As part of the Government’s oversight of KiwiSaver, it recently announced changes to the scheme. The changes take effect on 1 December 2021 and apply to those members who are invested with a ‘default provider’ and have been automatically enrolled in a ‘default fund’. They are big news in the industry, but to understand these terms and their importance, it requires a quick history lesson. In the mid 2000s, when the concept of introducing a new superannuation scheme was first mooted, the discussion focused on how to ensure it was successful. For many people this would be their first experience of being a diversified investor. The process by which prospective investors would select a fund manager and then a suitable asset allocation was seen as being critical to the scheme’s success. When the scheme was introduced in 2007 as KiwiSaver, the Government of the day set up a system where, if new investors enrolled in it without nominating a specific manager, they were rando...

The global commodities bull market has seen the price of many core commodities reach levels not seen since the mid-2000s. This has occurred across most core commodities including copper, iron, corn, soybeans and oil-based products. This raises the question as to whether we have entered a commodities supercycle that could last for years, or if we are just in a short-term bull market. This week’s Investment Insight looks at what is driving the current commodities bull market and the factors that could potentially see a multi-year period of high prices. What is a commodities supercycle? A commodities supercycle can be defined as a ‘decades-long, above-trend movement in a wide range of base material prices deriving from a structural change in demand’. ¹ We often see individual commodities entering bull markets where specific factors impact the supply and demand causing a price spike. Often these individual commodity bull markets are driven by a supply s...

As the world recovers from the pandemic and economies reopen, inflation is rising at accelerating levels. Inflation is expected to reach levels not seen for over 35 years which is having a significant impact on the investment landscape and potential returns. In this Investment Insight we look at why inflation is occurring, why it is important from an economic standpoint and how we are positioning our portfolios to benefit from this inflationary environment. What are the current inflation levels and what is causing it? In May, the reported United States Consumer Price Index (CPI) number was 5.0% (year on year) which is the highest level seen since 2008. Perhaps more startling is a measure followed closely by the United States Federal Reserve called ‘Core Inflation’, which removes the impact of more volatile food and energy prices. May showed a 0.7% month-on-month increase, or 8.4% on an annualised basis which is the highest level seen since the early 1980...

What do the New Zealand listed blue chip utility companies, such as Meridian and Contact Energy, have in common with some of the super growth stocks listed on the United States Nasdaq index such as Zoom and Virgin Galactic? At first look there are not a lot of similarities! The chart below (Share market valuations are at extended levels) provides a hint. While the companies that comprise the two indices are very different, there is an underlying relationship - they are both richly valued, as measured by their price to earnings ratio (P/E), relative to their own history and relative to other markets such as the S&P 500. One of the key factors that drives the valuation of all assets is interest rates; however, the importance it has on valuation varies. It tends to be of limited impact for a company that is generating strong current cashflow and has high margins, such as a casino share like Sky City. Many of the largest companies in the New Zealand share mark...

Low interest rates are creating challenges for investors who have relied on bonds to serve two purposes in a portfolio: first, as a source of steady income, and second, as a source of protection in periods of volatility. In the past, bonds have provided positive returns during bear markets, but during the COVID-19 market collapse, when interest rates were already low, the returns on bonds were also low. When interest rates are low, increasing a portfolio’s allocation to shares to boost returns is tempting. It would require the acceptance of considerably higher risk, especially given the valuation of shares is well above average. Accepting greater risk may be uncomfortable for investors with shorter-term savings objectives or lower risk tolerances. In our view, investors should instead maintain an exposure to shares and bonds but supplement this with other asset classes. Is the 60/40 portfolio dead? The challenge for investors is how to rethink the ...