REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE QUARTER ENDED 31 DECEMBER 2008
|
|
Aspiring
Fund |
|
NZX50 |
|
ASX ALL
ORDS
(NZ$) |
|
|
Month December 2008 |
|
+2.5% |
|
+0.2% |
|
0.0% |
|
| Quarter December 08 |
|
-2.8% |
|
-12.1% |
|
-19.5% |
|
|
Financial YTD (from 1/04/08) |
|
-3.4% |
|
-21.7% |
|
-28.3% |
|
|
Annualised Since PIE (1/10/07) |
|
-11.2% |
|
-30.3% |
|
-33.9% |
|
The Unit Price as at 1st January 2009 was 1.0269.
Our asset allocation at the end of the month was approximately:
|
New Zealand equities |
27% |
|
Australian equities |
33% |
|
Cash |
40% |
PERFORMANCE
December was another difficult month, with continued choppiness in markets, further evidence of economic weakness and more company profit warnings.
Markets globally enjoyed a strong rally in the last few days of the month and Australia participated fully in this. The New Zealand market also recovered but its mid month lows were a lot less extreme and the month end rally was correspondingly muted.
The Aspiring Fund’s December performance of + 2.5% was good in both absolute and relative terms, but we continue to emphasise longer term performance measures.
For the quarter, the funds performance was -2.8%, compared to -12.1% for the New Zealand market and -19.5% for the Australian market in NZ dollar terms.
The longer term return of -11% annualized since the introduction of the PIE regime is disappointing, but it could have been a lot worse. We have managed to avoid some of the bigger disaster areas and taken an overall cautious stance at appropriate times which has meant we have preserved the majority of our capital in these trying times. A slightly more positive perspective on this number is that our losses were roughly a third of the decline in both the Australian and New Zealand markets for the period.
During December further profit warnings came from PGG Wrightsons, NZ Farming Systems, PGC and Hellabys, whilst comments from Hallensteins and Michael Hill reinforced the challenging retail environment
New equity issues and capital raisings continued at a relatively brisk pace in Australia as their corporates moved to improve gearing. With the Commonwealth Bank and Westpac raising money during the month, all major Australian banks have now wisely moved to improve balance sheet strength ahead of what will be a year of deteriorating credit quality.
The current environment is throwing up a number of apparent mispricings in debt markets as well as our traditional stamping ground of Australasian equities. For example, there is a local corporate whose debt trades at approximately 8.5% in New Zealand but which has a listed Australian Security trading at a 26% yield. Unfortunately, volume is very thin and, so far, we have been unable to secure a stake but the stock remains on our watch page. We have occasionally invested in the local bond market as a way of boosting the return on our cash holdings and have kept a close eye on credit spreads here and offshore.
During December we added a small investment (about 4% of the portfolio) in a portfolio of diversified high-quality US corporate debt (the portfolio is listed in the US with a ticker LQD) to our portfolio. At the time that we bought this the portfolio had a yield to maturity of about 6.8% and US 10 year Treasury bonds were trading at a yield of 2.08%. This yield pick up seemed very generous relative to the yields available on far lower and less diversified credit risks in New Zealand. We effectively locked the spread in by shorting an equivalent value of US 10 year Treasury bonds and insulated ourselves against any currency risk by hedging our US$ exposure back to NZ$.
We apologise if the explanation above is long and obtuse, but it might be reassuring to know that every leg of this has moved in the Fund’s favour since we established the position. As an indication of the quality of the portfolio its biggest exposures are to names like Johnson and Johnson, Wal-Mart, Berkshire Hathaway and JP Morgan Chase -- all comparable quality credits to the New Zealand Government.
The steep decline in the cash rate means we will continue to look for safe ways of enhancing the yield on our cash weighting which we expect may remain quite high for the foreseeable future.
We would be very surprised if equity markets fare as badly in 2009 as they did in 2008. The outcome will be largely a function of how correctly the falls of 2008 have pre-empted the severity of the forthcoming economic environment. Prices are now clearly reflective of a downturn of significant proportions, but probably not of a 1930’s type outcome which some commentators predict.
The history of equity markets show that large down years are in most instances followed, in varying degrees, by an up year. The mere fact that so few predict that this will occur in 2009 can perversely make it more likely, as equity portfolio weightings have been cut to the quick and cash weightings are at record levels.
We will continue to look for oversold stocks to buy in the same manner as we did in late November/early December helping us to a solid December return. Additionally, we will continue to look for the equity-like returns which are occasionally available in the debt market at lower risk.
