NZ Fund Managers [Archive] - Sharetrader Forum

Snoopy

28-04-2022, 09:40 AM

Would appreciate thoughts / recommendations on NZ Fund managers. Was thinking of Milford but open to helpful comments etc.
Cheers

Hi there... I am looking to put some money with a NZ or Australian based fund, but.. i refuse to put my money with some turkey who has his main interest being to ensure he sticks close to index or ensure he doesnt have portfolio position such that he wont be too far out of line with index. I am looking for someone who wants to achieve -absolute returns- for the investor... ie; actually managing it, rather than just accumulating it.. I have no time for someone who charges you for managing your money, then parks it against index, loses some of it, then justifies the losses by saying the index lost money as well -- or even worse ' we are legends because the index lost 10% and we only lost 9%'. I want a proper fund manager who has a set of nuts... If anyone knows of any funds that have a goal of achieving absolute returns I would be interested to hear....
cheers

I am doing my own investigation into NZ based fund managers and find myself thinking along the same lines as GBPNZDBASISTRADER. So I thought I would share some of my thoughts on this thread. Are Milford the answer to Jack's question? They could be.

Milford have three share based funds with a track record:

1/ 'Global Equity Fund'

Investment Theme Almost entirely invested in non Australasian shares. From the disclosed holdings they are are heavily biased towards the NYSE and the NASDAQ. The only disclosed holding that does not fall under that umbrella is LVMH. 'Moët Hennessy Louis Vuitton', commonly known as LVMH, is a French holding multinational corporation and conglomerate specializing in luxury goods, headquartered in Paris. I have heard of those brands but know nothing about the company. So maybe it is evidence of thinking outside the index box?

Currency Hedging Policy0%, 50%, 100% (mid figure is neutral exposure)

Principal HoldingsThree of the funds top four holdings (Microsoft, Alphabet (was Google) and Apple) also top the NASDAQ capitalisation list. But absent from a top ten holding position is NASDAQ number 3, Amazon and NASDAQ number 4 Tesla. Those were interesting omissions, I thought.

Distribution over FY2022None

Total value of fund@31-03-2022 was $886.0m

Base management fee = 1.35%

Fund risk rating '5' (where '1' (Cash) is the least risky and '7' the most risky)

2/ 'Dynamic Fund'

Investment ThemeAustralian mid-cap shares.

Currency Hedging Policy-20%, 0%, 50% (mid figure is neutral exposure)

Principal holdingsCollins Foods (A YUM Brands franchisee), Credit Corp Group, Metcash, IPH Limited (deals with legalities of Intellectual Property), Contact Energy (looks like the Aussies have adopted Contact as their own), Seven Group Holdings, Carsales.com and Lifestyle Communities (retirement village owners).

Distribution over FY2022None

Total value of fund@31-03-2022 was $778.7m

Base management fee = 1.35%

Fund risk rating '6', but is now closed to new investment.

3/ 'Trans-tasman Equity Fund'

Investment ThemeStock picking across the NZX and the ASX

Currency Hedging Policy-10%, 0%, 60% (mid figure is neutral exposure)

Principal HoldingsF&P Healthcare, Mainfreight, Ebos, CSL Limited, Infratil, BHP, CBA, NAB, Contact Energy and Auckland International Airport

Distribution over FY20223.0cpu (based on a unit price of 3.7875 @05-05-2022 and a tax rate of 28%, this is a gross yield of 1.10%)

Total value of fund@31-03-2022 was $811.5m

Base management fee = 1.05%.

Fund risk rating'5'

-------------------

Miford's statement on Investment Policies and Objectives is here:
https://milfordasset.com/wp-content/uploads/2017/11/Milford-Investment-Funds-SIPO.pdf

An omission from the Milford line up is that there is no purely New Zealand based share fund. What does that omission indicate I wonder? (Edit later: In the video presentation below (post 3), it was mentioned that Milford now have too large a quantum of funds to manage to allow them to operate a pure NZ market based share fund).

If I add Milford's 'Investment Leadership Team' to Milford's 'Investment Team' I get a total of 33 people.

SNOOPY

Snoopy

28-04-2022, 02:59 PM

I am doing my own investigation into NZ based fund managers and find myself thinking along the same lines as GBPNZDBASISTRADER. So I thought I would share some of my thoughts on this thread. Are Milford the answer to Jack's question? They could be.

Interesting Q&A session video from Milford here from June 2021.

https://www.youtube.com/watch?v=jPu8RXF47gU

At 8.5minutes Felix Fok (Global Asset Manager) talks about selecting companies that go into the Active Growth Fund. The key points articulated are:

1/ Look for upside and opportunity for earnings growth.
2/ Look for companies where customers and strong and in a favourable spot in the economic cycle.
3/ Ask yourself a basic question: Why does this company exist? What is the job this company is doing for its customers?
4/ Check who are the competitors.
5/ How are the shares priced in terms of valuation, compared to other parts of the market? Then make a risk/reward judgement.
6/ Direct investments towards companies not so affected by rising interest rates (e.g. banks).
7/ Integrate ESG (Environmental, Social and Governance) into every investment decision: Consider emissions, and social responsibility across supply chains. ESG risks do not have to be eliminated, but do have to be managed well. Will not invest in tobacco manufacturers, companies involved in a broad range of weaponry or the processing of whale meat. Disclosure within companies is very important.
8/ Risk is measured by 'valuation of shares' (current value verses long run estimates) 'sentiment' (are investors getting carried away) and what are the 'catalysts on the horizon' (what will cause people to change their mind). E.G. took some money off table in January and February 2020 when the Covid-19 catalyst appeared and before the market dipped.

Other comments of note:

9/ Struggling to invest meaningful amounts in NZ companies due to growing size of Milford. Australia now thought of as a 'home market'.
10/ Overexposed (deliberately) to technology companies in Global Equities, based on expected value at a future date. Technology is 'fundamentally exciting'.
11/ Think traditional ICE vehicle makers will have a tough time. Investing in semiconductors as some of the fundamental building blocks of EVs. Also keen on autonomy. Not picking Tesla specifically, as not sure which of the car makers will come out in front. Have a minimum market cap for investment, so can't invest in very small start ups.
12/ Bitcoin and other cryptocurrencies intriguing, but Milford at the 'continue to monitor' stage. Has too many unknowns and question marks. Cryptocurrencies can also be emissions intensive, as computers mine the pure data. Invested in Paypal that allows investors to pay for items in cryptocurrency via a Paypal wallet. Also invested in 'Intercontinental Exchange' in the USA, which has a subsidiary providing futures trading and options in cryptocurrency. Invested in 'Taiwan semiconductor' which helps manufacture specific cryptocurrency mining chips.
13/ Regard the retirement sector as a proxy for investing in the NZ property market. Have reduced exposure in this sector in anticipation of a moderating property market.

SNOOPY

Muse

28-04-2022, 04:32 PM

Interesting Q&A session video from Milford here from June 2021.

https://www.youtube.com/watch?v=jPu8RXF47gU

At 8.5minutes Felix Fok (Global Asset Manager) talks about selecting companies that go into the Active Growth Fund. The key points articulated are:

1/ Look for upside and opportunity for earnings growth.
2/ Customers and strong and in a favourable spot in the economic cycle.
3/ Ask yourself a basic question: Why does this company exist? What is the job this company is doing for its customers?
4/ Check who are the competitors.
5/ How are the shares priced in terms of valuation, compared to other parts of the market? Then make a risk/reward judgement.
6/ Direct investments towards companies not so affected by rising interest rates (e.g. banks).
7/ Integrate ESG (Environmental, Social and Governance) into every investment decision they make: Emissions, social responsibility across supply chains. ESG risks do not have to be eliminated but do have to be managed well. Will not invest in tobacco manufacturers, companies involved in a broad range of weaponry or the processing of whale meat. Disclosure is very important.
8/ Risk is measured by 'valuation of shares' (current value verses long run estimates) 'sentiment' (are investors getting carried away) and what are the 'catalysts on the horizon' (what will cause people to change their mind). E.G. took some money off table in January and February 2020 when the Covid-19 catalyst appeared and before the market dipped.

Other comments of note:

9/ Struggling to invest meaningful amounts in NZ companies due to growing size of Milford. Australia now thought of as a 'home market'.
10/ Overexposed (deliberately) to technology companies in Global Equities, based on expected value at a future date. Technology is 'fundamentally exciting'.
11/ Think traditional ICE vehicle makers will have a tough time. In vesting in semiconductors as some of the fundamental building blocks of EVs. Also keen on autonomy. Not picking Tesla specifically as not sure which of the car makers will come out in front. Have a minimum market cap for investment, so can't invest in very small start ups.
12/ Bitcoin and other cryptocurrencies intriguing but Milford at the 'continue to monitor stage. Has too many unknowns and question marks. Cryptocurrencies can also be emissions intensive, as computers mine the pure data. Invested in Paypal that allows investors to pay for items in cryptocurrency via a Paypal wallet. Also invested in 'Intercontinental Exchange' in the USA, which has a subsidiary providing futures trading and options in cryptocurrency. Invested in 'Taiwan semiconductor' which helps manufacture specific cryptocurrency mining chips.
13/ Regard the retirement sector as a proxy for investing in the NZ property market. Have reduced exposure in this sector in anticipation of a moderating property market.

SNOOPY

interesting - and thanks for sumarising that.
Not with milford or any of their peers but always have regarded them fairly well.
I'd rather invest in milford itself. fund manager economics - particularly those exposed to & able to retain default kiwisaver status - are sublime.

Snoopy

28-04-2022, 06:53 PM

10/ Overexposed (deliberately) to technology companies in Global Equities, based on expected value at a future date. Technology is 'fundamentally exciting'.

There is a price to pay for 'excitement'.

Share Price 28-04-2022PE ratioPrice Change 01-012022 to 28-04-2022

Microsoft$282.3330.13-15.4%

Alphabet$2,285.8920.37-21.2%

Apple$156.5725.99-14.0%

These are big hits for three of the four largest investments in the Milford Global Equity Fund, representing 12.27% of the fund. as at 31-03-2021. Although I do note that the whole NASDAQ index is down 21.12% from the start of the year. I don't follow any of these shares. But those PE ratios are historical, and forward forecast PEs are likely higher. So I don't see Microsoft, Alphabet or Apple as 'cheap' - even now.

Annual return to 31-03-2022 was 5.66% after fees and taxes, down from 24.14% just 3 months earlier! Clearly the first quarter has been unkind to Milford Global Equities! Rising interest rates can deal a double blow to growth stocks, firstly due to a present day reduction of earnings, and secondly due to a rising discount rate affecting the present value of future earnings.

The fund rocketed by 37.36% over YE31-03-2021, against a long term average growth rate of 10.88% p.a.. So I don't think it is out of line to say that a correction is overdue. But is the correction finished?

SNOOPY

Snoopy

28-04-2022, 08:53 PM

1/ 'The 'Global Equity Fund' which is almost entirely invested in non Australasian shares. Base management fee is 1.35%.

2/ 'Dynamic Fund' concentrates on Australian mid-cap shares. Base management fee is 1.35%.

3/ 'Trans-tasman Equity Fund'. Base management fee is 1.05%.

I am having a hard time chasing down what the performance fees are for the above three Milford funds. I found the document below, which is a few years old.

https://milfordasset.com/wp-content/uploads/2017/11/Milford-Kiwisaver-Product-Disclosure-Statement.pdf

My reference page is page 15 of the above document.

It looks like for the 'global equity fund', the hurdle is now the MCSI world index, with net dividends reinvested. Gains must be adjusted assuming the currency is 50% hedged to the New Zealand Dollar. Anything achieved above that hurdle and 15% of the over-achievement goes to the manager. There is no upper dollar limit on the size of the bonus.

For the Dynamic fund, the bonus performance hurdle is set at the ASX small industrial accumulation index, with gains hedged 100% to the New Zealand Dollar. Anything achieved above that hurdle and 15% of the over-achievement goes to the manager. There is no upper dollar limit on the size of the bonus.

For the trans Tasman Equity Fund, the hurdle is a mixture of the NZX50 gross index (50%) and the ASX200 accumulation index 100% NZD hedged (50%,). Anything achieved above that hurdle and 15% of the over-achievement goes to the manager. There is no upper dollar limit on the size of the bonus.

This reference document was downloaded as a link of the Milford website, so I assume the reference numbers have not changed since July 2018.

SNOOPY

Snoopy

28-04-2022, 09:41 PM

Snoopy

29-04-2022, 11:37 AM

Fisher Funds have a 'concentrated approach' to their investments. A fund will typically hold just 15-20 different shares at any one time. This is consistent with a non-index tracking approach.

Here is a link to the latest webinar put on by Fisher Funds (broadcast February 2022)

https://www.youtube.com/watch?v=VjkVw8EDm6s

Trying to untangle the thinking behind how Fisher Funds operates, I make the following observations from this webinar, on the 'investment tactics' of Fisher Funds. Most of the strategy statements are from Ashley Gardyne, the Chief Investment Officer at Fisher Funds.

1/ Invest in the long term story. See market volatility as an opportunity.
2/ Inflation close to a near term peak, as a result of reducing spending by governments and cooling consumer markets all around the world. So interest rates may stop rising sooner than you think.
3/ Traditional retailers like WHS tend to be price takers operating in a competitive market, and can't put prices up too much ahead of competitors. But cost of merchandise shipping and labour is going up. So traditional retail is not favoured.
4/ Look for companies with 'pricing power', like some of the infrastructure companies and those in the software space (like Xero).
5/ Interest rate rises are only a problem if they rise further than the expected level of interest rate rise already priced into the assets you want to invest in. The consensus built into the market already is that the official cash rate will be 2.6% by the end of the year.
6/ Market investment themes going forward: End of 2021 - very few great businesses at attractive investment price levels. Six weeks on, technology companies being sold down are presenting the best opportunities. Have added Netflix on the recent sell off, Microsoft for the first time and Salesforce.com. Opportunities are there but you have to be picky as well. Happy to hold Meta (facebook) through the recent downturn as Fishers believe in their ability to fight off competition from Tik Tok. Long term Fishers see the trend away from traditional TV to streaming video on demand (facebook is going more into the streaming space) is intact.
7/ Banks in a good position as mortgage rates are rising faster than term deposit rates, caused by homeowners wanting to fix their mortgage at higher than today's prevailing floating rates to avoid paying even higher fixed mortgage rates in the future.
8/ Own Ryman and Summerset. While acknowledging the sell off in the wider property market could have a negative effect on retirement village earnings, the fundamental tailwinds mean many years of growth ahead for both these investments. Reallocated their retirement sector sector investment in favour of Summerset who are executing better.
9/ Oil and gas sectors are performing well.
10/ Don't try and pick sectors that are performing well over a short period of time. Maintain a broad portfolio across a range of different sectors, and try to pick companies in each of those sectors that will do better than average over the long run.
11/ Think 'company by company', rather than looking at whole country sharemarket movements.
12/ Like holding 'healthcare' companies and 'low end retailers' as defensive assets in a recessionary environment.
13/ Avoiding investing in times of crisis (war and pandemics) is very difficult, so do not consider the Geopolitical environment. Investments in good companies will eventually win out.
14/ Increased in growth asset percentage holding from 55% to 60% in Fisher's balanced fund, to offset effect of lower interest rates.
15/ Keen on 'cell tower' and 'data-centre' infrastructure assets.
16/ Crypto Assets: Fisher invest in high quality growing businesses, but they must be already profitable. and leaders in their industry. This reduces the volatility and downside risk. Will wait until they can identify clear winners before diving in. Not clear what crypto and web3 assets will be the winners, so intend to remain on the sidelines for now.

SNOOPY

Snoopy

29-04-2022, 09:04 PM

The Fisher Funds fee hurdle rate triggering bonus payments for managing growth assets is:

"The official cash rate" (OCR) + 5%.

On 13th April 2022 the OCR was increased to 1.5%. This means a Fisher Growth fund must earn over 1.5%+5%=6.5% per annum before a bonus payment becomes due to fund management.

https://fisherfunds.co.nz/investment/kiwisaver/fisher-funds-kiwisaver-scheme/fees-expenses/

As you can see from the link above, the following fee information specifically links to the kiwisaver funds. There is no separate fee information that I can find disclosed for non kiwisaver Fisher funds. So I assume the fee structure is the same for both kiwisaver and non-kiwisaver managed funds.

Fisher pockets 10% of the returns above the 'performance hurdle' of the investment (leaving the investors with 90%). However the absolute value of this bonus is also capped to be no more than 2% of the total asset value of the fund. Furthermore, there is a clause in the bonus payment rules that says the trigger level for hurdles being set at a new high must be 'grandfathered'. That means if:

1/ a share fund does well and a bonus is paid out, AND
2/ then it falls back,

THEN the 'grandfathered' clause means that if it rises again to its previous high level, the fund managers do not get an 'extra bonus payment' for making up the same ground twice in a later time period.

SNOOPY

Snoopy

30-04-2022, 12:15 PM

'Kiwiwealth' is the fund management business of 'Kiwibank' and emerged out of the former 'Gareth Morgan Investments'.

I finding it a lot harder to prise out information on this manager than the other two I have reviewed so far. There seems to be only one sharemarket investment option called the 'growth fund'. This has a mandate to invest 100% of the money invested inside it into shares, with the aim of beating a target of having 85% of the money invested in shares and 15% invested in cash and fixed interest.

The report on the last full year reporting period publication is here.

https://www.kiwiwealth.co.nz/assets/Documents/KiwiSaver/performance/Growth/Growth-June-2021.pdf

Growth Fund

Investment ThemeThe fund aims to invest 80% into the sharemarket and 10% each into NZ cash and fixed interest. Of note is that a core objective of the fund is to have no equity investment in Australia or New Zealand - nothing at all. In fact, the fund declares a reality of 6.8% of the funds under management invested in Australasian Equities.

Principal InvestmentsMicrosoft Corp, Apple Inc, Alphabet Inc (Google), Amazon, Facebook and ASML Holding NV (Computer Chip manufacturing technology). Also interestingly, two hedge fund investments.

1/ Two Trees Systematic Global Macro Fund – UCITS, takes long and short positions, primarily through futures and forwards, in global equity indices, bond, currency, commodity, and volatility markets.
2/ GMO Systematic Global Macro Trust, seems to be an Australian headquartered hedge fund for which little operational information is available.

Distribution over FY2022None

Fund size$2,206m (@30-06-2021)

Currency Hedging Policy
Hedge 70% of returns in foreign currency back to the New Zealand dollar (which covers 87.5% of the targeted foreign investment).

Total annual management fees = 1.11% of the fund's value

Fund risk rating'4'

Kiwiwealth's investment team numbers 15 people, to which I would add the CEO, COO and CIO to make a total of 18 people.

SNOOPY

Snoopy

30-04-2022, 03:10 PM

Kiwiwealth don't seem to do a regular Q&A member session like Fishers and Milford. Nevertheless I have tried to glean some of their investment tactics from their reports. The official statement on policies and investments is below:

https://app.companiesoffice.govt.nz/disclose/fmc-register/viewInstance/resource.html?node=W1019&drmKey=3f30212e18791759&id=0b027646737e9b07ae628628d1a391b3f4928a58c0541d9 5

The following report below was posted on 21st November 2021.

https://www.kiwiinvest.co.nz/investment-insights/a-retrospective-on-2021

1/ Look for liquidity and quality, and use diversification.
2/ Go for ESG companies that face lower regulatory risks and have a stronger social license to operate.
3/ Have removed carbon intensive companies from portfolios.
4/ Particular standout sectors for investment: Discount retail (Costco, Target and Walmart), Semiconductor value chain (companies behind the computer chips that go into phones, cars and smart refrigerators) and US banks (JP Morgan, Morgan Stanley and Bank of America)
5/ Have been taking profits on some of the themes that have done well during the pandemic (in particular snack foods and discount retailers).
6/ Investing towards next stage as economies recover (railroads, construction material companies and banks).

The latest update from February 2022 (not a video) is here:

https://www.kiwiinvest.co.nz/investment-insights/2021-a-year-in-review

7/ Rapid increases in interest rates, threatens the frothy valuations we see in certain Growth stocks. On the other hand, the combination of higher rates and more persistent inflation could spell good news for Value investors, those who favour stocks trading at lower multiples.
8/ Looking closely at trends in energy efficiency, efforts to electrify the global car fleet, and natural resource shortages.
9/ The withdrawal of government financial stimulus will present a challenge for some assets.

SNOOPY

Snoopy

30-04-2022, 06:47 PM

Muse

01-05-2022, 10:04 AM

Snoopy

02-05-2022, 09:36 PM

$23.3m & $16.6m in performance fees paid across FY21 and FY20, respectively. Big sums. Note 1 page 28.
https://app.companiesoffice.govt.nz/companies/app/service/services/documents/24F67C80B5A7F087059381175A8E7B22

might have to go for a few years without any performance fees thanks to their high watermark. poor fellas and gals.

I take note of the way Fishers disclose their 'comparative information'.

As an example I look at their international growth fund
https://fisherfunds.co.nz/unit-prices-and-performance/fund-performance-charts/InternationalGrowthFund

The above 'linked to' comparative graph shows the actual performance of their 'International Growth Fund' to the comparative 'International Equity Composite Index'. As it happens, their international growth fund shows a nice premium to their comparative reference index over time. However, my reading of the investor documentation is that 'bonus' payments to Fishers are not related to this difference. Instead the 'performance hurdle' for all Fisher funds is 'OCR + 5%'. (NZ weighted OCR over comparative period: = 0.25% => OCR + 5% = 5.25%)

The Fishers benchmark policy for international shares is to hedge 50% to the NZD (Refer Paragraph 3.3.6, Fisher Funds Investment Series, Statement of Investment Policy and Objectives, 25th March 2022).

Let's take the example of the year 1st April 2020 (NZD1 = USD0.6054) to 31st March 2021 (NZD1=USD0.7133) to see how the numbers work out.

If the 'International Equity Composite Index' is actually the MCSI world index
https://www.msci.com/our-solutions/indexes/acwi
then that index rose from 442.35 to 680.47 in USD terms over the year ending 31st March 2021.

The base annual fund fee is 1.42% of the asset value (refer https://fisherfunds.co.nz/assets/fact-sheets/International-Growth-Fund-Fact-Sheet.pdf)

Putting all this information together:

Year 01-04-2020 to 31-03-2021Starting PositionEnding PositionGain

Unhedged Gain 'MSCI World Index'442.35/0.6054680.47/0.7133+30.6%

Hedged Gain 'MSCI World Index'442.35680.47+53.8%

Composite Reference Gain 'MSCI World Index' (50% Hedged, 50% Unhedged)+42.2%

Comparative OCR Fisher Fund Reference Mark+5.25%

Fisher Growth Fund after fees (Cumulative value $10k invested from 3 year chart)$10,165$15,417+51.7%

Table Notes
1/ Fund performance figures are after deductions for charges but before tax.
2/ Average value of funds under management over period = ($10,165m+$15,417m)/2= $12,791

---------------------------

The above performance table is all very well. But what we want to know is the growth in the 'International Growth Fund' before fees, so we can get a real handle on what the fees are. This figure is not given. However, if we declare 'F' as the unknown base fee and 'B' as the unknown bonus fee (both measured in the same 'dollar units' as displayed on the fund performance chart), then there is enough information given to allow us to solve this problem. It becomes an exercise in algebra and solving two simultaneous equations.

Base Fee = F = 0.0142x(15,417+F+B) <=> 70.4F=15,417+F+B <=> 69.4F = 15,417 + B <=> B=69.4F-15,417 (i)
Bonus Fee = B = 0.1x( (15,417+F+B)-(1.0525x10,165) ) <=> 10B = 15,417+F+B - 10,699 <=> 9B = 4,718 +F (ii)

Substituting the expression for B from equation (i) into equation (ii) we get:

9x(69.4F-15,417) = 4,718 +F => (625-1)F = (138,753+4,718) => F=230

Putting this value for F back into equation (i) we can now calculate B

B=69.4x(230) - 15,417 = 545

Double Check

Base Fee = 230 / (15,417+230+545) = 1.42% (Check as correct)
Bonus Fee = 545 / (15,417+230+545) = 3.37% (Ouch! No wonder Fisher Funds did not want to disclose this!)

I do note though, that in recent years, Fishers have revised their bonus policy, so that the bonus fee never comes out as more than 2% of the gross value of the fund. That means the total fund fee for the period under consideration was 'only' 1.42%+2%=3.42%. That does sound high, even though we were dealing with an unusual period which started from the 'near the post Covid-19 shock low' and ended with a substantial market recovery.

The total value of the 'International Growth Fund' stood at $98.8m as at 31-03-2021. So this implies 'management' plus 'bonus' fees of
($98.8m x 0.0142=) $1.4m and ($98.8m x 0.02=) $2.0m respectively.

The performance fee figure quoted by FM of $23.3m was across all funds managed by Fisher Funds. The particular fund example that I have looked at is likely one of the worst affected by performance fees. Was that excessive over such an exceptional year? Fisher Funds have not been reappointed as a default provider for Kiwisaver funds at the latest reset which took effect from December 1st 2021. Perhaps therein lies the answer?

SNOOPY

Muse

04-05-2022, 11:20 AM

The performance fee figure quoted by FM of $23.3m was across all funds managed by Fisher Funds. The particular fund example that I have looked at is likely one of the worst affected by performance fees. Was that excessive over such an exceptional year? Fisher Funds have not been reappointed as a default provider for Kiwisaver funds at the latest reset which took effect from December 1st 2021. Perhaps therein lies the answer?

SNOOPY

nice work.

as an aside - check out those margins...npat as a % of revenue - 40% across both years (more or less). Not gross profit margin, EBITDA, not EBIT, not PBT margin....but good old fashioned statutory npat as a % of revenue.

don't think i've ever seen a business with such high margins.

bugger all capex, bugger all working capital....the perfect cashflow business. all npat paid out as dividends.

losing kiwisaver default will hurt - will be interesting to see how much default FUM transfers out

Snoopy

04-05-2022, 05:50 PM

Check out those margins...npat as a % of revenue - 40% across both years (more or less). Not gross profit margin, EBITDA, not EBIT, not PBT margin....but good old fashioned statutory npat as a % of revenue.

don't think i've ever seen a business with such high margins.

bugger all capex, bugger all working capital....the perfect cashflow business. all npat paid out as dividends.

losing kiwisaver default will hurt - will be interesting to see how much default FUM transfers out.

Yes the 'Net Profit Margin' at Fisher Funds is certainly eye-watering. But in any industry where you use other peoples money 'off the books' to generate your income, your 'net profit margin' is going to look impressive. Whether it is out of line with other market players is something I am trying to determine.

Kiwi Wealth is publicly owned, for now. I have found the annual report from the point of view of the individual funds, but not from the point of view parent management company. If anyone can find where that 'public' management firm information might be, I would love to fill in the gaps in the table below. (Edit: Thanks to Haumi, post 17, who tracked down the missing information!)

FY2021 ComparisonFisher FundsKiwi WealthMilford Funds Limited

NPAT {A}$49.778m$11.961m$11.726m

Fee Income (B}$125.906m$51.908m$162.710m

Net Profit Margin {A}/{B}39.5%23.0%7.21%

References

1/ Kiwi Wealth https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/key-documents/annual-reports-and-financial-statements/Managed-Funds-Financial-Statements-2021.pdf, https://www.fma.govt.nz/assets/Reports/Kiwisaver-AR-2021.pdf, https://app.companiesoffice.govt.nz/companies/app/service/services/documents/00AE7077639588E5D04E226E1FFDC7AA
2/ Fisher Funds https://app.companiesoffice.govt.nz/companies/app/service/services/documents/24F67C80B5A7F087059381175A8E7B22
3/ Milford Funds Limited https://app.companiesoffice.govt.nz/companies/app/service/services/documents/F64124A9C32CC1928549ACF3BF8AD107

SNOOPY

Haumi

04-05-2022, 06:35 PM

Muse

04-05-2022, 09:19 PM

Yes the 'Net Profit Margin' at Fisher Funds is certainly eye-watering. But in any industry where you use other peoples money 'off the books' to generate your income, your 'net profit margin' is going to look impressive. Whether it is out of line with other market players is something I am trying to determine.

Kiwi Wealth is publicly owned, for now. I have found the annual report from the point of view of the individual funds, but not from the point of view parent management company. If anyone can find where that 'public' management firm information might be, I would love to fill in the gaps in the table below.

FY2021 Comparison
Fisher Funds
Kiwi Wealth

NPAT {A}
$40.778m
?

Fee Income (B}
$125.906m
$659.227m

Net Profit Margin {A}/{B}
32.4%
?

References

1/ Kiwi Wealth https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/key-documents/annual-reports-and-financial-statements/Managed-Funds-Financial-Statements-2021.pdf
2/ Fisher Funds https://app.companiesoffice.govt.nz/companies/app/service/services/documents/24F67C80B5A7F087059381175A8E7B22

SNOOPY

Isn't fishers' NPAT 49.9778? and margin ~39.7% - page 23?

Milford Funds Limited financial accounts are below, but with a big caveat
https://app.companiesoffice.govt.nz/companies/app/service/services/documents/F64124A9C32CC1928549ACF3BF8AD107

Milford Funds pays a substantial management fee to its parent company Milford Asset Management. The later does not have to disclose its financials. So you can't work out what the true underlying profitability is without taking a pretty meaty guess. I'm also not au fait with if MFL is the management company for all funds (it appears to do most according to the notes) or if its parent company also undertakes some services and receives income and has its own expenses - hard to know what what group consolidated revenues and earnings are.

You could just assume those costs are pure intercompany and ignore them - gives you probably a decent picture of the true underlying revenue of milford.

Those are the only two i've ever bothered to 'snoop' on in NZ. Possible others disclose.

But Fishers is off the charts more profitable compared to its aussie peers. You can segment those into retail focued and wholesale focued. Retail are valued much more highly as margins are higher and FUM is more sticky, and have less shocks of sudden contract terminations. Some retailers are platinum, perpetual, magellan. Wholesale IOOF, BT, etc. Whole industry is in a state of flux after the hayne royal commission.

industry structure there is much different with self managed super schemes quite large. and post hayne there is been a shift in FUM from traditional asset managers to SMSF and indepedent advisors.

I've had happy hunting capitalising on that shift. Invested into Hub24 which is one of the leading independent platform providers over there. Hasn't been a pleasant 6 months but I'm still up 4.5x

Back to the point. Kiwisaver fees should be much cheaper because of the the magnitude of compounding forces driving up revenue off a scalable fixed cost base.

Members contribute regularly from their paycheck. Their pay tends to go up over the long term with inflation. Employers contribute on similar basis. Markets over the long term tend to go up. and you also get the occasional new member to kiwisaver, though the majority of that is done. Those things compound and compound and compound over the long term into huge increases in FUM from which revenue is ultimately derived. You don't need proportionately more staff to service growth in fum when that is coming from monthly contributions and market returns.

Of course you always get the corrections, like we are in now, or worse. And if you are don't play ball on fees when it comes for default scheme reappointments, you can get your mandate pulled.

but over the long term - its huge. there are graphs of the growth of kiwisaver under management you could easily find somewhere

Muse

04-05-2022, 10:05 PM

anyway thats all i got. hope useful - look forward to seeing what you come up with if you manage to benchmark any others

Snoopy

04-05-2022, 10:06 PM

Isn't fishers' NPAT 49.778? and margin ~39.7% - page 23?

Yes I made a typo on the net profit figure. Now corrected.

Milford Funds Limited financial accounts are below, but with a big caveat
https://app.companiesoffice.govt.nz/companies/app/service/services/documents/F64124A9C32CC1928549ACF3BF8AD107

Milford Funds pays a substantial management fee to its parent company Milford Asset Management. The later does not have to disclose its financials. So you can't work out what the true underlying profitability is without taking a pretty meaty guess. I'm also not au fait with if MFL is the management company for all funds or if its parent company also undertakes some services

Those are the only two I've ever bothered to 'snoop' on in NZ. Possible others disclose.

I have added Milford to my comparison table as well. I see in the 'Milford Limited' accounts, in the income statement, that there was a fee of $136.594m paid to the parent Milford Asset Management company (the fee you pointed out FM). You would have to assume that all the cost allocations are done in accord with the parent company's wishes. So if the parent were to decrease the fee required to be paid (and I do note this management services fee jumped an astonishing by $59.010m from FY2020 to FY2021), then the declared profit of 'Milford Limited' can be whatever Milford management want it be (within reason). I guess a net profit margin of 7.21% is there to appease the kiwisaver scheme overseers, so Milford don't look too greedy?

Note 8 in the Milford Limited accounts lists all the Milford funds that Milford Limited manages. This covers all the funds listed in the current Milford fund prospectus,

https://milfordasset.com/if-pds

less the AON branded fund, the kiwisaver fund and the wholesale funds. So it looks to me as though the company 'Milford Limited' does indeed manage all of the Milford funds (listed and unlisted).

SNOOPY

Muse

04-05-2022, 10:15 PM

Yes I made a typo on the net profit figure. Now corrected.

I have added Milford to my comparison table as well. I see in the 'Milford Limited' accounts, in the income statement, that there was a fee of $136.594m paid to the parent Milford Asset Management company (the fee you pointed out FM). You would have to assume that all the cost allocations are done in accord with the parent company's wishes. So if the parent were to decrease the fee required to be paid (and I do note this management services fee jumped an astonishing by $59.010m from FY2020 to FY2021), then the declared profit of 'Milford Limited' can be whatever Milford management want it be (within reason). I guess net net profit margin of 7.21% is there to appease the kiwisaver scheme overseers, so Milford don't look too greedy?

