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Monthly Report August 2020


Returns


Return  volatility

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

Since
inception pai

Aspiring Fund

3.17% 6.90%  8.09%   10.84%
    9.33%

New Zealand Equitiesii

1.79% 9.70% 10.97%     9.10%
   11.76%

Australian Equitiesiii

5.40% 9.36%  -1.17%     6.01%
    16.64%

World Equitiesiv

5.14% 5.07%  8.72%    6.58%
    12.81%
i February 2006, ii NZX50 Gross, iii ASX All Ordinaries Accumulated, iv MSCI World Equities Total Return

Unit Price

$4.1929


Asset Allocation

New Zealand Equities

39.2%

Australian Equities

15.6%

International Equities

29.6%

Bonds

3.0%

Total Cash

12.7%

Short Equities

-3.0%
Net Fund Value $419.4m


The Fund's main direct currency exposures at month end were - NZD 51%
, AUD 16% , USD 28%



The Fund returned 3.17% in August.

Equity markets continued to rally, with low interest rates, vaccine progress, and better than feared corporate earnings, as ongoing key explanatory drivers. A surge in momentum investing was a key observation for us during the month with Tesla and Apple shares gaining media attention. 

Apple’s market capitalisation was up 21% in August – a change representing an astonishing ~40% of what the company was valued at in August-18 (prior to the late 2018 sell-off). For Tesla, after overtaking Toyota as the biggest Auto company in the world in July, by mid-August its value was more than double Toyota. 

Interestingly, both companies had share splits during their August re-ratings, a process where a company manufactures a lower share price by increasing the number of shares on issue. In the case of Apple and Tesla, mathematical logic did not prevail, the valuations of both companies increased on their share splits. While we have seen this before (Brierley comes to mind), for it to occur with companies the size of Apple and Tesla is a clear signal of how large the risk seeking crowd has become in segments of the market.

The key event in New Zealand was the return to a level-3 COVID lockdown for Auckland from August 12th to month end. Pleasingly from an investment perspective, NZ equities exhibited a much more resilient (and rational) response to the news. We think this is in part due to similar experiences overseas (for example Victoria in Australia), and better understanding now of the earnings impact (cash burn) lock-down time has on a number of the most exposed New Zealand companies.

Auckland Airport (+4%) is a good example where management have executed well on managing the impacts of COVID. Based on information provided at the full year result investor call, we estimate the Airport reduced its underlying cash burn to ~$15m in August – representing an immaterial 1 cent per share (compared to a $7 share price). Similarly, results from the listed Australasian Casinos showed better cash control than expected. Sky City has taken $20m of cost out of the business and is benefiting from properties which primarily serve their local resident community. At the more economically vulnerable end of the market, NZ Herald owner NZME (+63% in August) produced a quite impressive second half result, and like the casino is targeting a high level of permanent cost out.

Air New Zealand is one company which despite best efforts to reduce costs, is still burning material levels of cash and is in need of a large equity raise. We, along with the rest of the institutional investor market, are waiting with interest as monthly cash burn is reducing the airline's equity value by around 5% every month.

Our NZ portfolio had a strong month, led by core Fund holdings, Contact Energy (+7%) and EBOS (+6%).

Contact (+7%) recovered the loss it recorded in July. After weeks of speculation, Rio Tinto confirmed it is open to delaying the closure of the Tiwai Point aluminium smelter. A delay would reduce cashflow uncertainty and provide more time for the industry to better adapt to a post-Tiwai environment.

EBOS (+6%) produced a very respectable full year result. Earnings growth was primarily due to the first year of the A$1b Chemist Warehouse contract, which was executed in typically flawless fashion. With balance sheet capacity and a history of accretive capital deployment, we still see scope for upside and note broker price targets are now as high as $30, ~25% above its current price.

The main headwind in the NZ portfolio was a2 Milk (-10.8%). a2 delivered strong earnings growth once again, however its important daigou channel was impacted in the 2nd half due to COVID. We saw the sell-off as a buying opportunity, with the company’s earnings multiple still well supported by globally listed consumer brand stocks.

We are normally wary at reporting season time in Australia, given a history of over-reaction to result announcements which do not meet market expectations. However Australian equities proved resilient despite the national economy plunging to its first recession in 30 years. The positive impact of government stimulus was clear through many of the results, as was the lack of visibility ahead with the absence of earnings guidance.

Our Australian portfolio had a particularly strong month, led by core holding Cleanaway (+23.4%). Cleanaway produced a very good result with modest revenue growth but strong cost management driving increased margins and a negligible impact overall from COVID disruption. Pleasingly, management said business activity grew in June and July. Telstra (-13%) shares disappointed, testing March lows. Post result commentary focused on the risk the dividend could fall in FY21, despite this being already anticipated by key Telco analysts. 

Our International portfolio was led by wins in Alibaba (+14.3%), Freeport McMoran (+20.8%) on the rising copper price and Amazon (+9%) whose share price recovered to highs following its stellar quarterly result in July.

Alibaba continues its strong run, up 33% in the last 2 months. Despite this, it remains at a material discount to US Tech stocks, and at a core earnings multiple (~20x) which is close to NZ equities. The company reported a strong Q1 in August, with profit up 30%, and segments including Cloud (revenues +50%) continuing to grow impressively.

The key detractor in the International portfolio was Grifols (-15%). The healthcare multinational suffered due to the impact of COVID on its plasma collection business. However, at its quarterly announcement in July, it guided for plasma collections to be down just 10% for the year ending December, implying that after a tough March-July period, they are seeing a rebound in collection activity. Priced on 10x forecast earnings, we see the stock well positioned to perform in a post COVID environment.

While August market performance presents as just more of the same, with T.I.N.A (there is no alternative / to equities versus low interest rates at the bank) well and truly alive and a key reason for elevated investor risk appetite, it is worth noting that during the month, trading on the New Zealand Stock Exchange was down for over 13 hours over 4-days. This unexpected disruption, and the outbreak of COVID in Auckland, provide good examples of the benefits of the Fund’s geographical diversification. We were pleased to see August Fund performance sourced from a wide range of company, sector and country investment positions.



Top 10 Holdings


Contact

4.0%

Infratil

3.9%

EBOS

3.7%

Tilt Renewables

3.1%

Cleanaway

3.1%

Amazon

3.0%

Alibaba

3.0%

a2 Milk

2.5%

Google

2.0%

Mastercard

1.9%


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..