As we move on to the final throes of the year the focus across global markets is increasingly on the trade-off between inflation and growth. In this Investment Insight, we outline the key themes that we believe will test markets and drive client portfolios in 2022. Inflation abounds Inflationary pressures remain stickier than many had believed. The United States Consumer Price Index (CPI), a key measure of inflation, rose to 6.8% in November and core CPI increased to 4.9%, a 30-year high. With inflation clearly more persistent than many had anticipated, a clear theme for 2022 is tightening financial conditions i.e. increasing interest rates. Global financial conditions remain extremely loose. Indeed, higher actual and expected inflation has kept real interest rates in many countries deeply negative. This naturally encourages investors to move further out on the risk spectrum. This will change in the coming year. Over the last month, the United States Federal Re...

Over recent weeks I have found myself wondering how many letters there are in the Greek alphabet. The answer is twenty-four and it turns out Omicron is the fifteenth letter. It is of course Greek letters that are assigned to COVID-19 variants as they emerge. It was news of this latest variant, Omicron, that has contributed to recent Global share market volatility. I like to finish my columns for the year with a light-hearted article in December, but it seems the Greeks have disrupted my plans. Investment markets have been 'climbing a wall of worry' as the spectre of a new variant that could require further lockdowns plays on investors' minds. To qualify as a correction, a share market must fall by 10% or greater. I have lost count of the number of market corrections that I have observed alongside my clients. My observation is that, in retrospect, there is a sameness about all of them, but in the heat of the moment they all feel very different. The sameness ...

As inflation and interest rates increase, bond portfolios have experienced volatility. Although market uncertainty can be challenging, it does present opportunities for investors. In this Investment Insight we are going to step back and discuss what determines the return investors receive from a bond. A bond is the same as any other asset in that its return is comprised of two components – the income it generates and the capital value of that asset. The first of these is simple to determine – the income you receive from a bond is the (typically fixed) coupon that a bond pays quarterly or semi-annually. It is the capital value of a bond that may lead to confusion. Its value can move in a way that is not initially obvious. A good way to describe the change in capital value is to use property as a comparison, as this is an asset class most people are familiar with. As well as being something we can own, a property can generate income through rent...

Investment performance update During the financial market rebound, NZ Funds acquired several positions which we expected to benefit from the world returning to normal. As the market rebounded these paid off and generated above index returns for the year ended 31 December 2020. Gains continued into 2021 with one of the strongest starts to the year NZ Funds has seen. However, from 1 April onwards positions became more volatile. This volatility led to most Portfolios giving up their gains from earlier in the year. While we have retained the capital gain over the index for 2020, to align the Portfolios more closely to their benchmark for the remainder of 2021, and for 2022, we have substantially reduced risk, acknowledging the current uncertainty around interest rates and Omicron. We remain strongly of the view that a well-diversified portfolio, which contains assets which profit from rising inflation and interest rates, will be more resilient throu...

"As we discussed two weeks ago in our Investment Insight about Allbirds , we’re always looking for opportunities to buy shares in innovative companies at the IPO stage. This is why we’ve just invested in Iris Energy’s IPO on the NASDAQ. Iris Energy is a Bitcoin mining company with a difference: it uses only renewable energy to power its mining operations. "The total size of the Bitcoin mining industry in 2021 is estimated to be US$16bn, with significant scope for growth in the coming years. Iris Energy represents an important and necessary step forward for this industry: a future where crypto mining operations can make a meaningful difference to carbon emissions and to the communities they operate in..." Read more about Bitcoin's energy consumption and the investment case for Iris Energy below.

I wonder where we would be without acronyms; probably using more ink but perhaps better informed. The acronym of the moment has been, of course, COP26 – the trendy acronym for the United Nations (UN) climate change conference, recently held in Glasgow. It was the 26th annual UN 'Conference of Parties' which began in Berlin in 1995. In simple terms. the purpose of the series of conferences has been to collectively agree on the actions required to limit the impact of climate change. Cynics have suggested that the empty promises resulting from past conferences have exacerbated, rather than reduced, the 'hot air' problem. However, in the wake of the global and existential threat that is COVID-19, the global community is awakening to the reality that a collective response is the only way to deal with a truly global threat. Retreating to 'your corner' when you live on a sphere doesn't really work! The Glasgow conference set a number of objectives, but it i...

