REPORT TO UNIT HOLDERS IN THE ASPIRING FUND FOR THE QUARTER ENDED 30/09/06
PERFORMANCE
| July Month |
+1.71% |
| August Month |
-1.46% |
| September Month |
+0.88% |
| September Quarter |
+1.10% |
| Since Inception ( 01/02/06 ) |
+14.11% |
| |
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The Aspiring Funds performance is calculated after providing for all taxes and fees.
QUARTERLY REVIEW
After the strong start to the fiscal year, the September quarter proved much more challenging for the fund with a return of just 1.10%, compared with 4.54% for June. This brought the total return for the fiscal year to date to 5.69%. The most commonly followed index for the New Zealand market is the NZX50 Gross which was up 0.1% for the September quarter but down 3.06% for the same 6 month period.
Measured in their own currencies, global equity markets, after a poor June quarter, generally performed well over the most recent quarter. Falling oil and commodity prices contributed to growing confidence that inflationary pressures in the US had peaked. This resulted in a strong rally in US bonds where the yield on their 30 year bond fell from 5.19% to 4.76% over the September quarter. This led longer rates lower globally and the rally in interest rates underpinned equity markets, helping the MSCI to put on 4.05% for the quarter.
Within the OECD, only one market, Norway, fell during the period while the Spanish market, up 13.5% was the best performing of the group. Unfortunately, our fund’s Madrid office failed to capitalise on this gain (owing no doubt to prolonged siestas in the summer heat!).
For a $NZ denominated fund, however, the waters were choppy and the going tough.
Most company announcements during the period reflected caution on the outlook for the coming year, with most debate centering on the extent to which the domestic economy is and might continue to slow. Domestic demand has held up much better than anticipated, thanks largely to a splurge in government spending on infrastructure and in social policy areas like ‘working for families’. This has delayed the inevitable fall in interest rates and the currency, both essential pre-requisites to the beginning of the next economic up cycle.
One continuing characteristic of the global environment is the extreme levels of investor liquidity, which is manifested in the growth and scale of both private equity and hedge funds. Their influence in N.Z is reflected in the price for The Warehouse Group (the best performing stock in the quarter), where Stephen Tindall linked with private equity fund PEP to attempt to privatise the company. Other high profile private equity transactions include the purchase of Kathmandu by a Goldman, Sachs JB Were led consortium and Metropolitan Glass by an Australian fund.
Hedge fund activity is now an accepted part of the daily life of New Zealand financial markets. When the Reserve Bank made its surprisingly hawkish statement last month, it triggered a rally in the $NZ of unexpected and, in our view, unwarranted proportions driven at least in part by hedge fund buying, who believe that the higher–for–longer interest rate outlook effectively underwrites the value of the currency. So far they are right, much to the chagrin of the wealth-producing sectors of the New Zealand economy.
Over the quarter, this move saw the $NZ gain 7% on a Trade Weighted basis-identical to its gain against the Australian dollar.
Thus, despite the Australian All Ords Index gaining 1.6% for the quarter, the return for unhedged New Zealand investors was -5.4%. Our own Australian portfolio performed in line with the broader Australian market with our industrial holdings all being up for the quarter but our two resource stocks BHP and RIO down 5 and 10% respectively.
FUND ACTIVITY
Throughout the quarter we have approached the New Zealand market with a degree of caution, given the softening outlook for corporate profitability and the historically fairly high valuations within the market. As a result we have carried more cash than we would envisage being the case in the longer run, with the cash weighting being above 30% for most of the quarter before a late foray into the market saw it fall to a closing level of 17%.
As at the end of the June quarter, Mainfreight remains our largest single exposure and is now 10% of the fund. The share price rose 20% in the quarter but we remain very impressed with the ability of the company to grow its earnings outside N.Z and, even now, do not feel that the market is paying an excessive price for this growth.
Contact Energy is now a significant investment for the fund. The price fell back sharply after the aborted takeover by Origin to the point were we believed the market was significantly undervaluing this very defensive business.
We also took advantage of some determined selling of Fletcher Building to build up a reasonable stake on the company. We believe the market is overestimating the significance of its exposure to the residential building cycle and have great confidence that Ralph Waters has completed his outstanding service to the company by overseeing the appointment of an equally able replacement.
The stakes in these companies were bought in September and these purchases are the main reason for the decline in our cash weighting at quarter end.
The two stocks whose performance had the most positive effect on the market in aggregate during the quarter were Telecom and The Warehouse. Unfortunately, we were spooked by the regulatory risk we perceived in Telecom and quit the position too early to gain any material benefit and we completely missed The Warehouse.
At the end of the June quarter about 12% of the fund was invested in Australia. By the end of September this had increased to 24%. Currency considerations and relative growth prospects mean that this percentage is likely to continue to climb over the next quarter but our enthusiasm for Australia will always be tempered by the knowledge that it will never be possible to replicate the ‘home ground’ advantage we enjoy in New Zealand.
BHP and Rio Tinto represent about 6% of our portfolio. As already mentioned, these stocks were a significant negative for us in the quarter, and along with the effect of the currency movement on the entire Australian portfolio cost the fund more than 2% in performance for the period. We remain persuaded that the global super cycle in commodities is likely to remain for some time, and that even if the price of some commodities should fall, the emergence of China and India as new economic powerhouses will keep demand and prices above trend for many years. On single figure P/E’s these companies still seemed to us to be very cheap. Over the quarter they just got cheaper!
As we stated in the last report, we consider ourselves bottom up investors and would never ‘bet the bank’ on big picture views. However we are surprised by the market’s treatment of these stocks.
We had no exposure outside Australasia at quarter end. While we will never rule out investing outside Australasia we don’t see this as an area of comparative advantage and will therefore do so sparingly.
SIGNIFICANT INVESTMENTS
Holdings by the fund of greater than 5% by value at quarter end.
| CASH |
17.0% |
| MAINFREIGHT |
10.0% |
| CONTACT |
6.5% |
| FLETCHER BUILDING |
6.5% |
OTHER ISSUES / TAX CHANGES
There is still a lot of uncertainty about the final outcome for the treatment of international investments. However, our most recent advice is that the proposed changes in the treatment of capital gains on equity investments within Australasia will still take effect for qualifying funds from 01 April, 2007.
If this eventuates, the long term benefits for investors in the Fund are likely to be significant. In the 8 months since the Fund’s inception the gross return ( pre-tax and fees) has been 22.90% and the net return 14.11%. Because some sources of the fund’s income will still be assessable ( interest, overseas dividends, currency gains etc.) it is not worthwhile calculating the exact effect the new tax rules would have had on the historic returns to investors but the net return would have been between 19.5 and 20%.
DISTRIBUTION
As has been advised separately, a fully imputed distribution of 2c per unit to all registered holders at 30/9/06 will be paid during the first week in October