COMMENTARY
Equity markets came to the conclusion in October and November that the global (and local) economic outlook was dire -- in December we continued to see economic statistics to back up this view.
In New Zealand the -0.4% September quarter GDP outcome (the third negative quarter in a row) was roughly as expected, with economists now mostly predicting at least two more negative quarters of GDP.
From a New Zealand perspective the scary thing is that the negative three quarters of growth arose before the onset of the stormy side of the global recession which only really developed its intensity in September. The negative growth to date is mostly symptomatic of a falling housing market and consequent reduction in retailing and construction.
Looking forward, New Zealand exporters will have to deal with sharp deterioration in terms of trade and falling volumes -- this in turn will see large-scale job destruction in the first half of 2009 -- a phenomenon to be shared by most world economies.
While Fonterra might avoid its payout falling as low as that of Westland Dairy Co-Op’s we expect that the dairy payout forecast for the majority of farmers will be further reduced to something close to $5, compounding the country’s problems.
The December National Bank business confidence survey showed the worst reading for "own activity" since the series began in 1988.
Retailing continues to be tough as evidenced by effective profit warnings from Michael Hill and Hallenstein Glassons. We suspect strong Boxing Day sales represented consumers simply taking advantage of the sales season to concentrate their discretionary spending in to a very few days. If we are right the rest of January will be the beginning of a long bleak spell for retailers and their suppliers.
It remains extremely difficult to judge how the contest between the downward forces of deteriorating global growth/rising unemployment and the hugely stimulatory fiscal and monetary stance of Governments will unfold and how stock markets will react. It is already clear that households in the USA are attempting to reduce spending and increase saving. We expect New Zealanders to follow suit which is very encouraging for the long term but has bleak short term implications for economic activity.
During December the Reserve Bank slashed 150 points off the overnight cash rate, bringing it down to 5%. Economists are predicting a 50-75 point reduction in January. If anything it will be more and we predict that by a third of the way into the year the OCR will be 3.5% or lower. Deposit rates and lending rates for those able to access credit will follow.
Treasury figures suggest that government finances will move from 14 years of surpluses into a deficit amounting to around 3% of GDP, but, given the growth outlook, this deficit is likely to balloon to close to 5% of GDP (for a historical perspective this number peaked at about 9% during the times of Muldoon).
The New Zealand situation mirrors the huge stimulus we're seeing in America (and many other countries) through its monetary and fiscal policy.
We are living in unprecedented times and it is extremely difficult to predict the direction of markets over the next six months but the following summarizes our strongest held views:
There are individual stocks you can find where value looks compelling -- stocks trading at less than their cash asset backing, low earnings multiples under conservative assumptions and great global franchises “on sale”.
Conversely, there are many companies were it is difficult to estimate what the toxic combination of falling margins and volumes might do to their value and even survival. But many of these have already fallen some distance.
There will be opportunities to make money from discounted placements and oversold situations.
High-quality corporate debt looks to offer good risk reward characteristics globally, but not in New Zealand where investors habitually take on all sorts of risk for just a couple of percent more than government bonds.
The cost of safety is increasing. We find US Treasury yields of 0.9% for two years and 2.2% for 10 years very unappealing -- especially in the context of ballooning supply and Fed policy which is explicitly aimed at encouraging businesses, banks and investors to take more risk.
Globally, there is a strong political incentive for Governments to be seen to do something. The sad reality is that they should have been doing something years ago and their actions now amount to little more than theft from our children and grandchildren who will be left to pick up the bill. Fortunately, New Zealand’s fiscal position as we entered this downturn was significantly better than most developed economies, particularly the United States where fiscal responsibility has become an oxymoron.
For those who have a safe job 2009 should be a great year -- a generous government, lower mortgage costs, tax cuts and cheap oil.
Things will get better one day!! On a long-term view risk assets appear cheap and safe assets expensive.
| Top 10 Holdings at 30 September 2008 |
| Cash |
35.9% |
|
Computershare |
4.2% |
|
QBE Insurance |
4.2% |
|
Telstra |
4.1% |
|
Wotif |
4.0% |
|
LQD |
4.0% |
|
Methven |
3.5% |
| Mainfreight |
3.2% |
|
The Warehouse |
3.0% |
|
Kiwi Income Property Trust |
2.9% |
| Michael Hill |
2.9% |
We have included LQD in the above list despite its obvious non-equity characteristics because it is technically a listed equity in the United States.
If we had omitted LQD our next biggest holding is Santos at 2.6% of the fund.