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Monthly Report April 2020


Returns


Return  volatility

All returns are in NZ$ 30 Apr 20 3 months 12 months Since
inception pai

Since
inception pai

Aspiring Fund

9.53% -8.86%  1.62%   10.38%
    9.40%

New Zealand Equitiesii

7.51% -10.12% 5.18%     8.37%
   11.81%

Australian Equitiesiii

12.60% -18.34%  -8.72%     5.06%
    16.71%

World Equitiesiv

6.59% -7.68%  3.32%    6.05%
    12.85%
i February 2006, ii NZX50 Gross, iii ASX All Ordinaries Accumulated, iv MSCI World Equities Total Return

Unit Price

$3.8220


Asset Allocation

New Zealand Equities

31.3%

Australian Equities

12.5%

International Equities

23.9%

Bonds

1.6%

Total Cash

30.7%

Short Equities

-0.9%
Net Fund Value $410.3m


The Fund's main direct currency exposures at month end were - NZD 47% , AUD 19% , USD 27%

 

The Fund returned a pleasing 9.53% in April.

US equities staged a remarkable bounce back following the fastest sell-off in history in March, to post the best monthly gain since 1987 with the S&P500 up 12.8%. Europe (+5.4%) and China (+4.8%) were laggards with the MSCI World up 10.8% in local currency.

In a truly memorable month, records were also set in the commodity markets with crude oil prices going into negative territory for the first time in history.

At the depths of late March lows, virus cases and deaths were soaring in Europe and the US in particular, aggressive shutdown measures were being enforced around the globe, and as a result economic uncertainty was particularly acute. Roll forward a few weeks, and the markets shot higher responding to further evidence of a ‘do-whatever-it-takes’ policy approach from central banks and Governments, and early signs of progress regarding anti-viral drugs and vaccine development. 

Australasian equities benchmarks under-performed offshore markets, with the Australian All Ordinaries up 9.5% (local currency) and the NZ50 Index 7.5%.

In a reversal of a long-standing trend, the 10.6% average return for stocks in the NZ50 surpassed the overall Index return. Despite the bounce, on an average stock basis, NZ50 shares are down 19.9% for the calendar year to date.

Pleasingly, all of the Fund's equities portfolios positively contributed with strong double digit returns (in local currencies) and with an absence of any major landmines (the top 10 negative contributors impacted Fund performance by 0.14%).

The key contributors in the NZ portfolio were Infratil (+17.6%), Auckland Airport (+22.0%) and a2 Milk (+14.2%).

We began building a position in Auckland Airport in late March and participated in the company’s $1.2b equity raise. Despite the extreme uncertainty in the outlook, the offer was swamped with buyer interest, further highlighting the recognition of asset quality and appeal of long duration infrastructure investment. Keeping in the sector, it was pleasing to see Infratil’s share price continue its correction to fair value.

A2 Milk provided a trading update noting revenue growth above expectations due to virus related pantry stocking and favourable currency movements, and an upgrade to expected margins. While A2’s share price is trading above our expectations, we are unlikely sellers given their continued strong execution and large investor fan base.

Our Australian portfolio was led by wins in Mesoblast (+142.6%) and a recovery in core Fund holding Cleanaway (+10.3%).

Mesoblast, an Australian listed bio-tech company, is developing stem cell technology for treating serious health issues including cardiovascular and inflammatory diseases. The nature of these company’s being early stage and therefore high risk has not normally attracted us, but after a conference call with management we thought it of sufficient interest to acquire a small position. What we didn’t expect was the recent announcement that the company’s product remestemcel-L would show highly promising results (from a small survey) in treating ventilator dependant COVID-19 patients with an 83% survival rate compared with only 12% of those not using the product. It is very early days and we will be watching future developments with great interest.

Amazon was the best contributor in the international portfolio and to the Fund's performance, up 27%. It was a key recipient of the “stay at home” trade along with a number of US technology companies (including Microsoft) in the portfolio. 

Amazon produced record revenues as expected and also record expenses and guided for a second quarter potential loss as they plan to invest heavily in safety systems for their workforce. Amazon’s dominant market position continues to be strengthened both by their own actions and the trend to “online” that was already established and that now, by necessity, has been turbocharged.

Another strong performer and new entrant into the Fund’s top 10 holdings was Sanofi (7.1%). It is a leading global pharmaceutical company with key franchises in immunology, oncology, diabetes and rare diseases. It is also a world leader in vaccines including influenza vaccines, and through its collaboration with Regeneron is currently evaluating an existing drug, Kevzara, as a possible treatment for Covid-19. The company should be largely unaffected by the global economic downturn and is guiding for earnings growth of around 5% in 2020.

Late in April we trimmed a number of our exposures that had run hard into their quarterly earnings announcements. Our expectation was forward guidance would be muted at best. We will use any new information and potential market weakness to rebuild positions. The common theme of our technology holdings is the resiliency of their business models and the net cash they carry on their balance sheets – they will make it through the crisis.

The unknowns of COVID has made having absolute investment conviction challenging. While Tourism and Hospitality will clearly bear the brunt of the economic damage, these businesses and their staff, are customers of other businesses. Further we expect eventual repayment of corporate and Government debt burdens will supress future growth medium term. We are resistant to buy-into the idea that things will never be the same (recall fears post the 9/11 terrorist attacks that high rise office towers would become a thing of the past and security measures would supress travel demand) – but more taxes and less growth seem likely to us.

Where we are gaining useful insights is through valuation back-testing. For example, what passenger recovery is priced into the Air New Zealand share price and is this different to the expectations implicit in Auckland Airport’s valuation.

Through this work, what surprised us in April was the sharp increase in investor risk appetite, despite our perception of an economic narrative that moved from hope of a V-shaped quick recovery to broader acknowledgement of a likely more elongated profile (a U resembling the Nike swoosh).

We have seen a pick-up in retail investors buying into cyclical stocks that had experienced heavy share price declines. Air New Zealand is a case in point when its share price rose up to 87% within a 2-week period where retail investor platform Sharesies accounted for over 15% of total volume traded in the stock. Similar observations have been made offshore about stock trading patterns on retail platforms.

As anticipated we have seen a rush of new equity issuance as corporates look to strengthen their balance-sheets, especially in Australia where ~$11b was raised in equity placements during the month. However, we have been surprised by the high levels of cash ready to be put to work into these deals (a number of equity issues have excluded non-shareholder participation), and the reluctance of some NZ companies not to take advantage of the opportunity to strengthen their capital positions.

High retail risk appetite and tight deal-flow competition were less apparent in the GFC. What is different this time? We suspect TINA (there is no alternative to equities) is still entrenched in investor behaviour.

A number of NZ economists are now telling us to be prepared for negative interest rates in NZ. While we have serious doubts about the economic rationale for negative rates, lower interest rates have a very positive impact on share prices. We expect ongoing support for yield stocks in a post COVID world. We are increasingly investing more time and money in this segment of the market.

We noted in last month’s newsletter that we saw more investment opportunities than we had seen in the last 10 years. Prices have rallied, despite the investment environment remaining very uncertain. We start May with 67% of the Fund invested in Equities, with high levels of liquidity, and cash available to pursue new investment opportunities and weather ongoing volatility.

 


Top 10 Holdings


TILT Renewables

3.4%

Infratil

3.2%

Amazon

2.9%

Contact

2.9%

Cleanaway

2.8%

a2 Milk

2.7%

Google

2.7%

Grifols

2.4%

Alibaba

2.4%

Sanofi

1.8%


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..