Investment Insights -
The drivers of return
There were three key drivers of performance in clients’ growth portfolios for the third quarter. This article discusses NZ Funds’ active management tilts and why we believe they are trends which will continue to benefit long-term investors.
1. Remaining invested
As we wrote in 17 July 2020 | Half year review, most see the abysmal forecasts for economic growth and quarterly earnings and believe shares are disconnected from reality — inflated by government or central bank largesse.
Yes, there is a disconnect between economic data and share markets but it does not mean markets are irrational. They are doing what they have always done: anticipating future conditions after weighing the worries that headlines and data convey.
The market does not wait for the all clear signal in times of hardship, such as COVID-19. In fact, this is likely already priced in to expectations. A sustained share market climb with volatility seems much more likely than another steep downturn and we therefore remain fully invested within the growth and inflation portfolios.
2. Technology-led global economy
Since April, clients’ growth portfolios have held a bias towards technology companies. In 22 May 2020 | Disruptive technology is the future, we wrote that while the economy is suffering from the crippling impact of COVID-19, technology companies are holding steady — even thriving.
Today, market skeptics who remember the technology boom/bust in the early noughties (2000 – 2003) are once again calling the end of the cycle of tech. But instead of trying to decide whether the share market rebound is rationale or not, what is truly important is the underlying fundamentals of companies. These fundamentals ultimately drive earnings and cash flow, which historically have driven share prices over the long term.
Boston-based MFS Investment Management (MFS) agree. “If we can keep answering the question ‘which companies will be stronger and significantly larger in the coming years and which will be weaker’ and worry less about the sector or region the company is in, we can determine whose share prices will perform the best".
The answer to the question right now is simple – technology. To survive a potentially challenging economic environment in the near term consumers are using technology and , many companies are investing in technology. This is an example of technology companies improving their ability to generate real earnings and cash flow through differentiated products and services.
If we follow the view of MFS and focus our time and effort on what drives share prices over time – earnings – then we believe technology will form a large part of clients’ portfolios for some time to come as technology companies’ ability to grow earnings accelerates.
3. Gold – two centuries of debt in one month
Gold is becoming viewed by many as the currency of last resort, particularly against a backdrop of rising geopolitical tensions, elevated United States domestic political uncertainty and a growing second wave of COVID-19 related infections.
Furthermore, the United States printed more money in June 2020 than in the first two centuries after its founding. Last month the United States budget deficit – US$864 billion in one month – was larger than the total debt incurred from 1776 through the end of 1979.
Why does money printing lead to higher gold prices?
The money that central banks are using to buy financial assets, as they are now, is created out of nowhere; it is not existent money that the central banks possess. Regardless, this gives commercial banks more money to lend to their customers, which pumps new money into the monetary supply. This is also referred to as quantitative easing (QE) and is inflationary.
Gold on the other hand, is a limited resource. You cannot ‘print’ gold! Therefore, as more investors demand a limited resource, it increases in value. Research from Fidelity suggests that most gold is held in central bank vaults or held as jewelry, so the investable market for gold is small. For example, SPDR Gold Shares – the largest and most liquid gold Exchange Traded Fund (ETF) – has just US$67 billion in assets under management. For perspective, the three largest S&P 500 index ETFs have US$1 trillion in combined assets.
Many global banks have recently revised their gold price expectations up. As gold increases in value, NZ Funds’ clients have benefited. Gold is not without its volatility but adds a unique uncorrelated return to the shares held within clients’ growth and inflation portfolios.
NZ Funds take an active approach to managing clients’ portfolios. Our approach enables us to better meet the objectives of each Portfolio and to take advantage of investment opportunities as they arise. In times of volatility, active management guides clients’ portfolios through cycles, especially during inflection points in the economic cycle. You can read more about our investment philosophy in 10 July 2020 | NZ Funds’ Investment Philosophy.
1. Remaining invested
As we wrote in 17 July 2020 | Half year review, most see the abysmal forecasts for economic growth and quarterly earnings and believe shares are disconnected from reality — inflated by government or central bank largesse.
Yes, there is a disconnect between economic data and share markets but it does not mean markets are irrational. They are doing what they have always done: anticipating future conditions after weighing the worries that headlines and data convey.
The market does not wait for the all clear signal in times of hardship, such as COVID-19. In fact, this is likely already priced in to expectations. A sustained share market climb with volatility seems much more likely than another steep downturn and we therefore remain fully invested within the growth and inflation portfolios.
2. Technology-led global economy
Since April, clients’ growth portfolios have held a bias towards technology companies. In 22 May 2020 | Disruptive technology is the future, we wrote that while the economy is suffering from the crippling impact of COVID-19, technology companies are holding steady — even thriving.
Today, market skeptics who remember the technology boom/bust in the early noughties (2000 – 2003) are once again calling the end of the cycle of tech. But instead of trying to decide whether the share market rebound is rationale or not, what is truly important is the underlying fundamentals of companies. These fundamentals ultimately drive earnings and cash flow, which historically have driven share prices over the long term.
Boston-based MFS Investment Management (MFS) agree. “If we can keep answering the question ‘which companies will be stronger and significantly larger in the coming years and which will be weaker’ and worry less about the sector or region the company is in, we can determine whose share prices will perform the best".
The answer to the question right now is simple – technology. To survive a potentially challenging economic environment in the near term consumers are using technology and , many companies are investing in technology. This is an example of technology companies improving their ability to generate real earnings and cash flow through differentiated products and services.
If we follow the view of MFS and focus our time and effort on what drives share prices over time – earnings – then we believe technology will form a large part of clients’ portfolios for some time to come as technology companies’ ability to grow earnings accelerates.
3. Gold – two centuries of debt in one month
Gold is becoming viewed by many as the currency of last resort, particularly against a backdrop of rising geopolitical tensions, elevated United States domestic political uncertainty and a growing second wave of COVID-19 related infections.
Furthermore, the United States printed more money in June 2020 than in the first two centuries after its founding. Last month the United States budget deficit – US$864 billion in one month – was larger than the total debt incurred from 1776 through the end of 1979.
Why does money printing lead to higher gold prices?
The money that central banks are using to buy financial assets, as they are now, is created out of nowhere; it is not existent money that the central banks possess. Regardless, this gives commercial banks more money to lend to their customers, which pumps new money into the monetary supply. This is also referred to as quantitative easing (QE) and is inflationary.
Gold on the other hand, is a limited resource. You cannot ‘print’ gold! Therefore, as more investors demand a limited resource, it increases in value. Research from Fidelity suggests that most gold is held in central bank vaults or held as jewelry, so the investable market for gold is small. For example, SPDR Gold Shares – the largest and most liquid gold Exchange Traded Fund (ETF) – has just US$67 billion in assets under management. For perspective, the three largest S&P 500 index ETFs have US$1 trillion in combined assets.
Many global banks have recently revised their gold price expectations up. As gold increases in value, NZ Funds’ clients have benefited. Gold is not without its volatility but adds a unique uncorrelated return to the shares held within clients’ growth and inflation portfolios.
NZ Funds take an active approach to managing clients’ portfolios. Our approach enables us to better meet the objectives of each Portfolio and to take advantage of investment opportunities as they arise. In times of volatility, active management guides clients’ portfolios through cycles, especially during inflection points in the economic cycle. You can read more about our investment philosophy in 10 July 2020 | NZ Funds’ Investment Philosophy.
Source: Bloomberg.
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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