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Monthly Report January 2020


Returns


Return  volatility

All returns are in NZ$ 31 Jan 20 3 months 12 months Since
inception pai

Since
inception pai

Aspiring Fund

1.69% 5.95%  21.10%   11.31%
    8.28%

New Zealand Equitiesii

1.96% 8.62% 30.41%     9.35%
   11.11%

Australian Equitiesiii

3.93% 1.93%  22.89%     6.68%
    15.30%

World Equitiesiv

3.35% 4.01%  25.46%    6.74%
    12.51%
i February 2006, ii NZX50 Gross, iii ASX All Ordinaries Accumulated, iv MSCI World Equities Total Return

Unit Price

$4.1937


Asset Allocation

New Zealand Equities

35.9%

Australian Equities

13.9%

International Equities

32.4%

Bonds

2.3%

Total Cash

15.5%

Short Equities

-1.1%
Net Fund Value $455.4m


The Fund's main direct currency exposures at month end were - NZD 48% , AUD 19% , USD 23%


The Fund returned 1.69% in January, a pleasing result in a month overshadowed by the coronavirus outbreak in China.

Markets opened the month positively, before the assassination of Iran’s General Suleimani on Iraqi soil and uncertainty about its consequences drove a surprisingly short period of volatility. Once those tensions had eased, markets charged on with the MSCI World Index up 2.5% at its intra-month high. However, the coronavirus outbreak saw a risk off tone return, with world equities ending down -0.6% for the month. The Fund was up over 3% before the virus fears set in, with our Australasian holdings performing particularly well.

The dramatic global response to the virus has seen significant travel and supply chain disruption. The uncertainty about the duration of this crisis makes assessing its eventual impact a real guessing game but we have already seen significant flight cancellations and other steps like the effective closing of Macau for a fortnight which guarantee the near term effect on travel will be severe. The widespread adoption of ‘just in time’ inventory management will also ensure that supply chain disruptions become widespread as freedom of movement for ships and planes is curtailed.

Commodity prices have tumbled including a -15% oil price fall in January, and, on the opening of trading following the Chinese Lunar Holiday, Iron Ore down -13.5%. The Chinese stock market gapped down over 7% on its first day of trading post the Lunar holiday and treasuries and safe-haven currencies have rallied. From January highs, NZ Tourism exposed stocks have sold off hard with Auckland Airport down 6%, Air New Zealand down 11%, Sky City down 17% and Tourism Holdings off 28% at recent lows.

In an attempt to stabilise the situation, China has injected liquidity into the financial system and, at the time of writing, Chinese stocks have recouped about 40% of their losses. However, reflecting on the impact the SARS virus had on markets in 2003, the market’s overall valuation did not recover until the virus was contained / cleared. We are treating this as a guide to navigating the market this time and will buy into the volatility where we see stocks oversold relative to their longer term return potential.

While the NZ and Australian markets slid on the general risk-off tone, both markets managed to hold on to strong NZ$ returns of 1.96% and 3.92% respectively. The Australian market was the best performing major market in local currency terms. This, according to research from Swiss Investment Bank UBS, pushed the market Price / Earnings ratio (the most common valuation multiple) of the Australian Industrials ex-Financials to 25.1, its highest level since at least the 1930s.

The Fund’s NZ portfolio had a strong month with no material headwinds and key wins coming from Spark (+7.6%) and Tilt (+5.6%) on no real news-flow, while one of the Fund’s core New Zealand holdings, Infratil, (+7.5%) reported a significant lift in the value of its now largest investment, a 48% stake in Canberra Data Centres (CDC).

Infratil’s investment in CDC has been independently assessed to be worth between NZ$1,326 to $1,668m (as at 31-Dec-19). This was materially up on the prior publicly disclosed independent valuation in Mar-19 of between NZ$841m to $942m, and a current average Broker Analyst valuation of just over $1bln.  

What made the 6-January valuation announcement increasingly relevant was the news 20 days later that investment partner, Commonwealth Super, had sold half of its 48% shareholding in CDC to another Australian pension Fund, the Future Fund. Infratil advised that as a result of the transaction, no change was required to the recently assessed value range, and in doing so validated it.

