On 13 May, NZ Funds sold and hedged its cryptocurrency exposure. We exited Bitcoin at approximately US$55,000 per coin (currently US$41,000) and Ethereum at approximately US$4,100 per coin (currently US$2,900). For growth category investors, the current exposure to cryptocurrency is now less than 0.70%. We are long-term supporters of the future of digital currencies but the volatility risks inherent in this asset class are acknowledged and we manage the positions actively. Active management approach to investing in cryptocurrencies Our approach to investing in cryptocurrency utilises several active management techniques. First, our investment decision is made following detailed research. We look to understand the asset class including its competitive advantages, total addressable market, growth opportunities and risks. On concluding that we see attractive upside returns compared to the potential downside, we will look to make an investment. Cryptocurrenc...

It is human nature to be fearful of missing out. Especially as other people experience short-term financial success. As we discussed in last week1s insight 07 May 2021 | All biases covered , behavioural biases such as confirmation bias and recency bias creep in and can stoke the flames of market exuberance. While some market participants are pointing the finger at newer asset classes, such as cryptocurrencies, it is within parts of the share market where assets have become irrational and overvalued. This includes high growth technology shares, unprofitable or early-stage technology shares, biotech shares and SPAC IPO shares (Special Purpose Acquisition Vehicles). The NASDAQ index is comprised of many high growth technology companies and provides a broad indicator for the valuations of these businesses. Currently the NASDAQ is trading at a valuation of 23x next year1s earnings. This compares to an average level of 16x over the past 10 years. This extended va...

With interest rates at their lowest levels in living memory and a government that seems determined to try to break New Zealanders’ love affair with property, I have noticed a significant increase in the number of people shopping for financial advice. As a profession, it is a great opportunity to help more New Zealanders, but from a consumer’s perspective it creates some challenges. The decision about who to work with can be confusing and difficult. The old truism that “you don’t know what you don’t know” comes to mind. Some years ago a research house developed a framework to allow comparisons to be made between investments. Its rationale was that using a consistent framework helps remove the biases that naturally creep into our judgement, especially when it comes to assessing people. Although it was designed to help compare specific investments, I believe that, with some modifications, the framework can be helpful when comparing financial advisers and their of...

If the COVID-19 market sell-off in early 2020, as countries locked down, spooked individual investors worldwide, then the recovery has made them uneasy. Today, share markets are at or above their pre-COVID-19 highs. Humanistic biases are leading some individuals to again react in a way that may not be in their long-term interests. A better approach is readily available. Not so Modern Portfolio Theory In 1952, Harry Markowitz published a breakthrough essay on Modern Portfolio Theory which showed the value of diversification and portfolio construction. This theory now underpins the investment approaches of most investment managers and financial advisers. It assumes investors process information in the same ‘numerically rational’ way and stay the course, remaining invested over the longer-term. But people are people and we react differently. During the COVID-19 market sell-off, many individual investors felt overwhelmed by fear and the potential magnitude of the d...

The world is starting on a decarbonisation journey where our reliance on hydrocarbons and carbon (coal) is being replaced by electrons and renewable energy. While some of the initiatives to address climate change can arguably be described as aspirational, others are legally binding. New Zealand is a signatory to the Paris Agreement – the global agreement on climate change. This sets the goal to limit global warming to below 2 degrees (preferably 1.5 degrees) above pre-industrial levels. In New Zealand’s case we have committed to reduce greenhouse gas emissions by 30% below 2005 levels by 2030. Unless there are some very significant technological breakthroughs in carbon capture/storage, the heavy lifting to achieve these goals will have to come from renewable energy and electrification as energy is currently the largest emitter of carbon globally, accounting for 73% of emissions in 2017. Hence the move from hydrocarbons to electrons. This transition means big ...