REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE MONTH ENDED THE 30TH NOVEMBER 2008
|
|
Aspiring
Fund |
|
NZX50 |
|
ASX ALL
ORDS
(NZ$) |
|
|
Month November 2008 |
|
-1.26% |
|
-3.9% |
|
-2.9% |
|
|
Financial YTD (from 1/04/08) |
|
-5.72% |
|
-21.9% |
|
-27.7% |
|
|
Annualised Since PIE (1/10/07) |
|
-13.9% |
|
-31.3% |
|
-35.6% |
|
The Unit Price as at 1st December 2008 was $1.0019
PERFORMANCE
The Aspiring Fund unit value declined 1.26% during November. Our continued cautious stance, as evidenced by our cash holding, enabled the fund to again do better than markets generally and to therefore minimize the loss in value.
The headline monthly performance numbers disguise the difficulty of operating in markets during the month. Volatility was extreme, as evidenced by the Australian market which at one point in November was down 23%, but rallied hard in the last few days to finish down 6.6%. As an example, BHP Billiton, Australia’s largest company and one of the largest companies in the world, was up 10% for the month but this was after rallying more than 50% in the last 6 trading days. Fortunately, we had bought some on the dip and we took advantage of the rally to sell 2/3rds of the holding. This was not our original intention at the time of purchase but our observation of the last few months has increased our inclination to take profits on moves of this speed and magnitude.
The New Zealand market was calmer than most, as it has been for some time, but there were still local land mines to avoid such as Rakon, Nuplex and Tourism Holdings all of which issued profit downgrades at their respective AGM’s. This did not stop Rakon rallying 40% in the last week of the month to finish down 25% on the month- just another example of the extraordinary volatility which has become an everyday feature of markets currently.
However, some of our larger investments in economically sensitive stocks such as Methven and Michael Hill were caught in the downdraft of deepening gloom over the state of the world economy. Illiquidity in small stocks continues to intensify, as does the reward for holding them in terms of price differential. The continuing volatility means we would need to see truly exceptional and certain value to increase our exposure to illiquid investments. As BHP’s behaviour last month showed, this combination of qualities can also occur in the more liquid large cap names.
The Australian market was notable for further big equity raisings. Many companies need to rebuild balance sheets partly as a result of having carried considerable debt in US dollars which has blown out following the sharp movement in the exchange rate and partly through the hardening of the banking sector towards the provision of debt.
Over $A7 Billion was raised in November by a raft of over geared property companies and a diverse range of industrials such as National Australia Bank, QBE Insurance, CSR, Transfield and AMP. We expect this trend towards balance sheet strengthening to continue and, given the discounts involved, to provide relatively cheap entries into quality businesses. The most obvious example in which we participated in November was QBE which has rallied nearly 20% above its placement price.
Our asset allocation at the end of the month was approximately:
|
New Zealand equities |
29% |
|
|
Australian equities |
25% |
|
|
Cash |
46% |
COMMENTARY
As every month goes by it is becoming clear that not only are we in a deep recession but that human behavior is undergoing a fundamental shift. This will set the basis for a more stable world and eventually a great buying opportunity in the share market, but it continues to be unclear as to how long this game will take to play out.
Even though consumers in countries such as New Zealand and Australia are being given considerable stimulus from tax cuts, lower interest rates and cheaper energy they are choosing to save their money rather than spend it.
Whilst not a new phenomena in the history of global economics, the scale of the demand destruction, the role of the financial system in exacerbating the problem and the extraordinary efforts being made by governments to ameliorate the recession is unprecedented in our lifetime.
With most people having taken a significant hit to their personal balance sheets through either house or stock price declines -- and many realistically contemplating either job loss or income reduction (fewer bonuses, less overtime) -- the scramble to rebuild balance sheets has been remarkable.
Discretionary expenditure is now being held back by economies en masse, dealing huge body blows to some parts of retailing, the automotive industry, house building et al.
On the other side of the ledger banks are withdrawing from certain areas of lending and tightening standards. A generation which has grown up addicted to credit- funded consumption is being (surprisingly slowly in many cases) educated about the merits of old-fashioned virtues like thrift. Consumers are having to take on their parents’ values of saving for a car and amassing a 20% deposit before buying a house.
The first-round effect in New Zealand was quickly seen in an approximate 5-15% decline in same-store sales for most retailers. Other countries around the globe are joining us in this retail constriction. As examples, Anne Taylor (US retailer to the well-heeled corporate woman) experienced a 25% decline in same-store sales in its latest quarter while David Jones, Australia’s iconic department store, is forecasting same store sales to fall 7.5% for each of the next 3 quarters.
Without being sexist, we regard the Ann Taylor example as particularly interesting. For this particular demographic to have closed its wallet so tight is symptomatic of a seismic shift in attitude.
Now the shrinkage in retailing is being felt by manufacturers. China, effectively the factory to the world, experienced its biggest ever decline in manufacturing in November with the index of activity falling from 44.6 in October to 38.8. Export and new order measures fell even further.
The demise of discretionary expenditure is best seen by the US car sales statistics. For October: GM -45%, Chrysler -36%, Ford -30%, Nissan -33%, Honda -25% and Toyota -23%. GM was especially hard hit by the withdrawal of available finance to its dealer network from GMAC, but it noted that on a population adjusted basis sales were the worst since 1945!
It is obvious that businesses small and large are reacting by cutting expenditure wherever possible. The next round effect will be in job losses which will mount through next year.
Probably the scariest part of the process is the role being adopted by governments as a matter of pragmatism -- not only are they looking to rescue the entire global finance system, assist specific industries such as car manufacturing but also replace the demand destruction within the private sector by increasing government spending.
Currently in the depths of this process it may be hard to see much light at the end of the tunnel, but we are now heading into unprecedented areas in terms of share market declines which suggests investors are preparing for the worst. These times always present opportunities.
Looking ahead, a time will come when corporates have reduced their cost structures dramatically and where there is effectively a "catch-up" needed in terms of deferred discretionary expenditure which will drive a sharp recovery in earnings as well as a significant expansion in PEs. That is the reward that lies in wait for the patient and the brave.
Well before the economies of the world bottom, interest rates are certainly giving markets an unprecedented level of support. In the US the dividend yield of the market (and they don't pay very high dividends in the US for tax reasons) is now higher than the 10-year bond rate which has dropped to just 2.7%. The last time this phenomenom occurred was in the 1950s when payout ratios were higher.
In New Zealand we will soon have bank deposit rates of around 5% and falling, yet investors can achieve equivalent pre-tax yields of around 12% on our higher-quality property stocks with limited earnings risk.
We will continue to nibble away at opportunities to make money through participating in well priced placements, investing in some yield plays ahead of interest rate declines, and keeping an eye out for oversold situations in companies with highly robust earnings.
However, overall, we remain cautious simply because of the enormous volume of negative news markets will have to digest over the next year. We find it difficult to anticipate just how much balance sheet rebuilding consumers will need to undertake before feeling comfortable enough in their jobs to start spending again and we wonder about the huge weight on the shoulders of global governments, especially the US.
|
Top10 Holdings as at 30 |
November 2008 |
| Cash |
46.0% |
|
QBE |
4.4% |
|
Methven |
3.7% |
|
Computershare |
3.5% |
|
Wotif |
3.4% |
|
Michael Hill |
3.2% |
|
Mainfreight |
3.2% |
| Telstra |
2.2% |
|
The Warehouse |
2.0% |
|
Ryman |
2.0% |