To highlight the significance of CDC’s January news, at the top end of the new value range, Broker Analyst valuations for Infratil would increase (excluding potential tax considerations) by about $1 per share and rise to over $6.25 versus the $5.50 share price at the time of writing.

Our Australian portfolio was up over 2% in A$, with a number of small wins and Treasury Wines (-19.8%) the key headwind. As is common leading into the February reporting season, we saw a number of earnings downgrades from Australian companies. We escaped the damage until market darling Treasury Wines took a dive, cutting its guidance on a fall in its US earnings, with group profit growth lowered from +15-20% to +5-10%. Treasury provides yet another example of the challenges faced by brands in the highly competitive US market. As a result of being lucky rather than good, we had sold close to half of our position before the downgrade, so the stock’s fall had a minor impact on Fund performance.

Our International Portfolio had a mixed month with wins in Amazon (+8.7%) and UK housebuilders Persimmon (+13%) and Taylor Wimpey (+11%), offset by Fevertree (-34%) and Freeport McMoRan (-15%).

While Freeport’s fall can be put down almost entirely to the fall in the copper price, Fevertree reported slightly disappointing preliminary results for 2019 where subdued pre-Christmas sales in the UK, their largest and most mature market, declined by 1% for the year. However, of greater concern to us was the news that management would be cutting the price of their premium mixers in the US market which will reduce revenue growth in this key market from a very satisfactory 33% in 2019 to around 10% in 2020. Our investment case was built on Fevertree, at least partially, replicating its undoubted success in the UK market in the large US market. This news was an unwelcome development and we reduced our position, despite the price fall, as the premium multiple is no longer justified given the lower growth outlook.

On a more positive note the UK house builders (Persimmon and Taylor Wimpey) continued their strong performance in the afterglow of the Conservative election victory. Both stocks have good exposure to the housing market in the north of England and should be key beneficiaries of the government’s pledge to close the north-south economic divide.

Further evidence that Brexit has not dented confidence in the housing market in the UK came from the following recent snippet in the Daily Telegraph:

“Knight Frank, the UK’s leading independent real estate company, reported the new number of prospective buyers registering with the company in London rising to its highest weekly total in more than 15 years. The figure was 92% higher  than the equivalent week last year and up 95% on 2018".

Amazon produced a 4th quarter result which was well received by the market with revenue and earnings comfortably above analyst expectations, led by its cash cow cloud business, AWS, and its US ecommerce division which saw a pleasing customer reaction to its new 1-day shipping offer. While the law of large numbers will continue to see growth metrics fall in % terms, we believe Amazon’s leading market position, scale, and innovation provides a very unique Consumer and Cloud exposure for the Fund. 

The muted global market response to the Suleimani assassination and the coronavirus outbreak highlight the extent to which ultra-low interest rates and accommodative public policy seem able to perpetuate the TINA (there is no alternative to equities) investor mentality. This has seen a significant reduction in the earnings yields (future returns) investors are accepting across a number of markets across the globe, and particularly in New Zealand and Australia. Specific stock reactions to the coronavirus outbreak highlight the tail-risk of investing in equities. Further, we have recently observed genuine air-pockets of liquidity across the New Zealand share market. Both in our view highlight the danger inherent in highly concentrated country and company / industry exposures.

We remain confident that the value and liquidity inherent in the Fund’s geographic and industry diversification is in our investors’ long term interests.



Top 10 Holdings


TILT Renewables

4.0%

Spark

3.6%

Amazon

3.4%

Contact

3.2%

Alibaba

2.8%

a2 Milk

2.5%

Google

2.4%

Infratil

2.4%

Cleanaway

2.4%

EBOS

2.3%



Disclaimer :  The information contained in this newsletter reflects the views and opinions of the issuer of the Aspiring Fund, Aspiring Asset Management Limited.  The content of this newsletter is not intended as a substitute for specific professional advice on investments, financial planning or any other matter, and does not take into account any particular investor’s objectives, financial situation or needs.  Investors should seek the advice of an authorised financial adviser before making any investment decisions. Although the information provided in the newsletter is, to the best of our knowledge and belief correct, Aspiring Asset Management, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed in this newsletter, except as required by law.  Please also note that past performance is not necessarily an indication of future returns.

For further information please read/request a copy of the Product Disclosure Statement for the Aspiring Fund (available at www.aaml.co.nz) or contact Aspiring Asset Management..