SNOOPY

aye

Milford Asset Management Ltd - topco - is the equivalent to Fisher Funds Management Limited - they are both the top entity and reflect the full consolidated view. Ideally we'd be comparing like for like. We have topco financials for fisher, not for milford, the later we just have a subsidiary. A subsidiary that probably generates the vast majority of its income. and probably its expenses. but we don't know what in milford topco. its possible the charges are just for IP and all the bums on seats and technology is in MFL, and the management fee is a simple profit minimisation tool for PR purposes (thats what I expect). possible the consolidated group looks a whole like MFL npat adding back the after tax intercompany fees. but just speculation.

what do the npat figures % of revenue for milford funds ltd look like if you do that? probably look weird

Muse

04-05-2022, 10:32 PM

sorry last contribute to your analysis snoopy. I'm getting a bit long in the tooth on all this but if i recall correctly only fisher funds and milford seek to charge performance fees amongst the kiwisaver providers. They will pay some proportion of that to staff and the management company keeps the balance - split unknown.

last time i looked into this there were quite a few industry sources you could look at if you wanted to delve deeper into FUM and returns

fundsource
morningstar do some industry research
the fma
and canstar in australia

cheers.

Snoopy

05-05-2022, 11:33 AM

Milford Asset Management Ltd - topco - is the equivalent to Fisher Funds Management Limited - they are both the top entity and reflect the full consolidated view. Ideally we'd be comparing like for like. We have topco financials for fisher, not for milford, the later we just have a subsidiary. A subsidiary that probably generates the vast majority of its income. and probably its expenses. but we don't know what in milford topco. its possible the charges are just for IP and all the bums on seats and technology is in MFL,

According to this link https://www.dnb.com/business-directory/company-profiles.milford_funds_limited.2623a23d7e7fef2f616 9388185d55a1e.html, Milford Funds Limited has 13 employees and generates $US119.39m in sales whereas Milford Asset Management Limited https://www.dnb.com/business-directory/company-profiles.milford_asset_management_limited.47526819 0316c2bc9b05d369eda2ee61.html has 210 employees and generates $US11.59m in sales.

Since I have already figured out Milford's 'investment team' contains 33 people (post 2 in this thread), it would be odd to have close to half of that investment management team inside 'Milford Funds Limited' with the others inside 'Milford Asset Management Limited'. So I would guess that those 13 'Milford Funds Limited' employees are more likely clerical positions 'booking sales' by keeping note of investment funds as they roll in, while all the actual investing expertise is outsourced to the parent 'Milford Asset Management'.

and the management fee is a simple profit minimisation tool for PR purposes (thats what I expect). possible the consolidated group looks a whole like MFL npat adding back the after tax intercompany fees. but just speculation.

what do the npat figures % of revenue for milford funds ltd look like if you do that? probably look weird

Putting some numbers on your speculation:

1/ The 'Management Services Fee' for 'Milford Funds Limited' amounted to $136.594m.
2/ If MFL had not paid this fee and booked this cashflow as profit, then they would have had to pay tax on it, leaving the amount to be added to profit as: 0.72( $136.594) = $98.348m.
3/ This would have increased MFL NPAT to $11.725m + $98.348m = $110.073m.
4/ This implies a 'net profit margin' of $110.073m/$162.710m = 68% (!)

That figure makes the net profit margin salted away by the Fisher team sound 'fundholder friendly'. However, given the future profitability of MAL is not determined by clerical staff and cleaners, I am picking this 68% figure overstates the true profitability of Milford managed funds, as an operation.

SNOOPY

Snoopy

06-05-2022, 08:46 AM

Snoopy

07-05-2022, 08:47 PM

This one is a bit more a 'boutique manager', although they do have a shareholder called Jardens (77.57% owned by them in fact). Share funds available for investment are as follows:

1/ Harbour Australasian Equity Fund:

Investment ThemeThe Fund is actively managed and invests in stocks which our equity team believes will outperform the local equity market over the long term. Stocks are chosen through a combination of qualitative bottom-up company research undertaken by our in-house analysts, environmental, social and governance (ESG) integration and quantitative screening of factors such as growth and quality.

Currency Hedging PolicyASX component 90%-95% hedged to the NZD

Top ten holdingsMFT, FPH, EBO, CEN, MEL, SUM, PEB, IFT, CSL Limited Australia (drug maker), and AIA. The top ten positions make up 55.8% of the fund. The fund currently has 29.3% of assets invested in Australian equities.

Distribution over FY2022:none.

Total management annual charge = 1.1% (plus a performance fee of 0%).

Fund size$248.6m @31-03-2022.

Fund risk rating5

2/ Harbour Australasian Equity Focus Fund:

Investment Theme The Focus Fund is actively managed and only invests in stocks which are rated highly by our in-house research analysts. The team use their in depth company and industry research to rate and pick stocks which they strongly believe will add positively to the Fund.

Top ten holdings: MFT, Macquarie Group Limited Australia (investment banking), EBO, CSL Limited Australia (drug maker), BHP Group, Australia (Mining), SUM, PEB, Xero Limited (Accounting Software), Goodman Group Australia (logistics management and development), Vulcan Steel Limited Australia. The top 10 investments make up 62.9% of the funds value. The fund currently has 54.56% of assets invested in Australian Equities.

Currency Hedging PolicyASX component 90%-95% hedged to the NZD

Distribution over FY2022: none.

Total management annual charge = 1.70% (which includes a 0.53% performance fee).

Fund size$35.2m @31-03-2022.

Fund risk rating6

3/ Harbour NZ Shares Index fund:

Investment ThemeTrack the NZX50 Portfolio Index. This index contains the top 50 companies listed on the NZX, but with a 5% cap on each company.

Top ten holdingsAIA, EBO, MFT, FBU, IFT, CEN, MEL, SPK, FPH and ATM. These holdings make up 48.9% of the fund.

Distribution over FY20222.28cpu (based on a unit price @05-05-2022 of 2.013 and a 28% tax rate, this is a gross yield of 1.39%)

Total management annual charge = 0.2%

Fund Size $382.4m @31-03-2022.

Fund risk rating 5.

4/ Harbour Sustainable NZ Shares Fund:

Investment ThemeTracks NZX50 index, but excludes companies that are exposed to large carbon emitters, alcohol, gambling, munitions, adult entertainment, nuclear armaments, firearms, tobacco and recreational cannabis, child labour and companies with human and animal right violations. There will also be positive and negative tilts to the remaining companies based on Harbour’s proprietary Corporate Behaviour Score, which has been a core part of Harbour's equity investment processes for over a decade.

Top ten holdings AIA, MFT, CEN, EBO, MEL, SPK, FPH, FBU, IFT, ATM, making up 54.1% of the asset value of the fund.

Distribution over FY2022:0.72cpu (based on a unit price of 0.9251@05-05-2022 and a tax rate of 28%, this is a gross yield of 1.08%)

Total management annual charge = 0.25%

Fund Size $186.0m @31-03-2022

Fund risk rating5

5/ Harbour Real Estate Investment Fund:

Invrestment ThemesAs well as holding listed Property Sector funds, the Fund may also hold securities which are not included in listed property security or Real Estate Investment Trusts (REITS) benchmark indices. To be included, underlying profit certainty needs to be high. Examples include property management, sea ports, toll roads, airports, cell-phone towers, aged care & retirement villages, waste management facilities and data centres industries.

Top ten holdingsGMT, PCT, KPG, VHP, PFI, ARG, SPG, IPL, Goodman Group (Australia) (this company owns develops and manages logistic building spaces) , Charter Hall Group Australia (invests and develops office, retail, industrial & logistics and social infrastructure). These top ten businesses make up 76.9% of the asset value of the fund.

Distribution over FY20222.01cpu (based on a unit price of 1.2476 and a tax rate of 28%, this is a gross yield of 2.24%)

Total management annual charge= 0.88%

Fund Size$110.4m @31-03-2022

Fund risk rating5

Note that I have omitted from this list the 'Harbour T Rowe' funds, that are repackaged funds from other providers. I have also excluded funds that have a non-share component.

The 'Investment Team' made up of 'Equities', 'Fixed Income' and 'Multi Asset' managers number 17 people.

SNOOPY

Snoopy

08-05-2022, 08:39 PM

3/ 'Trans-tasman Equity Fund'

Investment ThemeStock picking across the NZX and the ASX

Distribution over FY20223.0cpu

It looks like the above is the only Milford run 'purely share based' fund that offers an income payment during the year. Looking up distributions in the FAQ lead me to this curious text:

---------------

Milford Asset Management - How Do Distributions Work?

Some of our funds pay distributions at set intervals. Distributions are a way for some of the fund’s returns to be paid out to investors, in the form of cash payments. The portfolio managers have set the distribution amounts at levels they feel are sustainable, given the current and expected future environment. The amount paid to each investor is based on the number of cents per unit held.

If you are investing into a fund that pays regular distributions but opt not to receive the cash, it will instead be reinvested and used to purchase additional units in that fund.

Distributions from the funds are non-taxable events and are not treated as income for tax purposes.

------------------

It is the last bit that I have put in italics that intrigues me. How on earth can that be?

SNOOPY

777

09-05-2022, 08:57 AM

PIE income is not treated as income for tax purposes so maybe that explains it. Only a guess on my part.

Snoopy

09-05-2022, 09:21 AM

Milford Asset Management - How Do Distributions Work?

Distributions from the funds are non-taxable events and are not treated as income for tax purposes.

How on earth can that be?

PIE income is not treated as income for tax purposes so maybe that explains it. Only a guess on my part.

Your answer makes sense 777. But the Milford wording goes further than that in my view, suggesting such income is 'a non-taxable event'. As I understand it, PIE entities still have to pay tax. It is just that PIE unitholders, provided the PIE tax is deducted at the appropriate rate, have no further tax obligation. So by my thinking, describing distributions as a 'non taxable event' has muddied your -on the surface- reasonable explanation.

I even went back to my IR3 tax return from 2021 and looked at question 36

"Did you receive any PIE income?"

I then asked myself, why it was that I would be asked about a 'non taxable event' in my income tax form? That doesn't make sense in the context of your answer.

SNOOPY

Snoopy

09-05-2022, 10:06 AM

Snoopy,
is this KIWI WEALTH LIMITED (1738361) ?

NPAT $11.916m (page 9) / Fees $51.908m (page 15) = 23%

https://app.companiesoffice.govt.nz/companies/app/service/services/documents/00AE7077639588E5D04E226E1FFDC7AA

(Perhaps I'm confused about this; parent is NEW ZEALAND POST LIMITED (315766) financial statements p13: Kiwi Group Holdings intermediary, but KIWI WEALTH LIMITED (1738361) was previously
GARETH MORGAN KIWISAVER LIMITED (from 28 Mar 2006 to 01 Apr 2014)
GARETH MORGAN INVESTMENTS KIWISAVER LIMITED (from 17 Mar 2006 to 28 Mar 2006)
INFOMETRICS KIWISAVER LIMITED (from 24 Jan 2006 to 17 Mar 2006)

Last updated on 27 Oct 2021)

Haumi (welcome the forum BTW), I spent a lot of time poking around that NZ companies office website to get the annual accounts of Kiwi Wealth, with no success. Yet somehow you have managed it. THANK YOU! There is no confusion. That is exactly the information that I am after. You are a champion. I have now gone back to my net profit margin comparison table (post 16) and put your figures in to finish it off.

Your information has uncovered something mildly annoying in the respective accounts though. There are two perspectives on what is going on here. There are the managed funds themselves that are paying the management fees (balance date 31st March 2021):

https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/key-documents/annual-reports-and-financial-statements/Managed-Funds-Financial-Statements-2021.pdf

Then there is the management company 'Kiwi Wealth' that is receiving the management fees (balance date 30th June 2021)

https://app.companiesoffice.govt.nz/companies/app/service/services/documents/00AE7077639588E5D04E226E1FFDC7AA

As you can see the balance dates from both sides don't match. I am guessing this is because the funds wish to tie in their balance date with the unit holders individual tax return date (normally 31st March). Meanwhile Kiwi Wealth are tied in with the balance date of Kiwibank, which is 30th June.. Nevertheless it doesn't make it easy when you are looking through the two way mirror glass both ways. Case in point being the the revenue item 'Customer and Client Fees'.

If we look in Kiwi Wealth Annual Report 2021 on p2 this figure is $51.908m. If we look at the Kiwi Wealth Managed Funds Annual Report 2021 on page 3, the listed management expenses paid include $117.546m for the Conservative Fund, $257.838m for the Balanced Fund and $218.214m. Adding those three totals up, I get $593.598m, which is more than ten times the figure in the Kiwi Wealth books. Even with the balance date mismatch, something is not adding up here.

Going to explanatory Note 8 in the Managed Fund accounts we get the following information on fees,

"Kiwi Wealth Limited is the manager of Kiwi Wealth managed funds. In accordance with the trust deed, management fees are calculated based on the net asset values of the Funds that are calculated weekly and paid monthly. Management fees are a related party expense paid to Kiwi Wealth Limited, and are shown in the statements of Comprehensive Income under 'Management fees'."

This confirms I am comparing apples with apples.

A thought occurred to me that maybe the Kiwi Wealth accounts referred to only the much smaller managed fund side of the business, and the Kiwisaver fees were accounted for elsewhere in a separate company structure. However, if I look under note 4 in the Kiwi Wealth accounts, that shows two separate management fee entries for 'KS' (Kiwisaver) and 'MF' (Managed Fund) accounts. So it appears this is not the explanation.

Anyone else got a theory to explain this 10:1 fee mismatch?

SNOOPY

Snoopy

09-05-2022, 01:46 PM

I like to try and get a flavour of how the asset mangers think. The following information from this 8th April 2022 round up.

https://www.harbourasset.co.nz/research-and-commentary/harbour-outlook-stagflation-risk-real-rates-and-the-lands-down-under/

1/ Harbour consider that global efforts to control inflation will be successful.
2/ In 'equity growth' Harbour are overweight in 'healthcare' and 'information technology' sectors, as these sectors look 'relatively more attractive'.
3/ Harbour thinking is that during periods of low growth coming up, it may be prudent to move away from cyclical stocks as economic activity decreases. NZ interest rates have risen faster than most. With the markets being forward looking -coupled with decreasing economic activity- that means higher interest rates, and the accompanying discounting effect on future earnings may have already done their damage on growth stock valuations.
4/ Nevertheless Harbour has made selective investments in cyclical investments with 'pricing power': The materials and financial sectors. Disruption in the global supply chain is expected to favour more locally sourced solutions on an ongoing basis.
5/ Harbour are underweight in the energy sector, where risk of disruption is high.
6/ Harbour are underweight in communications, real estate, infrastructure and utilities sectors where valuations are high relative to potential growth.
7/ Harbour has sold out of US financial sector after booking some good interest rate related gains
8/ Harbour thinks that the Australia and New Zealand region has better near term outlook than other global equity markets.

SNOOPY

Snoopy

09-05-2022, 07:56 PM

Information on bonus payments that might become due to Harbour Asset Management may be found here.

https://harbourasset.co.nz/assets/Legal/FMA-Docs/2e76df5f9d/Other-Material-Information.pdf

The Harbour Australasian Equity Fund and Harbour Australasian Equity Focus Fund currently invest directly into wholesale funds managed by us (Harbour Wholesale Funds).

Outperformance is achieved if the Wholesale Fund’s unit price return (with any performance fee accrual added back) is greater than the return of the Wholesale Fund’s performance fee benchmark, plus an additional hurdle of 1% pa (calculated and accrued within the daily unit price).

For the Australasian Equity Fund, the Wholesale Fund’s performance fee benchmark is a composite index of 50% of the NZX 50 Net Index (does not include imputation credits) and 50% of the ASX 200 Index (which is 50% hedged into NZ dollars). The High Water Mark unit price is exceeded if the Wholesale Fund’s unit price, on 31 December of any year, is greater than the Wholesale Fund’s current High Water Mark unit price.

The concept of a High Water Mark exists so that the fund managers are not paid twice for creating growth that only covers previous losses.

The performance fee comprises 10% of the outperformance. The performance fee is capped at 10% of the outperformance. That is, the maximum performance fee that we can be paid is 0.90% ((10% outperformance cap less 1% benchmark hurdle) x 10% performance fee = 0.90%).

Other fees (which include performance fees) are listed as 'not applicable' to the two NZ based index based equity tracking funds. Similarly there is no bonus fee listed as applicable to the "Harbour Real Estate Investment Fund".

SNOOPY

Snoopy

09-05-2022, 08:12 PM

Milford Asset Management - How Do Distributions Work?

Distributions from the funds are non-taxable events and are not treated as income for tax purposes.

------------------

It is the bit that I have put in italics that intrigues me. How on earth can that be?

Not from Milford, but I have been reading up on how Harbour Asset Management does things

"The Fund may elect to deduct from your distribution an amount equal to the PIE tax (if any) paid by the Fund in respect of your holding. In such a case, unit holders may receive differing net distributions. Currently, however, the Funds intend to reflect PIE tax by adjusting your units held and not by making deductions from distributions."

I am now wondering if Milford does the same thing? Effectively Milford pay tax by deducting that tax from your unit balance. This means that should Milford choose to make a distribution to you from their fund, it is not a taxable event, because any tax due was paid in a 'prior event', where Milford took some of your fund capital to pay the tax due. I have no idea if that is how Milford actually run things. But such an explanation would fit in with their narrative.

SNOOPY

Snoopy

10-05-2022, 10:40 AM

At this point in the thread I think we have enough protagonists to make some observations and conclusions. I have listed the previously described funds from largest to smallest so that you can decide if being 'small and nimble' is really an advantage. Or does having large scale and amortising management resources over a larger asset base tend to produce better returns? Of course, we have to remember that all of these funds are not equal (neither in scope nor strategy) as per the earlier fund descriptions have already outlined (Milford Post 2, Fishers Post 7, KiwiWealth Post 10 and Harbour Post 25).

I have decided to look at both one year returns, that best reflect the current sharemarket environment and five years that give a longer term picture of what happened when the market was growing more steadily.

Fund NameFund SizeFund Return (1yr to 30-04-2022)Fund Return (5yr to 30-04-2022)

Kiwiwealth Growth Fund$2,206m (@30-06-2021)-1.27%N.A.

Milford Global Equity Fund$886.0m (@31-03-2022)-3.82%9.80%

Milford Trans Tasman Fund$811.5m (@31-03-2022)-0.08%12.58%

Milford Dynamic Fund$778.7m (@31-03-2022)0.44%14.07%

Harbour NZ Shares Index Fund$382.4m (@31-03-2022)-2.92%10.37%

Fisher NZ Growth Fund$320.0m (@31-12-2021)-13.1%12.3%
0

Harbour Australasian Equity Fund$248.6m (@31-03-2022)-2.81%11.27%

0
Harbour Sustainable NZ Share Index Fund$186.0m (@31-03-2022)-3.34%N.A.

Fisher International Growth Fund$142.9m (@31-12-2021)-16.7%11.3%

Harbour Real Estate Investment Fund$110.4m (@31-03-2022)1.63%N.A.equal

Fisher Australian Growth Fund$109.5m (@31-12-2021)1.5%11.7%

Harbour Australasian Equity Focus Fund$35.2m (@31-03-2022)3.47%13.35%

Average-2.85%10.7%

Notes

1/ All of these fund returns are after fees but before tax.
2/ The Milford Dynamic Fund is closed to new investors

So what do I make of all this? That's next.

SNOOPY

Snoopy

10-05-2022, 03:52 PM

So what do I make of all this? That's next.

First impression on the five year returns is all the protagonists have done a decent job. Of those funds where the history does not go that far back:

1/ Kiwi Wealth has been operating under Kiwibank ownership since 2012. However, their 'growth engine' (the KiwiWealth Growth fund) suffered a comparative performance slump in 2016 - they were the worst performing kiwisaver provider over 2016. This was due to the Australian and New Zealand sharemarkets doing well, while all Kiwi Wealth's growth investments were concentrated in other less profitable sharemarkets. Sometimes when a fund under-performs, management prefers to close it down and start a new fund to erase any historical baggage. The date of the start of the new KiwiWealth Growth fund (2018) suggests to me a 'fund rebirth' may have happened at KiwiWealth. I do not know how the investment strategy changed between the 'old' KiwiWealth growth fund and the 'new' KiwiWealth growth fund. But I would be fascinated to find out, if anyone does know.
2/ The Harbour Sustainable Shares option I am prepared to accept is a recent development (the idea of sustainable share investing has only become mainstream in the last five years).
3/ The Harbour Real Estate Investment Trust has a 3 year compounding return of 10.17%, and it is probably reasonable to expect a similar return had it been operating for five years. Not sure why Harbour wasn't offering such an investment five years ago. Perhaps they were still in their 'growth phase' at that point?

I think it is worth noting that the international (that means outside Australia and New Zealand in this context) share investment funds, performed a percentage point or two lower than other growth funds. This could be because international investment funds operate under New Zealand's FIF investment regime, which robs unit-holders of 1.5% of the capital value of the fund each year. On the size angle, is it notable that the smallest of the international funds looked at (Fishers) has performed best?

The Milford International Fund being the worst performing fund of all types under scrutiny was an eye opener. This is in contrast to their Australian and New Zealand based equity funds that were above average.

SNOOPY

Snoopy

10-05-2022, 08:28 PM

So what do I make of all this? That's next.

A one year investment return, as part of a multi-year savings program is a pretty meaningless statistic. So why am I looking at it?

Over the last year or so, the investment environment globally has become more difficult. The changes have in effect been a 'stress test' on our investment managers. So how have our investment mangers reacted? Has the change in the investing environment meant that some of the formerly very successful investment strategies have come unstuck? How robust is what our investment managers are doing? Let's take a look.

Two share funds stand out, and not in a good way: Fishers International Growth Fund (-16.7%) and Fisher's NZ Growth Fund (-13.1%). These losses are way in excess of the other funds. So what do Fisher Funds management have to say about them?

4th February 2022: https://fisherfunds.co.nz/newsroom/market-commentary/a-rollercoaster-start-to-the-year/

22nd March 2022: https://fisherfunds.co.nz/newsroom/market-commentary/volatility-and-active-management-attractive-new-investments-provide-a-silver-lining-in-challenging-times/

3rd May 2022:: https://fisherfunds.co.nz/assets/fund-updates/FFMF/Fisher-Funds-New-Zealand-Growth-Fund-31-March-2022-Fund-Update.pdf

9th May 2022: https://fisherfunds.co.nz/newsroom/market-commentary/investing-highlights-and-lowlights-ffks-and-managed-funds-2019-fisher-funds/

Key points from the above links are below:

NewZealand

09-05-2022: "a2 Milk (-13%) shares fell against the backdrop of Shanghai's extended lockdowns to curb the spread of Omicron. These lockdowns are creating renewed COVID-related supply chain challenges in getting product to market."
"
03-05-2022: "Fisher & Paykel Healthcare Corporation Limited, PE ratio now 24,, -12% Share Price Change, -2.0% Contribution to Return"
"Xero Limited (Yes Fishers still call it an NZ company), PE ratio -4400, -5% Share Price Change, -0.6% Contribution to Return"
"a2 Milk Company Ltd: PE Ratio 139, -13% Share Price Change -0.6% Contribution to Return"

---------------

My observation of the above negative outcomes is that Fishers look to be holding good companies 'at any price'. Those following the Covid-19 outbreak would have caught up with the fact that hospitalisations were going down with Omicron. With that, we might have expected a fall off in orders of Fisher and Paykel Healthcare (FPH)'s hospital level breathing equipment. Pre-Covid 19 FPH peaked around $16, and now the price has 'come down' (sic) to $21. So FPH has still done well, overall, over five years. But for those investors on the ball at the time, it was clear - at a certain stage- that investors were paying very handsomely to be part of the Covid-19 response (the FPH share price spiking towards $40 was putting the company on unsustainable multiples, and there was an opportunity there for Fisher to book profits - which they did not take).

Xero (XRO) makes no money - still. Good product from what I have heard, and SAAS companies can move from loss to profit in a flash. But at eye watering multiples, you would have to call this company speculative from an investment perspective.

A2 milk (ATM) was priced as a one trick Chinese market infant formula pony. Good product, but really, really fully priced even today.

Personally I admire FPH, XRO and ATM for their vision and what they have achieved, Yet as an investor, my admiration has always been from a distance as those big names have never ticked the value box for me. Today these companies are priced at higher PE values that than Fisher's NASDAQ heroes. What were Fishers thinking when they got on board? Where was the value discipline in their purchasing?

International

04-02-2022 "While we have wanted to buy into the company (Netflix) for a long time, it has always traded at a valuation we viewed as too expensive. With the sell-off in growth stocks in recent months, and what we see as some temporary headwinds facing the company, we were able to buy Netflix at a 45% discount to its November highs (Snoopy note: now at a 75% discount from November highs!)."

22-03-2022: "Since January 2022 we have taken the opportunity to add three new companies to our portfolio: Microsoft (Fishers like the cloud computing outlook), Netflix (oh dear, see below), and Salesforce. Markets have continued to fluctuate since our purchases; however, we have conviction in our investment approach and continue monitoring our portfolio companies closely to react to changes in business fundamentals."

09-05-2022: "The largest detractors for the month were Netflix (-49%, PE now 15.7) and PayPal (-24%, PE now 26). Netflix fell materially following their Q1 earnings and Q2 guidance for subscriber losses, disappointing the market. PayPal sold off with technology stocks more broadly, but partly rebounded after reporting results towards the end of the month that were better than feared. Despite disappointing recent stock price performance, we believe these are still great businesses that are well-positioned to grow in their respective industries."

----------

I can see why Fishers made the above highlighted investments. It aligns with the Fisher policy of buying and holding 'good companies'. I share this philosophy myself. But if buying good companies means purchasing at a 'speculative price', then IMO this means a 'speculative lightening strategy' should be in place to reduce such holdings when they get to stratospheric share price levels. And just because a share costs less than it did last month, does not mean it is cheap.

This example of Fishers isn't a case of failing to identify good companies. It is a case of paying too much for them IMO. Ironically now that the market has dealt Fishers a 'value hammer blow', it might be time to take up positions in these funds if you do not hold. Nevertheless chasing the big names without doing a down to earth value analysis is very disappointing investment management behaviour. I have lost a lot of faith in Fishers as a fund manager in choppy (i.e. more normal) markets over this quarter. I hope they have learned a lesson.

SNOOPY

Snoopy

11-05-2022, 10:40 AM

So what do I make of all this? That's next.

As a first step into investing into sharemarkets, having some 'skin in the game' of your local market is often not a bad way to start. So what opportunities have these four fund managers thrown up for making such investments?

Taking the five year view there are only two: Fisher's NZ Growth Fund, and Harbour's NZ Shares Index Tracker Fund. Despite the dismal record of Fishers NZ Growth Fund over the last 12 months, and their inherently higher fee structure, it is clear that Fishers have substantially outperformed the index, offering on average 20% higher returns each year. Whether this out-performance can continue under less bullish market conditions is open to question.

The third NZ market option - which hasn't yet been going for five years - is the Harbour Sustainable NZ Market Index tracker. The popular view is that 'investing sustainably' is good for both ESG and economic reasons. Over the last year this has not been true. The Harbour index tracker fund has outperformed its 'sustainable' index counterpart by 0.42%. Why?

Sin stock Sky City, taking into account their 7cps dividend, has declined by 13.4% over the tax year. Coal burning Genesis Energy dropped by 17.8% (using a tax adjusted estimated 13cps net dividend payment figure inclusion) over the same period. Meanwhile, over this time, the NZX50 declined by 3.2%. So these two high profile 'unsustainable exclusions' from the NZX50 constituents do not explain the Sustainable fund under-performance. Looking at the top ten fund constituents (post 25) the sustainable fund was less heavily weighted towards EBOS (EBO). EBOS increased in value by 40.5% (including the dividend contribution) over the financial year. Why the sustainable fund was less, in relative terms. invested in EBOS is unclear. But it doesn't seem to have anything to do with sustainability. A mere 0.05% of the sustainable return under-performance can be attributed to higher management fees in the sustainable fund. So it looks like the reason for the sustainable fund's under-performance might be 'lots of small reasons'. Overall, it doesn't look like the sustainable fund under-performance can be explained in terms of 'sustainability'.

Milford gave as their reason for not running an exclusive NZX equity investment fund, that they had reached a size where they had too much money to look after. The NZ domiciled split in their end of year declared position in the 'Milford Trans Tasman Equity Fund' is 24.22 percentage points out of 42.48, or 57%. 57% of the declared fund size works out to be: 0.57 x $811.5m = 463m. So we might infer from this that investing more than around $450m in one fund on the NZX is unworkable, for liquidity reasons, for an active manager. Maybe it is no co-incidence that the very successful 'Fisher NZ Growth Fund' is below this quantum in size. Of interest is that Kingfish, which is ostensibly the listed equivalent of the 'Fisher NZ Growth Fund' has $525m of NZ listed shares under management at the end of the financial year.

Decision Time Subject to being able to adapt their investment style - and in particular judgements of value - to the new post boom investment environment it looks like, out of all the protagonists, that the 'Fisher NZ Growth Fund' is the way to go for NZX investment.

SNOOPY

Snoopy

11-05-2022, 11:16 PM

Subject to being able to adapt their investment style - and in particular judgements of value - to the new post boom investment environment it looks like, out of all the protagonists, that the 'Fisher NZ Growth Fund' is the way to go for NZX investment.

Kingfish is the listed entity run by Fisher funds that invests in the NZ sharemarket. I had assumed that since both this and the 'Fisher NZ Growth Fund' were run by the same people, the investments would be the same. But while there are obvious resemblances between the portfolios, there are some differences worth noting.

Fund Assets @31-03-2022KingfishFisher NZ Growth Fund

Mainfreight20.0%18.99%

Infratil17.6%11.34%

Fisher & Paykel Healthcare14.1%15.02%

Summerset10.1%8.68%

Auckland International Airport8.6%7.12%

The A2 Milk Company4.3%4.25%

Vista Group International3.8%3.36%

Freightways3.7%?%
!

Ryman Healthcare3.7%?%!

Delegat Group3.2%3.24%!

Contact Energy3.0%?%
!

Ebos Group2.0%?%

Port of Tauranga2.0%?%

Meridian Energy1.0%?%

Pushpay Holdings1.0%?%

NZ Dollar Cash1.9%?%

Xero Limited0%12.12%

Serko Limited0%3.06%

Total100.0%87.18%

Kingfish provides full disclosure in their end of quarter report:

https://kingfish.co.nz/assets/Investor-Centre/Kingfish-Newsletter-March-2022.pdf

whereas the 'Fisher NZ Growth Fund' does not:

https://fisherfunds.co.nz/assets/fund-updates/FFMF/Fisher-Funds-New-Zealand-Growth-Fund-31-March-2022-Fund-Update.pdf

However it is very noticeable that Fishers have a 12.12% portfolio rating towards Xero, the accounting software company based in Wellington that removed their listing to the ASX, whereas Kingfish have none. It is a bit strange to have a company that is only listed on the ASX in the NZ Growth Fund. But there you go! I guess the headquarters are still in Wellington, so it counts as NZ!

SNOOPY

Snoopy

13-05-2022, 09:36 PM

Earlier fund descriptions have already outlined The Harbour NZX Index Fund (Post 25).

I have decided to look at both one year returns, that best reflect the current sharemarket environment, and five years that give a longer term picture of what happened when the market was growing more steadily.

This particular comparison I have set up because of the variation that Harbour have put into their index fund, that changes it from a pure index fund. Namely this is that no single entry in the fund must make up more than 5% of its capitalisation. I am old enough to remember why this restriction was introduced.

Back in the day, before 'Spark' was Spark, and before Chorus was hived off as a separate entity, there was this mother of all telco companies called Telecom, headed by one Theresa Gattung. Now Theresa was one of a triumvirate of "powerful women at the top in power at the time", including New Zealand's first elected female prime minister 'Refused Dame' Helen Clarke and Dame Sian Elias, the first female Chief Justice of New Zealand. Theresa was the first female leader of a major NZ corporate. And back then Telecom was by far the largest company on the NZX. However, she took the 'women can do anything' mantra one step too far. Telecom's monopolistic behaviour lead to it being broken up into separate wholesale lines (Chorus) and retail (later rebranded as Spark) companies. I can't remember the exact peak value of Telecom on the NZX was relative to all other companies. I think it was around 10% to 15% of the entire NZX. Needless to say when the monopolistic dream unravelled, shares in Telecom got savaged and so did the funds of index fund holders.

To avoid the change in fortune of one company so heavily affecting the fortunes of NZs more conservative index sharemarket investors, I recall a new index fund being set up with exactly the restriction that the Harbour Index fund now has: No more than 5% of the fund to be invested in any one company. In recent years, particularly with all the state power companies being listed and the break up of the old Fletcher Challenge conglomerate, I am not sure if this "5% rule" has really been needed since. But this 5% cap remains remains as a legacy of the "Untouchable Telecom" years.

Knowing the history of this 5% cap, I was curious as to whether it made a difference today. So what better way to do that than to compare it to the actual NZX50 index. The Smartshares NZX top 50 ETF I have thrown as a third comparator, is NZX's own index tracker. This Smartshares fund had the 5% cap on a single entity rule as well.

Fund NameFund SizeReturn (1yr to 30-04-2022)Return (5yr to 30-04-2022)

Harbour NZ Shares Index Fund$382.4m (@31-03-2022)-2.92%10.37%

Smartshares NZ ETF Top 50$641.4m (@31-03-2022)-3.40%10.52%

NZX50Not Applicable-6.65%10.00%

SNOOPY

P.S. Discussion to follow

P.S.S.

