REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE MONTH ENDED THE 31/08/08.
|
|
Aspiring
Fund |
|
NZX50 |
|
ASX ALL
ORDS
(NZ$) |
|
|
Month August 08 |
|
2.44% |
|
0.51% |
|
-0.68% |
|
|
Financial YTD (from 1/04/08) |
|
7.10% |
|
-3.38% |
|
-3.25% |
|
|
Since PIE (1/10/07) |
|
-4.51% |
|
-21.45% |
|
-14.20% |
|
Starting this month, we are reporting our performance number in a format which we hope makes them easier for our investors to assimilate quickly.
The comparative performances of the NZX50 Gross and the All Ords Accumulation Index (in NZ$ terms) is simply to enable investors to easily assess whether we are adding value over the long term.
We do not measure risk as the extent of deviation from any index and over short time frames there will be significant differences between the Fund’s performance and the indices.
The choice of PIE inception as a starting point has been made as that effectively puts the fund and the Indices on an equal tax footing.
PERFORMANCE
The month saw a large number of New Zealand and Australian companies report profit numbers for the period to June. With the notable exception of GPG, our companies either met or exceeded expectations. The reporting season overall was OK for the market and this caused many share prices to stage a relief rally as the market’s worst fears were dissipated.
It was particularly satisfying to see our chosen exposure to the retail sector, Michael Hill International, come in with a positive result. We continue to believe there is significant long-term option value in this company becoming an increasingly global brand. While the share price has been quite volatile this year, Michael Hill has outperformed all its listed New Zealand retailing peers over the longer term.
Our “default” position of owning zero or few Telecom and Fisher and Paykel Appliance shares also served us well in the month. These were two companies to really disappoint the market in terms of their outlook statements.
The A$ fell 8.9% against the US$ during the month and this helped to drive the Kiwi down 4.6% against the US$. We had elected to diversify our cash by holding about half of it in US$ throughout the month- a decision which clearly helped the Fund’s performance.
This currency decision plus the combination of holding a number of stocks re-rated after profit announcements and avoiding most of the disappointments led to another satisfactory monthly performance in an absolute sense and relative to markets.
Our asset allocation at the end of the month was approximately:
| |
New Zealand equities |
37% |
|
|
Australian equities |
17% |
|
|
Cash |
46% |
COMMENTARY
Locally, there was little in the way of economic news, with one confidence survey giving a small amount of evidence that the economy may be nearing the bottom. Our reaction would probably make a reasonable Tui beer billboard -- best not to get too excited yet, we believe, with negative GDP growth likely for the rest of the year.
Heavy rains throughout the country will cause some damage to the agricultural sector in terms of lambing percentages and early grass growth, but overall will do much to replenish water tables in drought damaged areas.
The currency continued to weaken against the US dollar which will be good for many of our exporters, and it is from this sector that eventually an economic recovery should emerge.
Globally, the most notable features of the month were probably the increasing evidence of recession in Europe, slowing growth out of China and other parts of Asia and continued bad news from the US banking sector. These realisations were probably the main drivers of the lower oil price and also the strength of the US dollar -- and to some extent the partial deflating of the commodities boom. We expect this to continue, which is a double edged sword – lower petrol and maybe food prices for consumers but weaker global growth and continued deleveraging which will keep pressure on corporate earnings.
As an example of the effect of speculative interest in hard commodities, platinum, which is mainly used for catalytic converters on cars (obviously a huge growth area) has now fallen from around US $2200 to US $1400. The CRB Index, a widely followed index of commodity prices which includes energy, metals and agricultural commodities has fallen nearly 20% over the last two months and, closer to home, BHP and RIO are both down by more than 10% since the end of June despite being obvious beneficiaries of the weaker A$.
Whilst the reporting season went well in Australia and New Zealand, it was interesting to note many companies declined to give guidance for the next year, suggesting that managers remain worried about the economic backdrop and in some cases financial market dislocation.
On a more positive note, it was encouraging to see the Fletcher Building share price rally concurrent with a raft of broker downgrades of future profitability. This sort of price action is a necessary pre-condition for a more sustained recovery in markets. However, it needs to be widespread, rather than isolated, to become persuasive.
Australia will benefit from a weaker dollar and the start of an interest-rate easing cycle, but we believe that, overall, these effects will be more than counteracted by falling property values and tight disposable income, much the same as in New Zealand.
Nevertheless, such shifting economic circumstances often throw up opportunities for profitable investing and trading.
The global credit crisis reared its head in August in the form of further significant downward pressure on the share prices of US mortgage lenders Freddie Mac and Fannie Mae as the extent of their bad loan portfolios became apparent. The minimum cost of bailing out these two institutions has been put at US $25 billion, but one suspects this estimate will only creep up over time.
From everything we have read and learnt, the problems within global credit markets are still a long way from being resolved, with evidence of widespread credit rationing and repricing throughout the developed world. The implications for the real economy are clearly negative but the extent and duration of these problems is still unknowable.
In this environment we place a high value on “the option value of cash”- i.e. our ability to move quickly to take advantage of opportunities as they arise. We may be wrong in maintaining such a high cash weighting but, even if we are, we still preserve our capital intact. Given the intrinsically unknowable risks created by the current global banking crisis, capital preservation is still our number one priority.
Thus, while we continue to look for and, occasionally, find trading/value opportunities and are generally happy with our existing portfolio of stocks, we are likely to retain high cash weightings for the time being.
|
Top 10 Holdings |
|
|
Mainfreight |
5.3% |
|
Methven |
4.9% |
|
Cavotec |
4.1% |
|
Michael Hill |
4.0% |
|
NZ Oil & Gas |
3.8% |
|
Eservglobal |
3.1% |
|
Ebos Group |
2.8% |
|
Guinness Peat Group |
2.4% |
|
Hellaby Holdings |
2.4% |
|
NIB Holdings |
2.3% |