REPORT TO THE UNIT HOLDERS IN THE ASPIRING FUND FOR THE QUARTER ENDED 31 MARCH 2009
|
|
Aspiring
Fund |
|
NZX50 |
|
ASX ALL
ORDS
(NZ$) |
|
|
Month March 2009 |
|
+3.49% |
|
+2.7% |
|
+4.5% |
|
| Quarter March 2009 |
|
+4.97% |
|
-4.61% |
|
+0.01% |
|
|
Financial YTD (from 1/04/08) |
|
+1.43% |
|
-25.4% |
|
-27.0% |
|
|
Annualised Since PIE (1/10/07) |
|
-6.48% |
|
-28.33% |
|
-26.23% |
|
The Unit Price as at 1st April 2009 was $1.0779.
The performance for the month of March was +3.49% after all expenses.
Our asset allocation at the end of the month was approximately;
|
New Zealand equities |
22.7% |
|
|
Australian equities |
35.4% |
|
Hybrid Debt |
18.3% |
|
|
Cash |
23.6% |
The Aspiring Fund’s March performance of + 3.49% was pleasing given the allocation to cash and fixed interest we carried throughout the month. In fact, most of our corporate credit exposures performed well but the return on cash is now very low.
Globally markets were strong in March for reasons we think we understand but are not totally in agreement with. Markets appeared to take solace from an apparent levelling in the previous accelerating rate of negative news, from moves to rid international banks of the need to mark bad assets to market, and from the announcement that the US government will quantitatively ease (i.e. print money). This move from borrowing and spending to printing, borrowing and spending does not strike us as a sustainable long term solution.
Additionally, markets everywhere had endured several months of sharp falls resulting in sentiment so bad that many investors had given up all hope and interest in equity markets, normally a pre-condition for a substantial rally. A corollary to this was very high institutional cash weightings which resulted in those institutions chasing equities hard once prices started to run. As an example the US market was up 8.5% for the month but rallied a huge 24.5% from the low set on March 9.
The New Zealand market participated in the rally in a relatively muted fashion just as it has declined at lower rates than major global markets through the turmoil. In addition, our dollar was very strong in March, rising virtually 20% against the US$. While the conventional view of this is that the currency benefited from decreasing risk aversion we think there is somewhat more to it. We believe that we are also benefiting from New Zealand’s competitive advantage as a low cost soft commodity producer and from the sanity of our Government and central bank responses to the global financial crisis. While many Governments have succumbed to the temptation to throw everything into short term stimulus packages our Government has recognized the limitations of Govt action and its response is both temperate and considered.
The Kiwi’s strength against the A$ where we gained 4.8% inhibited our returns for the month as we hold our Australian equities unhedged.
For the quarter, we benefited from our flexible investment mandate, some opportunistic trading, limited exposure to landmines and reasonable execution of our fixed interest strategy. This enabled the Fund to post a positive return of 4.97% which compared favourably with the -4.61% from the New Zealand market.
For the March year, the fund returned 1.43%, against declines in the New Zealand market of 25.4% and 27% for the All Ords in NZ$ terms. Given the extraordinary upheaval in the global economy, and more recently extreme volatility in markets it was pleasing to eke out a modest positive return.
Our portfolio managed to avoid any major catastrophe during the quarter (we owned no Fisher and Paykel Appliances or Nuplex) and our fixed interest investments, primarily our holdings in Sky City Aces and ANZ debt out of the US, rallied strongly in line with the improving sentiment of equity markets. This reflected the asymmetric risk that was always inherent in these investments, which have to date vindicated our view that they would provide equity type returns without the commensurate risk.
The fund’s open mandate allowed us to invest in these hybrid debt securities when they were somewhat homeless and friendless as many investment funds are precluded from owning these instruments which sit somewhere between pure debt and pure equity.
Equity markets remain tricky to gauge. Many argue that prices are already discounting all foreseeable bad news. We are less convinced and see a significant chance of global economic conditions being far worse for far longer than most expect.