Back Office Calculations

Rather annoyingly, the Smartshares return information I could find on-line was based on the year ending 31st March, whereas the Harbour NZ shares index fund figures I had recorded were to 30th April. There has been a significant deterioration in the NZX over this last month so I could not ignore the data mismatching periods. Historical quotes for this Smartshares Fund 'FNZ', I found as below

Date31-03-201730-04-201731-03-202130-04-202131-03-202230-04-2022

l
FNZ Price$2.19$2.25$3.41$3.40$3.29$3.23

This allowed me to work out correction factors for the time shifted months as follows.

For one year: $3.23 - $3.40 = -$0.17 and $3.29 - $3.41 = -$0.12. So an extra 5c was lost in the April year compared to the March year.

An extra 5c based on the closing price on 31-03-2022 represents 0.05/3.29 = 1.52% of the total return. So the reported total return for the March year must be reduced by this amount: -1.88% - 1.52% =-3.40%

For five years: $3.23 - $2.25 = $0.98 and $3.29 - $2.19 = $1.10. So an extra 12c was not gained in the April year compared to the March year.

An extra 12c 'not gained' based on the closing price on 31-03-2022 represents 0.12/3.29 = 3.65% of the total return. But this return difference was made over a five year period. Annualising that incremental return I get (1.0365)^0.2=1.00720. This means the compounding return per year lost is 0.72%.

So the reported total return for the March year must be reduced by this amount: 11.24% - 0.72% =10.52%

For the NZX50:

1 year return: 12731(1+r)= 11884 => r = -6.65%
5 year return: 7379(1+r)^5= 11884 => r = 10.0%

Wright

14-05-2022, 11:36 AM

Snoopy, awesome posts mate really insightful and helpful, hope there are lots more to come.

Snoopy

14-05-2022, 12:50 PM

Fund NameFund SizeReturn (1yr to 30-04-2022)Return (5yr to 30-04-2022)

Harbour NZ Shares Index Fund$382.4m (@31-03-2022)-2.92%10.37%

Smartshares NZ ETF Top 50$641.4m (@31-03-2022)-3.40%10.52%

NZX50Not Applicable-6.65%10.00%

P.S. Discussion to follow

Being a 'share picker' I generally pay very little attention to the index. However, looking at how things stand now:

https://www.interest.co.nz/nzx50

I can see that the 5% rule is having an effect for the index tracker funds that follow it. Take the example of A2 milk (ATM). At the time of writing it makes up 2.9% of the NZX50, with a share price of $4.45. This implies a share price of roughly $7.67 (this trigger figure also depends on the movement of other share values that make up the index of course) would have seen ATM over that 5% threshold. October 2017 on the way up is the likely date that this $7.67 'trigger price' would have come into play. A2 joined the NZX50 in early 2013. That meant that the rise from around 50c per share up until that $7.67 estimated 'crossover date' would have been fully captured by both the Harbour Asset and Smartshares referenced funds. That ATM index inclusion in 2013 was a prelude to a '15 bagger' for index fund investors!

However after that inclusion time, as the ATM share price continued to rise at a rate higher than the market, there would have been a steady selling of ATM shares by the two funds. That would have ensured that the overall value of ATM in those 'index approximating' Harbour and Smartshares funds remained at no higher than that 5% threshold cap. This meant that Harbour/Smartshares would have missed some of the extraordinary gains as the share raced up to $20. But it also meant that they missed out on that excess share of the share price fall as the ATM share price shrunk from $20 down to $4.50 over the last couple of years. That could be one reason that Smartshares/Harbour have outperformed the NZX50 index over the last year. An underweight rating in Fisher & Paykel Healthcare (nominally 10.6% of the index even now), following its sharp decline, would be another.

Tellingly the only reported difference I can find between the two managed funds is that Smartshares charges 0.5% of the value of the fund annually to, ahem, 'manage' this index fund where as Harbour only charges 0.2%. That should mean the Harbour fund produces a superior return - which it does over one year - but not over five. I am struggling to explain that. One theory I have is that in could be a matter of 'fund inflow timing'.

The Harbour Sustainable NZ shares fund, also index based, started two years ago. So suddenly Harbour investors would have had a choice of index hugging fund to select. I would expect the quantum of new money going into the original Harbour NZ Shares Index fund to reduce at that point. The alternative Smartshares index tracker would have had a more even funds inflow that would bias more gains and/or losses, in dollar terms, towards the latter two year part of the total five year period. The NZX50 has been roughly flat for two years. So with relatively less money going in over the last two years, the Harbour fund should have performed relatively better over the five year period (it didn't - I am not entirely convinced by my own argument either. No doubt someone will point out the error in my logic).

Further internet trawling and I may have found the answer:

https://investmentnews.co.nz/investment-news/harbour-takes-beta-fund-full-passive-dimensional-cuts-fees-again-wins-over-etf-fans/

It looks like the Harbour Fund was not a full index tracker until two years ago. It used to be called the 'NZ Equity Advanced Beta Fund' and had under-performed.

"Over the five years to the end of December 2019, the Beta fund returned about 14.8 per cent after fees compared to almost 17 per cent for the raw benchmark."

This would explain why the Harbour 'now' index tracker under-performed its higher fee Smartshares alternative over the last five years.

SNOOPY

Snoopy

15-05-2022, 02:01 PM

So what do I make of all this? That's next.

Is there any reason why the best fund performances seem to come from those targetting the Australian market? Let's do a quick round up of the largest positions of our protagonists that invest in Australia., and see where they are investing.

Milford Trans Tasman EquityHarbour Australasian Equity FundHarbour Australasian Equity Focus FundFisher Australian Growth Fund

BHP.ASX (5.62%)MFT (9.95%)MFT (10.2%)CSL.ASX (9.52%)

FPH (5.48%)FPH (8.42%)MQG.ASX (9.06%)WTC.ASX (6.79%)

CBA.ASX (4.70%)EBO (7.64%)EBO (7.59%)CAR.ASX (6.31%)

CSL.ASX (4.45%)CEN (5.33%)CSL.ASX (7.53%)SEK.ASX (5.12%)

[TR]
IFT (4.35%)MEL (4.71%)BHP.ASX (7.39%)CBA.ASX (4.84%)

MFT (3.50%)SUM (4.53%)SUM (6.68%)NXT.ASX (4.58%)

CEN (3.44%)PEB (4.05%)PEB (3.91%)MQG.ASX (4.40%)

EBO (3.40%)IFT (3.87%)XRO.ASX (3.67%)BXB.ASX (4.21%)

NAB (3.33%)CSL.ASX (3.81%)GHG.ASX (3.58%)AUB.ASX (4.04%)

AIA (2.70%)AIA (3.46%)VSL.ASX (3.31%)RMD.ASX (4.06%)

All of the above funds have had very respectable 5 year returns (post 33). Looking at the top holdings you might be forgiven for thinking that the 'Harbour Australasian Equity Fund', was really an NZ fund with one or two token Australian investments. But the 31-03-2022 Fund summary sheet says that 29.3% of all holdings are on the ASX.

Best performing fund over both 1 and 5 year periods was the 'Harbour Australasian Equity Focus Fund'. I observe that they are the only fund to have a significant holding in Macquarie Bank and BHP over the five year period, over which the MQG and BHP share price doubled. Both have continued to hold their value in the current rising interest rate and rising commodity market, where banks and commodity miners generally do well. Their largest holding back in 31-03-2020 was A2 Milk, making up 14% of the fund's value. By 31-03-2021 this holding had sunk from 13.43% to 5.57% of the funds value as the share price sank from $17 to $9 over the same period. This indicates a net reduction of one quarter of the fund's position in A2, over and above 'index shrinkage'. So some profit taking was likely booked as the outlook of the A2 milk company turned sour.

At the bottom of the larger holdings list in the 'Harbour Australasian Equity Focus Fund' sits Vulcan Steel, which was a very successful float from six months ago (+10% over the ensuing period to now).

Another 'two bagger' over five years has been Australian drug maker CSL, in which the 'Harbour Australasian Equity Focus Fund' had a 7.53% stake at the 30-03-2022 reporting date, verses just 3.81% for the 'less focussed' 'Harbour Australasian Equity Fund'. The 'Harbour Equity Focus Fund' is also by far the smallest fund here at just $35m in size, only one eighth the size the more broadly invested 'Harbour Australasian Equity Fund'. Being so relatively small and so nimble for an investment fund is an asset.

Milford Asset management are the second best performing fund of our quadrio. At the end of March 2020, A2 milk was the funds top holding. One year on and it fell outside the top ten, minimising the A2 share price carnage. In the year to 30-03-2020, an investment in Xero was disclosed. Two years later that investment was gone at what looks like a good profit. This is active investing at its best. The Milford portfolio was cushioned, of late, from rising interest rates by having a couple of decent holdings in Australian banks, and also BHP to take advantage of commodity price hikes. I would like to say this was pre-emptive positioning. But in fact these resource and bank holdings had been in place for some years. Considering this fund is more than three times the size of the next largest fund under consideration, the ability to switch portfolio positions , and overall fund performance is very creditable. It has a slightly lower base fee than the other funds too, which always helps. There is no 'split' given on how much of the fund overall is invested in the NZX or the ASX.

Nevertheless if you are looking for a pure 'Australian' investment, the only choice here is the 'Fisher Australian Growth Fund'. Names on the top ten holding list will be a bit less familiar to kiwis. CSL is Australia's largest drug manufacturer. Further down the list there are a couple of familiar banks (Commonwealth & MacQuarie). All good holds for present times.

Next we have a series of leading tech businesses, with the extraordinary connecting factor that they all make a profit! 'Wisetech' is a software for supply chain businesses worldwide. 'Carsales.com.au' and 'seek.com.au' are, respectively, leading web based motor vehicle and job seeking website based businesses. NextDC is an Australian data centre operator.

To finish off the top ten, we have Brambles as the Aussie equivalent of Mainfreight. AUB is an insurance broker and underwriting business. Resmed is the principal Australian competitor to our own Fisher & Paykel healthcare.

I would like to say this Fisher fund has repositioned themselves for the new business environment going forwards. But looking at the change in holdings year to year, the addition of NextDC apart, all the right building blocks were already in place. Well done Fisher Funds management!

So quite a high tech modern look to the 'Fisher Australian Growth Fund' then. And CSL holding apart, very different to the others in terms of fund constituents.

Decision time Which of the above four funds to choose? I have to go with the top performer in both the long term (5 year) and agility (1 year) contest. And that is the 'Harbour Australasian Equity Focus Fund'. Yet that fund is closed to new investors :-(. But if I wanted to diversify my trans-tasman portfolio adding either the Milford Trans Tasman Equity Fund or the Fisher Australian Growth fund would be good options. And both have complimentary investments to my first choice.

SNOOPY

P.S. What about the question I posed right at the beginning at the start of this post? Australia looks to be the place for profitable banks, in demand and quality resources and mature and profitable tech. That adds up to quite a sweet spot for investing in 2022.

Snoopy

16-05-2022, 12:11 PM

So what do I make of all this? That's next.

'Internationally' in the New Zealand investment context means outside of Australia and New Zealand. If we look through all of the funds offered by our protagonists, there are just three that fit into this category. Let's see where they are invested.

Holdings @ 31-03-2022Milford Global EquityKiwiWealth Growth FundFisher International Growth Fund

MSFT.NASDAQ (4.53%)AAPL.NASDAQ (4.6%)FB.NASDAQ (8.98%)

GOOGL.NASDAQ (4.34%)MSFT.NASDAQ (4.4%)GOOGL.NASDAQ (7.28%)

Cash NZD (4.03%)GOOGL.NASDAQ (3.1%)PYPL.NASDAQ (7.20%)

AAPL.NASDAQ (3.40%)AMZN.NASDAQ (2.7%)BABA.NASDAQ (5.80%)

[TR]
MA.NYSE (3.13%)UNH.NYSE (1.4%)AMZN.NASDAQ (5.78%)

COST.NASDAQ (3.12%)ASML.AMS (1.3%)Tencent.HKG (5.44%)

ICE.NYSE (2.69%)TSLA.NASDAQ (1.2%)ICLR.NASDAQ (5.09%)

EOG.NYSE (2.68%)V.NYSE (1.2%)FND.NYSE (4.57%)

AON.NYSE (2.48%)MC.EPA (1.1%)BSX.NYSE (4.55%)

ACN.NYSE (2.26%)Two Trees Hedge Fund (1.0%)SBNY.NASDAQ (4.37%)

Those 'stock tickers' I have listed above may not mean much to our NZ based readers. So for clarity I will use the names of the 'invested in companies' in my round up of the three fund protagonists investment results and philosophies below.

KiwiWealth has had the best one year 'market shock' performance. So how was it they manged to 'calm the bear'? The NASDAQ fell by 10.2% over the first three months of this year. By contrast, the four largest KiwiWealth holdings -also part of the NASDAQ- fell by -4.1 % (Apple), -7.9% (Microsoft) , -4.1% (Alphabet) and -4.4% (Amazon). Absent from the top ten KiwiWealth holdings was Meta (Facebook) (-34.3%). KiwiWealth were also relatively underweight holding the NASDAQ number 4 ranked company Tesla (-10.2%).

By contrast, Fisher funds were relatively overweight for the quarter in Meta (-34.3%) and Paypal (-40.7%). For the full year overweight Alibaba was 50% down too. It is clear that the Fisher NASDAQ investments, over the last year, have released a lot more 'hot air' than the KiwiWealth ones. The Fisher International Growth Fund has had what can only be described as a 'disastrous investment performance' over one year: 16.7% in total of fund value was lost. Despite this, the five year performance of the Fisher International Fund was quite acceptable, or even 'good' (+11.3% per year, compounding for five years).

Other significant KiwiWealth investments over the first three months of the year like United Health +1.6% and Visa (no change) helped steady the KiwiWealth ship.

There is a different class of asset called 'Hedge Funds' that KiwiWealth invests in. These, like Two Tree Systematic Global Macro Fund, are targetting superior returns uncorrelated to traditional asset classes, and can help smooth returns. The other two comparative international funds have not declared any hedge fund assets.

Apple and Microsoft make up around 22% of the NASDAQ top 100 index. From that, you might argue that Fishers are showing more 'independent thinking' (check out Fisher's lack of a position in these two companies in the list above), whereas KiwiWealth and Milford are more in the 'me too' investor box. KiwiWealth has reduced their position in Meta over the last few months while Fishers have increased their holding. Short term KiwiWealth are looking smarter. But Fisher claim a trend of more video content on Facebook will increase time spent on the platform and advertising revenue in the future.

KiwiWealth has selected 'United Health', which is the top non pharmaceutical healthcare company on the NYSE by capitalisation. Likewise KiwiWealth's Visa investment is the top NYSE fintech listing. My impression is that KiwiWealth's portfolio has more of an 'index look'. But it also has the lowest base fee structure, complete with no return eroding 'bonus fees'.

Milford are unusual in declaring a large (4.03%) cash holding. Normally I would mark a fund down for that. If I want to keep a bit of cash on hand I can do that myself! I don't need a fund manager to do it for me. However, cash also represents opportunity. In a turbulent market, I am pleased to see that Milford have some cash on hand to take advantage of investment opportunities as undoubtedly will arise. I note that Milford favours 'Mastercard' as their number one fintech investment, ahead of the more well known and larger 'Visa'. Milford also have a share of 'Intercontinental Exchange' (no. 142 on the NYSE), which owns the 'New York Stock Exchange' itself! Milford's other high conviction positions include low cost retailing (Costco), Oil exploration (EOG Resources), Accenture (Infotech) and AON (Insurance). These share selection themes are consistent with a rising interest rate, rising commodity price, high tech economy. My impression is that Milford are not trying to do anything radical with their share selections. But they are trying to pick out 'best in class' operators, to colour a quite conventional share selection picture.

Decision Time I am going for the KiwiWealth growth fund as my international fund manager pick for the following reasons.

1/ They offer a chance to acquire some big NASDAQ names at a somewhat beaten down price.
2/ They hold some hedged investments which they are using to damp down the NASDAQ volatility.
3/ They have the lowest fees by some measure (around 30% less than the others as a minimum).
4/ KiwiWealth have just been gifted a large lump of default Kiwisaver cash (being just named as a default provider). That should give them the scale to keep running a relatively low cost operation.
5/ This is the only growth fund in shares that KiwiWealth run. If they stuff it up the whole KiwiWealth operation will go in the punishment bin. They did this before in 2017. But since you learn more from your mistakes than your successes I am picking that KiwiWealth has learned not to make those same mistakes again.

I find myself agreeing with the Fisher philosophy of buying good companies and hanging on to them. But I have that sinking feeling that Fishers may have paid too much for their 'good ideas' in their international investment fund. It would be a useful diversification to add Fishers as a complimentary international investment manager. But my gut feeling is to wait for a year to see what if anything Fishers learn from their heavy FY2022 investment write-downs. And that just leaves Milford.

Milford looks like an index+ high fee manager, that nevertheless has delivered the worst (albeit still adequate 9.80%) five year fund performance of all funds in all market classes looked at. Milford appear to deliver their best results closer to home. Maybe that fine edge of 'Brian Gaynor magic' has departed this fund with Brian's own departure for 'other worlds' yesterday? I am leaving the Milford 'Global Equity Fund' outside of my recommendations.

SNOOPY

Snoopy

16-05-2022, 05:33 PM

The revenue item 'Customer and Client Fees'......

If we look in Kiwi Wealth Annual Report 2021 on p2 this figure is $51.908m. If we look at the Kiwi Wealth Managed Funds Annual Report 2021 on page 3, the listed management expenses paid include $117.546m for the Conservative Fund, $257.838m for the Balanced Fund and $218.214m. Adding those three totals up, I get $593.598m, which is more than ten times the figure in the Kiwi Wealth books. Even with the balance date mismatch, something is not adding up here.

A thought occurred to me that maybe the Kiwi Wealth accounts referred to only the much smaller managed fund side of the business, and the Kiwisaver fees were accounted for elsewhere in a separate company structure. However, if I look under note 4 in the Kiwi Wealth accounts, that shows two separate management fee entries for 'KS' (Kiwisaver) and 'MF' (Managed Fund) accounts. So it appears this is not the explanation.

Anyone else got a theory to explain this 10:1 fee mismatch?

No-one else has bitten to answer this question, so I have come up with a new theory of my own.

The page below:

https://www.kiwiinvest.co.nz/our-approach#our-funds

tells us of the KiwiWealth fund structures. Ordinary plebs, like me, have only the choice of investing in the KiwiWealth 'Growth Fund'. But if you are a 'wholesale investor', then you have a choice of 'Global Thematic' (Total funds under management $1,992m), 'Global Quantitative' (Tfum $1,502m) and 'Core Global' (Tfum $986m). That adds to a total of $4,480m.

Go back to the Kiwi Wealth fund documentation:

https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/key-documents/annual-reports-and-financial-statements/Managed-Funds-Financial-Statements-2021.pdf

On page 5, I add up the net assets attributable to unit-holders as follows:

$24m+$64m+$50m=$138m

If $138m represents the 'client' portfolio and $4,480m represents the 'customer' portfolio, that represents a huge mismatch in relative size of assets under management.

If you take the 'customer and client ' fees from the income statement in the reference below

https://app.companiesoffice.govt.nz/companies/app/service/services/documents/00AE7077639588E5D04E226E1FFDC7AA

That is $51.908m. Spread across all funds under management, this represents a management fee rate of:

$51.908m / ($138m + $4,480m) = 1.12%

I would suggest that wholesale investors will pay a lesser percentage management fee than retail investors. So the information on the wholesale funds which I can combine with information on the retail funds makes the management fees declared as earned by KiwiWealth ballpark believable.

SNOOPY

Snoopy

30-05-2022, 07:04 PM

I thought I would jot down a few notes from Fishers May Webinar.

https://fisherfunds.co.nz/newsroom/video-library/the-smart-investor-series-looking-past-volatility/

They sound unrepentant. An "If you are feeling bad, we are sorry about that" kind of apology for their market performance.
If the story has not changed and the share price is down keep buying is the mantra. They are buying Xero , Amazon, Microsoft, CSL, Fisher and Paykel Healthcare and Cochlear.

Sam Dickie (Senior Portfolio Manager, NZ shares and infrastructure)
"It is critical we do not get knocked off our path by fear."
"We are more excited than we have been for some time and we are buying."
"Volatility is very normal."

"During peak Covid fear, F&P were keeping their prices steady on their life saving equipment to help save lives. But now, F&P are lifting the prices of their products across the board at the fastest rate they have for a long time."
"Not all companies have pricing power like this."

"We are super long term investors (in the context of long term being ten years)"

"Look for companies run by high quality management teams, companies with wide economic moats around their business (only one Auckland Airport and there is no sign of an alternative being built), and long runways for growth (Xero - global cloud accounting penetration is less than 10% global, (Fishers expect 100% in due course))"

"Divorce long term view from market volatility of equities."

"Re derogatory comments made by CEO of DGL. Not invested in DGL. If a broad cultural problem appeared in a company they would sell. If it was just one person making derogatory comments, they would try to force that person out."

"Hand pick investments to no more than 100 companies across all funds." So plenty of other investments to choose from if one of their own breaks the ESG standards.

Ashley Gardyne (Chief Investment Officer)
"The inflation crisis is a once in every couple of years opportunity"
"Provided fighting in Ukraine does not escalate to other countries, there will be little further effect on the world economic situation. Taken together Ukraine and Russia only make up 2% of global GDP."
"Indifferent to dividend yield as want to invest in companies that hang onto their dividends and grow." (e.g Amazon, keeps investing in more data centres and more distribution networks)

SNOOPY

Snoopy

28-09-2022, 11:11 AM

Would appreciate thoughts / recommendations on NZ Fund managers. Was thinking of Milford but open to helpful comments etc.
Cheers

I want to broaden my review of the performance of NZ fund managers, this time looking at the fixed interest/bond market. I am going to concentrate on the local bond market. That is because when NZ fund managers invest in global bonds, they tend to use overseas organisations as subcontractors to do that for them. So by sticking to the local market, I am getting a better feel for the expertise of 'the local investment team' .

To keep the review manageable, I am once again going to look at four protagonists to try and understand any nuances of differing approaches of managing fixed interest funds. The four protagonists are: Milford Asset Management, Fisher Funds, Harbour Asset Management and KiwiWealth. I should note that Fisher funds acquired KiwiWealth on 15th August 2022. However the review period of the last year and further back does not encompass any portfolio management influence by Fisher Funds that may or may not change the future course of KiwiWealth's management style.

The performance of fixed interest markets has been particularly difficult over the last year. So what better time to put some scrutiny on our local fund managers to see how they have navigated the fixed interest market in 'tough times'?

A common concern on the performance of the bond markets was expressed as a question from twenty minutes into the Fisher Funds seminar that I have referenced below: The following video seminar is dated 11th August 2022.

https://fisherfunds.co.nz/newsroom/video-library/common-kiwisaver-and-investment-questions/

Robbie Urquhart, Senior Portfolio Manager for Fisher Funds, speaks (from 20 minutes into the seminar):

"It has been a really tricky period for conservative portfolios over the last six months because of volatility. If we think about normal economic crises, conservative funds tend to have a higher proportion of their assets in lower risk assets classes, namely fixed interest or bonds, and a smaller proportion of growth assets like shares and property. The reason for this is that normally these lower risk assets act as an insulation against big economic crises. So when the world is going into recession and people are worried about financial crises emerging, typically we see bond prices go up (i.e. interest rates fall) and that protects the value of the portfolio and so conservative portfolios tend to hold up reasonably well.

But what we have had in the last six months is quote different. It is quite an unusual set up where the cause of the economic turmoil across the globe this year has been driven by sky rocketing inflation, which has sent goods prices and services prices, travel, restaurant services and all of those prices up. The cost of living crisis is on everybody's lips at the moment and with the rise of inflation, central banks have tried to combat that by increasing interest rates, and they have done that quite sharply. In so doing, not only have sharemarkets been sold off this year and property prices have started falling, but it has also lead to bonds and fixed interest prices falling as their yields have gone higher.

We have had this pretty tricky environment where the 'insurance contract' (the fixed interest portion) has fallen as much as we have seen from shares. That is what has been negatively affecting conservative portfolios. But as much as the journey has been quite rough for conservative portfolios over the last six months, given where fixed interest assets are priced today, our view is that they are really attractively priced. We have also seen some nascent signs that some of the worst parts of this inflationary pressure may be starting to ease. US CPI data has been high but less than expected. Companies we invest in have told us that their supply chain constraints are starting to ease. If we get more data points like that we should see a stability return to where interest rates are and that should be quite constructive for fixed interest assets and consequently conservative portfolios.

So in a nutshell it has been a tough journey, but in a nutshell I think the outlook from here is a lot better."

Robbie has set the background scene. Now how did Fisher funds - and the other protagonists - measure up over this 'really tricky' period?

SNOOPY

SBQ

28-09-2022, 02:47 PM

@Snoopy:

What Robbie Urquhart has mentioned is of no surprise. But I would say his statement of recent events and uncertainty is nothing more than an 'excuse' ploy to the shareholders. These fund managers are what I call "the helpers" and Buffet always says, "they help themselves".

Take the individual investor whom may have little understanding of economics, finance, or the world market variables.. consistently leave their $ to guys like Robbie Urquhart to manage their money? One report card earnings after another, the general public doesn't get the message.

Take the example of a garage mechanic. Word of mouth has it that if that guy does a good job, he attracts more customers. But in Finance, it's a funny industry where one portfolio manager after another that provides sub-par returns by not beating the market index returns, gets away with time after time. They will say "perhaps we will have better results next year and so on.." The marketing of these funds to as Buffet says "The helpers help themselves".

So what does Warren Buffet do that is consistently different than all these fund managers? Have a simple observation for 2022 and what has Berkshire done? Well they've acquired a major stake in Occidental Petroleum (last I recall over 20%). What as your typical NZ fund manager done during the same period? They've just bought over diversification by buying lots and lots of shares or corporate junk bonds on various different companies.

John Bogle (RIP) founder of Vanguard says, if these fund managers are only trying to replicate the market index return (either in bonds or equities), the more shares they buy in that index, the more they are likely to have the same average return of the index. However they will not win because they need to charge their management fees. Why should they be rewarded for not being exceptional ; because buying more and more of the shares of the index gets you the similar average returns.

Buffet doesn't float in that boat. If you want to consistently beat say the S&P500 index return, you need to be able to concentrate on specific companies that have far higher returns than the average. Much like at the roulette table; bet 1/2 of the #s and you get 1/3rd return. Bet 1 chip on 1 # of the 36 on the table and you get 36 times.

Well there's an easier way to beat this game. Just go and own Berkshire shares and forget the rest. No need to worry about timing when to be in or out of bonds, when to be in this sector or that industry. Just buy BRKB and come back in 50 years time. BTW, in 1964 1 share of BRKA was $19. In 2020 March that same share was $268K. Today it's $400K

Now you tell me, would you be far happier to own a portion of bonds or the capital gain that BRKA has done? I would say in around 2 years going from $268K to $400K is mighty impressive than to worry about buying bonds in NZ or abroad.

Snoopy

28-09-2022, 03:44 PM

"So in a nutshell it has been a tough journey, but in a nutshell I think the outlook from here is a lot better."

Robbie has set the background scene. Now how did Fisher funds - and the other protagonists - measure up over this 'really tricky' period?

First fund to be reviewed 'out of the blocks' is Fishers "New Zealand Fixed Income Trust."

Information in this post is derived from these two respective 3 month quarterly statements:

https://fisherfunds.co.nz/assets/fund-updates/FFIS/Fisher-Funds-New-Zealand-Fixed-Income-Trust-30-June-2022-Fund-Update.pdf

https://fisherfunds.co.nz/assets/fund-updates/FFIS/Fisher-Funds-New-Zealand-Fixed-Income-Trust-30-June-2021-Fund-Update.pdf

Key Bullet Points

1/ Fund goal is to be 100% invested in 'NZ market fixed interest'.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $126.7m of fixed interest funds and bonds under management.
4/ 'Management fee's are set at 0.96% of the funds asset value, comprising a managers base fee of 0.86% and an 'other management and administration charges' deduction of 0.10% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -7.13% (-1.80%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 0.69% (2.21%).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)
Fund Return YE Mar(xxxx) {A}
Index Return YE Mar(xxinnocentxx)
After Tax Index Return YE Mar(xxxx) (x0.72) {B}
{A}-{B}

2022-5.16%-6.28%-4.52%
-0.64%

2021-0.19%-0.78%-0.56%
+0.37%

20203.15%4.82%3.47%
-0.32%

20195.58%7.38%5.31%
+0.27%

20183.15%4.54%3.27%
-0.12%

A positive number in the {A}-{B} column indicates that Fisher's management has 'added value', whereas a negative value indicates the reverse. No-one likes to lose money. But it looks like, over FY2021 Fishers have 'added value' by not losing as much money as an index tracker invested in the same asset class. Conversely, in the other four years I have considered , any 'under-performance' of Fishers can be explained away by management fees alone. (The management fee is a tax deductible expense. So a management fee of 0.96% equates to a profit margin reduction of 0.72x 0.96% = 0.69%. But 0.64% is the largest amount that the fund has undershot the index). So if the Fisher fund managers had decided to forgo their fees, they would have added value to the fund in those years after all.

What can we learn about how Fisher fund managers have operated over the last reported twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us a clue.

Fund Constituent Holding Name[/TD]Top Ten Holdings 30-06-2022Top Ten Holdings 30-06-2021

GOVERNMENT OF NEW ZEALAND 3.5% 14-APR-20336.37%7.08%

GOVERNMENT OF NEW ZEALAND 3.0% 20-APR-2029 5.70%5.49%

GOVERNMENT OF NEW ZEALAND 2.75% 15-APR20254.15%3.75%

GOVERNMENT OF NEW ZEALAND 2.75% 15-APR20374.08%4.79%

GOVERNMENT OF NEW ZEALAND 4.5% 15-APR-2027 3.54%3.35%

GOVERNMENT OF NEW ZEALAND 1.5% 15-MAY-20313.08%3.02%

ANZ 10 A/C - CURRENT ACCOUNTS2.90%6.54%

GOVERNMENT OF NEW ZEALAND 0.5% 15-MAY-20262.86%2.59%

HOUSING NEW ZEALAND LTD. 3.36% 12-JUN-20252.84%?%

ANZ BANK NEW ZEALAND LTD. 3.03% 20-MAR-20242.80%?%

GOVERNMENT OF NEW ZEALAND 1.75% 15-MAY2041?%2.87%

GOVERNMENT OF NEW ZEALAND 2.0% 15-MAY-2032?%3.16%

Total Top Ten38.32%42.64%

Top Nine Investment Average Coupon RateCoupon 2.77%Coupon 2.47%

Top Nine Investment Average Years to Maturity6.2 years10.3 years

I have to be careful here attributing actions to Fisher fund managers. For a start, I don't have enough combined information (see above table) to see even 50% of the constituency of the fund on either comparative date (30-06-2022 or 30-06-2021). To my knowledge, Fishers have made no commentary on what they did over the 'difficult year in question'. Furthermore I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'.

IMO it does appear that 'on average', Fishers dramatically shortened the maturity profile of their bond holdings over the year. This is a sensible move, because long dated bonds do very poorly in a climate of rising interest rates. Notice that the two additions to the 'top ten holdings' (Housing NZ and ANZ bank bonds) are both 'short dated', maturing in two and three years time respectively. It is almost impossible to make money from a bond portfolio in a climate of rising interest rates. But it does appear that Fishers active bond managers have 'limited the damage' with some pro-active bond portfolio adjustments. Well done to the Fishers team for that. The increasing annual coupon yield is possibly a function of new bonds being able to be bought, on average, at higher rates of return than in the previous year

SNOOPY

Snoopy

28-09-2022, 08:30 PM

The second fund to be reviewed is Milford Asset Management's "Trans Tasman Bond Fund."

Information in this post is derived from these two respective 3 month quarterly statements:

https://milfordasset.com/wp-content/uploads/2018/10/Milford_Trans-Tasman_Bond_Fund_Jun22.pdf

https://milfordasset.com/wp-content/uploads/2018/10/Milford_Trans-Tasman_Bond_Fund_Jun21.pdf

Key Bullet Points

1/ The Fund's objective is to generate a positive, low volatility return after the base fund fee but before tax, that exceeds the relevant benchmark over the minimum recommended investment timeframe of three years.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly reported date), had $1,152.3m of fixed interest funds and bonds under management.
4/ 'Management fee's are set at 0.65% of the funds asset value, comprising a managers base fee of 0.64% and an 'other management and administration charges' deduction of 0.01% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -5.94% (+2.12%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 1.29% (4.27%).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)
Fund Return YE Mar(xxxx) {A}
Index Return YE Mar(xxxx)
After Tax Index Return YE Mar(xxxx) (x0.72) {B}
{A}-{B}

2022-3.81%-4.75%-3.42%
-0.39%

20213.26%2.73%1.97%
+1.29%

20202.73%4.43%3.19%
-0.46%

20193.61%5.63%4.05%
-0.44%

20183.54%4.55%3.28%
+0.26%

A positive number in the {A}-{B} column indicates that Milford's management has 'added value', whereas a negative value indicates the reverse. No-one likes to lose money. But it looks like, over the last year Milford have 'subtracted value' by losing even more money than an index tracker invested in the same asset class. Conversely, in the four years of quoted positive market returns, there is a mixed picture. A good result over both FY2018 and FY2021, was largely neutralised over FY2019 and FY2020. Milford have a lower fund management fee than Fishers. But despite this, investment performance from FY2018 to FY2020:

Milford: (1.0354)(1.0361)(1.0273)= 1.10
Fisher: (1.0315)(1.0558)(1.0315)= 1.12

was noticeably worse. The difference would be more pronounced if you took the higher level of fees charged by Fishers into account (I didn't do that because as a fund investor you have to pay the fees) pointing to a lower level of bond fund manager skill at Milford prior to the Covid-19 pandemic.

