Archived Monthly Report

The Unit Price as at 1st May 2008 was 1.1231 after all expenses.

The performance for the month of March was 5.7% after all expenses.

Our asset allocation at the end of the month was approximately:
    

The Australian market was up 4.7% in its local currency, but up 8.9% in New Zealand dollar terms due to the strength of the Australian dollar.

The month of April saw what we would characterise as a “relief rally" in global sharemarkets.  There was only a modicum of positive economic news behind this rally, with the major factor being simply that shares had probably been sold too hard previously.

Our out performance of the New Zealand market during the month was surprising (but satisfying) given our current cautious stance and high weighting of cash.

There were three main reasons behind this outperformance. 

Firstly, we benefited from the decline in the New Zealand dollar against the Australian dollar not only from our Australian equities but also from Australian dollar cash holdings.  We have made a conscious decision to diversify a reasonable portion of our funds outside of New Zealand because we believe in the medium term the New Zealand dollar will inevitably fall.

Secondly, as noted in the last quarterly commentary some of our core holdings ended March at what we thought were oversold levels and this proved to be the case.  The prices of Cavotec and Mainfreight, in particular, bounced strongly.

Thirdly, despite our general caution, we decided that the universal bearishness in early April made a short term rally highly likely. We bought a portfolio of highly liquid Australian shares to take advantage of this. With hindsight, we sold out of those stocks too soon but the timing of our purchases was at or near their lows for the month. 

The second factor above is a classic example of the natural variability of monthly returns.  With share prices and currencies highly volatile, performance numbers can jag around considerably from month-to-month.

In terms of measuring our performance the team at Aspiring tends to judge its efforts by the Fund’s performance over the long term. Unfortunately, the introduction of the PIE regime on 1 October, 2007 complicates performance measurement since the Fund’s inception. Since October 1 (the introduction of the PIE regime) the fund has returned -5.8% post taxes and fees versus the New Zealand gross index of -15%. The Australian market has returned -11.6% in New Zealand dollar terms over the same period.

As we have mentioned before, the Gross index overestimates the real return of the New Zealand market. Effectively, if the gross yield of the New Zealand index is 6%, about 33% of this yield is imputation credits. The Index performance calculation includes the value of these credits whereas we do not. This makes our relative performance somewhat better than the bare numbers suggest.

We are acutely aware that our investors can not spend relative returns and are doing our best to move the Fund’s performance back in to positive territory. However, the circumstances of the past few months have been quite challenging and the reason for drawing our investors’ attention to the relative performance is that the aggregate market returns highlight the magnitude of the challenge.

During April, we switched most of our New Zealand dollar denominated cash in to foreign currencies which are held as either call or 30 day deposits with the ANZ.
The allocation of cash by currency at month end was;
 

With the benefit of hindsight April would have been a good month to have had less cash in the portfolio.  But on a medium-term view we think there is still reason to be cautious about the world and to continue to hold solid amounts of cash, not only as a defensive ploy but also to be able to grasp opportunities that present in volatile markets.

In April the US first-quarter reporting season helped settle the market.  The larger companies in the US are global in nature and are seeing significant benefits from the decline in the US dollar.  Even though the US domestic economy is contracting there were many strong earnings numbers in the quarter which gave their market considerable comfort.

Towards the end of the month a positive US GDP number and a further 0.25% drop in US interest rates helped to underpin confidence in stock market, as did increasing fluidity in credit markets.

The US has effectively “exported” some of its economic woes by depreciating its currency through an easy monetary policy.  This has imposed the deserved pain on its consumers in the form of lower global purchasing power rather than high interest rates and lower employment.

The flip side of the strong US reporting season is declining profitability for many international companies based in Europe and Japan where the currencies have been strong.

Many companies in New Zealand and Australia are also facing the head wind of a rising currency, although the New Zealand dollar has started to weaken off slightly.

Whilst the New Zealand and Australian sharemarket took some lead from the stronger US market over the course of the month economic news in both countries was broadly negative.  High inflation numbers out of Australia and plummeting house sales in New Zealand were two of the sobering pieces of economic news to come out during April  although neither was unexpected.

Indeed, there is still much bearish news coming out of the US domestic sector in terms of house prices, mortgage defaults and the home building industry.  Unemployment numbers are softening and could get considerably worse at a time when the US consumer is facing identical headwinds to the New Zealand counterpart- rising interest rates and escalating food and energy prices. No wonder 70% of them expect to use their imminent tax credits for saving/ debt reduction rather than increased consumption.

During the month the media in New Zealand grasped with enthusiasm the theme of rising food and petrol inflation together with higher interest rates squeezing household budgets.  The normal rule might be that once issues are broadly batted around in the media they are well and truly ensconced in share prices. However, we believe the issues of stressed consumer budgets and rising inflation will be themes for a number of years.  April was notable for rice shortages/rationing, huge growth in fertiliser prices and oil touching $US120 a barrel at one stage.

At the time of writing many commentators are beginning to warm to equities.  Whilst we think the savage decline in share prices over the past six months will not be repeated over the back end of the year we remain cautious that squeezed household budgets will have serious consequences all over the world.

We are still wary of economically sensitive companies in New Zealand and Australia, but there are opportunities in shares with more secure income streams which have been beaten down in the broad decline of the market.  Indeed, there are probably economically sensitive stocks which have been sold too far, but making judgment on such companies is trickier.

With our weighting of cash we risk underperforming the market in any rally, but at the moment we attach much value to the safety and optionality this approach brings us.

Our high overseas cash weighting has increased the potential volatility of the portfolio but we believe that this is the best long-term strategy.

We expect to be forwarding investors their end of year statements shortly. However, these are the first statements to be compiled under the PIE regime and this has delayed the process due to the added complexity of the various calculations. Any investor needing greater certainty about the timeframe for this should contact our office manager, Marian Crookbain ( mcrookbain@aaml.co.nz ).