"At NZ Funds, we have a modern, diversified approach to investing. Diversification is one of the key tenets of finance. It improves risk-adjusted returns over time and is often referred to as the only ‘free lunch’ in financial markets. Put differently, the inability to diversify leads to inferior risk-adjusted returns. "We take this approach so we can find long-term growth for our clients, wherever it may be in financial markets. But it is also about preserving as much of our clients’ capital as possible, especially when markets in traditional asset classes go through big cyclical shifts. This is exactly what we’re currently witnessing in global bond markets with the rise in interest rates and inflation. We use futures contracts to manage this shift..." Read the full story about why bond markets are falling and are expected to fall further below.

"At NZ Funds, we’re constantly looking for innovative companies to invest in, particularly at the IPO (Initial Public Offering) stage. Investing at the 'ground floor' level gives our clients the greatest chance of benefiting from long-term growth in company share prices. It’s rare to be presented with the opportunity to back a new NASDAQ listing that also has strong New Zealand connections. This is one of the reasons we were delighted to make a successful bid for shares in Allbirds (NASDAQ: BIRD), which has grown from a Kickstarter campaign by its Kiwi cofounder to a global footwear and apparel company with a US$3.1 billion market capitalisation..." Read the full story about NZ Funds' IPO investment in Allbirds below.

In the first Investment Insight of each month, we will look back at the key themes and trends for the previous month; and forward, setting out our views on what will affect client performance in the months to come. Persistent supply chain constraints are weighing on the path of the recovery and feeding fears of longer lasting inflationary pressures. However, the growth outlook remains firmly underpinned by huge levels of pent-up demand, solid corporate balance sheets and robust investment intentions. Meanwhile, income assets and property are under pressure from rising interest rates. Those who cannot manage duration risk are already suffering large negative returns in their income assets. October was a tale of two halves, but we retain our conviction as we fast approach the end of 2021. Interest Rates October proved to be an eventful four weeks for interest rates. Markets have been wary of the spectre of rising inflation for some time. However, a ru...

NZ Funds was the first fund manager to add crypto to KiwiSaver. On 8 September 2021, Parliament’s Finance and Expenditure Select Committee heard evidence as part of their inquiry into the current and future nature, impact, and risks of cryptocurrencies. CEO Michael Lang presented the business case for including cryptocurrencies as part of a well diversified investment portfolio. The document accompanying NZ Funds’ submission can be read  here . Watch the full video of the Select Committee session  here . Alternatively, please read NZ Funds' full Submission to the Finance and Expenditure Committee below.

The Polar Vortex is a large area of low pressure and cold air around the Earth's North Pole. It's a long-documented weather pattern that typically goes unnoticed by those of us not living in the Arctic Circle, except for when occasionally the air pressure and winds shift. In this Investment Insight, we talk weather. We discuss why climate change induced weather events are having a direct impact on increasing energy costs. Finally, we explain how weather will influence the returns generated by positions we hold in natural gas and heating oil. What is a Polar Vortex event? When stable, the Polar Vortex remains closer to the North Pole, constrained by a strong polar jet stream which keeps the cold air from moving into the mid-latitude continents below i.e., Europe, United States, China (the 'Continents'). The polar jet stream is sustained by a temperature difference between the Continents and the polar region. When the temperature difference across the j...

Many investors are worried that another share market crash is just around the corner, and this prevents them from taking the step of investing at least a portion of their savings into the share market. While sudden declines are risks that need to be faced occasionally in investment markets, they are less frequent than many anticipate. What investors should be worried about is a more real and pressing risk lurking in assets they see as being low-risk. This is the impact of increasing interest rates, which will cause a slow but prolonged decline in the value of most bonds. The sudden global shutdown in March and April 2020 saw governments announce record recovery packages and some of the largest budget deficits since World War II. At the same time central banks slashed interest rates to zero. These actions aimed to support economies and encourage growth, and while the pandemic has continued for longer than many had envisaged, these actions have had the desired effect. Ec...