What can we learn from the way that Milford bond fund managers have operated over the last twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us some clues.

Fund Constituent Holding Name[/TD]Top Ten Holdings 30-06-2022Top Ten Holdings 30-06-2021

NZ Local Government Funding 2.25% 15/05/20283.54%?%

NZ Local Government Funding 1.5% 15/04/20263.15%4.47%

NZ Local Government Funding 2.25% 15/04/20242.92%?%

NZ Local Government Funding 4.5% 15/04/20272.21%?%

NZ Local Government Funding 2.25% 15/05/20312.04%?%

Monash University 4.05% 06/04/20291.95%?%

Genesis Energy 5.66% 09/06/20271.72%?%

Housing New Zealand 3.36% 12/06/20251.56%2.21%

NZ Local Government Funding 1.5% 20/04/2029 1.45%2.16%

Spark 4.37% 29/09/20281.45%?%

NZ Local Government Funding 3.5% 2033?%1.98%

Transpower 1.735% 2025?%1.83%

ANZ Bank Float 2024?%1.79%

Macquarie Float 2025?%1.69%

Westpac 1.439% 2026?%1.65%

Bendigo & Adelaide Bank Float 2025?%1.55%

Ausgrid Finance Pty Ltd. 1.814% 2027?%1.54%

Total Top Ten21.99%20.87%

Top Ten (Seven) Investment Average Coupon RateCoupon 3.17%Coupon 2.12%

Top Ten Investment Average Years to Maturity5.4 years5.5 years

Notes

1/ The average coupon rate for YE June 2021 has been calculated from just seven investments, not ten. This is because for three of the top ten investments, the coupon rates were not disclosed.

--------------------

Once again the fund composition is not fully disclosed, with only the top ten positions, making up 21.99% of the fund, as at 30-06-2022 made public. If this were a share fund, then that would be a real problem. However, in a bond fund, interest rates tend to move in tandem across all parts of the portfolio. This means sampling the behaviour of just 22% of a fund can still offer insight into the behaviour of the whole fund. Milford have not given us a running commentary on why their fund was adjusted in content over the year. So I am just using the end of year positions, as disclosed by Milford, to intimate what I can.

In contrast to Fishers, there has been no significant change in the the overall profile of maturity dates held by the Milford Trams Tasman bond fund. Although I do note that the relative maturity dates were short, in comparison with Fishers, anyway. In general, keeping your average bond maturity short in times of rising interest rates is good policy. So kudos to Milford for apparently having this policy in place for some time. But this 'early transition to shorter maturity times' could explain the fund under-performance over the June 2021 to June 2022 year.

One thing that has changed is that many of the former top ten 'Australian' holdings have 'come home'. The headline constituents disclosed are now, with one exception (Monash University), all New Zealand entities. The NZD:AUD exchange rate has moved against us over the year (down from 93c to 91c June to June). This means that any Australian funds repatriated would likely have been worth more in NZ Dollar terms. However this change has not been enough to boost fund performance significantly.

SNOOPY

SBQ

29-09-2022, 09:39 AM

Are these fund figure returns net of all taxes and mgt / administration fees?
A more meaningful analysis is to do a cumulative % return of ALL the years in question. Also why stop at taking the top 10% of the holdings? I'm sure they have a full disclosure of the entire fund returns. Deduct all taxes and fund fees they take off each year returns and compare what the individual could do by directly buying into the index ETF market return.

The 5 years from 2018 to 2022 year end shows they've under performed the index by -3.26%. Compound that through 10 or 20 years and then you will see the helpers have really helped themselves.

But if you ask me, in times of high inflation the last thing I would want to hold are bonds, especially corporate bonds where profit margins are normally squeezed out during recessionary times. Your best protection against the eroding power of inflation is to own companies that have the ability to raise prices without hurting their profit margins. Now if fixed term rates on cash holdings were around 10% a year, ok then things stack up as you really need cash rates above the inflation rate. But anything less than the inflation rate is a waste of time - net after paying taxes.

Entrep

29-09-2022, 10:08 AM

Snoopy

29-09-2022, 10:30 AM

But if you ask me, in times of high inflation the last thing I would want to hold are bonds, especially corporate bonds where profit margins are normally squeezed out during recessionary times. Your best protection against the eroding power of inflation is to own companies that have the ability to raise prices without hurting their profit margins. Now if fixed term rates on cash holdings were around 10% a year, ok then things stack up as you really need cash rates above the inflation rate. But anything less than the inflation rate is a waste of time - net after paying taxes.

I am not going to disagree with your comment above SBQ. My own view is that an offered bond rate should be a couple of percentage points above the dividend rate offered by the same company. This is as compensation for holding a fixed interest investment that has an equity like downside risk, but with most of the compensating upside risk that an equity investment in the same company would have, now removed. Perhaps I should disclose that I do not hold any bond investments myself, and I am not necessarily recommending that others do so either. I do have some bank term deposits though, which I see as more secure than company issued bonds.

However, there are some instances where owning bonds is necessary. like if you are acting as a trustee for a defined purposes account for example. Another instance is where you are invested in a 'balanced fund' which has a mixture of shares and bonds. Although you may not be invested in bonds as a 'headline act', they are there in your portfolio nevertheless.

My main point in investigating bond managers then, is to try and understand how various bond managers styles influences returns. Or paradoxically if these managers 'have no style' and are just creating 'index hugging returns.' I think it is worth knowing this stuff, even if 'investing in bonds' is not part of your own core investment philosophy. But if you don't want to know, then you don't have to read it!

SNOOPY

Snoopy

29-09-2022, 10:50 AM

Are these fund figure returns net of all taxes and management / administration fees?

This is a really good question. If you click on the Milford link for the June 30th 2022 report that I have provided,

https://milfordasset.com/wp-content/uploads/2018/10/Milford_Trans-Tasman_Bond_Fund_Jun22.pdf

then you will see that 'Annual Returns' are reported under 'How has the fund performed' in two ways:

a/ Annual return (after deductions for charges and tax) .
b/ Annual return (after deductions for charges but before tax)

For comparison purposes I have chosen to report 'option a', which is the figure a 28% PIE taxpayer will receive 'in the hand'.

Then if you go to the 'Annual Return Graph' (based on a year ended 31st March which is why these return figures differ to the June 30th year ended figures quoted earlier in the report) , with the comparison of fund returns verses an index, we find there is the following disclaimer:

"The Fund returns in this update are after tax at the highest prescribed investor rate (PIR) of tax for an individual New Zealand resident. Your tax may be lower."

"The market index return is before tax and fees."

This may indicate that the 'Annual Returns Graph' comparison graph is not an apples with apples comparison! I find that very odd, if the whole purpose of requiring a 'comparative index return' is to figure out if your manager is doing a good job or not.

Let's unpick this a bit further. This Milford Trans Tasman Bond fund is a New Zealand based PIE investment. So when they are talking about the maximum PIR tax rate, they mean 28%, (not 39% - the maximum individual tax rate). But is tax just taken off the coupon interest paid by the bond? Or does tax reflect tax on capital gains and losses on trading those bonds as well? If this was an NZ based share fund, then the answer to that last question would be 'no'. But for an individual investor (who is not a trader) then investing in NZ bonds comes under the 'scheme of arrangement' income tax rules. This means an individual investor is in effect liable for a capital gains tax on bond profits, regardless of whether they are a 'share trader' or not. So do funds pay 'income tax' on any capital trading profits they make from bond trading? I do not know the answer to that question. Yet the answer to that question has a very material effect on what an 'after tax' profit figure is for these funds.

My gut feeling is that a fund paying tax on 'bond trading profits' would be wholly unfair for a unit holder, because different unit holders would have different PIE tax rates. But this would go against the 'set and forget' PIE income doctrine, that is meant to make filling out tax returns for PIE investors so much easier. To me it would still make more sense to treat 'capital gain treated as income' at the investor level rather than at the fund level. But the intersection path between 'making more sense' and 'IRD tax rulings' is not a guaranteed one. If anyone does know what tax rules these NZ based PIE bond funds operate under, I would love to know!

In the meantime I am just going with the comparative graph that, in this instance Milford, has provided us with!

SNOOPY

Snoopy

29-09-2022, 11:58 AM

The 5 years from 2018 to 2022 year end shows they've under performed the index by -3.26%. Compound that through 10 or 20 years and then you will see the helpers have really helped themselves.

I see where you get your -3.26% figure from: 0.94%+ 0.53%-1.70%-2.02%-1.01% = -3.26% . This is not how you work out the under-performance of the fund over five years though.

What we have here is a 'multiplicative event' where each annual performance multiplies on what has happened in the years before. The correct method is to compare the fund verses the index performance as follows (Numbers taken from the annual result comparative table in post 48):

Cumulative 5 Year Fund Return (multiplier): (1.0354)(1.0361)(1.0273)(1.0326)(1-0.0381)= 1.0946

Cumulative 5 Year Index Return (multiplier): (1.0455)(1.0563)(1.0443)((1.0273)(1-0.0475) = 1.1285

Underperformance Over the Five Year Period is therefore: 1.1285 - 1.0946 = 0.0339 or 3.39% (that is the total percentage underperformance over 5 years, not 'per year')

Nevertheless, I do understand this changed calculation doesn't invalidate the point you were making about the 'helpers helping themselves'.

SNOOPY

Snoopy

29-09-2022, 07:36 PM

Next up for review is the KiwiWealth conservative fund. There is no pure bond fund available to KiwiWealth investors. Instead there is a 'Conservative Fund' that aims to have a maximum 20% allocation to growth assets.

Information in this post is derived from these two respective 3 month quarterly statements:

https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/quarterly-fund-updates/Conservative/Fund-Update-KWMF-Conservative-Fund-June-2022.pdf

https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/quarterly-fund-updates/Conservative/Conservative-June-2021.pdf

Key Bullet Points

1/ The Conservative Fund is invested in up to 20% in shares and other growth assets (target 15%), with the remainder invested in cash and fixed interest assets. Current Position 14.81% equities (30-06-2022) vs 15.73% equities (30-06-2021).
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $38.054m of fixed interest funds, bonds and growth investments under management.
4/'Management fee's are set at 0.71% of the funds asset value, comprising a managers base fee of 0.70% and an 'other management and administration charges' deduction of 0.01% (June 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -6.34% (+3.53%).
6/ After fees and tax average annual return over the last three financial years at EOFY22 31-03-2022 (and two financial years from the FY2021 EOFY position): +1.55% (+4.40%). At EOFY2022, the fund had only been operating for three years

The difference between the 'fund return' and 'market index return' over the last three years paints an interesting picture.

Year (xxxx)
Fund Return YE Mar(xxxx) {A}
Index Return YE Mar(xxxx)
After Tax Index Return YE Mar(xxxx) (x0.72) {B}
{A}-{B}

2022-2.14%-1.72%-1.24%
-0.90%

2021+6.42%+4.48%+3.26%
+3.16%

2020+2.54%+2.76%+1.99%
+0.55%

A positive number in the {A}-{B} column indicates that KiwiWealth's management has 'added value', whereas a negative value indicates the reverse. Comparing KiwiWealth with the the other two protagonists we have looked at so far (Fishers and Milford), the management at KiwiWealth has contributed more negatively over the difficult FY2022.

So what has gone 'comparatively wrong' at the KiwiWealth Conservative Fund? Looking at the change in the fund holdings over the last reported twelve months might give us a clue as to what happened.

Fund Constituent Holding Name[/TD]Top Ten Holdings 30-06-2022Top Ten Holdings 30-06-2021

Westpac NZD Account (Cash & Cash Equivalents)3.24%10.87%

New Zealand Local Government Funding Agency Bond 3.5% 14/4/2033 2.80%3.22%

New Zealand Local Government Funding Agency Bond 4.5% 15/4/20272.53%2.71%

New Zealand Local Government Funding Agency Bond 1.5% 20/4/20292.34%2.54%

Kommunalbanken AS 4% 20/8/2025 (Norway)2.22%2.31%

Kainga Ora 3.42% 18/10/20282.20%2.39%

Transpower New Zealand Ltd 1.735% 4/9/20252.06%?%

International Bank for Reconstruction & Development 1.625% 10/5/2028 (USA)2.00%2.13%

Kommunalbanken AS 1.25% 2/7/2030 (Norway)1.96%1.87%

Asian Development Bank 2.125% 19/5/2031 (Philippines)1.94%?%

Landwirtschaftliche Rentenbank 0.75% 9/6/2025 (Germany)?%1.95%

New Zealand Government Bond 2% 15/5/2032?%1.90%

Total Top Ten23.09%31.89%

Top Nine Investment Average Coupon RateCoupon 2.63%Coupon 2.51%

Top Nine Investment Average Years to Maturity6.4 years7.6 years

A four step dissection of the year ended 30th June 2022 one year returns

a/ If you look at the comparative fund constituent lists, then you will see - over the year - KiwiWealth has converted most of what was a 'very high cash holding' (more than 10% of the fund) into bond holdings. Net buying of bonds, when interest rates are rising, is a sure way to lose money. This is what KiwiWealth has done.

b/ Next when we look at the bond holding list, we will see that not much has changed (8 out of 10 holdings are the same). KiwiWealth has shortened -by a year- their average bond maturity date. But they are still 'on average' longer dated in bond maturity than Fishers or Milford. Furthermore, their averaged coupon rate -while increasing-, is still below the other two as well. This is another sign of lacklustre management in this admittedly difficult rising interest rate environment.

c/ We need to consider the effect of the Conservative Fund 'equity holdings' (not a normal inclusion for a conservative fund) on the overall result. There was a significant 'equity loss' over June FY2022 (See Appendix post 57).

d/ An additional complication of the KiwiWealth Conservative Fund is that, unlike Fishers and Milford, they have gone in search of multinational bonds from Norway, Germany, the United States and the Philippines. This again brings intro play KiwiWealth's currency hedging policy that will apply to 90% of foreign exposures (In fact, this has provided windfall currency gains over FY June 2022: See Appendix post 57).

KiwiWealth Conservative Fund Mismanagement Summary: June 2021 to June 2022 (See Appendix post 57 for numbers source)

-$1.66m (equity losses) - $1.41m (bond losses) + $0.47m (windfall currency bond gains) = -$2.60m (overall loss)

Taking the non standard items out of the equation, we can work out the 'core bond loss' of the bond portfolio for the year: -$1.41m. This figure is only 60% of the headline loss. if we use this revised core loss figure as a comparison to the index figure, core management performance switches from 'unfavourable' to 'favourable'. Using equity in the conservative portfolio has paid dividends in times of rising equity markets. But this tactic has backfired spectacularly over the June 2022 financial year.

The next point of interest is multi-year returns.

The three year return at 1.55%pa is greater than the five year return Fishers 0.69%pa or Milford 1.39%pa. I believe this is due to the equity component of the KiwiWealth Conservative fund roughly doubling over the study period (despite recent falls from all time highs). Not super superior management of bonds that make up 85% of the KiwiWealth Conservative portfolio.

To separate 'underlying performance' from the 'level of fees charged', we can add back the annual fee charges for each comparative fund to the actual returns:

KiwiWealth: 1.55%+(0.72)0.71%= 2.06%, Fisher: 0.69% + (0.72)0.96%= 1.38%, Milford: 1.29%+(0.72)0.65%= 1.76%

I have to be cautious here attributing actions to KiwiWealth fund managers. For a start, I don't have enough combined information (see above table) to see even 32% of the constituency of the fund on either comparative date (30-06-2022 or 30-06-2021). Furthermore I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'.

KiwiWealth commented on FY20222 bond market conditions in their annual report for FY2022:

https://www.kiwiwealth.co.nz/assets/Documents/KiwiSaver/key-documents/annual-reports/Kiwi-Wealth-KiwiSaver-Scheme-Annual-Report-2022.pdf

Two principal points of note:
a/ Central banks shifted their stance from viewing inflation as a “transitory” phenomenon to eventually realising it was more of an enduring issue. That caused interest rates to spike higher - and sooner than expected.
b// Russia’s invasion of Ukraine caused a global shock in the markets. Commodity prices soared. Given Russia is a key producer of several crucial commodities, including oil, gas, and wheat, this contributed to a further surge in inflation. Bond yields rose sharply (=>bond prices down).

Taking a/ and b/ together, we might think that KiwiWealth have a good excuse for interest rates rising faster than they expected. But we all knew interest rates would rise from 50 year lows. It was only a question of when. Some other fund managers were sitting on cash 'in anticipation' of interest rates rising, whereas KiwiWealth was not.

Notice that one of the two additions to the 'top ten holdings' for KiwiWealth (Asian Development Bank Bonds) has a maturity of 9 years. coupled with a potential US currency risk. On the surface this looks like a poor move, because longer dated bonds do worse in a climate of rising interest rates. And the US dollar tends to rise in times of global uncertainty (increasing capital repayment requirements on US denominated bonds). I am not sensing a great demonstration of 'active bond market skill' on behalf of KiwiWealth here. It looks to me more like an 'equity boost' has been attached to a 'mostly bond portfolio', with the longer term perspective that it will cover 'bond market mistakes' (this strategy backfired over FY2022).

In Summary, the KiwiWealth Conservative Fund looks like it has delivered a creditable result. But closer inspection reveals this was due to the structure of the fund not complying with common industry understanding of what a 'conservative' label is. So comparison with Fishers and Milford is not -in this instance- an 'apples with apples' comparison.

SNOOPY

SBQ

29-09-2022, 10:54 PM

These are small variances between Fisher Fund and the market index. Why? Because they hold a 'slightly' different mix, but not enough to prove to themselves and demonstrate to others, real skill in choosing the right stocks to buy. Di-WORSIfication is the term Charlie Munger uses when fund managers do a few tweaks here and there to get some minimal benefit. His claim is the most you try to buy everything, as a means to reduce risk by diversification, the more your portfolio mimics what the index return is. It's a cop out way of doing the same what all other fund managers do. With Berkshire, they demonstrate real skill in stock picking by only holding a small handful of companies. Because they aim to be is partnership in the business and obtain as much as possible, the 'profit margin' from that company. You throw figures like EBITDA out the door because when you think like a partner of the business, you think about how to minimise tax, operating costs, and even more so, retain as much earnings as possible for future expansion, and less of paying large fat dividends.

SBQ

29-09-2022, 11:12 PM

Back in 2016 at Berkshire's AGM, Buffet explained it very clearly about the disadvantages of fund managers (hedge funds, any dude with a job trying to pick stocks):

https://www.youtube.com/watch?v=xp9KUCel778

I like the example he refers to "the low energy people" that buy 1/2 of the whole market while "the hyperactives" buy the other 1/2 of the market. As these hyperactives are busy buying and selling, swapping stocks here and there in the same 1/2 of the market pool, will always generate a lower return than the 'low energy people' group. They charge fees for their so called expertise knowledge in investments but over the long long term - multi-decade period, they can not do better than simply owning the index market ETF itself.

Snoopy, while you're making these comparisons among various NZ fund managers, I have to say it's kinda pointless. There will be some variances in returns, but they're really fighting a losing battle.

Snoopy

01-10-2022, 12:38 PM

The main post 54 got too long. So I have split off these background calculations to make the main post more readable.

---------------------

c Appendix/ There is no specific information on the particular equity holdings in this fund. However if we look at my post 10 on the 'KiwiWealth Equity Fund', you will see KiwiWealth favour NASDAQ listed companies. So I am going to use the NASDAQ index as a proxy for the circa 15% of equity value the KiwiWealth Conservative fund holds. Over the June 2021 to June 2022 year, the NASDAQ declined from 14639 to 11128. In exchange rate adjusted terms, that represents a decline of:

[(11128/0.61 ) - (14639/ 0.70)]/ (14639/0.70) = -12.8% (Unhedged Portion) AND
[(11128) - (14639)]/ (14639) = -23.5% (Hedged Portion)

The total equity portion of this fund is currently:

0.1 x (0.15 x $38.054m) = $0.57m (unhedged) AND
0.9 x (0.15 x $38.054m) = $5.14m (hedged)

(This adds up to a total equity share of the fund being worth an indicative $5.71m)

So the 'equity share loss' of the overall Conservative Fund loss for the June 2021 to June 2022 year is:

$0.57m - $0.57m/(1-0.128) = -$0.08m (unhedged)
$5.14m - $5.14m/(1-0.235) = -$1.58m (hedged)

(That adds up to a total equity share loss of -$1.66m)

Compare that figure with:

[$38.034m - $38.054/(1-0.0634)] = -$2.60m (the total fund loss for the year)

This shows the 'equity loss' made up: $1.66m/$2.60m= 62% of all net losses. That will come as a shock to investors who thought their KiwiWealth Conservative Fund was actually being managed conservatively!

d Appendix/ From the top ten disclosures, these overseas bond funds make up 35% of bond holdings. I don't know if these overseas bond funds make up 35% percent of the total bond holdings. But in the absence of information to the contrary, I have to assume that they do. In alignment with KiwiWealth's hedging policy (90% of overseas positions hedged), and backing out the 'equity' portion of the fund, the unhedged overseas bond holding balance is now:

0.1 x (0.35x($38.05m-$5.71m)) = $1.13m

The euro has been quite stable over the June to June year relative to the NZD (0.59->0.60). But the USD has strengthened (0.70->0.61). So if half of the 'overseas bonds' were linked to the USD, and assuming a 28% PIE tax rate, there would be an expected windfall currency gain of:

0.5 x 0.72 x (70/61) x $1.13m = $0.47m

Now we need to look at that 'windfall currency gain' in comparison to the overall loss declared for the year.

[$38.034m - $38.054/(1-0.0634)] = -$2.60m

This means it looks like the 'windfall currency gain' reduced total net losses by: $0.47m/($2.60m+$0.47m)= 15%

KiwiWealth Conservative Fund Mismanagement Summary: June 2021 to June 2022

-$1.66m (equity losses) - $1.41m (bond losses) + $0.47m (windfall currency bond gains) = -$2.60m (overall loss)

Note: the $1.41m in 'core bond losses' have been calculated using the other three surrounding numbers.

SNOOPY

Snoopy

01-10-2022, 09:03 PM

The final of the four managers I have chosen to examine in this 'fixed interest' series is "Harbour Asset Management" starting with their "NZ Core Fixed Interest Fund."

Information in this post is derived from these two respective 3 month quarterly statements:

https://www.harbourasset.co.nz/assets/Fund-Updates/Fund-Updates-Base-Folder/1e87ecbc0e/Fund-Update-Harbour-NZ-Core-Fixed-Interest-Fund.pdf

https://www.harbourasset.co.nz/assets/Fund-Updates/All-Fund-Updates-Archive/96de588aed/Fund-Update-ALL-Funds-30-June-2021-final.pdf

Key Bullet Points

1/ An actively managed investment grade bond fund that invests mainly in New Zealand Government and corporate bond fixed interest securities, but also includes International Fixed Interest constituent content of up to 10%.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $152.910m of fixed interest funds and bonds under management.
4/ 'Management fees' are set at 0.65% of the funds asset value, comprising a managers base fee of 0.56% and an 'other management and administration charges' deduction of 0.09% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -6.07% (-0.92%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 0.64% (2.16%).
7/ Aims to make quarterly distributions in March, June, September and December
8/ Variation in Total fund maturity in years permitted from reference index: + or - 1.5 years (source: ringing fund manager and Harbour_SIPO_-_29_August_2022.pdf).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)
Fund Return YE Mar(xxxx) {A}
Index Return YE Mar(xxxx)
After Tax Index Return YE Mar(xxxx) (x0.72) {B}
{A}-{B}

2022-4.10%-6.28%-4.52%
+0.42%

2021+1.11%-0.78%-0.56%
+1.67%

2020+2.39%+4.72%+3.68%
-1.29%

2019+3.80%+6.63%+4.77%
-0.97%

2018+3.07%+4.64%+3.34%
-0.27%

A positive number in the {A}-{B} column indicates that Harbour management has 'added value', whereas a negative value indicates the reverse. No-one likes to lose money. But it looks like, over the last year Harbour have 'added the most value' by not losing as much money as an index tracker invested in the same asset class. Conversely, over the FY2019 and FY2020 periods, the 'under-performance' of Harbour cannot be explained away by management fees alone. Over these two years, fund manager directed deviation from the index has resulted in significant losses for fund holders.

What is it that Harbour Asset Management have 'done right' over the last reported twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us a clue.

Fund Constituent Holding Name[/TD]Top Ten Holdings 30-06-2022Top Ten Holdings 30-06-2021

NZ Government Stock 15/04/2037 2.75%13.16%4.57%

NZ Government Stock 15/05/2041 1.75% 7.44%?%

NZGS Index Linked Bond 20/09/2025 2.00%6.21%4.81%

NZ Government Stock 15/05/2024 0.50%5.63%12.78%

NZ Government Stock 15/04/2025 2.75%3.63%?%

NZ Government Stock 15/05/2032 2.00%2.66%2.90%

ANZ NZD Cash2.48%3.81%

NZ Government Stock 14/04/2033 3.50%2.38%3.50%

NZ Government Stock 15/04/2023 5.50% 2.29%4.00%

NZ Government Stock 15/05/2028 0.25%2.28%8.38%

NZ Government Stock 20/04/2029 3.00%?%3.94%

NZGS Index Linked Bond 20/09/2030 3.00%?%2.46%

Total Top Ten48.16%51.15%

Top Nine Investment Average Coupon RateCoupon 2.33%Coupon 2.50%

Top Nine Investment Average Years to Maturity7.8 years8.0 years

I have to be careful here attributing actions to Harbour Asset fund managers. Even though the fund content disclosure is the best of the protagonists so far, I still barely have enough combined information (see above table) to see only 50%ish of the constituency of the fund on both comparative dates (30-06-2022 or 30-06-2021).

Harbour Asset's June 2022 comment on the state of the global interest rate market may be found here:

https://www.harbourasset.co.nz/research-and-commentary/the-end-of-the-great-moderation/

"Factors have contributed to a period of low volatility in key macroeconomic variables since the mid-1980s that is often referred to as the “Great Moderation” "
"Over the coming decades it may just be digitisation (technological advancement) among the factors that helps economies to contain inflation pressures. An additional structural inflation force may have also emerged in the world’s effort to tackle climate change via de-carbonisation."
"The possible end of the 'great moderation' may see fixed income investors seek greater compensation to part with their money for long periods of time and presents an upside risk to longer-dated bond yields."
"The ongoing war in Ukraine and China’s zero-tolerance COVID approach are key risks to the economic outlook. Both could keep inflation elevated for longer and weigh more heavily on global economic activity."

My interpretation of what Harbour Asset Management is saying is that, on a global basis, both in the long term and the short term, interest rates are going to be higher than what we have been used to.

Having 'talked the talk' of where interest rates might be heading, has the resultant Harbour Asset fixed interest investment strategy 'walked the walk'? Unlike the other three protagonists, the average 'bond interest rate' for Harbour's investments has come down over the year. Also although the average 'time to maturity' has reduced slightly, it is still significantly higher than the other three protagonists. A true belief in 'higher interest rates coming' would be consistent with buying higher yield bonds with shorter maturity dates - the opposite to what has happened in the Harbour portfolio. Whether you believe the persistently higher interest rate story or not, my opinion is that if a manager has a philosophy, then the said manager should follow their own convictions. That does not seem to have happened at Harbour Asset management. Finally, on the one year result measuring stick, only Fisher funds have done worse.

Moving onto the multi year picture (bullet point 6), 'Harbour Asset Management', with their "NZ Core Fixed Interest Fund" are the worst performer of the four protagonists.

I want to remind readers that I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'. Nevertheless my overall conclusion is that although Harbour has some bright people that have put a lot of effort into thinking about what is driving interest rates and where they will likely go, they haven't acted on this thinking. Harbour Asset's management of interest bearing investments over this 'testing time' is by my measures, a 'bottom of the class' effort. Very disappointing.

SNOOPY

Snoopy

03-10-2022, 11:48 AM

After my previous review, it is only fair that I look at Harbour Asset management's second fixed interest fund, the 'NZ Corporate Bond Fund', which becomes the fifth fund I am considering from our set of four 'bond fund investing' protagonists.

Information in this post is derived from these two respective 3 month quarterly statements:

https://www.harbourasset.co.nz/assets/Fund-Updates/Fund-Updates-Base-Folder/58f3cbfb92/Fund-Update-Harbour-NZ-Corporate-Bond-Fund.pdf

https://www.harbourasset.co.nz/assets/Fund-Updates/All-Fund-Updates-Archive/96de588aed/Fund-Update-ALL-Funds-30-June-2021-final.pdf

Key Bullet Points

1/ An actively managed investment grade bond fund that provides access to favourable income yields through a diversified portfolio of primarily investment grade corporate bond fixed interest securities. 5% of the fund is targeted to remain as cash or cash equivalents.
2/ Fund Risk rating of '3' on NZ's 1 to 7 investment fund scale (where 7 is the most risky)
3/ The fund, as at 30-06-2022 (the date of the latest quarterly report), had $418.533m of fixed interest funds and bonds under management.
4/ 'Management fee's are set at 0.46% of the funds asset value, comprising a managers base fee of 0.38% and an 'other management and administration charges' deduction of 0.08% (July 2022 reporting date).
5/ After fees and tax return for previous 12 month period (and 12 months prior to that): -5.37% (-0.36%).
6/ After fees and tax average annual return over the last five financial years (and measured over 5 years 12 months prior to that): 0.99% (2.49%).
7/ Aims to make quarterly distributions in March, June, September and December
8/ Variation in Total fund maturity in years permitted from reference index: + or - 0.5 years (Source; ringing fund manager, and Harbour_SIPO_-_29_August_2022.pdf).

The difference between the 'fund return' and 'market index return' over the last five years paints an interesting picture.

Year (xxxx)
Fund Return YE Mar(xxxx) {A}
Index Return YE Mar(xxxx)
After Tax Index Return YE Mar(xxxx) (x0.72) {B}
{A}-{B}

2022-4.24%-5.22%-3.76%
-0.48%

2021+2.13%+1.90%+1.37%
+0.76%

2020+2.64%+4.19%+3.02%
-0.38%

2019+3.70%+6.04%+4.35%
-0.65%

2018+2.98%+4.72%+3.40%
-0.42%

A positive number in the {A}-{B} column indicates that Harbour management has 'added value', whereas a negative value indicates the reverse. Over FY2021 Harbour managers have 'added the most value'. Conversely, over the FY2018, FY2019 , FY2020 and FY2022 periods, the 'under-performance' of Harbour can be explained by fund applied management fees. It is particularly important to recognise that when the yield of a bond portfolio goes very low, management fees take a disproportionate shine off the year to year fund management performance. This is because fees are charged on the capital value of the fund, and not the income produced.

Over FY2018, FY2020 and FY2022, the fund manager directed deviation from the index has resulted in small gains, which have turned into small losses for fund holders, because of the management fees applied. Since by nature, Harbour's 'NZ Corporate Bond Fund' is a low fee fund, this effect should lessen as interest rates rise again.

What can we learn from Harbour Asset Management's management performance over the last twelve months? Looking at the change in the fund holdings over the last reported twelve months might give us some clues.

Fund Constituent Holding Name[/TD]Top Ten Holdings 30-06-2022Top Ten Holdings 30-06-2021

Bank of New Zealand 07/06/2027 4.985%4.08%?%

Housing New Zealand Ltd 24/04/30 2.183%3.68%?%

Westpac NZ Limited 23/03/2023 3.72%3.50%3.31%

Westpac NZ Limited 16/02/2027 3.696%3.45%?%

Housing New Zealand Ltd 05/10/26 2.247%2.98%3.45%

NZ Government Stock 15/04/2023 5.50%2.95%3.32%

NZ Local Gov Fund Agency 15/04/37 2.00%2.87%?%

NZGS Index Linked Bond 20/09/2025 2.00%2.77%?%

Westpac NZ Limited 29/07/2024 2.22%2.76%?%

Kommunalbanken AS 12/06/2025 0.75%2.72%3.07%

NZ Local Gov Fund Agency 15/04/25 2.75%?%3.40%

Housing New Zealand Ltd 12/06/25 3.36%?%2.97%

Transpower NZ Limited 04/09/25 1.735%?%2.51%

Dunedin City Treasury 17/07/2025 3.61%?%2.36%

Municipality Finance PLC 06/23 0.625%?%2.36%

Landwirtschaftliche Ren 23/04/24 5.375%?%2.20%

Total Top Ten31.76%28.95%

Top Ten Investment Average Coupon RateCoupon 2.93%Coupon 2.97%

Top Ten Investment Average Years to Maturity4.70 years3.40 years

I have to be careful here attributing actions to Harbour Asset fund managers. I still barely have enough combined information (see above table) to see only 30%ish of the constituency of the fund on both comparative dates (30-06-2022 or 30-06-2021).