We believe that the best approach in the current environment is to be flexible and open in our views, to be cautious, and to try to avoid stepping on "landmines". Opportunities are now emerging which allow us to buy stocks at “wholesale” prices as companies react to the future uncertainty of credit availability and raise capital at discounted prices. Fletcher Building, Kiwi Income Property Trust and Freightways are examples of this over the last couple of weeks. Nuplex’s hand was forced and the terms were correspondingly onerous for existing equity holders but, as non-holders, we saw the sub-underwriting as a low risk opportunity from which we might gain some equity exposure at an attractive entry price. We expect to see more capital raisings in coming months and will ensure we have the liquidity to participate in those we find attractive.
Our caution has helped us to outperform markets over the past year, and indeed since the fund’s inception a little over 3 years ago. If markets continue to rally hard this caution may well see us surrender some of this outperformance. However, our emphasis is on long term returns and we remain confident of our ability to achieve them.
COMMENTARY
The news out of New Zealand continues to be mostly negative, but relatively speaking more encouraging than that being experienced in major global economies. This in turn has caused our dollar to rally and our Reserve Bank to be more hesitant than others, which may ironically prolong our recession.
The New Zealand economy shrank by 0.9% in the December quarter compared with a 1.5% contraction in the US. Our export sector based mostly on simple food products continues to hold up relatively well compared to the manufacturing sectors of other countries -- January exports were up 3% and in March Fonterra saw some increased prices at its internet auctions -- glimmers of hope in an otherwise depressing environment.
Our corporates remain extremely gloomy as witnessed by the National Bank of New Zealand March business confidence survey which was just a small smidgen more positive than February's all-time low. Redundancies, and thus unemployment, will probably accelerate at least to the midway point in the year.
Although Fisher and Paykel Appliances and Nuplex have been dominating the press for the past two months for all the wrong reasons, generally speaking New Zealand listed businesses remain well capitalised and to date are coping reasonably well with the recession.
The Reserve Bank of New Zealand has talked relatively optimistically about not needing to drop rates substantially further and of the economy recovering in the second half of 2009. This, against the backdrop of the US Fed increasing the money supply after taking rates to effectively zero, has caused the New Zealand dollar to strengthen during the month.
Bank lending rates have also increased -- to homeowners for longer duration mortgages and for businesses on all loans being renewed. The combination of the dollar and rates rising has effectively amounted to a significant tightening in monetary conditions, an unwanted development in the current environment.
We believe the Reserve Bank will be forced to change its mind and will inevitably ease further than the 2.5% bottom it is currently signalling.
The chairman of the US Fed, Ben Bernanke, talked of "green shoots" of good news in the form of a small blip up in house sales and factory orders but for every optimistic piece of news there are probably two pessimistic events.
For example, US auto sales were down 37% in March compared with February's 41% decline from the same month a year earlier. Whilst this can be read as encouraging March last year was weak and in reality the seasonal increase in car sales between February and March this year was lower than normal.
The US unemployment data showed a certain consistency in March with a reduction in non-farm payrolls of 663,000, pretty much right on the average for the last five months during which 3.3 million jobs in the US have been shed.
Believe it or not US unemployment data underestimates the problem, with the decrease in employment being matched by a similar rise in the number of people now working reduced hours or part-time as a result of the recession. Under-employment in the US (unemployed plus those involuntarily on reduced hours plus those who have given up looking for work) is now over 13%.
Whilst unemployment is continuing to rise at such a pace it is hard to see demand doing anything but shrink which in turn will continue to put pressure on global corporates.
The equity market in the US has enjoyed a spring rally at the first signs of "green shoots" but we think it is too early to predict a golden summer.
There are still problems in the global banking system which are manifesting themselves in Australasia in a continued desire by corporates to reduce debt overall and to diversify into retail borrowing products where possible. The banks, in turn, appear to be making excess margins, fees and profits prior to bad debt charges. The one solace for those on the other end of this behaviour is that a very profitable bank is a strong one.
| Top 10 Holdings at 31st March 2009 |
|
ANZ Hybrid |
6.5% |
|
Sky City Aces |
5.5% |
|
Santos |
4.1% |
| PipeNetworks Ltd |
3.7% |
|
The Warehouse |
3.6% |
| Methven Ltd |
2.7% |
| CSL Ltd |
2.4% |
| Nufarm Ltd |
2.4% |
| Telstra Corp |
2.4% |
| Westpac Banking Corp |
2.3% |