Archived Quarterly Report
REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE QUARTER ENDED 31/3/07
PERFORMANCE
After providing for all fees and taxes the fund returned 2.40% for the March quarter and 16.89% for the March financial year. Both of these outcomes are satisfactory relative to the most common benchmark for New Zealand equity funds, the NZSE50, which returned 1.27% and 10.93% respectively for the same periods.
COMMENTARY
The March quarter was a frustrating time for us. We have felt for some time that the valuations being afforded by the market to many of the businesses we like have left little room for disappointment at a time when the economic environment has made disappointment more likely. There was nothing in the recent reporting round or the economic conditions currently troubling the Reserve Bank to dissuade us from this view.
Our reaction to these circumstances will normally be to reduce the risk of incurring capital losses (measured by reference to the current market value rather than the historic book cost of our holdings) and that is precisely what we did during the quarter. We reduced the size of our holdings in virtually all of our Investee companies including selling out of a couple completely. This resulted in our cash weighting hovering around 21% for most of the month before dipping to 18% on the last day of the month as our year end accounts provide for the cash equivalent of the March distribution despite about 65% of the distribution being re-invested.
The forecast cash inflow to the fund in early April returned us to a position of about 23% cash which is consistent with our cautious view of the value on offer in the market. It is always gratifying for these sorts of decisions to be vindicated by an immediate market sell off. However, it is also extremely rare and this is no exception. As this is being written, the jury is still out on the merits of our decision and it could easily remain so for some months. Much of our selling has been at levels below current market prices but the fact that the market has taken prices higher is not, by itself, sufficient to persuade us that we are wrong. That will take new information and, while we hope that our programme of company visits and tyre kicking will provide us with the sort of information which would enable us to confidently reduce the cash weighting, it is not happening yet.
In summary, we believe that the aggregate level of market valuation is such that there is an uncomfortably low probability of either the New Zealand or Australian market providing total shareholder returns above the risk free alternative over the next three months.
Why then would we not move entirely to cash?
| 1 |
Because we can’t be sure about that view. The fact that valuations are sufficiently stretched to make us cautious does not mean they won’t become more stretched, in fact we all have a tendency to sell too early from which one could reasonably infer that our view of stretched is often the same as the markets’ view of comfortably taut.
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| 2 |
Because we like the companies we own and expect our portfolio to weather a general market downturn well. Whether they can do so without losing value in an absolute sense will depend on the severity of the downturn (and the quality of our stock picking).
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| 3 |
We are still a very small fund relative to the markets in which we invest. That size makes it possible for us to adjust our overall market exposure and risk very quickly with minimal impact on the market itself. This is a luxury which large funds do not enjoy. Investors should note that this does not protect us from stock specific risk although the fund is very well diversified among the less liquid stocks it owns
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The upshot of all this is that it may well be that the returns for the fund over the next few months are more pedestrian than in the past and may well be negative in some months. However, our experience is that opportunities frequently emerge when least expected and we believe the fund is well positioned to take advantage should these occur. It is, however fair to expect the fund to underperform a strong market but outperform a weak one in the coming period.
|
Cash |
18.4% |
|
Mainfreight |
6.6% |
|
Cavotec |
5.4% |
|
QBE |
5.1% |
|
Energy Devl |
4.0% |
|
Turners and Growers |
3.8% |
|
Contact Energy |
3.6% |
| Methven |
3.5% |
|
Iress |
3.3% |
|
Infratil |
3.2% |
| Total |
56.9% |
TAX CHANGES
On April 1 this year the FDR (Fair Dividend Rate) Regime came into effect. This has implications for the Aspiring Fund (mostly positive) as well as individuals who hold foreign equities or financial products outside the exempted lists in New Zealand and Australia.
Most shares listed in New Zealand and the largest 500 listed companies in Australia are exempt from the FDR Regime and this group by and large make up the bulk of our investment universe. We do however hold stocks outside that list and they will be subject to the new tax treatment. In essence if we lose money on one of those investments it will not be deductible against gains made elsewhere in the portfolio but if we make money the maximum tax we will pay 1.65% of the gain instead of the current 33%. Given the small number of stocks we own in this category the financial impact on the fund will be negligible.
In October this year when the new PIE (Portfolio Investment Entity) legislation takes effect the change for the Aspiring Fund will be much more pronounced. Any gains made in our portfolio from October 1 this year in the list of exempt New Zealand and Australian companies referred to above will not be taxed. Currently those gains are taxed at 33% so the new legislation will have a significant positive impact on the Funds performance.