Archived Monthly Report

For the month of May the Aspiring Fund returned 2.1% after fees and tax.  The NZX 50 Gross index returned 0.0% for the month. We regard this as a good result in what are still volatile and testing market conditions.

The Australian market was up 1.9% in its local currency, and up 3.1% in New Zealand dollar terms due to the strength of the Australian dollar.

The strength of the Australian market is somewhat misleading as it has been concentrated in large mining shares such as BHP, RIO and Woodside Petroleum while industrial shares have generally been as weak as their NZ equivalents. 

Our May numbers were helped by strong rallies in two of our core holdings, Mainfreight and Methven, which reported pleasing profit numbers during the month.  We also made good returns from the holding of two Australian Resource companies in the coal seam gas and coal areas.

Both Mainfreight and Methven are global in their business mix and outlook and are benefiting from higher overseas earnings - something we believe will be accentuated even further when the New Zealand dollar begins its inevitable decline.

The results of these two companies and their relatively positive outlook comments are a reminder that even in tough times well-run companies with strong market positions and innovative products can do well.

We have been extremely pleased with the most recent profit announcements of all our major holdings, the Mainfreight and Methven numbers adding to good news from Cavotec and Michael Hill in previous months.

Our offshore cash weightings, with the exception of money held in Australia, were a net drain on returns during the month.  The New Zealand dollar initially weakened as we had expected but it rallied on the back of the budget. This situation is showing signs of reversing post the RBNZ statement earlier today.

The cumulative performance of the Aspiring Fund since the introduction of the PIE regime on 1 October now stands at -3.8% compared with the -15.1% decline in the NZX 50 gross index over the same time period.

Economic data in the month of May continued to be broadly negative in New Zealand.  Ironically, we see this as a net positive for the Aspiring Fund in that market expectations of a downbeat economy for an extended period of time now match our own long-held view.  Thus, the share prices of domestically sensitive companies have now been marked back more appropriately and there are more opportunities worthy of consideration.

In the world of government-issued economic statistics full-time employment numbers were down 1.7% in the March quarter, with the unemployment rate increase only moderate (3.4 to 3.6%) due to a huge drop in the participation rate.  This was the largest quarterly decline ever measured in the number of full-time employed and preceded some significant redundancies announced during the month.

But probably the most up-to-date economic news came from the sharemarket where Briscoes Group and The Warehouse announced very soft April quarter sales.  Briscoes reported a 7% same-store sales decline in its flagship homeware stores and -15% sales growth at Rebel Sport.  The Rebel Sport number may be an anomaly, but we believe that Briscoes runs its homeware divisions extremely efficiently and that its numbers are representative of the trends in retailing expenditure outside of food and fuel.  The Warehouse, which arguably acts as a low cost beacon in hard economic times, saw same-store sales decline 3.5%.

And, of course, the oil price continued to rise, putting further pressure on household budgets and inflation.

These types of empirical evidence were leading the market to believe the Reserve Bank would ease sooner and/or more aggressively than previously thought.  This in turn led to weakness in our currency.

However, higher than expected tax cuts announced in the budget  saw the market quickly reverse its position on this issue, pushing interest rates and the currency up on the basis that the Reserve Bank would now delay further easing to make up for the Government's more stimulatory fiscal stance.

We believe that the Government’s tax cuts will in no way be inflationary and that the extra money received by most people will be used to buy groceries and fuel, or service the mountain of household debt accumulated over the last few years.  At the time of writing the Reserve Bank has just released its quarterly statement, suggesting that it is well aware of the problems in the economy and that it will begin easing with some urgency later in the year. 

Whilst economic news now sounds overwhelmingly negative, increasingly this is being priced into share prices in New Zealand and Australia.  The time to buy is generally when others are panicking and we are extremely happy to be entering the next period of market uncertainty with a high cash position.

The Australian market, where our knowledge and expertise is growing, presents its own challenges and opportunities.  Basically, Australian investors tend to be strong momentum followers and currently everyone is rushing mining/commodity stocks and the odd company which services that sector.

Taking a contrarian view and investing in other undervalued situations requires patience but we believe will be rewarded in the long run.

While markets remain challenging, there continue to be money making opportunities available by selecting well-run companies, backing strongly held economic views (a falling currency, falling long-term interest rates etc) and generally being awake to opportunities (such as those presented by the recent changes in the MSCI).