the profit reporting season.
Whilst it has been a difficult time -- and it is never good to lose money – the Aspiring fund has outperformed the New Zealand market in every month since the PIE regime was introduced on October 1 (this is really the only period where it is intellectually valid to compare our performance number with what is a pre-tax index). Our cumulative performance after taxes and fees since that date stands at -5.9% versus -16.1% for the New Zealand gross index for the same period.
We would, of course, like to report positive numbers for every time period, but the reality is that we are predominantly equity investors, and it has been impossible to sidestep this extremely rapid and unusual correction in equity prices.
COMMENTARY
The world remains an uncertain place, warranting caution even amongst an ever increasing set of attractively priced opportunities.
We are continuing to see the fallout from the credit crisis which has its origins in the American securitisation and home lending industries, but which is unfortunately spreading around the globe and into other industries.
The natural progression of the credit crisis has seen a repricing of risk. In equity markets this has exhibited itself in many ways. Highly geared concerns have been severely punished as the market builds in not only an expected repricing of debt, but probably a rationing of debt. High PE stocks have been significantly derated because investors are no longer willing to risk the downside of disappointment in such companies; small companies have been hit hard by a flight to liquidity; banks and other financial companies have been slaughtered due to a perceived increase in credit risk; companies exposed to consumer spending have seen their share prices fall as the market anticipates an economic slowdown in many regions of the globe; and biotechs and other developing technology companies have seen their share prices decline significantly simply as the market "reprices risk".
In New Zealand and Australia we also have our own set of problems caused by the different attitude of our central banks to that of the American and the linked issue of soaring currencies. Exporters of manufactured goods have been particularly hard hit.
From the above, it is obvious that there have been few places to hide in a bearish market. But it would also be fair to say that many companies whose medium and long-term earnings outlooks have not changed significantly have seen their share prices marked down significantly. There is now a plethora of value opportunities, particularly if one is willing to take on some liquidity risk in return for buying some great small companies at outstanding prices.
The issue comes down to timing. Although there has been much commentary about the credit crisis, we suspect many participants in the economy may not yet be fully aware of the ramifications of the credit crisis on the real world. There are also some unresolved issues in the US such as the plight of the so-called monoline insurance companies. These companies, which have written guarantees over numerous securitised debt instruments, need to be recapitalised to ensure there is not a further round of panic in financial markets. Yet it is by no means certain such an event will happen.
We believe there are many cheap stocks in just about every global market. Whilst some market participants try to minimise risk by flocking to very liquid shares our tendency is to try to reduce risk by concentrating on well-run companies, with strong fundamentals in terms of return on shareholders funds, cash flows, growth and value.
Our outperformance last month was due in no small part to simply avoiding "landmines" during the result season. Our core New Zealand companies such as Mainfreight, Michael Hill, Ebos and Cavotec all produced excellent December profit numbers.
We feel as confident now about the long-term outlook for most of our major investments -- and for many potential investments -- as we have ever done. But our cautiousness towards markets means we will guard our cash carefully until the right opportunities present themselves.