Harbour Asset's June 2022 comment on the state of the global interest rate market may be found here:

https://www.harbourasset.co.nz/research-and-commentary/the-end-of-the-great-moderation/

"Factors have contributed to a period of low volatility in key macroeconomic variables since the mid-1980s that is often referred to as the “Great Moderation” "
"Over the coming decades it may just be digitisation (technological advancement) among the factors that helps economies to contain inflation pressures. An additional structural inflation force may have also emerged in the world’s effort to tackle climate change via de-carbonisation."
"The possible end of the 'great moderation' may see fixed income investors seek greater compensation to part with their money for long periods of time and presents an upside risk to longer-dated bond yields."
"The ongoing war in Ukraine and China’s zero-tolerance COVID approach are key risks to the economic outlook. Both could keep inflation elevated for longer and weigh more heavily on global economic activity."

My interpretation of what Harbour Asset Management is saying is that, on a global basis, both in the long term and the short term, interest rates are going to be higher than what we have been used to.

Having 'talked the talk' of where interest rates might be heading, has the resultant Harbour Asset fixed interest investment strategy 'walked the walk'? Unlike the other three protagonists, the average 'bond interest rate' for Harbour's investments has come down over the year. The average 'time to maturity' has gone up, even if it is still within the ball park offered by the other protagonists. A true belief in 'higher interest rates coming' would be consistent with buying higher yield bonds with shorter maturity dates - the opposite to what has happened in the Harbour portfolio. Whether you believe the persistently higher interest rate story or not, my opinion is that if a manager has a philosophy, then the said manager should follow their own convictions. That does not seem to have happened at Harbour Asset Management, with their 'NZ Corporate Bond Fund. But what Harbour have or haven't done is at least consistent behaviour with the management of Harbour's other fixed interest: "NZ Core Fixed Interest Fund".

On both the one year and five year result measuring stick, the 'NZ Corporate Bond Fund' has performed better (or less worse) than the "NZ Core Fixed Interest Fund". When adjusted for fees:

'NZ Corporate Bond Fund' (percentage return): -5.37 + 0.72(0.45) = -5.05 (One Year), 0.99 +0.72(0.45) = 1.31 (5yrs)
'NZ Core Fixed Interest Fund' (percentage return): -6.07 +0.72(0.65) = -5.60 (One Year), 0.64 +0.72(0.65) =1.11 (5yrs)

Yet it isn't surprising that the corporate bonds would provide a better return than a fund containing government stock. That's because government stock is priced for a lower risk premium.

I want to remind readers that I am forming my view on what happened over the year based entirely on looking at the start and end points, while ignoring bond holding levels 'in the middle'.

Moving on to judging the 'multi year fixed income picture', Harbour Asset Management's ' 'NZ Corporate Bond Fund' are the second best performer behind Milford. So I rate the 'NZ Corporate Bond Fund' as a longer term sound investment option amongst our group of protagonists. Albeit one let down by not adapting as well to the changing interest rate market over the last financial year, compared to some other 'fixed interest managers' out there.

SNOOPY

Snoopy

04-10-2022, 08:20 PM

At this point in the thread I think we have enough protagonists to make some observations and conclusions. I have listed the previously described funds from largest to smallest so that you can decide if being 'small and nimble' is really an advantage. Or does having large scale and amortising management resources over a larger asset base tend to produce better returns? Of course, we have to remember that all of these funds are not equal (neither in scope nor strategy) as per the earlier fund descriptions have already outlined (Milford Post 48, Fishers Post 47, KiwiWealth Post 54 and Harbour Posts 58 & 59).

I have decided to look at both one year returns, that best reflect the current bond market environment, and five years that give a longer term picture of what happened when the market was growing more steadily (even if that -last year-, this does reflect a sudden and significant rise in interest rates).

Fund NameFund SizeFund Return (1yr to 30-06-2022)Annual Fund Return (5yr to 31-03-2022)

Milford Trans Tasman Bond Fund$1,152,3m (@30-06-2022)-5.94%+1.29%

Harbour NZ Corporate Bond Fund$418.533m (@30-06-2022)-5.37%+0.99%

Harbour NZ Core Fixed Interest Fund$153.910m (@30-06-2022)-6.07%+0.64%

Fisher NZ Fixed Income Trust$126.7m (@30-06-2022)-7.13%+0.69%

KiwiWealth Conservative Fund$38.054m (@30-06-2022)-6.34%+1.35% (3 years) (2)

Average-6.17%+0.99%

Notes

1/ All of these fund returns are after fees but before tax.
2/ The Kiwiwealth Conservative Fund has only been active for 3 years. It is also the only 'conservative' fund that contains a share equity component.

So what are the constituents of these funds that are giving surprisingly consistent results? That's next.

SNOOPY

Snoopy

05-10-2022, 10:04 AM

This is a representation of information that I have already provided, but in a form that makes it easier to compare the prospective protagonists. I list the top ten holdings of each fund.

Where an entry has two percentage figures attached to it:

a/ The first is the 'coupon rate' of the bond, AND
b/ The second (in brackets) is the percentage of that bond fund that heads the column, which is made up of the holding that is being detailed.

Kiwiwealth Conservative Fund
Harbour NZ Corporate Bond Fund
Harbour NZ Core Fixed Interest Fund
Fisher NZ Fixed Income Trust
Milford Trans-Tasman Bond Fund

Westpac NZD Account (Cash & Cash Equivalents) (3.24%)
Bank of New Zealand 07/06/27 4.985% (4.08%)
NZ Government Stock 15/04/37 2.75% (13.16%)
NZ Government Stock 14/04/33 3.5% (6.37%)
NZ Local Gov Fund Agency 15/05/28 2.25% (3.54%)

NZ Local Gov Fund Agency Bond 3.5% 14/04/33 (2.80%)
Kainga Ora 24/04/30 2.183% (3.68%)
NZ Government Stock 15/05/41 1.75% (7.44%)
NZ Government Stock 20/04/29 3.0% (5.70%)
NZ Local Gov Fund Agency 15/04/26 1.5% (3.15%)

NZ Local Gov Fund Agency Bond 4.5% 15/04/27 (2.53%)
Westpac NZ Limited 23/03/23 3.72% (3.50%)
NZGS Index Linked Bond 20/09/25 2.00% (6.21%)
NZ Government Stock 15/04/25 2.75% (4.15%)
NZ Local Gov Fund Agency 15/04/24 2.25% (2.92%)

NZ Local Gov Fund Agency Bond 1.5% 20/04/29 (2.34%)
Westpac NZ Limited 16/02/27 3.696% (3.45%)
NZ Government Stock 15/05/24 0.50% (5.63%)
NZ Government Stock 15/04/37 2.75% (4.08%)
NZ Local Gov Fund Agency 15/04/2027 4.5% (2.21%)

[TR]

Kommunalbanken AS 4% 20/08/25 (Norway) (2.22%)
Kainga Ora 05/10/26 2.247% (2.98%)
NZ Government Stock 15/04/25 2.75% (3.63%)
NZ Government Stock 15/04/27 4.5% (3.54%)
NZ Local Gov Fund Agency 15/05/31 2.25% (2.04%)

Kainga Ora 3.42% 18/10/28 (2.20%)
NZ Government Stock 15/04/23 5.50% (2.95%)
NZ Government Stock 15/05/32 2.00% (2.66%)
NZ Government Stock 15/05/31 1.50% (4.58%)
Monash University 06/04/29 4.05% (1.95%)

Transpower New Zealand Ltd 1.735% 4/09/25 (2.06%)
NZ Local Gov Fund Agency 15/04/37 2.00% (2.87%)
ANZ NZD Cash (2.48%)
ANZ NZD Cash (2.90%)
Genesis Energy 09/06/27 5.66% (1.72%)

Housing New Zealand Ltd 05/10/26 2.247%

International Bank for Reconstruction & Development 1.625% 10/05/28 (USA) (2.00%)
NZGS Index Linked Bond 20/09/25 2.00% (2.77%)
NZ Government Stock 14/04/2033 3.50% (2.38%)
NZ Government Stock 15/05/26 0.5% (2.86%)
Kainga Ora. 3.36% 12/06/25 (1.56%)

Kommunalbanken AS 1.25% 02/07/30 (Norway) (1.96%)
Westpac NZ Limited 29/07/24 2.22% (2.76%)
NZ Government Stock 15/04/2023 5.50% (2.29%)
Kainga Ora. 3.36% 12/06/25 (2.84%)
NZ Local Gov Fund Agency 20/04/29 1.5% (1.45%)

Asian Development Bank 2.125% 19/05/31 (Philippines) (1.94%)
Kommunalbanken AS 12/06/25 0.75% (2.72%)
NZ Government Stock 15/05/28 0.25% (2.28%)
ANZ NZ Ltd. 3.03% 20/03/24 (2.80%)
Spark 29/09/28 4.37% (1.45%)

Total Top Ten Holdings
(23.09%)
(31.76%)
(48.16%)
(38.32%)
(21.99%)

Top Ten Bond Time to Maturity (Average)
6.4 years
4.7 years
7.8 years
6.2 years
5.4 years

Top Ten Bond Coupon Yield (Average)
2.63%
2.93%
2.33%
2.77%
3.17%

Annual Fund Management Fee
0.71%
0.46%
0.65%
0.96%
0.65%

Notes

1/ 'Kainga Ora' is the agency formerly known as 'Housing New Zealand'.

SNOOPY

Snoopy

05-10-2022, 06:41 PM

Bond Funds are suitable for a 'medium term' investment time line. That generally translates to a time frame of 3 to 5 years. The average performance of our five protagonist funds - over the study period ended 31st March 2022 - was around 1% per year after tax. Furthermore, the best performer - KiwiWealth Conservative Fund - at 1.33% per year - gained their edge by having a targeted 15% 'equity investment' contained within their 'Conservative fund'. I guess one learning from this is that -if you are investing for the medium to long term-, it pays to have an 'equity component' in your investment portfolio. And this is true even if one year in five, your equity component experiences a significant correction. But we are talking about 'pure fixed interest and bond funds' today as the topic of interest. So I am setting aside the KiwiWealth Conservative Fund from our comparison at this point.

For someone used to investing in shares, rather than bonds, the biggest surprise for me was that the difference between the best and worst of the remaining 'bond funds' was a mere 1.29% - 0.64% = 0.65% percentage points per year. In the grand scheme of investment fund returns, this isn't a lot. This suggests to me that as part of a 'balanced fund investment strategy', perhaps investor research should be directed towards how good the manager is at managing shares, while investor clients just accept whatever bond return goes along with that.

The short term (one year) return on the bond funds under consideration I can only describe as dismal, with investors losing at least 5.17% of their funds over the year if they selected the best manager, or 7.13% if they selected the worst. But this was a particularly trying year as explained in the introduction to this series of posts (Post No. 45). It is often said that "past performance may not be a good predictor of future performance." I am fairly sure that motto will apply here.

For a bond fund to perform at its best, it will do so in a climate of falling interest rates. The higher the average constituent interest rate of each bond fund today, the more room the interest rate has to fall. So I am going to pick that the best performer of the current year going forwards will be the 'Harbour NZ Corporate Bond Fund'. That this fund also has the lowest management fees of all the protagonists strengthens my view that this one is the 'best bet'.

For some sensible diversification into different classes of bonds (from choosing NZ government binds , to adding some exposure from across the Tasman), I like the Milford Trans Tasman bond fund. The Milford fund has the best five year earnings record too.

Unlike share funds, where a boutique fund can operate at a significant advantage, it looks like the more funds a bond investment vehicle has available to deploy, the better it will do - as a rule. I expect this is something to do with 'economies of scale' allowing lower fund management fees.

Of the others, the Harbour 'Fixed Interest Fund' looks likely to deliver the least surprises, because it is stacked with government stock. Fisher's 'Fixed Income Trust' have a stack of government stock too, and -as far as I can tell- they have recovered from a not so satisfactory position a year ago to position themselves much better for when interest rates eventually fall again.

Thus ends my little exercise on 'evaluation of NZ managed bond funds'.

SNOOPY

Snoopy

07-10-2022, 09:29 AM

Are these fund figure returns net of all taxes and mgt / administration fees?

This is a really good question.

You go to the 'Annual Return Graph' (based on a year ended 31st March), with the comparison of fund returns verses an index, we find there is the following disclaimer:

"The Fund returns in this update are after tax at the highest prescribed investor rate (PIR) of tax for an individual New Zealand resident. Your tax may be lower."

"The market index return is before tax and fees."

This may indicate that the 'Annual Returns Graph' comparison graph is not an apples with apples comparison! I find that very odd, if the whole purpose of requiring a 'comparative index return' is to figure out if your manager is doing a good job or not.

I took the initiative to ring up one of these 'bond fund providers' to answer these outstanding questions. The requirement to list your fund return in comparison to an index is a legal one. However, the way in which this must be done is closely prescribed. In this instance 'prescribed' ends up comparing an 'after tax' return for the managed fund with a 'before tax' return for an index. In other words the officially sanctioned comparison is guaranteed to mislead! How silly is that?

The fund manager I talked to agreed it was an anomaly, and that there was work going on behind the scenes to fix it. But reform seems to be stalled in the government bureaucratic processes.

Let's unpick this a bit further. As a New Zealand based PIE investment, when they are talking about the maximum PIR tax rate, they mean 28%, (not 39% - the maximum individual tax rate). But is tax just taken off the coupon interest paid by the bond? Or does tax reflect tax on capital gains and losses on trading those bonds as well? If this was an NZ based share fund, then the answer to that last question would be 'no'. But for an individual investor (who is not a trader) then investing in NZ bonds comes under the 'scheme of arrangement' income tax rules. This means an individual investor is in effect liable for a capital gains tax on bond profits, regardless of whether they are a 'share trader' or not. So do funds pay 'income tax' on any capital trading profits they make from bond trading? I do not know the answer to that question. Yet the answer to that question has a very material effect on what an 'after tax' profit figure is for these funds.

A bond fund pays tax on any bond held, in relation to both of:

1/ The interest coupon payment AND
2/ On any capital gain made on a bond that is sold before maturity OR is bought on the market after the issue date but sold at maturity.

IOW the bond funds are subject to the same tax rules as a natural person. The one difference being that because these bond funds are 'PIEs', the maximum tax rate charged on all profits is 28%.

My gut feeling is that a fund paying tax on 'bond trading profits' would be wholly unfair for a unit holder, because different unit holders would have different PIE tax rates. But this would go against the 'set and forget' PIE income doctrine, that is meant to make filling out tax returns for PIE investors so much easier. To me it would still make more sense to treat 'capital gain treated as income' at the investor level rather than at the fund level. But the intersection path between 'making more sense' and 'IRD tax rulings' is not a guaranteed one. If anyone does know what tax rules these NZ based PIE bond funds operate under, I would love to know!

I was very surprised to learn the answer to this question. The fund takes careful note of each customer's PIE prescribed tax rate. Then all transactions that relate to that particular customer are taxed at that individual PIE rate. So 'capital gain treated as income' is taxed at the individual level. But it is all sorted out behind the scenes for you by your PIE provider! Kudos to the PIE providers for doing this. It sounds like a huge amount of background effort to keep track of individual customer detail of all transactions at the tax level. Furthermore, because funds don't know 'how many of their customers' are going to 'withdraw how much money' and 'when', I imagine sorting out the fund's own tax bill is a nightmare. But I didn't ask about that!

SNOOPY

GTM 3442

07-10-2022, 03:14 PM

Snoopy, thank you very much for this series of posts. They have been extremely useful to this bond investor - even though I'm invested in individual bonds bought at time of issue and held to maturity.

Snoopy

08-10-2022, 04:02 PM

Hi Snoopy, you seem to spend a lot of time creating very detailed analysis and reports. It might be a good idea for you to start your own website and post them all there, where they can be more readily accessed, archived, search, found by Google, and read. I would if I were you. You could also keep posting them here at the same time. Just a suggestion. Cheers

Glad you are finding my posting worthy of reference Entrep! If I had my own website I would have to be doubly sure I wasn't posting articles riddled with spelling, punctuation and grammatical errors. Plus my 'writing on the fly' would have to stop, or I would pigeon holed as owning an unprofessional website full of misinformation. So I think right now, 'sharetrader' suits me fine.

In terms of searching this website, the 'Search forum' and 'Search thread' tools within the website are useful. If you want to search for my posts, use the 'advanced search' tag which allows you to filter a search by author and put in a key word. If you want to look at my research on individual companies, go to that individual company thread, then use 'Advanced Search' with 'Snoopy' as the author and the tag phrase 'BT1/'. That will bring you to any 'Buffett style analysis' that I have done on that company, (as BT1 is a tag headline I use that stands for 'Buffett Test 1'). Alternatively, to seek out a 'Capitalised Dividend valuation' that I have done use, the key word 'capitalised'.

This is how I find my own posts!

Snoopy, thank you very much for this series of posts. They have been extremely useful to this bond investor - even though I'm invested in individual bonds bought at time of issue and held to maturity.

Glad the posts have been helpful GTM. I must say that I have learned a lot from the background research needed to post on the topic of 'bond fund managers' myself. That included the realisation that the officially sanctioned way of evaluating a bond fund against an un-taxed index of bond returns was inappropriate. As a result I have had to edit all my posts on bonds on this thread to even up that comparative misalignment over the last couple of days! Those adjustments didn't change any of my overall conclusions. But I had to do it to ensure that my text was true to the figures.

I think that bonds are probably an under posted about topic in financial journalism generally. That they are a bit harder to understand than shares, when most people think they are easier to deal with, probably doesn't help. However, since this is a 'sharetrader' site, I guess we can forgive this website for its bias towards shares.

SNOOPY

SBQ

08-10-2022, 10:13 PM

@Snoopy:

I applaud you for the amount of work done, especially picking up the phone and calling up a fund manager (as it's unlikely a fund manager would be hanging out in this forum and do a proper reply). This shows your dedication to getting down to the finer details of investing. Virtually most people just don't care and go on the basis of "assuming".

In this instance 'prescribed' ends up comparing an 'after tax' return for the managed fund with a 'before tax' return for an index. In other words the officially sanctioned comparison is guaranteed to mislead! How silly is that?

This still leaves me scratching my head. There does not seem to be a standardise disclosure of the % returns various bond funds and equity funds show in their prospectus. After tax? What about after mgt fees? Do the fees vary from year to year? As I mentioned before, over in N. America, they've basically eliminated the problem of taxation with full intent of 'tax free compound returns'. The tax is deal at the individual level and the 401k/RRSP etc funds themselves do not pay any taxes. This just leaves only the management fees they charge which over the decades, have been screwed down to minimal % per year.

Funds under the PIE scheme don't appear to be that complicated in regards to taxation at the individual tax bracket. The PIE funds would operate tax free and conduct all the trading that is required on balance. Then at tax time, the portfolio funds pay a lump sum tax which becomes an aggregate of the total tax every individual has to pay. However, my beef is this paper gain tax robs valuable compound returns over many decades, not to mention a taxing of return during years when the individual is most productive on higher income and can contribute the most. It's not an 'evening' out of tax to pay through deferment.

Snoopy

09-10-2022, 07:34 PM

Funds under the PIE scheme don't appear to be that complicated in regards to taxation at the individual tax bracket. The PIE funds would operate tax free and conduct all the trading that is required on balance. Then at tax time, the portfolio funds pay a lump sum tax which becomes an aggregate of the total tax every individual has to pay. However, my beef is this paper gain tax robs valuable compound returns over many decades, not to mention a taxing of return during years when the individual is most productive on higher income and can contribute the most. It's not an 'evening' out of tax to pay through deferment.

I can't disagree with the first bit of what you are saying. You are merely reflecting on the Canadian position and noticing that by contrast here in NZ: Pay as you go management fees have a negative compounding effect on returns.

However, I am not sure you are right about the 'evening out' bit.

a/ A PIE fund is taxed at 10.5% if you have an income of $48k or less.
b/ In New Zealand the incremental tax threshold rate of tax changes from 17.5% to 30% once your income exceeds $48k.
c/ The gross weekly pension rate for someone living alone is $538.24 per week (@1st April 2022). Over 52 weeks that adds up to $29,988.48.

So it would take a supplementary income stream of $18k to get a pensioner to exceed that $48k tax threshold. This in the context of an NZ minimum wage employee now earning $44k for a 40hour week job.

My summation,from all the above figures, is that if:

a/ You are a single retired person on the NZ pension, AND
b/ You have a supplementary income of up to $18k

then you are getting a considerable tax benefit from the PIE income you can derive in your senior years to lift your income to $48k. The mere fact your supplementary income stream is a PIE has reduced the amount of tax you pay on that income by (17.5-10.5)/17.5 = 40%.

No-one calls that deferment. It is a straight out cut to your personal tax bill. But it has the same effect (taxing you at a lower rate in retirement).

Below SBQ is what you said on the 'How much do I need to retire on thread'.

The idea of the national superannuation pension is it should be enough to pay for one's living cost on reasonable means. The house should be mortgage free, perhaps live down to a smaller size unit, which keeps costs lower. It should also be income tested so if the pensioner has a 6 figure income, well they don't need it. In Canada where I grew up, there's basically 3 pensions. For most annuitants, they collect both CPP and OAS. The latter being everyone gets it after age 65 and is funded and operated like NZ's superannuation. The former being you pay into it BUT is clawed back if your income at pension age is too high. Then there's the 3rd pension which resembles NZ's KS called RRSP.

So you are saying that in Canada, if you are 'too successful' in your saving, then some of your savings will be clawed back by partially removing your pension payments. That doesn't happen in NZ.

Also the maximum tax if you are on higher income in NZ that applies to your PIE investments is 28%. If you earn just more than $70k per year, probably not a 'higher income' these days, your incremental savings PIE tax is capped at 28%, verses the personal incremental tax rate of 33%. And if are lucky/skilled enough to earn over $180k per year, then your PIE gives you an 11% percentage point discount on your 39% incremental tax rate. That is quite an incentive for NZ's high income earners to save via the PIE route right there.

SNOOPY

Snoopy

09-10-2022, 08:29 PM

There does not seem to be a standardise disclosure of the % returns various bond funds and equity funds show in their prospectus. After tax? What about after mgt fees? Do the fees vary from year to year? As I mentioned before, over in N. America, they've basically eliminated the problem of taxation with full intent of 'tax free compound returns'. The tax is dealt at the individual level and the 401k/RRSP etc funds themselves do not pay any taxes. This just leaves only the management fees they charge which over the decades, have been screwed down to minimal % per year.

I think you might have used the wrong word here. You can't possibly expect a fund to list their returns in a 'prospectus', because that is, by definition, before any investing has happened. But if you mean 'report' (after the event), or a 'fund update', then all of those individual funds that I have looked at are quite clear in their declared returns. The returns are listed :

a/ 'Annual Return' (after deductions for charges but before tax) AND
b/ 'Annual Return' ('after deductions for charges and tax')

I am picking these two methods of reporting on NZ PIE funds are standardised by law.

The management fees for all of the bond funds I looked at do not contain a bonus element. So I am thinking in the 'bond realm', these fees are consistent from year to year, and charged at a fixed percentage of fund value. But perhaps it is just the fact that the deemed index for comparison is 'before tax', but the fund is measured 'after tax'? IOW the bond fund would have to earn 28% more than the index just to stay even with the index, let alone earn a bonus fee (if such a fee exists).

SNOOPY

SBQ

11-10-2022, 08:36 PM

However, I am not sure you are right about the 'evening out' bit.

a/ A PIE fund is taxed at 10.5% if you have an income of $48k or less.
b/ In New Zealand the incremental tax threshold rate of tax changes from 17.5% to 30% once your income exceeds $48k.
c/ The gross weekly pension rate for someone living alone is $538.24 per week (@1st April 2022). Over 52 weeks that adds up to $29,988.48.

So it would take a supplementary income stream of $18k to get a pensioner to exceed that $48k tax threshold. This in the context of an NZ minimum wage employee now earning $44k for a 40hour week job.

My summation,from all the above figures, is that if:

a/ You are a single retired person on the NZ pension, AND
b/ You have a supplementary income of up to $18k

then you are getting a considerable tax benefit from the PIE income you can derive in your senior years to lift your income to $48k. The mere fact your supplementary income stream is a PIE has reduced the amount of tax you pay on that income by (17.5-10.5)/17.5 = 40%.

No-one calls that deferment. It is a straight out cut to your personal tax bill. But it has the same effect (taxing you at a lower rate in retirement).

The PIE funds clearly benefit those on high income that are in a tax bracket higher than 28%. No need to show the example of $18K over amount to be in the higher tax bracket. The deferment I was explaining pertains only in Canada's RRSP scheme where funds compound over the long term without taxes until at time of withdrawal.

Perhaps the biggest flaw about the whole Kiwi Saver / PIE fund scheme is around inflation. As I said before, those who get the most benefit from KS are high income earners in the high tax brackets; they are also in age groups that are most productive - so between 25 - 45? The most they contribute at an early age, the more they lose in compound returns as IRD takes the lion share of the portfolio gains. Recall my post about John Bogle's math where even a 2% take from a portfolio that had 7% return = 5%. This 5% return only sees 1/3rd of the gain of the 7% portfolio over a 50 year time frame. The 2/3rds was robbed by IRD + mgt admin fund fees. You can't dispute the impact this has on KS funds at the individual level. Now imagine the effects inflation has in say 40 or 50 years time? This was one of the leading arguments against the KS scheme where to the average person contributing, the level of inflation would outstrip the buying power KS funds would have at the end. A person on $100K/year income that contributes $6K every year into KS, will find out that they won't have a lot left to spend after 40 or 50 years inflation eats away the returns of KS funds.

Then you have the issue of changing tax policies. What if the NZ gov't imposes some new tax scheme like they tried to do recently with GST? If the potential compound gains were not already ruined enough, the gov't does not seem to have any regard on creating incentives for retirement planning.

Now hop on over to Canada where you have deferred taxation. The effects are naturally going to be a lot less and introducing any policy to change the deferred taxation scheme is extremely unlikely.

Below SBQ is what you said on the 'How much do I need to retire on thread'.

So you are saying that in Canada, if you are 'too successful' in your saving, then some of your savings will be clawed back by partially removing your pension payments. That doesn't happen in NZ.

Also the maximum tax if you are on higher income in NZ that applies to your PIE investments is 28%. If you earn just more than $70k per year, probably not a 'higher income' these days, your incremental savings PIE tax is capped at 28%, verses the personal incremental tax rate of 33%. And if are lucky/skilled enough to earn over $180k per year, then your PIE gives you an 11% percentage point discount on your 39% incremental tax rate. That is quite an incentive for NZ's high income earners to save via the PIE route right there.

SNOOPY

Yes clawback applies when you exceed the income at retirement. Keep in mind the clawback only applies on CPP (Canada Pension Plan) scheme and the OAS (Old Age Security) pension you don't lose. The CPP is a deduction off the wage / salary pay and is mandatory. However, there's a key distinction about OAS and CPP and that is around the issue of 'safety nets' for individuals. Everyone is entitled to OAS like your NZ superannuation pension. Where CPP stops is for some reason at retirement if the income is way way too high, then portions of the CPP is clawed back. Why? Because it's around the issue of 'equity' which I find there's not much of in NZ among say the 1%. So you have the wrong incentives where the rich just keep piling on more and more wealth.

Then you have the RRSP (Registered Retirement Savings Plan) which is the deferred taxation I have spoke about. It's entirely voluntary. If the odds are that at retirement if the pensioner makes too much $$ from withdrawing their RRSP, then it's only fair their CPP is clawed back. All in all, the RRSP has been so successful that the gov't introduced other savings plans. RDSP (reg Disability SP) and RESP (reg Education SP) offer greater perks in that they can be entirely 100% tax free even at withdrawal stage. Something the Jacinda gov't could have considered in addressing the high cost of uni education ; instead of offering 1st year uni free. Parents would make contributions to nearly any investment assets (shares, ETFs, managed funds etc) and over the 18 years since their child was born, it would grow tax free, and all those funds if used for the purpose of education, is withdrawn tax free.

I should also add that in RRSPs, there is a maximum time limit (if I recall correctly) after age 80 all the funds have to be withdrawn and the tax has to be paid. Or upon death, tax is paid. The notice our tax prof at uni told us was the gov't didn't want funds to grow without serving the purpose to "fund retirement". So the incentive is there at retirement 65 to tap in the RRSP funds.

Then you have the TFSA (Tax Free SA) which anyone over 18 can start. Annual contributions limit to $6K now and is indexed to inflation on future years. All gains are 100% tax free, likewise on withdrawals.

To give you an idea how adamant the Cdn gov't is about saving for retirement. Some of these plans (ie RESP and RDSP) the gov't wants to invest their portion into the stock market in the same way as the individual would. Gov't matching contributions but at your choice of where you invest the funds in. Not this $521/year kind of deal in KS but serious amounts of $. Say in an RDSP if a friend or family member puts in $2000, the Cdn gov't will match it and it does not have to be returned. Where are the incentives in NZ for people with disabilities? Those wanting education but can't fund it? It's clear in Canada, the gov't wants to put investment first for the future. Among my friends and family i've been very vocal against the NZ tax scheme and KS. How all the benefits are for the rich to buy multiple houses and just simply hold it for more than 10 years and never pay a dollar in tax on the house price gain. Meanwhile the low income earners struggle to get into a level to own a house. This same logic applies to KS where the PIE funds gives the benefit to the rich so they pay less tax than otherwise. Sure the low income earners are already paying lower taxes, but that doesn't change the fact that setting a ceiling on the amount of tax they will pay is fair.

SBQ

11-10-2022, 08:47 PM

I think you might have used the wrong word here. You can't possibly expect a fund to list their returns in a 'prospectus', because that is, by definition, before any investing has happened. But if you mean 'report' (after the event), or a 'fund update', then all of those individual funds that I have looked at are quite clear in their declared returns. The returns are listed :

a/ 'Annual Return' (after deductions for charges but before tax) AND
b/ 'Annual Return' ('after deductions for charges and tax')

I am picking these two methods of reporting on NZ PIE funds are standardised by law.

The management fees for all of the bond funds I looked at do not contain a bonus element. So I am thinking in the 'bond realm', these fees are consistent from year to year, and charged at a fixed percentage of fund value. But perhaps it is just the fact that the deemed index for comparison is 'before tax', but the fund is measured 'after tax'? IOW the bond fund would have to earn 28% more than the index just to stay even with the index, let alone earn a bonus fee (if such a fee exists).

SNOOPY

In Canada the term prospectus is used when individuals look to send their $ to that fund. It may consist of annual reports, fancy graphs of returns they've done over the years, etc. But the main problem is they're grossly window dressed. Lots of excuses for poor year returns, change a bit of here and there, but overall the agenda with the prospectus is to entire new investors as they sit in the office with their financial adviser.

We live in interesting times with inflation out of control. My wife told me today last quarter food prices have gone up 9%. What kind of return does one have to get to beat inflation? The work you've done on various NZ bond funds has been incredible, but at the end of the day, for what means? IMO, the only fighting chance to win against inflation is through owning stocks of companies over the long term. That's because companies can raise prices to keep profits going, but in fixed term incomes are well.. fixed.

Snoopy

11-10-2022, 09:26 PM

Deleted In Error 12/12/2022.

Snoopy

11-10-2022, 09:53 PM

Perhaps the biggest flaw about the whole Kiwi Saver / PIE fund scheme is around inflation. As I said before, those who get the most benefit from KS are high income earners in the high tax brackets; they are also in age groups that are most productive - so between 25 - 45? The most they contribute at an early age, the more they lose in compound returns as IRD takes the lion share of the portfolio gains. Recall my post about John Bogle's math where even a 2% take from a portfolio that had 7% return = 5%. This 5% return only sees 1/3rd of the gain of the 7% portfolio over a 50 year time frame. The 2/3rds was robbed by IRD + mgt admin fund fees. You can't dispute the impact this has on KS funds at the individual level. Now imagine the effects inflation has in say 40 or 50 years time? This was one of the leading arguments against the KS scheme where to the average person contributing, the level of inflation would outstrip the buying power KS funds would have at the end.

With the exception of 'inflation adjusted bonds', inflation is the enemy of all savings schemes. This is not just a problem for Kiwisaver. As you have noted before, a share based investment portfolio is probably your best investment vehicle to keep ahead of inflation. You could even argue that the $521.43 that the government contributes on top of your own minimum $1,042.86 Kiwisaver contribution is a pretty good offset against inflation, - provided inflation does not exceed:

$521.43 / $1,042.86 = 50%

SNOOPY

Snoopy

11-10-2022, 10:21 PM

Now hop on over to Canada where you have deferred taxation. The effects are naturally going to be a lot less and introducing any policy to change the deferred taxation scheme is extremely unlikely.

Yes clawback applies when you exceed the income at retirement. Keep in mind the clawback only applies on CPP (Canada Pension Plan) scheme and the OAS (Old Age Security) pension you don't lose. The CPP is a deduction off the wage / salary pay and is mandatory. However, there's a key distinction about OAS and CPP and that is around the issue of 'safety nets' for individuals. Everyone is entitled to OAS like your NZ superannuation pension. Where CPP stops is for some reason at retirement if the income is way way too high, then portions of the CPP is clawed back. Why? Because it's around the issue of 'equity' which I find there's not much of in NZ among say the 1%. So you have the wrong incentives where the rich just keep piling on more and more wealth.

Then you have the RRSP (Registered Retirement Savings Plan) which is the deferred taxation I have spoke about. It's entirely voluntary. If the odds are that at retirement if the pensioner makes too much $$ from withdrawing their RRSP, then it's only fair their CPP is clawed back.

