Commentary from George Carter, Director of Nikko AM

The momentum in financial markets that we’ve discussed in recent monthly updates was largely unchanged during August with investors experiencing strong returns across different sectors. The New Zealand equity market was seen as a relative sluggard with a return of just under 2% for the month, whilst global equity markets extended by more than 6%, leading to headlines noting that by some measurements this was the strongest August since 1986 (perhaps an ominous portent). As a sign of just how low interest rates have fallen, we have the somewhat odd scenario that P/E (Price to Earnings) ratios are at all time elevated levels, and yet equity yields look as attractive against bonds as they’ve ever done. Taking this dynamic, along with the previously mentioned central bank actions, and the fact that current earnings are likely suppressed due to COVID related uncertainty, and it can be seen why investors continue buying into equities.

Within the fixed income portion of the portfolios, we saw rates in NZ push lower resulting in strong mark-market gains for investors which were further enhanced in the Nikko AM funds due to strong active management returns whereas global bond returns were the only sector for the funds which were negative for the month having had a strong 4 month run. The fund’s exposure to alternative sectors (the Option Fund and the Multi-Strategy Fund) contributed positively with returns of approximately 1% each which may look modest in the context of some of the recent equity movements, but are a pleasing source of a diversified return stream as well as exceeding long-term expected returns from those sectors. The recent addition of the ARK Disruptive Innovation fund has also proved to be a strong performer returning over 12% for the month and 34% for the past 3 months [note: for inclusion in balanced and growth funds only]

Notwithstanding the significant market falls earlier in the year, the 1 year returns for all the diversified funds are well ahead of our long-term expectations which says something about the strength of returns experienced since late March. Investors should expect these returns to moderate in future months.