Article written by Fisher Funds – 4th March 2021

A SNAPSHOT OF THE KEY FACTORS DRIVING THE PERFORMANCE OF MARKETS AND YOUR FUNDS LAST MONTH

All Fund returns below are after fees & before tax

New Zealand Growth Fund

The NZ Growth Fund was down -5.1% in February. Shares in global cinema software business Vista (+14%) gained as COVID infection rates fell and the vaccine rollout gained some traction. For example, cinemas in New York have been closed for almost a year but are beginning to re-open from March. Vista has weathered the storm and looked after its customers and is well placed to return to profitability as COVID subsides around the world and cinemas re-open.

a2 Milk (-16%) reduced its sales and profit guidance, pointing to persistently high inventory levels that are taking longer to clear than anticipated. The company is now reducing its sales to allow these to reduce to more normal levels rather than compounding the problem which is weighing on results.

Australian Growth Fund

The Australian Growth Fund returned 0.01% (net) in February.  This compares to +1.46% return for the ASX 200 Index (70% hedged into NZ$).

PWR Holdings (+23.3%), a niche manufacturer of cooling products delivered a strong earnings result.  This was driven by material growth in its burgeoning ‘Emerging Technologies’ products. This was tangible evidence that its culture of innovation and development is starting to gain real traction.  The company also benefited from a pick-up in Formula 1 and other motorsport category races in the second half of 2020. It has a sound foundation for further earnings growth in 2021.

Our bank shareholdings of Westpac (+12.7%), ANZ (+10.4%), NAB (+4.7%) and CBA (+0.1%) continued their upward trajectory as market updates revealed further reductions in COVID related repayment deferrals and improved underlying economic conditions.  The banks also benefitted strongly from the sharp rise in interest rates with the 10yr Australian Govt bond yield rising from 1.13% to 1.92% in the month.

In addition to financials, the materials and energy sectors benefitted strongly from the rise in interest rates.  Investors funded purchases of companies in these sectors by selling high growth or defensive businesses such as information technology and healthcare companies.  To this end, despite delivering credible financial results, portfolio companies like Wisetech (-12.8%), Resmed (-9.8%) and Sonic Healthcare (-7.7%) underperformed in the month.

International Growth Fund

The International Growth Fund ended the month up 6.1% versus the benchmark up 1.9%. Equity markets closed the month with positive returns, despite a drop towards the end of the month. The rotation in favour of value (+4.8%) and small caps (+5.0%) over growth (+0.4%) continued because of the expected post-pandemic normalisation and rising US bond yields.

Signature Bank (+31%), continues to perform well, as does the US banking index which was up +16% in February. Underpinning this rise is a shift higher in the US 10-year government bond yield, which ended the month at 1.42%, up from 0.91% at the start of the year.

The next top three portfolio performers are companies, that we classify as our ‘old habits return’ bucket. This group of businesses includes airplane componentry manufacturer, Hexcel (+23%), hotel brand franchisor Hilton (+22%), and conference and research provider Gartner (+18%). There is increased confidence that vaccination programs currently underway could achieve large-scale reopening of economies in the second half of the year.

Icon (-11%) was our largest detractor for the month after the announcement of the acquisition of competitor PRA Healthcare overshadowed strong quarterly earnings and guidance. This transaction, if approved by regulators and shareholders, would make Icon the second largest contract research organisation (CRO), providing clinical research services to pharma and biotech companies. Prior mergers of CRO’s have had some issues and we are realistic that there could be some bumps along the road. However, our initial view is that this transaction will better position Icon in this attractive and growing industry.

Property & Infrastructure Fund

The Property and Infrastructure Fund was down -0.5% in February.

Childcare property owner Arena (+7%) delivered a solid half year result and increased its full year dividend guidance. The importance of the sector in Australia was enhanced through COVID and the Australian Government stood by the sector with specialised subsidies. This is now being recognised in the market with childcare centres transacting at higher valuations.

Contact Energy (-16%) raised $400 million primarily to develop its Tauhara geothermal field. The announcement confirmed the strong economics of the renewable electricity project. Contact shares have fallen despite due to what we think are non-fundamental factors (relating to possible index changes) so this presented an attractive buying opportunity.

Income Fund 

A portfolio highlight this month was the fund’s position in Banca Monte dei Paschi di Siena – a leading Italian banking group. Investors reacted positively to the appointment of Mario Draghi as the Italian Prime Minister given the favourable leadership reputation he established during his recent role as President of the European Central Bank. We also held a call with the bank during February and remain supportive of their plan to boost capital levels via the injection of common equity.

Closer to home, our investment in the bonds of New Zealand Refining Company Limited also contributed positively to the fund’s. The management team updated the market regarding its plan to operate as an import terminal and in short, the business and its customers continue to make progress toward a commercial arrangement that is fair for all stakeholders. We remain confident the company’s infrastructure assets and staff will continue to play an important role in the country’s energy sector in the years ahead.

Rising long-term interest rates were the dominant theme across fixed income markets in February. Government bond yields in New Zealand and abroad spiked higher as investors reassessed future inflation rates given positive vaccination progress alongside continued monetary and fiscal policy support. This caused fixed income assets to broadly register negative returns this month. As previously communicated, we have been reducing the fund’s interest rate sensitivity (i.e. duration) over the past few months which has helped immunise the Fund from the negative impact of rising interest rates. Given the sharpness of this rise, we plan to maintain a flexible approach to managing the fund’s interest rate exposure.