OK, so in Canada CPP deductions at 5.7% of your own wage are compulsory, matched by an equal contribution from your employer. But if you are successful enough, -outside of your CPP investing for retirement-, to have an income above a certain threshold, THEN everything you have put into your CCP scheme is confiscated by the Canadian government?

Could you not argue that is the ultimate disincentive for investors? Why bother trying to invest yourself, if you know the result of 'you being successful' is that the supplementary CCP pension into which you have paid your own hard earned money, will just be taken away? I guess if most people are incentivised 'not to bother', that is one way to achieve 'social equity'!

SNOOPY

SBQ

12-10-2022, 08:47 PM

With the exception of 'inflation adjusted bonds', inflation is the enemy of all savings schemes. This is not just a problem for Kiwisaver. As you have noted before, a share based investment portfolio is probably your best investment vehicle to keep ahead of inflation. You could even argue that the $521.43 that the government contributes on top of your own minimum $1,042.86 Kiwisaver contribution is a pretty good offset against inflation, - provided inflation does not exceed:

$521.43 / $1,042.86 = 50%

SNOOPY

They're near insignificant amounts that go towards retirement saving. I've mentioned many times the 3% minimum that goes in KS, despite it being matched by the employer's 3% + that $521.43 would not have a chance in offering much buying power at the end of retirement. Because inflation has eaten away the cost of living in NZ so much that 3% would not even address the higher cost of inflation. It's the same view that many believe they're winning with a term deposit at the bank of 3% / year when inflation is 8% / year. To have any meaningful investment at end of retirement, one needs to contribute in far larger sums than $6,000/year. In Canada this would only be chum change and would fit in the TFSA category for the small guy. But in NZ, $100K/year income would be considered a lot of $ in some places, but not so much in Auckland. Hop over in Canada, RRSP individuals can contribute up to 18% of their annual income towards the deferred tax savings plan. With the right company that wants to deduct more expense through higher employee contribution (which lowers their tax pay), individuals have far more of a nest egg than what KS would provide. Not to mention that RRSPs room limits are accumulative and can be carried forward to future years in say like this year in a stock market crash - one can elect on their tax return to use say they accumulated contributions of $100,000 or more. Unlike KS, you're only locked on on a minimum 3% annual contribution basis with no adjustments for going forward or back that would account for market volatility year after year.

What KS needs to be done is contributions amounts need to be 'indexed to inflation'. Canada does this for pretty much everything from teacher's pay to OAS pension annuities, welfare payments, personal tax exemption limits, basically when you do this, you avoid less disputes on gov't pay that I see too often in NZ (ie teachers go back to the union to fight for higher pay because their pay has not been reflected to inflation over the many years etc.). But overall how much will KS serve to the middle class saver? Probably not a lot. It might have a chance if the gains were not taxed and no FIF so the returns can grow more exponentially. But somehow with this high inflation we are experiencing, $5,000 or $6,000 a year is not a lot of money and basically does not buy much.

OK, so in Canada CPP deductions at 5.7% of your own wage are compulsory, matched by an equal contribution from your employer. But if you are successful enough, -outside of your CPP investing for retirement-, to have an income above a certain threshold, THEN everything you have put into your CCP scheme is confiscated by the Canadian government?

Could you not argue that is the ultimate disincentive for investors? Why bother trying to invest yourself, if you know the result of 'you being successful' is that the supplementary CCP pension into which you have paid your own hard earned money, will just be taken away? I guess if most people are incentivised 'not to bother', that is one way to achieve 'social equity'!

Regarding CPP, that is correct because the ultimate goal for CPP is 'safety net'. If everyone receives OAS (like your NZ Super), then what is the CPP for? What it provides is a safety net for those that rolled the dice wrong. But what it's not intended for is to make those on already extremely high incomes at retirement, to benefit more.

And to explain this situation more... NZ really only has 2 forms of gov't pension income streams. Compared that to a teacher in Canada that receives 3 and it's not uncommon for some retirees receiving 4 or 5 pension stream incomes. So there comes to a point that at retirement, if you're drawing down on your multi-million $ portfolio, the CPP is really an insult to the taking. In a different way, the CPP is just the insurance scheme in case your investment bets did not work out at retirement (and they often do when say we have multi-year bear market). Whereas in NZ, 2 or 3 bad years really hurts those that want to withdraw from their KS fund. There is no deferment on tax as the entire fund paper gains are taxed year after year. You're taxed again at the KS when on recovery from a negative year. (ie fund loses 20% this year, in 2023 when it recovers back to par, you pay tax again on that recovered portion ; so like paying tax on it again in the previous year). This scheme reminds me of ICBC (BC, Canada's provincial auto insurance scheme) where changing hands of 2nd hand cars net the gov't to pay tax on the sale of the car (paid when changing the rego). The more times the car changes hands, the more the PST applies.

Snoopy

03-12-2022, 03:10 PM

I thought I would jot down a few notes from Fishers September 2022 Webinar.

https://www.youtube.com/watch?v=0R9a01PGrhY

Ashley Gardyne (Chief Investment Officer): Opening remark:
"When investors are at their most worried, that is also the time that a lot of that worry is already in the price."

Quin Casey: (Portfolio Manager – Fixed Interest Investment): On how high interest rates will go:
"Inflation is the highest it has been on 30 years. Inflation impacts on interest rates. When inflation moves up, interest rates move up - because people want to be compensated for their lack of purchasing power. I think inflation will likely fall over the next twelve months. Commodity prices (oils, metals) have now come down from their high levels, including a few food commodity prices (wheat, corn). Housing markets are slowing as well (both prices and transaction volumes). We have also seen improvements in the supply chain (freight rates are down and delivery times for fruit are down). For the companies we follow, production processes are a bit easier (especially durable goods), and there is more inventory around. This should all take some of the pressure off the fixed interest market."

Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure): On recession prospects:
"I think it is fairly certain that New Zealand and the globe will fall into a recession 'at some stage'. But whether it is in one year or five years I do not know. Warren Buffett once said:

"If you can tell me with certainty that there is going to be a recession next year, I would still be buying and selling the same stocks as I am today."

We are long term investors who invest on a five, ten, or twenty year plus time-frame. Recessions are part of the normal course of doing business for long term equality investors. When something is on the front page of the newspaper and has been talked about a lot, we can say it is at least partially baked into stock prices"

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) Comments on investment strategy:
"We look for companies with a strong competitive advantage for a product or service that is very important for customers and that it is hard for customers to shift away from. For example, Xero has accounting software that is used by many small and medium sized businesses here in NZ. Once those businesses have embedded Xero into their business operations, and they use it for all accounting purposes, it is very unlikely they are going to switch away from that 'month in' or 'month out', and find an alternative accounting platform provider. It means Xero customers tend to be really sticky."

'"A company with a good growth runway in front of it that is providing goods and services that customers need means that, over time, that growth runway underpins earnings growth. In the end share prices follow earnings growth."

Quin Casey: (Portfolio Manager – Fixed Interest Investments) On fixed interest opportunities:
"I am particularly excited about corporate bonds, and especially corporate bonds in overseas markets which have been marked down more than local bonds. We are starting to get to historically high yield levels. The Fisher Funds income fund, for example, now yields over 7%, a multi year high and within that fund we do have corporate bonds. We pick those using our credit research process: solid business models, robust balance sheets and good people at the helm. We have an investment in Sanniikos Group, who own resorts throughout the Mediterranean. The company was established in the 1970s, and they have a great track record for exceptional customer service. They target high income families right throughout Europe. That bond is yielding just over 9% in NZD terms. attractive for a business with that track record and quality asset base."
.
Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure) On shares exposed to the 'rough ride' of the NZ housing market:
"More that 60% of Fisher Funds NZ share portfolio's revenue is coming from offshore. For example, F&P Healthcare has 96% of their revenue coming from offshore. But Summerset and Ryman, for example, absolutely have links to the housing market. If a new resident wants to enter a retirement village, they probably have to sell a house in this prevailing fairly weak (housing) market to fund that new retirement village unit,. But that is where the linkages stop."

"In my opinion, whether a resident enters a retirement village or not is driven by their own circumstances. To give you an example of that, my grandmother went to a Ryman village in Whanganui a few years ago. She didn't do this because of anything to do with the housing market. It was because she was living in a large house alone. She didn't want the hassle of looking after that house. She wanted the camaraderie on the bowling green and of the happy hour. She wanted the security of living in a retirement village. She had owned her house in Whanganui for about 35 years. She couldn't have really cared less about the prevailing Whanganui housing market dynamics at the time when she entered her village."

"On Summerset in particular, current sales and business stress indicators are near all time highs. So really retirement villages have their own supply/demand dynamic, independent of the housing market."

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) On the Fisher Australian portfolio:
"The domestic economy in Australia is performing quite well. Consumers are spending, the job market is very tight, and the post pandemic return to freer life is well in train, much as in New Zealand. Inflation is happening, but many companies in the Fisher portfolio are able to increase prices and offset those inflationary pressures. Domestic supply chain pressures are easing (including import of goods rates). On a cautious note, they are concerned about low cost fixed mortgage interest rates 'rolling off'. The banks in particular are cautious about what that will mean for mortgages and households into 2023. Prudent steps are being taken,and company managers are staying alert."

Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure) On war and the European energy shortage:
"Europe is NZ's third biggest trading partner. But NZ itself is in a very good energy position. NZ relies on natural gas for around 20% of our energy needs, but this is harnessed locally mostly from the Taranaki region. Natural gas needs to be liquefied to be economically transported - a very expensive process that needs bespoke shipping terminals for international trade. So the NZ price of $7/MMBtu is not connected to the war shocked European price of $50/MMBtu.

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) On repositioning of portfolios:
"Shares are being sold off indiscriminately in response to macro pressures. So Fishers have been beefing up positions in the 25 or so ASX shares we have in our portfolio that have long growth runways. One such example is Dominos, the pizza franchisor for Australia, New Zealand, Japan ,(and now) South East Asia and some of Europe. Concerns about what is happening in Europe has seen the share price fall back to 2019 levels. Yet between 2019 and now, its earnings are up 30%. Allied to this, we see this business doubling their store footprint over the next 6-8 years."

"We are using as a funding source some cash as well as reducing our weightings in some more defensive companies that have done really well for us in this environment and have hung in there but aren't necessarily as cheap as some of these businesses that have been severely punished. We are tilting capital within the book."

on other Australian investments with a growth bent
"CSL, a large healthcare business that collects plasma, makes plasma bag products for people with blood related deficiencies, have spent over $US1b this last year in R&D and have gone out and acquired an adjacent business in the kidney market, providing kidney treatments for people with chronic kidney disease. They haven't held back because of rising interest rates, they have moved forward."

"We invest in "Wisetech", a leader in the software logistics services market that has spent $180m in R&D over the last year, which adds to their ability to keep growing over the next 5-10 years."

Sam Dickie: (Senior Portfolio Manager – New Zealand Shares and Property & Infrastructure) On managing a business in a recession:
"Mainfreight has learned a lot from previous downturns. The NZ business, back in the global financial crisis, was a more mature business and profitability and margins actually improved during the GFC because the company was very quick to cut costs. With 300 branches across the world, imagine the maintenance that is normally outsourced to third parties. When things slow down, Mainfreight switch to doing their own maintenance internally. Every single person in the 10,000 strong work-force around the world shares in the profit of their local branch. So they all think like business owners."

Robbie Urquhart: (Senior Portfolio Manager – Australian Shares) 'On alternative investment categories':
"Bitcoin is down more than 60% year to date. it has been touted as a digital alternative to gold in turbulent times but it has been anything but. It's volatility has been a lot more than share-markets, not less. It hasn't protected investors to the downside when economic times have got tough. It will be interesting to see how these markets evolve. But for now I would steer clear of Crypto, because these markets don't have the characteristics that people say they should have in times like these. In addition Crypto doesn't earn any income. So there is no cash flow metric upon which we can base the valuation. We tend to steer clear of assets that have those characteristics."

"Gold similarly doesn't earn an income, so sitting there trying to value it and trying to find the right time to invest in gold is quite tough. But gold does have a long history of being a store of value and there is an argument that gold should form part of peoples diversified portfolios because over centuries it has proven to be a bellweather in times where countries have mismanaged themselves. In the era of FIAT currencies that is the argument that is often put forward. However, in a climate of rising interest rates there is a strong argument for gold going lower because the costs to store gold and the costs to protect it, they go up relative to what you can earn with that money by putting it in a term deposit. For me, studying gold is unproductive use of time, relative to the time I would much rather spend studying share-markets with productive assets"

-----------------

So what do I make of the above? It is pretty much 'same old. same old'. Fishers keep on buying 'good' companies whatever the price 'because price follows earnings growth'. One problem I have which such an approach is that I think it is a bit lazy from a value investors' perspective. What ultimate projected yield are Fishers buying at? And how long will these 'expensive but good' investments take to grow into that projected yield? Maybe Fishers do know the answers to these questions and they are just not telling us? Time horizons and quantifiable returns do matter and my impression is that Fishers obfuscate both. Just saying your investment horizon is 'long term' and increasing the length of that term if your investment performance isn't cutting it doesn't wash with me.

Where some 'shift in thought' is happening was the shifting of some 'defensive money' that had done well in recent months into more growth assets. Also the highlighting of the comparative worth of some good fixed interest rate deals. These shifts in strategy make good sense if interest rates are truly peaking and are set to fall back.

SNOOPY

Snoopy

07-12-2022, 02:39 PM

My notes on this webinar are below

https://www.youtube.com/watch?v=QWtLt6sIodE

Robbie Urquhart – Senior Portfolio Manager, Australian Equities: Outlook for 2023
"Markets are forward looking. This is what gives us optimism about 2023 and beyond."

Ashley Gardyne – Chief Investment Officer :On shaping current investment opportunities
"This time last year, putting money into investment grade bonds in the US we would have got a 3.5% return. The same companies now yield 7-8%. And there are places where you can get 10%+ yield. So we are rotating these fixed interest portfolios out of government bonds that tend to offer lower yields into more credit. On the equity side too, our portfolio managers have been looking through lists of companies that we truly admire, but we have not been able to buy because the price is too high. Companies like 'Salesforce.com' and 'Microsoft' are great businesses that we think have got really good long term prospects. We think about the micro, companies and individual securities, rather than the macro picture."

"With our multi asset portfolios (balanced and conservative funds), the bond return component is looking more attractive going forwards. But we have been increasing our equity weighting as markets are falling, to take advantage of buying shares at lower prices. A new international equity fund and a new global credit fund and a private debt fund are providing a wider range of input constituents in our multi-asset funds.

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On company adaptation
"Audinate Group Limited creates hardware as well as software that is used in audio equipment to help components network with each other. So microphones can speak to speakers and so on. They have had a challenge in sourcing microchips out of South East Asia. They have approached this by redesigning a bunch of their circuitry so they can source more abundant chips which there are no shortages of, and put those into their hardware. They have also increased the flexibility of the software componentry so that it can be retrofitted into physical products, to avoid the necessity of some microchips at all."

"Resmed, a company that makes ventilators, a global leader in sleep apnea equipment, is another example of adapting to a microchip component shortage. They have a work around whereby they have gone back to using some of the older 'card' technology. You literally insert these cards into the ventilators to capture the data that is necessary. You can upload that data physically into the card. it is a short term workaround solution. But it is one way they can treat their patients and meet the demand of their customers."

Ashley Gardyne – Chief Investment Officer :On NZ equity reaction to RBNZ slowing the NZ economy.
"Consumers will come under more pressure due to the globally high proportion of mortgage debt that Kiwis have. Offsetting this is NZ's extremely low unemployment, and so far the economy is operating resiliently despite the hikes we have already. if it does start to slow too much the central bank can back off. Markets are already pricing some difficult times ahead. A decision to sell NZ stocks will depend on what they are and how resilient they will be to the coming economic environment. A large proportion of our NZX investments get most of their income from offshore. F&P Healthcare is really an international company with a head office in NZ. Same for Xero, same for A2 milk, same for Mainfreight."

Laura O’Reilly – Senior Wealth Management Advisor :On taking advantage of those higher term deposit rates.
"Term deposits are good for investors with shorter term investment needs and for those that have other reasons for being very conservative. But they are not optimal for long term savings growth. Inflation will eat away at the real value."

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On ESG and the evolving investing landscape
"Investors are more interested in engaging with companies to see that they will be match fit, rather than putting them into a box of being 'good' or 'bad'. In the short term we are still reliant on hydrocarbons and there is a trade off that needs to be balanced."

Ashley Gardyne – Chief Investment Officer :On the outlook for property
"One advantage of buying property has been the ability to leverage it. You don't want to be borrowing money to invest in the share-market. But it is very different geography by geography. The last 10 years in the USA, Ireland and the UK haven't been that great in the property market. There are places there and in Europe where property prices are still below where they were 15 years ago. It really does depend on the characteristics of each market. In New Zealand our property is really quite expensive relative to income. So if I had to guess which market, shares or property, would do better over the next ten years I would probably guess shares. But I am reasonably positive on both."

"On commercial property, we do see some real challenges for office in some parts of the world. if you look at some data in New York, vacancies are really quite high and people just haven't come back from lock-downs. They are still working from home. Retail perhaps a little bit the same, as people bought on-line. But people are still gravitating towards the biggest and best malls. We have direct ownership of commercial property in our Kiwisaver funds. We are leaning towards industrial at the moment, often warehousing and logistics facilities that are benefitting from a range of different factors, one being e-commerce and the need to move parcels around. We have been tilting that portfolio towards commercial and industrial property recently."

Ashley Gardyne – Chief Investment Officer :On Ryman and the retirement sector, portfolio adjustments
"Ryman has been a great NZ success story for over 20 years, and we have held it right from the start of the Fisher Growth fund, At one point the original investment had increased 100 fold over that period of time. It has been a phenomenal NZ success story. But it is also an interesting NZ investment lesson because you have to remember that some things do well for a long period of time but it doesn't mean they always will. So it is important to be constantly reviewing your positions. We took the weight down in our portfolio pretty significantly over the last couple of years and it is actually a very small weight at the moment. It has gone from a period of great success, this growth story, to a period where they got so large that it became harder to grow. So they moved into Australia, they bought quite a bit of land over there. But Australia is a market that is harder to break into - there are more regulatory issues there. And in New Zealand they started building denser units, multi-level rather than building individual retirement units. The new ones have a lot of care facilities in there as well, so they became very capital intensive, and you also could not just build a village 'unit by unit' and recycle your capital as you sell each individual unit. They have a lot more capital tied up in the business now and as a result their debt levels have moved up and the business has come under quite a bit of pressure. So these are some of the reasons we have become a little bit cautious."

"It is also linked somewhat to the property market which is another area of concern for us. But we think these are temporary issues. There is still a lot of growth ahead in the retirement sector. We really still have a positive view on Summerset, But for now Ryman is a lower weight for us."

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On Crypto and Gold
"Gold traditionally does well in a high interest rate environment. But this year it is down a few percent, simply because the cost of owning and storing gold is going up relative to other assets."

"Crypto is largely an experiment and it is not one that has worked out really well. Financial parts of the sharemarkets could have some contagion spread from the rapid melt down of crypto assets, as the crypto markets unwind. To date that looks relatively contained. But in our international portfolio we have one bank that has lent to the companies involved in blockchain and in the crypto world: 'Signature Bank'. But Signature bank seems to have come through pretty well thus far."

Ashley Gardyne – Chief Investment Officer :On Signature Bank
"Signature Bank" takes deposits from some of the crypto exchanges. But it is a very small part of its business. It doesn't do any lending or anything like that. It really is just a service provider to some of those businesses. Given it was a new market, they have essentially ring fenced those deposits so that if they desire to they can wind that part of the business down without having too much of an impact. That is the only company that has an exposure to Crypto in any of our portfolios."

Robbie Urquhart – Senior Portfolio Manager, Australian Equities :On the twelve month underperformance of the Australian Growth Fund
"The ASX200 recovery has been driven by a very strong skew to materials and mining companies, commodities as well as energy. These are not companies that have strong pricing power that can drive growth under their own steam. So commodity companies don't fit the Fisher investment criteria that well, We don't expect such companies to outperform long term, so long term we believe we can generate greater returns by not investing in them."

----------------------------

My own reflections on what was said. The 'mea culpa' from CIO Ashley Gardyne on the recent performance Ryman was quite refreshing, as you don't often hear managers say they got it wrong. This deserves a whole 'response post' in itself, which I have done in post 77.

No real excuse was offered in ignoring the current commodity boom. The message was if you want to invest in commodities, best to do so somewhere else. I applaud the clear communication from Fishers on this issue, and I think their position is fair enough given their previously stated 'modus operandi'.

On Crypto, they pretty much put the boot in, as Crypto in general and Bitcoin in particular trended down. That is a change from their 'wait and see while the market evolves' position of old. The main problem seems to be Crypto doesn't follow any investment rules so 'we can't analyze it'. Do it yourself if you want some!

SNOOPY

Snoopy

08-12-2022, 12:03 PM

Ashley Gardyne – Chief Investment Officer :On Ryman and the retirement sector, portfolio adjustments
"Ryman has been a great NZ success story for over 20 years, and we have held it right from the start of the Fisher Growth fund, At one point the original investment had increased 100 fold over that period of time. It has been a phenomenal NZ success story. But it is also an interesting NZ investment lesson because you have to remember that some things do well for a long period of time but it doesn't mean they always will. So it is important to be constantly reviewing your positions. We took the weight down in our portfolio pretty significantly over the last couple of years and it is actually a very small weight at the moment. It has gone from a period of great success, this growth story, to a period where they got so large that it became harder to grow. So they moved into Australia, they bought quite a bit of land over there. But Australia is a market that is harder to break into - there are more regulatory issues there. And in New Zealand they started building denser units, multi-level rather than building individual retirement units. The new ones have a lot of care facilities in there as well, so they became very capital intensive, and you also could not just build a village 'unit by unit' and recycle your capital as you sell each individual unit. They have a lot more capital tied up in the business now and as a result their debt levels have moved up and the business has come under quite a bit of pressure. So these are some of the reasons we have become a little bit cautious."

"It is also linked somewhat to the property market which is another area of concern for us. But we think these are temporary issues. There is still a lot of growth ahead in the retirement sector. We really still have a positive view on Summerset, But for now Ryman is a lower weight for us."

Fisher's standard call on volatility in their investment performance is to say they are investing in quality companies for the long term so volatility does not matter. I therefore thought it was interesting for once to see an alternative tack. CIO Ashley Gardyne outlining in detailed terms, on why the NZ Growth Fund has de-rated Ryman from its investment darling position. Ryman started falling from their most recent peak share price of just under $16 at the end of September 2021. But when was it that Fishers set about reducing their holding? Did they get their market timing right? Or is Ashley's explanation an 'after the event' excuse? Salient points in the Ryman sell down saga are as follows:

Figures are taken from the respective period fund reports found at the web address below.
https://fisherfunds.co.nz/funds-and-performance/new-zealand-growth-fund/performance#fund-updates

1/ On 30th September 2021, Ryman (priced at $15.10 per share ) was 3.86% (or $12.53m worth, or 0.830m shares) of Fishers NZ growth fund s total, compared with 7.61% of the same fund in Summerset.
2/ If we go back to March 2020, the percentage of the fund held in Ryman and Summerset was almost equal, at 4.62% and 4.64% respectively. This would indicate that prior to that September 2021 share price peak, Fishers were already pivoting away from Ryman towards Summerset as their preferred Retirement Sector investment.
3/ At the most recent fund reporting date, 30th September 2022, Summerset now makes up 10.04% of the NZ growth fund, while Ryman has dropped out of the top ten. So when was it that Ryman last appeared on the Fishers NZ Growth Fund top ten list?
4/ In December 2021 Ryman (priced at $12.25/share) made up 3.12% ($9.984m worth, or 0.817m shares) of the NZ Growth Fund, their last appearance as a 'top ten' Fisher NZ Growth Fund holding.

There were no substantial security holder sales reported to the NZX over that September 2021 to December 2021 time.

The total number of RYM shares sold by Fishers NZ Growth fund over that time (refer to notes 1 and 4 above) was: 830,000-817,000= 13,000 shares. If those shares were sold at an average price of $13.50 per share over the period, those share sales would have netted Fishers cash of: 13,000 x $13.50 = $0.176m.

Over the quarter the total value of Ryman shares in the portfolio dropped from: $12.53m -$9.98m = $2.55m. That $2.55m represents both

a/ A drop in value, representing the number of shares held. AND
b/ A drop in the total value of the shares remaining in the portfolio that were not sold.

By simple subtraction, the drop in value of the shares retained was: $2.55m - $0.176m = $2.37m

This means that

c/ 93% of the market value of RYM shares lost came from share price depreciation AND
d/ only 7% came from share sales.

I don't know exactly when Fishers came to a realisation that their shareholding in RYM should reduce. But this calculation is telling us that most of the sell down must have occurred after 31st December 2021. More likely than not, this would have been at a price closer to $9 than $12 - with both of those figure well down on September 2021 highs.

Of course if Fishers had continued to hold those 'excess' RYM shares, they would now only be worth $6.60 each.

Scorecard for Fishers on de-favouritising Ryman

There is both a 'glass half full' and a 'glass half empty' way to review this outcome. The glass half full way is to say that Fishers have saved unit holders a loss of: 1-($.6.60/$9.00) =27% of their capital (a good thing). The glass half empty way is to say that by 'selling late' Fishers managed to lose: 1-($9.00/$15.00)=40% of their previously accumulated unit holders Ryman capital (a bad thing).

I am not a student of Ryman. So I don't know when, on a 'fundamental basis', the outlook for Ryman at Fishers started changing from 'hold forever' to 'let's sell down'. I am certainly not saying that I could have done better in the circumstances. But for a self professed 'seeker and keeper' of 'excellent shares', I would have hoped that Fishers would have been on top of the situation a little earlier. It looks like Fishers did not understand the drivers of this business as well as they thought they did, although I do give them some credit for reversing their long held 'never sell' opinion and selling down. My scorecard on Fishers handling of this situation: C+. Satisfactory, but had the potential to do much better.

SNOOPY

Snoopy

09-12-2022, 03:31 PM

Finding Opportunities Amongst the Volatility

https://milfordasset.com.au/insights/milford-adviser-webinar-finding-opportunities-amongst-the-volatility/

Notes I have made from the above webinar are below:

How Macro Views Influence Portfolio Positioning William Curtayne, Co-Portfolio Manager of the Milford Australian Absolute Growth Fund

1/ We are the most cautious we have been on USA and NZ equities. Australia is somewhat cushioned by strong commodity prices (wheat, coal, iron ore (prices on iron ore higher in the cycle than other commodities) , LNG, oil) copper lithium). In the US those in the bottom quintile of earnings have lost by far the highest proportion of their purchasing power, due to interest rates rising, and the loss of stimulus cheque payments. Wage increases are not compensating for this. The purchasing power of consumers has begun to weaken around the world and this will eventually flow into equity prices over the next 12 to 18 months.

2/ Companies will be paying more for labour and cost inputs. Given the pressure on consumers it is going to be hard to pass these costs on. Inflation is increasing the cost of necessities (energy prices and food in supermarkets)

3/ We talk about the USA because they are probably at the forefront of facing these pressures. Australian consumers are relatively better placed.

4/ Auckland New Zealand is at the forefront of the world in the housing market, because interest rates started to go up earlier in New Zealand than in any other developed nation. We believe house prices will go down at least 20% in Auckland. (House prices would have to decline 30% to get back to where they were pre-Covid. We believe there would be some kind of government policy intervention if things got that bad.) At the 20% equity lost point, the wealthier parts of the economy are going to feel a bit of 'negative equity effects' and tighten their belts. The NZ economy is our 'crash dummy' for what may occur in the rest of the world.

Why Australia Looks better than NZ or the USA Regan van Berlo - Head of Distribution -Milford Australia,

5/ The Russian crisis is creating a safe haven status for Australian equities (CBA bank and BHP being prime examples). We ourselves have bought more energy positions (Santos a key pick) and miners, particularly gold miners, and have stuck with them. We believe the Russian crisis will play out for a bit longer than expected (simply because three out of the five military commentators we have talked to say that - we are not geopolitical experts ourselves). We think a lot of the energy companies and gold miners are well priced even without the war.

6/ Australia is delayed with inflation w.r.t. the rest of the world. The labour market in Australia is not quite as tight as in NZ and the USA. Good crop yields and lots of rainfall has made fresh food prices weaker. There is also a delay in forcing through imported food price rises because of contract structures.

7/ Lagging inflation has allowed the Reserve Bank of Australia to be the most dovish central bank in the world. That flows thorough to property prices not falling as they are in NZ, and the consequent wealth effects on the consumer.

8/ We have avoided a lot of the pain in the IT sector, and also trimmed quality growth stocks that are not necessarily IT. like 'James Hardie', REA, Carsales.com and Goodman Group on the assumption that interest rates would be stickier and go up. But we have remained defensive by maintaining big supermarket exposures (a big inflation beneficiary with margins expanding because of inflation). We are investing in Metcash, Coles and Woolworths to varying degrees.

9/ Earnings strength seen in financials. Have trimmed the big banks somewhat, but are into 'Virgin Money, ticker VUK' (should do well as UK interest rates spike). NAB is our key banking stock as it adopts technology, catching up with CBA in this space. Technology means quick approval of mortgages. if you don't have that, you have to compete on price - which is not good for margins, or you compete on asset quality by giving looser credit terms (not good either). NAB sets the standard on SME lending as well.

10/ Healthcare company valuations are improving a bit (CSL).

11/ Valuation of Real Estate Investment Trusts REITs. Over 6% dividend yield is attractive like charter hall (CQR), and they also offer inflation protection.

12/ Favorite in the supermarket sector is 'Metcash'. Wholesaler to independent grocery retailers and now 50% of business is tools and hardware. High fixed cost base but inflation allows one to leverage this. More people working from home after Covid-19 means more people shopping locally at small independent supermarkets. At 15x earnings verses Woolworths on 28 and Coles on 22, Metcash looks like the value investors choice.

13/ The relative underinvestment in iron ore. China, the biggest market for commodities has some positives and negatives. China is determined not to go back to the old world of stimulating property. Demographics mean property construction is in decline anyway. China wants better technology and to be less reliant on overseas goods, and less reliance on Australian iron ore in the future. Consequently we expect iron ore prices to decline in the medium term, and we have been taking profits while the iron ore futures price has been bid up by speculators. Omicron in China and the associated lock downs cools the short term demand picture for construction and iron ore.

Nevertheless the remilitarization of the world's forces does require steel (raw material iron ore) and 3% of the world's iron ore supply does come out of the Ukraine. But the market is more positive for other metals, Nickel, Copper , Energy (LNG, Oil and coal).

14/ BHP and Rio Tinto are the go to investments for global fund managers who find themselves short on exposure to commodities.

---------------------

My comments

This investment management style at Milford is very different to Fishers. There is a clear aim to 'catch the mood of the market' at Milford, with less attachment to their long term favourites. it is interesting that from a more international perspective that these guys based in Australia take, they don't fancy investment in New Zealand at all (the one exception being Contact Energy which falls under their energy sector preference and has a superior dividend yield). The NZ market is seen as a 'crash dummy' for the rest of the world's bourses. Is it time to tighten our seat belts?

SNOOPY

Snoopy

09-12-2022, 10:09 PM

I have just noticed that one of my like with like comparisons is not as 'like with like' as it could have been.

I was looking at the "Kiwi Wealth KiwiSaver Scheme - Growth Fund"
https://www.kiwiwealth.co.nz/assets/Documents/KiwiSaver/performance/Growth/Growth-June-2021.pdf

When I might have been better to consider the "Kiwi Wealth Managed Funds - Growth Fund"
https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/quarterly-fund-updates/Growth/Growth-June-2021.pdf

What is the difference between the two? Apart from the first being part of the Kiwisaver scheme and the other not (meaning you can withdraw your funds from that second entity at any time)? The top ten constituents (as at 30th June 2021) line up alongside each other as follows:

Kiwiwealth Kiwisaver Scheme Growth FundKiwiiWealth Growth Fund

Microsoft Corp2.78%3.31%

Apple Inc2.50%2.95%

Westpac NZD cash account2.37%2.07%

Alphabet Inc1.89%2.26%

Amazon.com Inc1.86%2.22%

Two Trees Global Macro UCITS1.52%?%

GMO Systematic Global macro Trust1.50%?%

facebook Inc1.20%1.45%

ISAM Systematic Trend Q-Sep190.98%?%

ASML Holding NV0.91%1.11%

Nestle SA?%0.98%

Visa Inc?%0.92%

United Health Group ?%0.91%

Observations

1/ If we follow down each list top to bottom, then the individual international stocks held rank in the same order (from higher percentage held to lower percentage held).
2/ The Kiwiwealth Kiwisaver Growth Fund held a slightly higher holding of cash at the comparison date.
3/ The Kiwiwealth Kiwisaver Growth Fund held three hedge funds in their top ten holdings, while the straight 'Growth Fund' held none in their top ten holdings.

Discussion

New Zealand managed investments are rated on a 1 to 7 scale. A fund rated '1' carries the least risk while a fund rated '7' carries the most. A hedge fund on its own would normally be seen as the most risky class of investment of all (class 7). 'Cash in the bank' gives an entirely predictable return (class 1). Superficially then, it seems odd that the fund with the highest declared holdings of hedge funds (Kiwisaver) has a lower risk profile of 'Class 4', compared to the fund with no declared hedge fund holdings (Managed Growth) with a 'Class 5' risk profile. One explanation of this could be hedge funds and ordinary share funds tend to operate in negatively correlated cycles. This means it can be good news for a hedge fund when markets go down, whereas clearly this is not good news for a fund that holds only company stocks. That in turn means that 'taken together', the volatility of a managed fund that includes hedge fund components may be less than the volatility of a fund that holds only shares.

