Archived Quarterly Report

REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE QUARTER ENDED 31/12/2006

 

PERFORMANCE

October Month

 +2.40%

November Month

  +2.59%

December Month

 +2.78%

December Quarter

 +7.97%

Since Inception ( 01/02/06 )    

 +23.20%

   

The Aspiring Fund’s performance is calculated after providing for all taxes and fees.


QUARTERLY REVIEW

The last quarter of 2006 was a good one for the Aspiring Fund with a return of 7.97%. Equity markets both locally and abroad performed well with the NZX50 Gross and the ASX All Ords returning 13% and 10.4% respectively for the quarter and the MSCI gaining 7.8% in US dollar terms. The significance of the tax impost on the Fund is particularly obvious in this quarter’s return but it has been pleasing to outperform the NZX50 for the year despite this handicap. We look forward to the changes that are due to take effect on 1 October 2007 when the fund will move to the new PIE (Portfolio Investment Entity) regime and will be exempt from paying tax on gains from New Zealand or Australian equities. Had this regime been operating at the time the fund commenced the returns for the 11 months ending 31 December 2006 would have been approximately 35%. The impending changes cannot be over emphasized in terms of their long term influence on the Fund’s performance as the compounding nature of the returns in the absence of the taxation expense will be significant to unit holders. We will comment in more detail later in the New Year on the changes, as a large amount of detail on the new legislation is still “work in progress”

The quarter in review and indeed 2006’s main influences have been driven from corporate activity. The Private Equity industry has been highly active both consummating transactions and flirting with deals in New Zealand and Australia, the latest being the privatization of Qantas. With the operating leverage of the airline and the financial leverage of the buyout the business will be severely tested by any of the one off shocks which seem to occur in the industry quite regularly. Since the aviation industry was founded it is worth noting in aggregate it has not made money, a frightening statistic when you look at the capital tied up in aircraft and airline infrastructure. We were all involved in financial markets in the run up to the 87 crash and we see some quite close parallels with the sentiment prevalent in that market- easy credit and large fees have created an environment in which it is common to see industry players with the best understanding of value and the ability to gain synergies from acquisitions in their own industries being outbid by financial industry players. We will be very surprised not to see some fairly large casualties coming from the private equity transactions done in the last few years but many of these will bleed slowly and be buried quietly so may not make headlines the way Feltex’s demise did.

Locally many commentators agreed both the New Zealand dollar and the housing market would soften in 2006 and we expect the resilience of the job market, consumer confidence and asset prices- most notably housing – to tie the Reserve Bank’s hands for most of this year. In fact, we will be surprised if they don’t raise rates again early in the New Year. Ultimately they will succeed in slowing the household sector’s debt-fuelled consumption binge but, in the interim, the potential for interest rate differentials to drive the New Zealand dollar higher is hardly encouraging news for the productive side of the economy. Given the valuations generated by the market’s performance in 2006 and a potentially weakening economic outlook it has become increasingly difficult to identify stocks that appear great value. This is likely to mean a continuation of our historic bias towards a significant cash weighting in the fund. The New Zealand market has performed exceptionally well for each of the last 4 years and a lot more of this performance is attributable to P/E expansion than EPS growth. We cannot predict when returns will start the process of mean reversion (if we could time markets that well we would have been fully invested for the last quarter instead of holding an average cash weighting of 20%) but we can predict with total certainty that it will occur. In accordance with our core philosophy, we won’t justify telling you you’ve done well because we only lost 5% of your money when the index lost 10%. If we don’t like the equity market 7.25% for holding cash is very acceptable to us.


ACTIVITY 

The Aspiring Fund at the end of the quarter held 23% of its portfolio in three stocks, Contact Energy Ltd, Fletcher Building Ltd and Mainfreight Ltd. The Australian exposure accounted for 15% of the portfolio and the main exposure in that market was to the financial services sector particularly wealth management. The fund reduced its resource exposure during the quarter to negligible levels. Cash accounted for 19% and roughly half of that was held in Australian dollars. For those companies that reported earnings during the quarter EBITA grew by approximately 10% and this was at the higher end of expectation. Whilst in general most companies have seen cost pressure this year they have been able to pass on some of those costs in price increases. This provided an earning “surprise” for the market and followed through into stronger share prices for a number of companies during the quarter. Mainfreight Ltd and Methven Ltd reported during the quarter and both the results and forward outlook were encouraging. Looking ahead into the New Year earnings are forecast to continue to grow and the quality of those earnings is high, so the question for us, is how much to pay for those earnings and whether we think there is room for positive surprises from individual stocks.

 

Top 10 Holdings

Cash
Contact Energy Limited
Fletcher Building  Ltd
GPG Ltd
Infratil Ltd
Mainfreight Ltd    
Methven Ltd
Postie Plus Group Ltd
Mooring  Systems Ltd
Turners and Growers Ltd

We hope you have had a good break over the holiday period or, even better, are still enjoying one and wish you all the best for 2007. We’ll endeavor to make it a profitable one.