REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE QUARTER ENDED THE 31/03/2008
The Unit Price as at 1st April 2008 was 1.0627 after all expenses.
The performance for the month of March was -5.36% after all expenses.
Our asset allocation at the end of the month was approximately:
Cash Australian
Cash New Zealand |
20%
21% |
| NZ Equities |
40% |
| Overseas Equities |
10% |
PERFORMANCE
In the month of March the Aspiring Fund returned -5.3% after fees and tax. The NZX 50 Gross index returned -3.1% for the month and the Australian market -5.3% in New Zealand dollars.
Over the March quarter the Aspiring Fund returned -11.7% after fees and tax. The NZ50 Gross index was down -14.1% for the quarter. The Australian market was down 14.4% in New Zealand dollars. The New Zealand small companies index (which better mirrors the types of companies we typically invest in) was down 17% for the quarter.
The month of March was a disappointing end to the quarter, with the fund underperforming the New Zealand market even though we held considerable amounts of cash.
Key holdings such as Michael Hill and Mainfreight were amongst the worst performers in the New Zealand market in March despite both posting excellent interim announcements. These are core holdings which have served the fund exceptionally well in the past and which we believe will serve the fund well in the long-term. The price falls in these and a number of other mid caps appeared more to do with the perception (actual or real) that there would be some forced selling of these stocks. Interestingly, both have recovered to some degree since month end.
Another example was that our biggest holding in Australia (Eservglobal) lost 20% in March after what we thought was a great interim, with prospects for the future improving. Eservglobal has significantly outperformed the market since we bought it and we believe will continue to do so into the future -- but monthly variations in small companies can be extreme, especially at the moment.
We are comfortable with the portfolio construction and in the expectation of some recovery from an oversold position at the end of March we selectively bought some of the larger cap stocks in Australia and New Zealand on April 1 to take advantage of what we believe will be a relief rally.
COMMENTARY
This was the worst quarter for New Zealand shares since 1998. Globally it was an extremely negative quarter with the world index down 11.8% in local currency terms. The March quarter followed what was a very difficult December quarter which has seen our market lose approximately 20% in the last six months.
The reasons for world market weakness have been well-documented in the media -- poor lending practices in the US have spread to a worldwide tightening in liquidity, an aversion to risk and a realisation that growth in most Western economies is likely to slow or go negative.
Amongst this global turmoil the New Zealand and Australian sharemarkets have been amongst the worst performing. This mainly reflects the tighter monetary policies by our reserve banks which are putting significant pressure on house prices, consumer spending and inevitably corporate profitability.
In Australia, excess leverage of individual investors and some corporates (particularly in the property sector) have played a part, whilst in New Zealand the individual investor has had a series of confidence knocks from finance company failures, the Blue Chip debacle and recently the freezing of the ING funds. This, in turn, has led to a sharp reduction in liquidity in smaller companies and often in severe price declines.
Markets have been exceedingly volatile and almost seemingly irrational in their day-to-day movements.
So where to from now?
On the positive side panic and volatility bring opportunities. We ended the quarter with a large cash holding which we believe gives us significant "optionality".
We have the option of sitting on the cash or of investing it into specific undervalued shares, perhaps being sold impatiently, or in the market generally if we think it undervalued overall.
The selling has been relatively indiscriminate. Just about all stocks have been hit hard, with little differentiation for risk and reward characteristics in what will most certainly be a slowing global environment in 2008. Already we are starting to see some of the utility plays in Australia bounce strongly off their bottoms and we expect to see similar phenomena amongst other high-quality businesses.
Although the economic environment is likely to deteriorate for many companies, and we are likely to see many downward earnings revisions, it is a moot point as to whether the market has already adjusted the pricing of companies accordingly. A lot of prices are down 30 -- 50% which builds in a significant reduction in earnings, of which we have seen very little to date.
We also suspect that the Reserve Bank of New Zealand will surprise the market by either reducing rates earlier than most economists expect, or by doing so faster once the easing begins.
This should spark a reduction in the local currency which will be good for many of the companies on the sharemarket, or reward overseas diversification. We are beginning to position our portfolio accordingly.
On the minus side, we are still in unprecedented times in terms of the scale of the dislocation in global financial markets.
Although the problems caused by the "sub prime" meltdown are now widely understood, we are not absolutely certain that the scale of the problem is fully comprehended by many.
For example, we believe the specialist bond insurers in the US are likely to go bankrupt in the absence of intervention from the US authorities (possible given the precedent set with Bear Stearns). This would have second round effects as much US financial market securitized debt is only rated as investment grade because of the guarantees of such entities rather than the underlying strength of the security.
Also, the rationing and repricing of debt may be more severe than many realise. We suspect some companies will get an enormous shock when they go to renegotiate existing banking arrangements and already you are seeing this in terms of solid companies who used to be able to source credit at approximately 1% more than benchmark rates are now having to pay around 3% over benchmark. Where this repricing and rationing of debt will be most severe is in the property sector where many have taken on excessive leverage and will be forced to sell properties as facilities come up for renewal -- we believe this will see a sharp move in property capitalisation rates, meaning that property is not, as is normally the case in a recession, a place one can "hide".
This is a challenging time for the fund. We remain cautious, as reflected by our extreme cash holding at quarter end. However, experience tells us that such times of fear and uncertainty often provide opportunities and we will be alert to these.
Our high cash weighting is of significant value in these volatile times, and whilst it will fluctuate as we trade in and out of opportunities, investors can expect that conservative levels of cash will be maintained for some time.
| Top 10 Holdings as at 31 March |
| Cash |
50.0% |
| Mainfreight |
7.0% |
| Methven |
5.0% |
| Michael Hill |
4.0% |
| Cavotec |
4.0% |
| Wellington Drive |
4.0% |
| EservGlobal |
3.0% |
| Sky Network Television |
2.0% |
| Sky City |
2.0% |
| Hellabys |
2.0% |