What actually happened to returns over the years ended 30th June 2021 and 30th June 2022?:

ReturnsYear Ended 30th June 2021Year Ended 30th June 2022

KiwiWealth Kiwisaver Growth (after tax & fees)23.91%-10.80%

KiwiWealth Kiwisaver Growth fees1.11%1.12%

KiwiWealth Managed Growth (after tax & fees)28.10%-11.10%

KiwiWealth Managed Growth fees0.95%0.96%

This is pretty much as expected. The fund with the most hedging produced a moderated annual return in good times. But when market conditions turned sharply negative, the losses on the annual return were also moderated.

SNOOPY

Snoopy

09-12-2022, 10:26 PM

There is a price to pay for 'excitement'.

Share Price 28-04-2022PE ratioPrice Change 01-012022 to 28-04-2022

Microsoft$282.3330.13-15.4%

Alphabet$2,285.8920.37-21.2%

Apple$156.5725.99-14.0%

These are big hits for three of the four largest investments in the Milford Global Equity Fund, representing 12.27% of the fund. as at 31-03-2021. Although I do note that the whole NASDAQ index is down 21.12% from the start of the year. I don't follow any of these shares. But those PE ratios are historical, and forward forecast PEs are likely higher. So I don't see Microsoft, Alphabet or Apple as 'cheap' - even now.

Annual return to 31-03-2022 was 5.66% after fees and taxes, down from 24.14% just 3 months earlier! Clearly the first quarter has been unkind to Milford Global Equities! Rising interest rates can deal a double blow to growth stocks, firstly due to a present day reduction of earnings, and secondly due to a rising discount rate affecting the present value of future earnings.

The fund rocketed by 37.36% over YE31-03-2021, against a long term average growth rate of 10.88% p.a.. So I don't think it is out of line to say that a correction is overdue. But is the correction finished?

The 'excitement' continues.

Share Price 09-12-2022PE ratioPrice Change 01-012022 to 09-12-2022

Microsoft$247.4026.77-26.1%

Alphabet$93.7118.97-35.4%

Apple$156.5723.33-21.6%

Notes

1/ Alphabet underwent a 20:1 share split on 18th July 2022. The beginning of year share price was adjusted accordingly for comparison purposes.
2/ Those PE ratios are historical,

-------

The hits for two of the five largest investments in the Milford Global Equity Fund (Microsoft and Alphabet) have got bigger. Apple, the largest company on the NASDAQ has fallen out of Milford's top ten holdings. To give a sense of context, the entire NASDAQ has fallen by 30.01% year to date as I write this.

The top three constituents of the Milford Global Equity Fund are now Elevance Health Inc (a US based NYSE listed medical insurance provider), Boston Scientific (a US based NYSE listed manufacturer of medical devices) and HCA Holdings (a US based NYSE listed owner of hospitals)

"Technology stocks have been weak this year and our decision to reduce exposure to companies such as Amazon (-9.3%) and Alphabet (-1.5%) was validated as earnings released from these companies in the month disappointed expectations."

For the active growth fund the unit price at the start of the year was $5.26. As at the end of October it was $4.75. This represents a unit price loss of 10%.

Annual return for the fund to 31-10-2022 was -7.32% after fees and taxes.

It is never good to lose money on the markets. But in relative terms, looking at what has happened in other markets, this result doesn't look too bad!

SNOOPY

Snoopy

12-12-2022, 11:37 AM

Kiwiwealth don't seem to do a regular Q&A member session like Fishers and Milford.

I have managed to find a Kiwiwealth Webinar from June 2022 for those interested.

https://www.kiwiwealth.co.nz/learn/articles/steering-your-investment-through-market-volatility/

Answers below Steffan Berridge, Chief Investment Officer, at KiwiWealth talk.

My Notes

Q/ Why is the marker volatile and why have KiwiWealth investments gone down in value?

A/ We have funds with significant diversification across many companies. But there are factors that can affect all companies like 'high inflation'. furthermore, the level of downturn in fixed interest funds recently is higher than we would normally expect.

Q/ What is KiwiWealth doing about it?

A/ Volatility is when market opportunities present themselves. We have recently increased our holdings in some cheap looking high technology and consumer companies, like Microsoft and Home Depot. We have been increasing our holdings in higher yielding corporate bonds.

We also invest in 'macro funds' that invest in such things as interest rates and commodities and the US dollar. These are included in all of our Kiwiwealth growth, balanced and conservative funds. These macrofunds are designed to pivot quickly to global trends in markets like this, and have worked very well this year, especially for commodities. But just because we are an active investor, adjusting portfolios, does not mean we always get it right.

-----------------

It is always refreshing to hear from fund managers when they state that they 'do not always get it right' These macrofunds that KiwiWealth talks about are what I would call hedge funds. They are invested in positions that turn out to be 'right' or 'wrong'. And the funds make a profit or not on their taken up positions accordingly. Taking a 'long term view', such transactions are a 'zero sum game'. But they do have the ability to smooth out returns over the short term.

Of particular interest, I thought, was the comment made on these hedge funds
"These are included in all of our KiwiWealth growth, balanced and conservative funds"

That is a stark point of difference between KiwiWealth as fund managers and the other protagonists that we have examined so far. It also means that the comparison that I went through in post 79, suggesting I had made an error of judgement, is likely less of an issue. Those absolute funds are still there in the managed KiwiWealth Growth Fund that is not a part of Kiwisaver, But they are there outside of the top ten holdings in the fund list. It is just that we outsiders cannot readily see them.

SNOOPY

Snoopy

28-12-2022, 09:58 AM

https://fisherfunds.co.nz/assets/annual-reports/Managed-Funds-Annual-Report-year-ended-31-March-2021.pdf

Fisher funds have been widely discussed on this forum for their listed exchange traded funds, Kingfish (NZX), Barramundi (ASX) and Marlin (Rest of World). But this is a discussion of the unlisted versions of those funds. The funds under scrutiny here are:

1/ The New Zealand Growth Fund:

Investment ThemeStock picking on the NZX

Fund Size@31-12-2021 was $320.0m

Principal holdings@31-12-2021 were: Mainfreight, Fisher & Paykel Healthcare, Xero Limited, Infratil Limited, Summerset Group Holdings Ltd, Auckland International Airport Limited, A2 Milk Company Limited, Vista Group International Limited and Ryman Healthcare Limited.

Distribution over FY2022None

Total Management Annual Charge = 1.40%

Fund risk rating'5'

2/ The Australian Growth Fund:

Investment ThemeStock picking on the ASX

Fund size @31-12-2021 was $109.8m

Principal holdings @31-12-2021 were: CSLLimited, Wisetech Global Limited (software for freight and customs management), Carsales.com Ltd, CBA, Seek Limited, NextDC Limited (data centre operator), NAB, ANZ, AUB Group Limited (insurance brokers and underwriting agencies), Brambles Ltd (freight).

Currency Hedging PolicyTarget 70% to NZD

Distribution over FY2022None

Total management annual charge = 1.42%

Risk rating'6'

3/ The International Growth Fund:

Investment ThemeStock picking outside of Australia and New Zealand

Fund size@31-12-2021 was $142.9m.

Principal holdings@31-12-2021 were: Meta (was Facebook), Alphabet (was Google), Signature Bank (US based full service commercial bank), Tencent Holdings Ltd (Chinese multinational technology and entertainment conglomerate and holding company headquartered in Shenzhen, Hong Kong listed), Dollar General Corporation (American variety stores), Paypal Holdings, Gartner Inc (consulting company doing technical research), ICON plc (clinical research organization doing research outsourced by pharmaceutical, biotechnology and medical device companies), Mastercard.

Currency Hedging PolicyTarget 50% (In practice between 0% and 110%)

Distribution over FY2022None

Total management and annual charge = 1.42%

Risk rating''5'

----------

Fisher funds claims to be the fifth largest investment manager in New Zealand, managing over $13.2 billion for more than 280,000 clients (AR2021 page 4). They have a 20 strong investment team (AR2021 p6). Fisher Funds have a 'concentrated approach' to their investments. A fund will typically hold just 15-20 different shares at any one time. This is consistent with a non-index tracking approach.

The above post is from 28th April 2022, reviewing data from 31-03-2021. Since that time there has been no fundamental change in the nature of these funds. However, one thing that has changed is the risk profiles on two of these funds. As at 28th December 2022, the risk profiles for these three funds is as follows:

The New Zealand Growth Fund:

Fund risk rating'6'

The Australian Growth Fund:

Fund risk rating'6'

The International Growth Fund:

Fund risk rating''6'

At EOCY2021 Australia was an outlier for risk. Come EOCY2022, NZ and Global investments have joined Australia with a high '6' risk profile. So what happened to change these risk ratings?

Australia is a market with a very high concentration of resource shares. Commodity prices tend not to correlate well with sharemarkets in general. (Think of what has happened to the global price of oil since the start of 2022, +then think what has happened to share prices over that same period). Over time, this has resulted in more volatility in Australian share prices. And volatility - we are told- is equivalent to risk.

Over 2022, the severe reversal in the fortunes of the NZX and the "NYSE and NASDAQ " (which is where most international funds from kiwi fund holders end up being invested) has increased the medium term volatility profile of shares in those markets. Therefore because the volatility increased, that means the 'risk' (as measured by the NZ Investment scale of risk) has consummately increased.

So all of a sudden with the market taking a big hit, the risk of investing in shares has gone up? With a more everyday understanding of the word 'risk' , this is clearly not true. In fact the opposite is true. The deeper the discount you can get on your share purchases, clearly the risk of getting a poor return going forwards is lower. In my view this is a serious problem with the mandated comparison standard of linking risk with volatility. Put simply, I can fully understand why putting your money in an investment which declines in value by 20% per year is, with hindsight., risky. Yet take these same investors and put their money on a bull market run, where their investments gain 20% are they equally likely to be under severe mental stress? I would say not. My argument here is that the downside 'risk' is a problem, but the upside 'risk' is not. Therefore it makes little sense to rate the risk of a particular investment fund by measuring its volatility.

Using Fishers here as an example (but I don't want to single out Fishers as all other NZ fund managers face the same issue), suddenly they are being forced, by government standards, to tell us that the risk of putting your money in NZ markets and International markets, after the end of a bull run, has gone up. Yes the volatility as measured by share price movements has gone up. But investing funds today will very likely earn a far better return going forwards, than if you had taken that same money and invested it a year ago. So what signals are we giving to our less financially literate brethren when we rubber stamp an 'Investment Rating Scale' that directs inexperienced investors to put their money into markets at the wrong time?

SNOOPY

Snoopy

16-02-2023, 08:44 PM

https://fisherfunds.co.nz/news-and-insights/financial-wellbeing-for-women

New Zealand women have savings balances that are, on average, 20% less than men. How to level up the sexes in terms of savings? Below are my notes from the webinar.

------------------

Unique challenges faced by women when it comes to retirement planning:

1/ Statistically women do earn less than men. In 2021, the gender pay gap was 9.1%, which in terms of saving resources compounds year on year on year.
2/ Women have less time in the workforce to save. Women tend to take more maternity and family leave and make more of an unpaid contribution to family life.
3/ Women's life expectancy is longer (83.5yrs verses 80 years in NZ). So whatever savings you have, on average, have to last for longer.

Overcoming the Challenges

Early adulthood

1/ You get your first real job and maybe think about going overseas for the big 'OE'. But you may have a large student loan to pay down. And that first job might not be as lucrative as you were hoping. At this time you should look to:
1i/ Master basic budgeting skills. Goal should be 1/3 on rent, 1/3 on living expenses and 1/3 on saving. OR
1ii/ The 50/30/20 rule. 50% on living expenses, 30% on going out and having fun and 20% on savings.

2/ What do we mean by savings?
2i/ Paying down debt is included.
2ii/ Key is to choose your method, and stick with it.
2iii/ You must contribute to kiwisaver, at least to the level to get to get the minimum 1:0.5 government equivalent top up contribution of $1,042.86 per year. This allows you to get the $521.43 annual top up from the government.

3/ Be in the right savings strategy. Unless you are twelve months out from purchasing a house, you should be in a growth strategy.

Your 30s

Buying property for the first time, career progression and starting a family

4/ Optimizing your kiwisaver remains your core opportunity.
4i/ Buying a home in the near term? Switch your kiwisaver to a more conservative kind of fund.

5/ Start utilizing managed funds as an adjunct to kiwisaver if you want to turbocharge your savings and have access to that money before you turn 65.

Mission Retire

You hit 50 and realize that retirement is not that far away.

6/ 15 years is still a long timeframe as far as investing is concerned. So maintain a growth strategy..

7/ Increase your kiwisaver contributions if you are nearing the pinnacle of your earning capability, gain an inheritance or sell down the family home to release capital.

8/ Take the chance to diversify your assets away from being heavily weighted to property into shares and bonds.

Retirement

Aged 65+

9/ Consider working part time for longer to stretch out those retirement funds.

10/ Balance leaving a legacy for your children with enjoying your retirement as long as possible.

11/ You can now consolidate your kiwisaver with any managed funds you have into one investment portfolio, as the government and employer top up incentives cease. But this is optional. There is no tax disadvantage to retaining your kiwisaver as is, and you now have access to the balance at any time.

12/ Look at investing your nest egg in a way that can keep up its purchasing power for as long as possible.

Audience Questions

Q1/ How much money do I need to have to retire and leave comfortably?

A1/ See retirement calculator on Fisher funds website:
https://retirement.fisherfunds.co.nz/

No one answer for all because your specific needs are going to have to be gone through and thought about.

Q2/ What does 'investing in shares' mean, and how does the Fisher investment team invest?

A2/ Kiwisaver funds are diversified funds across all the different asset classes: NZ shares, Australian shares, International shares (predominantly UK and US), Property and Infrastructure, and cash, cash like assets, and treasury (government) or corporate bonds.

--------------------

SNOOPY

Snoopy

18-02-2023, 08:09 PM

The ANZ bank is New Zealand's largest trading bank, and offers their own in house funds for investors. If you go through ANZ's own website, then you end up here:

https://www.anz.co.nz/personal/investing-kiwisaver/investment-funds/compare-funds/

In the investment funds section, investors have a choice of investing in five different funds. The funds all appear to be 'under the same management team' and the risk categories are reflected in what portion of funds are invested in 'growth assets' (equities, listed property and listed infrastructure) and 'income assets' (cash and cash equivalents and fixed interest). The funds may also invest in alternative assets (hedging positions). The composition of listed assets in the five funds offered are listed below.

Growth FundBalanced Growth FundBalanced Fund
Conservative Balanced FundConservative Fund

Growth Assets80%65%50%35%20%

Income Assets20%35%50%65%80%

Annual Fund Charge1.12%1.07%1.02%0.82%0.68%

If we look at the investment team roles:

https://www.anz.co.nz/personal/investing-kiwisaver/about-anz-investments/our-investment-team/

we can see that the team is very much focused on Australia and New Zealand. Expertise in other markets is 'bought in' via wholesale arrangements with overseas fund managers.

Rather curiously, ANZ offer a second investment platform called 'OneAnswer investment funds'.

https://www.anz.co.nz/comms/investments/investment-funds/

OneAnswer offers the multi-class asset funds as tabulated above, but in addition to that, individual single class asset funds as follows:

a/ New Zealand Fixed Interest Fund (Run by ANZ). Risk rating '3'. Management fee 0.47%.
b/ International Fixed Interest Fund (Run by external managers Northern Trust and Pimco Australia). Risk rating '4'. Management fee 0.63%.
c/ Property Securities Fund (Run by ANZ) Risk rating '6'. Management fee 1.16%.
d/ International Property Fund (Run by external managers Resolution Capital). Risk rating '6'. Management fee 1.14%.
e/ New Zealand Share Fund (Run by ANZ). Risk rating '5'. Management fee 1.16%.
f/ Equity Selection Fund (70% NZ based and 30% Aus based) (Run by ANZ). Risk rating '5'. Management fee 1.29%.
g/ Australian Share Fund (Run by external managers Tyndall Asset Management). Risk rating '6'. Management fee 1.15%.
h/ International Share Fund (Run by external managers: Franklin Equity Group, MFS Institutional Advisors, LSV Asset Management and Vontobel Asset Management). Risk rating '5'. Management fee 1.16%.
i/ International Listed Infrastructure Fund (Run by external managers Maple-Brown Abbott). Risk rating '5'. Management fee 0.95%.

Notes

1/ All fees listed above are the maximum investors will pay. There are no bonus fees payable for fund outperformance of a benchmark

---------------

Some information on these funds may be found here:
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/OASAC-Guide.pdf

My brief summary of investment style is that both ANZ and their investing agent price fall under the category of GARP (Growth at a Reasonable Price) except for LSV which looks for 'out of favour' beaten down in price 'value assets'.

Disclosure of what is in these individual asset class funds is very poor, to the extent that it hard to find and only the top ten holdings are disclosed. Single year performance data for these funds is available here:
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/OA-single-AR.pdf

And historical quarterly reports are here:
https://www.anz.co.nz/comms/investments/investment-funds/performance-and-fees/historical-fund-updates/

Fund risk ratings and management fees may be found here:
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/OASAC-PDS.pdf

SNOOPY

P.S. To get more of a feel for 'investment style', I always find it useful to look at the top ten NZX holdings under management.

Snoopy

18-02-2023, 09:48 PM

P.S. To get more of a feel for 'investment style', I always find it useful to look at the top ten NZX holdings under management.

One thing you can't fault the 'ANZ NZ growth fund' for is 'full disclosure'. All 4,410 of the investments held are listed!
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/ANZ-Investment-Growth.pdf

The ANZ Oneanswer NZ Shares Fund is a bit less forthcoming, with only the top ten holdings disclosed.
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/oamac-disclosures/2022/OAMAC-FU-300922-Growth.pdf

NZ Equities Top Ten Holdings

Oneanswer NZ share Top Ten holding fund percentage (30/09/2022)
Oneanswer NZ share Top Ten relative percentage (30/09/2022)
ANZ Growth Fund, Top ten NZ holdings percentage (30/09/2022)
ANZ Growth Top Ten NZ holdings relative percentage
NZX50 capitalisation (30-09-2022)
NZX50 Top Ten relative percentage (30-09-2022)

Fisher & Paykel Healthcare
9.83%
15.3%
0.99%
16.0%
$10.72b
13.8%

Spark
7.95%
12.3%
0.80%
12.9%
$9.37b
12.0%

Auckland International Airport
7.12%
11.1%
0.69%
11.1%
$10.60b
13.6%

Mainfreight Limited
7.98%
12.4%
0.65%
10.5%
$6.79b
8.7%

Contact Energy
6.14%
9.5%
0.61%
9.8%
$5.86b
7.5%

Meridian Energy
6.41%
10.0%
0.59%
9.5%
$12.39b
15.9%

Ebos
6.34%
9.8%
0.55%
8.9%
$7.17b
9.2%

Infratil
4.41%
6.8%
0.54%
8.7%
$6.26b
8.0%

A2 Milk Company
3.94%
6.1%
0.39%
6.3%
$4.47b
5.7%

Ryman Healthcare
n.a.
n.a.
0.39%
6.3%
$4.31b
5.5%

Chorus
4.24%.
6.6%.
n.a.
n.a.
$3.31b
n.a

Total
64.4%
100%
6.2%
100%
n.a.
100%

Mercury Energy
n.a.
n.a.
0.23%
n.a.
[$7.90b
n.a.

[/TR]

Lots of numbers, so what is the best way to make sense of them? The figures to look at are those in every second column (the ones that add up to 100%). These give a normalised view of the proportion of shares held. I would expect the first two such columns to be very similar, because these two funds are managed by the same managers. This is broadly true, but the Oneanswer fund has noticeably higher 'relative holdings' in Mainfreight, and notably less in Infratil. The 30-09-2022 update report for Oneanswer is 'matter of fact' and offers no commentary on the thinking behind any of the holdings.

There is a phenomena among 'active fund managers' that I term 'Index Plus' management. Such funds are not index funds. But the fund managers get timid and don't want to diverge too far away from those index fund returns they are trying to beat. The larger the total dollar amount of funds under management, the more these active funds gravitate toward becoming 'Index Plus'. That is partly because making 'side bets' on lesser known shares becomes impossible for liquidity reasons, and also insignificant in the overall context of the fund.

How much independent thinking is evident in these ANZ funds? For that we need to look at those first two '100% sum' columns in the table and compare them with the last, which represents the share proportions represented in the index. Fisher and Paykel Healthcare may be one of the top two shares on the NZX, but ANZ want even more of this pie than an index holding would give them. This is consistent with the idea of buying great companies and never selling them, with little regard for value for money. Auckland International Airport in an underweight position, even if 'takeover talk' with the Auckland Councils shareholding likely coming onto the block has subsequently seen the share price rise above any sensible earnings valuation. Takeover talk can lift a share above fair value, so I don't disparage ANZ management for holding an underweight position in what was, IMO, a very fully priced asset. Mainfreight is in an overweight position at ANZ, as is A2 milk. 'Long term Ryman' that can do no wrong (sic) is overweight. I am reminded very much of Fisher Funds when I look at the NZ shares portfolio, except that Fishers did fall out of love with Ryman.

The after fees but before tax performance for the year ended 31-03-2022 was -4.36%, with the comparable figure at Fishers being -7.4%.. Fees were startlingly higher at Fishers for the year at 3.52% (much of that being a 2.12% bonus earned in the previous year, base fee is 1.40%), alongside ANZ charges of just 1.07%. So most of ANZ's relative out-performance can be put down to lower fees.

One area where ANZ (and many other active fund managers it must be said) appear to have made some poor decisions over CY2022, is in relation to their holdings in the gentailers. I say this with a tinge of arrogance as the NZ power system is something I have put a great deal of time into understanding over the last few years. Mercury is well underweight in the ANZ holdings compared to its index rating. This is a decision a fund manager might make on a dividend yield basis, if they didn't understand the powerful synergies available from combining the old Trustpower windfarm portfolio with Mercury's Waikato river hydro system. I personally took advantage of this 'market mispricing' in the middle of last year betting against the prevailing view on Mercury (not just held by ANZ) that other gentailers were better value. Contact was widely touted as the best value at the time and has risen in price since. But Mercury has gone up much more. That little 'power misplay', while occurring largely after the 31-03-2022 balance date, is evidence of ANZ not understanding the subtleties of NZ's power system market. I am putting 1% of their fund outperformance down to that, while noting that Fishers have long underweighted the power gentailers (makes sense, do not go headlong into an investment universe that you do not understand).

Conclusion time: The ten year performance of the "ANZ Oneanswer NZ Shares Fund" is a claimed annualised 13.11% per year over 10 years. Meanwhile the NZX50 index went from about 3488 to 12089 over the same period.

3488(1+i)^10=12089 => i = (12089/3488)^0.1 - 1= => i=13.2% (no fees deducted)

This means that despite the Oneanswer NZ Shares Fund being credible, they have really only slightly under-performed the index over the ten year time-frame, after fees. I am calling the Oneanswer NZ Shares Fund, an 'index+' fund. Fees are commendably low at 1.07%. But the Smartshares NZ Top 50 ETF (FNZ) index fund has even lower fees at just 0.5%. It is not clear that the 'good active calls' have outweighed the 'bad active calls' in any meaningful way.

SNOOPY

Snoopy

19-02-2023, 08:44 PM

Snoopy

21-03-2023, 06:27 PM

https://www.kiwiwealth.co.nz/products/managed-funds/fees/

"There is one annual fee that applies for each of our Managed Funds. There are also some ‘Other costs’ that flow through to our funds which we’ve estimated in the table below (don’t worry – we don’t expect they’ll vary too much from the estimate)."

"Unlike some other providers, we don’t charge performance fees on top of the return your investment makes, so you get to keep more of your returns."

When I click through the link above., I can no longer find the quoted text I have reproduced above. For more information on fees, I am directed here:

https://www.kiwiwealth.co.nz/products/managed-funds/key-documents/

Then when I click "Kiwiwealth Managed Funds - Other Material Information", i get sent to a pdf. That is a relatively new document issued in December 2022

Page 20 of that document contains the following information on fees

---------------

Limits on fees and expenses

Under the Trust Deed the maximum fees that we can charge out of each Fund are:
Contribution fee 5% (plus any GST) of the consideration for meeting the issue price of units.
Annual Fees 2% (plus any GST) per annum of the net asset value of the Fund.
Performance fee To be set at the time any performance fee is introduced.
Withdrawal fee 5% (plus any GST) of the amount withdrawn.
Supervisor fee 0.075% (plus any GST) per annum of the net asset value of the Fund.

There are no limits on the Buy/Sell spreads that we can charge. Subject to the above limitations and the limitation set out under ‘Additional costs, charges, and expenses’ above, there is no limit to the amount of remuneration that we can be paid or on the amount of expenses we can recover

----------------

While I note that these are 'maximum fees', they do seem high by industry standards. Annual management fees for the funds look to be:

(2% + 0.075%) x 1.15 (GST) = 3.1625%, with performance fees to be added to that.

I believe that this fee update is a direct result of Kiwiwealth being acquired by Fisher Funds. By way of comparison, the total Kiwiwealth Growth Fund annual fee for YE30-06-2022 (before the Fisher Funds takeover) was a mere 0.96%!

It does seem there is now a clear intent to introduce performance fees on top of management fees, something that was in the past a clear point of difference between Kiwiwealth and most other fund managers. Buy/Sell spreads are in effect another layer of fees on top of the standard contribution fees. Suddenly Kiwiwealth is looking very expensive indeed to be getting in and out of!

It would appear that in December 2022, the entire collective wisdom of the Kiwiwealth investment team was dispensed with:

https://www.newsroom.co.nz/fisher-funds-loses-80m-in-bank-collapse

"Fisher Funds also acquired Kiwi Wealth and its 13 funds in December; Fisher laid off Kiwi Wealth’s senior investment managers and parachuted in its own people to make the key decisions. The Kiwi Wealth funds had no exposure to Signature or Silicon Valley banks, and have only small holdings in First Republic – investors in Kiwi Wealth may be thanking their stars Fisher’s managers haven’t had more time to “rebalance” their portfolios."

If Kiwiwealth is to become a Fisher Funds clone, then all the information I have posted on this thread previously on the distinguishing advantages of the Kiwiwealth platform have gone.

Going to the Facebook page

https://www.facebook.com/kiwiwealth.co.nz

the only updates for 2023 seem to be on stories by Children's author Suzy Cato on investing for kids. Not much investment wisdom to download from that source I would have thought.

SNOOPY

Aaron

22-03-2023, 08:34 AM

Snoopy

22-03-2023, 10:12 AM

Thanks Snoopy I have been with Kiwiwealth since it was Gareth Morgan because he hated how opaque the managed funds industry was and kept fees reasonably cheap. Only small contributions to this though $1,042 a year so have not given it much thought. Is there a page to compare Kiwisaver managers fees.

Here is a reasonably recent report on some of the performance of some of the leading managers by Morningstar.

https://cdn.morningstar.com.au/mca/s/documents/KiwiSaver-December-2022.pdf

If you look at the ''growth" fund section, you will see a column of 'asset based fees' (which I believe do not include performance fees). You will see that Fishers charge their customers 2.51%, the most of any provider. However, if you look across at the five and ten year performance which are generally listed as 'after all fees', you will see that Fishers are near the top of the pack (beaten only by Milford). So you could say that Fishers have 'earned their high fees'.

The alternative Fisher managed arm, dubbed Fisher TWO, came about with Fishers takeover of Tower's Investment product arm in 2013. That has a lower asset based fee structure, starting from 1.04%, and actually recorded a slightly better result than the 'original' Fisher Growth fund. Perhaps this gives hope that Fishers will not look to raise their asset management fees at KiwiWealth, once that acquisition is bedded down? I did note, as a disclaimer, that the fee structure I outlined for KiwiWealth going forwards was in the context of the 'maximum fees we can charge'.

After I made my 'big ramp up in fees' accusation for Kiwiwealth participants, I had a look at the latest December 2022 KiwiWealth Growth fund quarterly report.

https://www.kiwiwealth.co.nz/assets/Documents/Managed-Funds/quarterly-fund-updates/Growth/Growth-Fund-Update-December-2022.pdf

That shows annual asset based fees at just 0.96%. However although the performance fund figures were up to date, the accompanying fee information referenced was for the year ended 31st March 2022. Almost a year old! So although I can read between the lines and say what I think will happen to Kiwiwealth fees, Kiwiwealth investors are being kept 'fully in the dark'. The truth of what will happen is not yet out there.

I think I will switch to whoever is reasonably sized and cheapest. Any suggestions

I think there was always a twelve month timeframe for integration. So that equates to December 2023. I think that if Kiwi Wealth had served me well, I would wait to see what the new fee structure actually was before switching. Perhaps more important than that would be to see how the fund managers changed, and any new philosophy they might bring to the funds under management.

Was thinking about Fisher Funds this morning when I see in the herald they lost $50mill in a US bank (signature I think). One fund that got hit was their conservative fund. Funny how as borrowers have been bailed out over the years conservative investors are the ones taking the risk/hits with interest rates below inflation and bank runs.

Fisher funds investment philosophy seems to be to buy high conviction stocks in a relatively concentrated portfolio and hold them through thick and thin. Investing in banks is, I think, at the trickier end of the spectrum of businesses to understand from a risk perspective. So I think their losses at Signature Bank were to an extent unlucky (interest rates rose much faster than anyone expected, causing the implosion in bond values used to back depositors funds), and not just a question of 'poor stock selection'.

Personally my sole reason for investing in overseas markets is to gain exposure to a sector that I cannot get at home. There are plenty of banks you can invest in much closer to home than Signature bank was. In this way I am out of step with the 'Fisher Investment Philosophy'.

The hit on Fishers conservative funds was another outcome of rapidly rising interest rates, which were a core part of Fisher's conservatively managed funds.

SNOOPY

Snoopy

22-03-2023, 11:09 AM

It would appear that in December 2022, the entire collective wisdom of the Kiwiwealth investment team was dispensed with:

https://www.newsroom.co.nz/fisher-funds-loses-80m-in-bank-collapse

"Fisher Funds also acquired Kiwi Wealth and its 13 funds in December; Fisher laid off Kiwi Wealth’s senior investment managers and parachuted in its own people to make the key decisions. The Kiwi Wealth funds had no exposure to Signature or Silicon Valley banks, and have only small holdings in First Republic – investors in Kiwi Wealth may be thanking their stars Fisher’s managers haven’t had more time to “rebalance” their portfolios."

More information on the cull of Kiwiwealth staff is here:

https://www.goodreturns.co.nz/article/976521370/the-axe-falls-at-kiwi-wealth.html

"Fisher Funds has begun its rationalisation of Kiwi Wealth with key executives losing their jobs."

"Those to go include former chief executive Rhiannon McKinnon, chief investment officer Steffan Berridge, chief technology officer Craig Ward and chief customer Officer Morne Redgard."

"One executive to survive the cull is general counsel Vanessa Simons. Kiwi Wealth chief operating officer Craig Holloway survives the initial cull and "will be staying on to support the integration for a period of 12 months from Wellington." "

"Berridge will be leaving the business after a four-month period assisting the integration."

" “Steffan will play an important role in supporting the integration of the businesses and ensuring our clients’ investment outcomes remain at the forefront throughout. His assistance will be invaluable as we continue to progress through this complex work and we are incredibly grateful for his ongoing support,” McLachlan says."

"Fisher Funds says it "wishes" to retain a significant number of the Kiwi Wealth team and "expects to continue to have a meaningful Wellington presence for the foreseeable future, enhancing the growth aspirations for a national footprint." "

SNOOPY

stoploss

22-03-2023, 01:07 PM

Snoopy you might like this
https://www.fundsmith.co.uk/news/2023/4933-financial-times-why-i-never-invest-in-bank-shares/

Snoopy

22-03-2023, 04:22 PM

Fisher funds investment philosophy seems to be to buy high conviction stocks in a relatively concentrated portfolio and hold them through thick and thin.
Investing in banks is, I think, at the trickier end of the spectrum of businesses to understand from a risk perspective. So I think their losses at Signature Bank were to an extent unlucky (interest rates rose much faster than anyone expected, causing the implosion in bond values used to back depositors funds), and not just a question of 'poor stock selection'.

Snoopy you might like this
https://www.fundsmith.co.uk/news/2023/4933-financial-times-why-i-never-invest-in-bank-shares/

Moral summary: "Never yourself (including fund managers) invest in banks "!
Terry Smith is chief executive of Fundsmith LLP. *He was the number 1-rated banking analyst in the Reuters and Institutional Investor surveys 1984-89

I don't agree with that proposition in general, because of the underlying assumption, that banks are overleveraged, -and can be wiped out by falling asset prices-, doesn't apply in the same way to Australian and New Zealand banks. Most bank loans in NZ are set off against valuable secured assets like property. Sure it might be a problem if every property owner was 'mortgaged to the max', but they are not. Sure there is some security for loans set off against bank bonds. But generally the redemption dates of any such bonds are spread.so that not too many need refinancing at the same time.

Looking over the long pond at Signature Bank in Silicon valley, it doesn't sound like Signature had the offsetting supporting asset values to back up their deposit base. The 'strong assets', that they thought were supporting their deposit base were unsalable as the market for those assets turned down. If the same thing happened in New Zealand, there would still be enough housing equity left to ensure those depositors did get paid back in full. And that includes the scenario where highly leveraged property owners have their houses sold out from under them.

