Investment Insight -
Performance update
When share markets fell -34.0% from their highs in the first quarter of this year NZ Funds mitigated the downside and clients’ growth portfolios were down half as much as the share market. It is easy to forget that we had also positioned clients’ portfolios so that if markets fell further, client portfolios would not have.
Since March, NZ Funds has put a huge amount of resource into capturing the share market rebound. At first, we lagged the market - although we reinvested early, the share market recovered faster than expected. However, we aggressively positioned clients’ portfolios across multiple asset classes as the recovery took hold.
Year-to-31 July 2020 returns across clients’ growth portfolios are in positive territory with the NZ Funds KiwiSaver Growth Strategy up 0.54%. The average 40-year old KiwiSaver member is now up around 0.62% year-to-date and the average 65-year old KiwiSaver member is estimated to be up 0.77% year-to-date. This compares to New Zealand and global shares which are down 5.13% and 1.59% respectively. We are particularly satisfied with these results given the downside mitigation we achieved earlier in the year.
Of course, one always wants to talk about performance when performance is strong. However, that is not the purpose of this article. Our journey of smoothing returns by mitigating the downside and outperforming share markets would not have been possible for those who invest in a single factor fund, such as only New Zealand shares. NZ Funds’ multi-dimensional investment strategy means we can take positions in themes and opportunities, in New Zealand and globally, that a vanilla or passive share portfolio cannot do.
In last week’s 31 July 2020 | Drivers of return, we discussed the three key drivers of our returns to the end of July. While we are of course pleased with how clients’ investments in technology shares and gold have played out, it is important to remember that the market is a continuum. It never stops to ‘smell the roses’ and the next issue or event is just around the corner. While the active positions we are currently invested in are important, what turns a ‘good’ investment manager into a ‘great’ investment manager is the pipeline of positions, themes, sectors and opportunities that can and will be implemented going forward.
The pipeline of investment ideas
Three months from now, the world may be looking at a substantially different landscape. There is a good chance that we will be on the verge of an approved COVID-19 vaccine. The United States election will be behind us. The prospect of an early vaccine and the outlook for the United States election are likely to be the key drivers of markets between now and then.
A vaccine will not only be positive for the health of global citizens but also the health of the global economy. A vaccine will drive share markets higher, but the share market will not necessarily be driven by the sectors that have driven markets higher up until now. An approved vaccine could mean a significant recovery for cyclical shares such as airlines, banks, and retail companies, challenging the current domination of sharemarkets by the technology sector.
Increased earnings and economic activity will cause the demand for commodities to increase. An increase in demand, and lower supply of commodities such as oil because of large and permanent supply side cuts, means commodity prices could move significantly higher.
In the early days of COVID-19 there were deflationary fears. Inflation expectations will increase following the announcement of a vaccine alongside record government stimulus. Increasing inflation expectations leads to higher long-term interest rates. While not a good environment for bonds, it can be a boon for the financial sector including banks.
NZ Funds continues to caution against the use of single sector funds which tend to perform well in an ‘all boats rise in a rising tide’ scenario. In an environment where the investment regime is ever changing, having an active approach with the intensity to continually develop investment ideas, like the examples we have described here, will more likely provide strong absolute returns no matter what direction the share market trades.
Portfolio positioning
As well as getting the asset allocation right for clients using NZ Funds’ sophisticated asset allocation tool, we are also getting clients’ portfolios ready for what we anticipate will be an upcoming change in the investment regime. We have commenced positioning portfolios for a cyclical upswing by purchasing an initial holding in United States small cap companies. We have also taken a small position in commodities. We believe gold remains best placed to take advantage of inflationary pressures but we will look to reduce this position as gold trades closer to our target price of US$2,500/oz.
Since March, NZ Funds has put a huge amount of resource into capturing the share market rebound. At first, we lagged the market - although we reinvested early, the share market recovered faster than expected. However, we aggressively positioned clients’ portfolios across multiple asset classes as the recovery took hold.
Year-to-31 July 2020 returns across clients’ growth portfolios are in positive territory with the NZ Funds KiwiSaver Growth Strategy up 0.54%. The average 40-year old KiwiSaver member is now up around 0.62% year-to-date and the average 65-year old KiwiSaver member is estimated to be up 0.77% year-to-date. This compares to New Zealand and global shares which are down 5.13% and 1.59% respectively. We are particularly satisfied with these results given the downside mitigation we achieved earlier in the year.
Of course, one always wants to talk about performance when performance is strong. However, that is not the purpose of this article. Our journey of smoothing returns by mitigating the downside and outperforming share markets would not have been possible for those who invest in a single factor fund, such as only New Zealand shares. NZ Funds’ multi-dimensional investment strategy means we can take positions in themes and opportunities, in New Zealand and globally, that a vanilla or passive share portfolio cannot do.
In last week’s 31 July 2020 | Drivers of return, we discussed the three key drivers of our returns to the end of July. While we are of course pleased with how clients’ investments in technology shares and gold have played out, it is important to remember that the market is a continuum. It never stops to ‘smell the roses’ and the next issue or event is just around the corner. While the active positions we are currently invested in are important, what turns a ‘good’ investment manager into a ‘great’ investment manager is the pipeline of positions, themes, sectors and opportunities that can and will be implemented going forward.
The pipeline of investment ideas
Three months from now, the world may be looking at a substantially different landscape. There is a good chance that we will be on the verge of an approved COVID-19 vaccine. The United States election will be behind us. The prospect of an early vaccine and the outlook for the United States election are likely to be the key drivers of markets between now and then.
A vaccine will not only be positive for the health of global citizens but also the health of the global economy. A vaccine will drive share markets higher, but the share market will not necessarily be driven by the sectors that have driven markets higher up until now. An approved vaccine could mean a significant recovery for cyclical shares such as airlines, banks, and retail companies, challenging the current domination of sharemarkets by the technology sector.
Increased earnings and economic activity will cause the demand for commodities to increase. An increase in demand, and lower supply of commodities such as oil because of large and permanent supply side cuts, means commodity prices could move significantly higher.
In the early days of COVID-19 there were deflationary fears. Inflation expectations will increase following the announcement of a vaccine alongside record government stimulus. Increasing inflation expectations leads to higher long-term interest rates. While not a good environment for bonds, it can be a boon for the financial sector including banks.
NZ Funds continues to caution against the use of single sector funds which tend to perform well in an ‘all boats rise in a rising tide’ scenario. In an environment where the investment regime is ever changing, having an active approach with the intensity to continually develop investment ideas, like the examples we have described here, will more likely provide strong absolute returns no matter what direction the share market trades.
Portfolio positioning
As well as getting the asset allocation right for clients using NZ Funds’ sophisticated asset allocation tool, we are also getting clients’ portfolios ready for what we anticipate will be an upcoming change in the investment regime. We have commenced positioning portfolios for a cyclical upswing by purchasing an initial holding in United States small cap companies. We have also taken a small position in commodities. We believe gold remains best placed to take advantage of inflationary pressures but we will look to reduce this position as gold trades closer to our target price of US$2,500/oz.
Source: Bloomberg, MSCI ACWI Net Total Return Index, S&P NZX50 Portfolio Index with imputation credits.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, 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 except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, 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 except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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