Thankfully in NZ we have reserve bank governor Adrian Orr to ensure that banks are building up sufficient assets so that the loan market does not cause their balance sheet to be overstretched.

SNOOPY

Snoopy

24-04-2023, 03:34 PM

https://www.youtube.com/watch?v=QWtLt6sIodE

'Setting the scene', Robbie Urquhart, Portfolio Manager, Australian Equities: Looking at data going back to the 1870s, 2022 was the worst year in 150 years for the combination of bonds and shares performing badly together.

Q/ How is the investment team shaping the portfolio to capture the opportunities in this environment?

A/ Ashley Gardyne (Chief Investment Officer): A lot of market concerns are already priced into equity and fixed income prices. High quality US company bonds earlier in 2022 were yielding a 3.5% return. The same companies are now yielding a 7-8% return (all investment grade). Beyond investment grade there are places you can get 10% plus. We are starting to rotate these fixed interest bonds out of government bonds that tend to offer lower yield into more credit (loans to companies). Similar story on the equity side. We have a long list of companies that we really admire but we haven't been able to acquire because the price has been too high. We have been able to acquire some of thes ethis year, 'salesforce.com', 'Microsoft' are great businesses that we think have got really good ling term prospects. We think about 'micro' (individual securities and their own opportunities and risks) rather than 'macro' (the whole economy, where you are distracted by inflation -should I buy now or wait until after the recession/- where there are always thongs to distract you).

Q/ How are you positioning multi asset portfolios (mixture of equities and property and bonds) to get the best returns for our clients?

A/ Ashley Gardyne (Chief Investment Officer) : Current allocation to all three categories (equity, property and bonds) is looking a lot more attractive than last year. We are tilting a little to wards equities to try and take advantage of cheaper prices. In the bond universe we have been tilting more towards high interest rather than government bonds. A new international equity fund is feeding into those portfolios. In the last couple of months we have set up a 'global credit fund' and a 'private debt fund', both new ways to invest money in the bond space.

Q/ 'Adapting and rewiring by companies'. What is an example form a company that you manage?

A/ Robbie Urquhart (Portfolio Manager, Australian Equities): I manage the Australian equity portfolios. We have a company called Audinate, that creates hardware as well as software that is used in audio equipment, and how audio equipment networks with each other., so that microphones can speak to speakers and so on. They have had a challenge sourcing microchips out of South East Asia They have approached this by redesigning a bunch of their circuitry so they can source more abundant chips which there are no shortages of, and put those into their hardware. They have also increased the flexibility of the software componentry so that it can be retrofitted into physical products, to avoid the necessity of some microchips at all."

"Resmed, a company that makes ventilators, a global leader in sleep apnea equipment, is another example of adapting to a microchip component shortage. They have a work around whereby they have gone back to using some of the older 'card' technology. You literally insert these cards into the ventilators to capture the data that is necessary. You can upload that data physically into the card. it is a short term workaround solution. But it is one way they can treat their patients and meet the demand of their customers."

(Oops just realise I have already reviewed this seminar see post 76)

SNOOPY

Snoopy

24-04-2023, 09:02 PM

https://www.kiwiwealth.co.nz/products/managed-funds/key-documents/

I click "Kiwiwealth Managed Funds - Other Material Information", I get sent to a pdf. That is a relatively new document issued in December 2022

Page 20 of that document contains the following information on fees

---------------

Limits on fees and expenses

Under the Trust Deed the maximum fees that we can charge out of each Fund are:
Contribution fee 5% (plus any GST) of the consideration for meeting the issue price of units.
Annual Fees 2% (plus any GST) per annum of the net asset value of the Fund.
Performance fee To be set at the time any performance fee is introduced.
Withdrawal fee 5% (plus any GST) of the amount withdrawn.
Supervisor fee 0.075% (plus any GST) per annum of the net asset value of the Fund.

There are no limits on the Buy/Sell spreads that we can charge. Subject to the above limitations and the limitation set out under ‘Additional costs, charges, and expenses’ above, there is no limit to the amount of remuneration that we can be paid or on the amount of expenses we can recover

----------------

While I note that these are 'maximum fees', they do seem high by industry standards. Annual management fees for the funds look to be:

(2% + 0.075%) x 1.15 (GST) = 3.1625%, with performance fees to be added to that.

I believe that this fee update is a direct result of Kiwiwealth being acquired by Fisher Funds. By way of comparison, the total Kiwiwealth Growth Fund annual fee for YE30-06-2022 (before the Fisher Funds takeover) was a mere 0.96%!

It does seem there is now a clear intent to introduce performance fees on top of management fees, something that was in the past a clear point of difference between Kiwiwealth and most other fund managers. Buy/Sell spreads are in effect another layer of fees on top of the standard contribution fees. Suddenly Kiwiwealth is looking very expensive indeed to be getting in and out of!

Fishers have reported for their own label 'growth' and 'balanced' managed funds, they will be dropping performance fees from July.

https://fisherfunds.co.nz/investment/managed-funds/fees-and-expenses#what-are-the-fees-for-fisher-funds-managed-funds

"From 1 July 2023 the Growth Fund and Balanced Strategy will no longer incur a performance fee."

Recently acquired Kiwiwealth have a 'growth' and 'balanced' strategy with no performance fees. So it looks like bringing the two into line has resulted in Fishers losing their performance fee rather than Kiwiwealth gaining such fees.

The historical Fisher Balanced Fund fee including GST (with zero performance fees) was 1.21% + 0.19% = 1.40%
The historical Fisher Growth Fund fee including GST (with zero performance fees) was 1.27% + 0.18% = 1.45%

Those fees look to be less than the 3.165% fees charged by the now sister fund at Kiwiwealth. But further investigation suggests that I may have been wrong about GST being imposed at 15% at Kiwiwealth. From https://www.taxpolicy.ird.govt.nz/-/media/project/ir/tp/publications/2022/2022-ria-perm-bill/2022-ria-3-gst-managed-funds.pdf

"Treating 90% of their services as exempt and effectively charging 1.5% GST on their fees (15% GST on 10% of their fees). This practice is applied by most retail managed funds and wholesale funds that other funds such as retirement schemes invest into."
"(because they consider their services are mostly “arranging” the buying and selling of investment products and so should qualify for the GST exemption for financial services)."

If this is true then the annual Kiwiwealth Growth Fund fee is projected to be (2% + 0.075%) x 1.015 (GST) = 2.106%, an overall fee that is nevertheless higher than the Fisher Funds branded sister funds.

Reading the fine print, it looks like the more specialised growth funds, Fishers Property & Infrastructure Fund, New Zealand Growth Fund, Australian Growth Fund, and International Growth Fund are NOT going to be exempt from future performance fees (albeit such fees will be capped at a maximum of 2% of the value of each fund per year).

This is contrary to the report here:
https://www.goodreturns.co.nz/article/976521586/fisher-funds-to-jettison-fees.html

which, (erroneously?) suggests all Fisher Funds performance fees will be jettisoned.

SNOOPY

Snoopy

10-05-2023, 01:51 PM

Here are my notes taken from the seminar linked to below "The Fisher Funds Smart Investor Webinar: 4 May 2023"

-----------------

https://www.youtube.com/watch?v=6xdMCq4vpj4

Ashley Gardyne (Chief Investment Officer)/ (On Context) We have come through a period of unprecedented surprises that has left investors in all market segments, be they aggressive, balanced or conservative, with nowhere to hide. Over 2022 Bonds had the biggest fall in over 150 years of recorded data,. Rampant inflation has been largely caused by constraints in the supply side. Once production starts to normalise (e.g. semiconductors, lumber), then the cost pressures start to ease. Bond yields are now materially higher (which means less scope for capital loss as there is a smaller chance of interest rates going higher) and the global PE ratios are now below the 10 year average (albeit just sitting at 15 - with the ten year average at 16).

Harry Smiith (Portfolio Manager International Equities)/ (On opportunities Fisher sees internationally) Half of all the gains in the S&P500 over the last 15 years have been delivered by just a handful of companies. 20 companies have delivered as much gain as the next 480 companies combined. Fisher aims to identify the next 'best 20 companies' for the next 15 years. Selection criteria are:

1/ Wide economic moats (intellectual property, scale or a brand): e.g. Mastercard, Resmed, Xero
2/ Talented and Aligned Management (managers with ownership skin in the game): e.g. Edwards Life Sciences (make non-surgically invasive heart valves, competitors face regulatory hurdles to compete, CEO has big stake in the company, and other heart valve designs waiting in the wings), Mainfreight, 'PWR Advanced cooling technology' (ASX).
3/ Underappreciated earnings growth: e.g. Fisher & Paykel Healthcare, Floor & Decor (a US headquartered specialty retailer of 'hard floors': tile, wood, laminate, vinyl, and natural stone flooring), AUB Group (insurance brokers and underwriters) (ASX)

A more detailed dive into one example: Floor & Decor is a US chain of mega warehouses that generally compete with much smaller local operators that cannot compete on price or service. Inventory is bought directly from the source. This allows Floor & Decor to sell inventory 30% cheaper than their competitors can, by cutting out the middle man. Large store means much better in stock availability, and the company can offer free storage of product until the builder needs it delivered to their building site. Furthermore, Floor & Decor can offer goods on credit. There are 200 stores across the USA at the moment. Fisher sees potential for 500 stores longer term.

Q/ Will rapidly rising mortgage rates cause a recession?
A (Harry Smith)/ Rising mortgage rates threatens consumption that affects 60% of the economy. All mortgages reset to the two year rate today would be a 2.5% headwind to the NZ economy. BUT unemployment at 3.4% is still very very low, it looks like inflation is starting to abate, the tourism tap is turned back on, and lastly immigration numbers are up. All good news for NZ's economy.

Q/ How to manage inflation risk?
A/ (Laura O'Reilly, Senior Wealth Management Advisor)/ An allocation to Growth assets and high yielding bonds are the best hedge against inflation for retirees.

Q/ Markets have been stronger in the last few months. What has been driving that and how have our portfolios gone?
A/ (Ashley Gardyne)/ Inflation has started to change direction,. The Fisher portfolios have been outperforming their benchmarks. Growth businesses that Fisher tend to invest in, have outperformed. Interest rates going up allows banks as a category to expand their margins. But if interest rates go up too quickly, then this tailwind for banks can become a headwind. US bank failures unwound the good performance of banks from a year earlier. Likewise energy investments, that had a good year last year with the oil price spike. Such a spike in price can cause a pull back in consumption of oil (ends up being bad for energy companies.) Most of the positive return in the US in 2023 has come from a handful of growth companies. Last year the Googles and Amazons 'overhired' expecting more growth than there was. The tech companies reacted by taking costs out of their businesses. With revenue re-accelerating, profit growth has returned.

Q/ What effect will the upcoming election have on New Zealand and the market?
A/ (Harry Smith)/ Politicians create the foundations for success. The key is a democratic system having clear property rights. Otherwise politicians do not have a massive effect on the stock market. The NZ sharemarket has done relatively well under both Labour and National. So whoever wins the election is not a huge consideration.

Q/ Have central banks got inflation under control?
A/ (Ashley Gardyne)/ We think the action central banks have taken already has done enough. It is usually 9, 12, 15 months out that the real effect of interest rates on inflation is seen to work. That is how long hikes in interest rates get to be reflected in people's mortgage rates. Also the supply side inflation, which was a major factor, is already well on the way to being resolved. If anything the reserve bank in NZ risks going too far with interest rate rises, given how much debt we have in the economy.

Q/ Is it a good time now to invest cash?
A/ (Laura O'Reilly)/ Peter Lynch quote: "Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves." Successful investors are much more focussed on sticking to a strategy, rather than successfully timing their entries and exits. Investing in stages can be a good way to spread out your market risks over a longer time period.

Q/ What is Fishers ESG (Envirionment, Social and Governance) investment policy and how is it executed?
A/ (Ashley Gardyne)/ We don't invest in weapons manufacturers, and we do take into account the environmental factors around individual companies. 'Excluding things' is not enough. We embed responsible investing into our entire process and engage with the managers in companies we invest in. There is an ESG debate among our investment team on each new investment. Losing their social licence , getting regulated out of existence, and receiving big fines are the possible fiscal downsides of poor ESG company policy. Simply 'selling shares' means a manager does not have the opportunity to meet the company executives, and lobby. Being invested and having discussions is the only way for investors to influence change. For example, Mainfreight is fundamentally a polluting trucking company. But all 300 facilities around the world are self sustaining from an energy and water perspective, and they are looking at ways of making their trucks greener, potentially having electric powered trucks and hydrogen powered trucks at some point. Real change requires engagement.

Q/ With higher interest rates at the bank, are term deposits a better option than shares?
A/ (Laura O'Reilly)/ Term deposits have their place for investors close to their goal, or needing to access funds in a short period of time. But returns on term deposits do not do the best job of providing long term inflation protection. There is a risk that as term high term deposit rates today roll off, future rates could be lower. Complementing term deposits with higher yielding shares can be a good retirement strategy to stretch out that nest egg in the retirement years.

Q/ Are tech stocks now stretched, or still looking attractive?
A/ (Harry Smith)/ Many tech companies over-invested coming out of Covid-19. Subsequently taking costs out of their business has been a boost to profitability. The NASDAQ, which is tech heavy, is up 17% year to date. So are valuations overstretched now? Look at Google (which dominates search, has exposure to 'car computing' and 'artificial intelligence' as well) as an example.

Google currently trades on 17 times past earnings, below the S&P 500 average PE right now. This is the first time this has happened in ten years. Household product companies also did well in 2022 - companies associated with products you find in the middle of supermarket aisles: like cleaning products, Coke and Pepsi. These companies trade at around 27 x PE ratios at the moment, a significant premium to the likes of Google. Given the outlook four to five years down the track, we favour Google (and their like).

Q/ What good investment opportunities have you seen in the market with examples?
A/ (Harry Smith)/ We like companies that have seen significant growth in the wake of Covid-19, are cutting their costs, and have reset expectations. Part of this 'like' is that their share prices are below here they were at the start of 2022. I like Amazon. Significant demand was brought forward with Covid-19. Amazon really ramped up investment in their fulfillment infrastructure, and then found they had to unwind some of that. As a result their share price has come back a long way.. But fundamentally Amazon represents e-commerce (which will continue to take market share off physical retail, and Amazon has 40% of US e-commerce), cloud computing (in early stage but Amazon is the dominant provider of cloud computing services), and a rapidly growing and highly profitable advertising business (the ad slot they serve me as an on-line committed and targetted buyer is incredible valuable for a manufacturer.)

Switching to healthcare, I like 'Icon' listed in Ireland. Icon runs medical trials for biotech firms and pharmaceutical companies. Shares have been under pressure recently because there has been concern around start up biotech companies funding, and their ability to continue to grow. We think these concerns are relatively unfounded for Icon, because unprofitable start up companies are a relatively small proportion of Icon's client base. This company is an integral part of R&D into new drugs, and we think they will do well over five to ten years.

---------------

SNOOPY

Snoopy

19-06-2023, 11:09 AM

Fishers have reported for their own label 'growth' and 'balanced' managed funds, they will be dropping performance fees from July.

https://fisherfunds.co.nz/investment/managed-funds/fees-and-expenses#what-are-the-fees-for-fisher-funds-managed-funds

"From 1 July 2023 the Growth Fund and Balanced Strategy will no longer incur a performance fee."

Recently acquired Kiwiwealth have a 'growth' and 'balanced' strategy with no performance fees. So it looks like bringing the two into line has resulted in Fishers losing their performance fee rather than Kiwiwealth gaining such fees.

The historical Fisher Balanced Fund fee including GST (with zero performance fees) was 1.21% + 0.19% = 1.40%
The historical Fisher Growth Fund fee including GST (with zero performance fees) was 1.27% + 0.18% = 1.45%

Reading the fine print, it looks like the more specialised growth funds, Fishers Property & Infrastructure Fund, New Zealand Growth Fund, Australian Growth Fund, and International Growth Fund are NOT going to be exempt from future performance fees (albeit such fees will be capped at a maximum of 2% of the value of each fund per year).

This is contrary to the report here:
https://www.goodreturns.co.nz/article/976521586/fisher-funds-to-jettison-fees.html

which, (erroneously?) suggests all Fisher Funds performance fees will be jettisoned.

I rang Fisher Funds this morning. They confirmed to me that only the "(Envelope) Growth Fund" and "Balanced Strategy" will no longer incur a performance fee from 01/07/2023. For all of the other more prescriptive funds, e.g. NZ Growth Fund, Australian Growth Fund and International Growth Fund, and the Property and Infrastructure fund, performance fees remain.

The Goodreturns article I quoted above was sub-headlined:

"Fisher Funds has announced it will remove performance fees across all its KiwiSaver and managed funds’ multi asset portfolios on July 1."

The key phrase in that headline is 'multi asset portfolios'. In 'Fisher speak' this means 'fund of funds' type investments, the balanced and growth strategies that are built up from the building blocks of more prescriptive specialized Fisher funds. Not any fund that includes multiple assets of any kind.

However the first line in that goodreturns article
"Fisher clients were told performance fees will go in their monthly performance update."

gives the impression that all performance fees are going. Unfortunately for Fisher clients the Property and Infrastructure Fund, NZ Growth Fund, Australian Growth Fund and International Growth funds will still be charging performance fees going forwards. IMO the benchmarks used for 'outperformance' in these funds are spurious:

https://fisherfunds.co.nz/investment/managed-funds/fees-and-expenses#performance-fee

For the growth funds the 'bonus hurdle rate' is the NZ Official cash rate plus 5% (or plus 3% for the property infrastructure fund). This strikes me as being structured towards 'what the market will bear in a good year', rather than bearing any relation to the selection of assets allowed under each fund management directive. That would be a true measure of fund manager skill. IMO the performance fee, as structured, is a very poor management incentive tool.

SNOOPY

Snoopy

11-09-2023, 12:18 PM

One thing you can't fault the 'ANZ NZ growth fund' for is 'full disclosure'. All 4,410 of the investments held are listed!
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/ANZ-Investment-Growth.pdf

The ANZ Oneanswer Properties Securities Fund is a bit less forthcoming, with only the top ten holdings disclosed. However these top ten holdings do make up 94% of the total value of the fund.
https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/oasac-disclosures/2022/OASAC-FU-300922-Property-Securities.pdf

Property Securities Top Ten Holdings

Oneanswer Property Securities Top Ten holding fund percentage (30/09/2022)
Oneanswer Property Securities Top Ten relative percentage (30/09/2022)
Oneanswer Property Securities Top Eight relative percentage (30/09/2022)
ANZ Property Securities Top ten percentage (30/09/2022)
ANZ Property Securities Top ten NZ holdings relative percentage (30/09/2022)
NZX50 capitalisation (30-09-2022)
NZX50 Top Eight relative percentage (30-09-2022)

Precinct Properties
15.59%
16.5%
17.1%
0.38%
14.0%
$2,062m
17.7%

Stride Stapled Group
12.85%
13.6%
14.1%
0.35%
12.9%
$902m
7.7%

Property for Industry
14.06%
14.9%
15.4%
0.34%
12.5%
$1,225m
10.5%

Summerset Group Holdings
1.76%
1.9%
n.a.
0.33%
12.2%
$2,502m (2)
n.a.

Kiwi Income Property Trust
14.22%
15.0%
15.5%
0.33%
12.2%
$1,438m][/
12.3%

Goodman Property Trust
17.00%][/
18.0%
18.7%
0.30%)
11.1%
$2,779m
23.8%

Charter Hall Group (Aus)
1.65%
1.7%
n.a.
0.28%
10.3%
$18,469m (1)
n.a.

Vital Healthcare Property Trust
9.21%
9.7%
10.1%
0.23%
8.5%
$1,677m
14.4%

Investore Property
5.64%
6.0%
6.2%
0.17%
6.3%
$558.6m
4.8%

Argosy Property
2.61%
2.8%
2.9%
0.00%
0%
$1,016m
8.7%

Total
94.59%
100%
100%
2.71%
100%
n.a.
100%

[/TR]

Notes

1/ Charter Hall Group (CHC.ASX) is an Australian listed property company. On 30th September 2022, the exchange rate was NZD1.13379 = AUD1. This is the exchange rate that i have used when converting the market capitalisation of CHC to New Zealand dollars on the date of analysis. However Charter Hall is such a large entity it is worth as much as the entire New Zealand property sector combined. Given it is not even a New Zealand company, it is hard to justify its inclusion as part of any New Zealand Property sector investment analysis. Consequently I believe it would be an artificial construct to include Charter Hall Group in any asset allocation analysis for this fund.

2/ Summerset Group is a New Zealand retirement village operator. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, they are not property owning companies in the conventional sense. And if we include Summerset in a property sector analysis, are we not obliged to include the other listed retirement village operators as well? Consequently I have decided to omit Summerset from any property sector proportional analysis.

I had a favourable impression of how ANZ have run their dedicated property investment fund last year. So I thought it was worthwhile having another snapshot look at how ANZ is managing their property investments, 9 months further into this period of property market turmoil.

This file on the total 'ANZ Growth Fund' holdings as at 30th June 2023 is not yet released as I write this (ANZIF-FU-300623-Growth.pdf).

The comparative 'ANZ Oneanswer Properties Securities Fund' only discloses the top ten holdings in their quarterly reporting releases. However these top ten holdings do make up 94% of the total value of the fund.

https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/oasac-disclosures/2023/OASAC-FU-300623-Properties-Securities.pdf

The total value of the ANZ Oneanswer Property Securities fund on our reference date was $93.565m. However, the actual total funds in this sector managed by ANZ is much higher. That $93.565m does not include property investments made from ANZ's other broader based managed funds.

Property Securities Top Ten Holdings

Oneanswer Property Securities Top Ten holding fund percentage (30/06/2023)
Oneanswer Property Securities Top Ten relative percentage (30/06/2023)
Oneanswer Property Securities Top Eight relative percentage (30/06/2023)
ANZ Property Securities Top ten percentage (30/09/2022)
ANZ Property Securities Top ten NZ holdings relative percentage (30/09/2022)
NZX50 capitalisation (30-06-2023)
NZX50 Top Eight relative percentage (30-06-2023)

]
Precinct Properties
16.45%
17.57%
18.22%
0.38%
14.0%
$2,046m
17.7%

Stride Stapled Group
11.85%
12.65%
13.11%
0.35%
12.9%
$765m
6.6%

Property for Industry
13.79%
14.73%
15.28%
0.34%
12.5%
$1,188m
10.3%

Summerset Group Holdings
1.82%
1.94%
n.a.
0.33%
12.2%
$2,237m (1)
n.a.

Kiwi Property Group
13.27%
14.17%
14.70%
0.33%
12.4%
$1,439m
12.3%

Goodman Property Trust
19.41%
20.73%
21.50%
0.30%
11.1%
$3,115m
26.9%

Oceania Healthcare
1.54%
1.64%
n.a.
?
?%
$558m (1)
n.a.

Vital Healthcare Property Trust
9.31%
9.94%
10.31%
0.23%
8.5%
$1,544m
13.4%

Investore Property
4.35%
4.65%
4.82%
0.17%
6.3%
$522m
4.6%

Argosy Property
1.85%https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/oasac-disclosures/2022/OASAC-FU-300623-Properties-Securities.pdf
1.98%
2.05%
0.00%
0%
$945m
8.2%

Total
93.64%
100%
100%
?%
100%https://www.anz.co.nz/content/dam/anzconz/documents/personal/investments-kiwisaver/oasac-disclosures/2022/OASAC-FU-300922-Property-Securities.pdf
$11,564m (2)
100%

[/TR]

Notes

1/ Summerset Group and Oceania Holdings are New Zealand retirement village operators. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, they are not property owning companies in the conventional sense. Consequently I have decided to omit Summerset and Oceania from any property sector proportional analyses.

2/ $11,564m represents $11,564m/ ($11,564m+$2,237m+$558m) = 80.53% by market value of the NZX50 derived fund top ten.

-------------------------------

Lots of numbers, so what is the best way to make sense of them? The figures to look at are those columns that add up to 100%. These give a normalised view of the proportion of shares held. I would expect the:

a/ Oneanswer Property Portfolio AND
b/ The ANZ Growth Fund (Property Constituents only) Portfolio

to be very similar. These two funds are run by the same managers (ANZ). (As I write this the contents of ANZ's growth fund at our 30-06-2023 reference date have not been released. I will update columns 4 & 5 when these figures become available). The 'property' investment picture has become distorted by the inclusion of Summerset and Oceania, which are not normally on the list for those seeking investment in the NZ property sector. Token holdings representing 1.82% (SUM) and 1.54% (OCA) have been included in the NZ property fund, which are nevertheless in a much smaller proportion to those that exist in the much more widely invested growth fund. ANZ do not comment on these inclusions. So we are forced to speculate on why this might be. My guess is that it is 'liquidity issues' within the NZ property sector, which contains only eight significant players in the whole NZX50, that is the reason (ANZ is a relatively large player in the managed fund and kiwisaver investment sector).

Leaving aside Summerset and Oceania, ANZ have continued, relative to the property index, to be significantly underweight in both the Goodman Property Trust (gross yield 3.87%, c.f. PFI at 4.54%) and Vital Healthcare Property Trust (Gross yield 4.4%). We are told industrial property in key areas of Auckland is in short supply and consequently double digit rent rises are on the cards for landlords in this sector as rental contracts roll over. But even so, PFI (where 'ANZ Oneanswer' are overweight) looks like a much better bet yield wise than GMT. Meanwhile 'Vital Healthcare' are somewhat unique in that healthcare landlord space, a fact that seems to have market investors willing to pay a premium that 'ANZ Oneanswer' are unwilling to mimic. Even with expected rent reviews factored in, GMT and VHP are producing returns well below what an investor might expect from a term deposit. Despite being too big to sell out of one of the big eight property sector players entirely, the portfolio under-weighting of both GMT and VHP continues looks to look like a sound strategic move by 'ANZ Oneanswer'.

Argosy continues to be very much out of favour. Gross yield is good at 8.38% (PIE tax rate 28%). The Kaikoura earthquake damage to 7 Waterloo key in Wellington, resulted in facade repairs of $14.5m. These were booked in FY2022. Removing this cost should have improved FY2023 AFFO earnings by the same amount. Yet the increase in FY2023 earnings was only $10m. A National lead government, come election time, may torpedo future demand for government department office space, which is a key market for Argosy's office portfolio. Could it be the shunning of Argosy is a reflection of those Auckland based fund managers not liking the prospects for Wellington property in general and government based tenants in particular? I note the Ministry of Business Innovation and Employment, tenanted at 15-21 Stout St Wellington, has a lease that expires on March 2027. That one lease is nearly 10% of Argosy's total property portfolio!

'ANZ Oneanswer' continue to be very overweight on Stride Property, which is working towards the goal of becoming the 'on the ground manager' of other people's property portfolios. In the past this has meant Stride building up their own property portfolio before floating/selling those assets off to third party investors. Stride is the parent company of Investore, the listed big box retailer with a heavy presence in the supermarket sector. I like Investore for its defensive tenant nature. Nevertheless I do note it is saddled with some rather onerous management contracts from parent company Stride on one hand, while negotiating constrained rent deals from powerful Countdown supermarket parent Woolworths of Australia on the other. IOW Investore, which has a fairly 'neutral rating' in 'ANZ Oneanswer's portfolio overview has a constrained income stream and little leverage in being able to control their own expenses. Having an overweight shareholding in Stride would be a way for 'ANZ Oneanswer' to claw back any potential 'management contract overspending' at Stride's 'strategic investment' (18.83% shareholding) in Investore.

ANZ's investment arm has been in the news -post these tabulated results- reducing their shareholding in the Kiwi Property Group. However the number of shares sold down 'so far' are more in line with bringing the KPG shareholding back to a 'neutral portfolio position', rather than expressing any deep disgust at the prospects of KPG looking out into the future.

The low 'ANZ Oneanswer' nz property fund return for the year ended 30-06-2023 of -1.23%, did not compare well with the market benchmark loss of -0.09%. But when you consider that management fees 1.10% have been stripped from the fund result as was tax paid, the underlying fund performance was near enough to line ball with the ANZ reference index.

In conclusion, I like the 'allocation skew' that 'ANZ Oneanswer' has put on this property investment fund. But that small skew isn't enough to get them too far away from falling into the general basket of being an 'index tracker plus' property fund.

SNOOPY

Snoopy

13-09-2023, 08:53 PM

Harbour Real Estate Investment Fund:

Invrestment ThemesAs well as holding listed Property Sector funds, the Fund may also hold securities which are not included in listed property security or Real Estate Investment Trusts (REITS) benchmark indices. To be included, underlying profit certainty needs to be high. Examples include property management, sea ports, toll roads, airports, cell-phone towers, aged care & retirement villages, waste management facilities and data centres industries.

Top ten holdingsGMT, PCT, KPG, VHP, PFI, ARG, SPG, IPL, Goodman Group (Australia) (this company owns develops and manages logistic building spaces) , Charter Hall Group Australia (invests and develops office, retail, industrial & logistics and social infrastructure). These top ten businesses make up 76.9% of the asset value of the fund.

Distribution over FY20222.01cpu (based on a unit price of 1.2476 and a tax rate of 28%, this is a gross yield of 2.24%)

Total management annual charge= 0.88%

Fund Size$110.4m @31-03-2022

Fund risk rating5

I have just looked at ANZ bank's Oneanswer property portfolio management skills (one of the larger fund managers in the industry) in post 97. Now let's see how Harbour Asset Management's more 'boutique management style' compares:

The 30th June 2023 fund update is here:
https://www.harbourasset.co.nz/assets/Fund-Updates/Fund-Updates-Base-Folder/a985aa429d/Fund-Update-Harbour-Real-Estate-Investment-Fund.pdf

Harbour Real Estate Top Ten holding fund percentage (30/06/2023)
Harbour Real Estate Top Ten relative percentage (30/06/2023)
Harbour Real Estate Top Seven relative percentage (30/06/2023)

NZX50 capitalisation (30-06-2023)
NZX50 Top Seven relative percentage (30-06-2023)

Precinct Properties
12.61%
16.04%
18.02%

$2,046m
18.5%

Stride Stapled Group
3.79%
4.82%
5.42%

$765m
6.92%

Property for Industry
8.15%
10.37%
11.65%

$1,188m
10.8%

Ryman Healthcare
2.94%
3.74%
n.a.

$2,840m (1)
n.a.

Kiwi Property Group
10.04%
12.77%
14.35%

$1,439m
13.0%

Goodman Property Trust
19.05%
24.23%
27.22%

$3,115m
28.2%

Goodman Group (AUS)
3.00%
3.82%
n.a.

$41,695m (1)
n.a.

Vital Healthcare Property Trust
8.94%
11.37%
12.78%

$1,544m
14.0%

Infratil
2.72%
3.46%
n.a.

$2,813m (1)
n.a.

Argosy Property
7.39%
9.40%
10.56%

$945m
8.56%

Total
78.63%
100%
100%

$11,042m
100%

[/TR]

Notes

1/ Ryman healthcare is a New Zealand retirement village operator. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, retirement village operators are not property owning companies in the conventional sense. Infratil is a global owner of global infrastructure assets. It is a reputable and well run company, but is not known as an owner of buildings, as such. Goodman Group is a global property manager based out of Australia running a co-investment property ownership model (The Goodman Property Trust in New Zealand, GMT, is just one of these co-investment partners).
All three of these companies, despite their merits, are not really NZ property investments in any majorative sense. This is why I have left them out of my 'relative ranking' calculations

-----------------

Looking at the 'relative percentage ownership' compared to the property index composition, the Harbour Property Fund property constituents are within one percentage point of their relative index rating - with two exceptions. Harbour are overweight in Argosy Property and underweight in Stride Property. This is a reverse of the position espoused by 'ANZ Oneanswer' at the same snapshot in time. The rest of the property portfolio is pretty much index tracking.

Harbour have taken what I would term a 'broad view' of real estate, with the shares they have added outside of those core 'top eight' holdings (I include Investore in that core grouping). Are the three companies in the top ten outside of the 'core group of eight' good places to have your money invested outside of conventional property? - Probably. Are they what you would expect to find in a property investment fund? - Probably not.

The 'Harbour Real Estate Fund' had $99,565,724 of assets under management as at 30th June 2023. The annual return to that date after deductions of fees and tax was 1.61%. Harbour give scant commentary on any Real Estate Fund strategy. But we can get some hint of their thinking from a remark by lead manager Shane Solly in April 2022 from a review article.
https://www.harbourasset.co.nz/research-and-commentary/time-to-get-real-listed-real-estate-rate-hikes-and-real-returns/

"REIT investment universe is more diversified than was the case even five years ago with REITS now including investments in sectors such as logistics, healthcare and education which have structural tail winds."

One year on, how did the Harbour Real Estate Fund look in the shadow of this vision by Solly? The largest logistic company property managers in the portfolio are GMT (Harbour holding -1%ge point below index rating) and PFI (Harbour holding +1%ge point above index rating). That adds up to the fund having a neutral rating on logistics property. The only healthcare property company, Vital, is underweight by 1%ge point compared to the index rating. Furthermore, Harbour have not declared any real estate assets in the education sector, although with none listed in NZ, we can't blame Solly and his team for that.

The SIPO or Statement of Investment Policy Objective for this fund can be found here, from page 28:
https://www.harbourasset.co.nz/assets/Legal/FMA-Docs/b7c49b61a2/Statement-of-Investment-Policy-Objectives.pdf

Nevertheless it is extremely disappointing that Solly has not followed through on his vision and is leaving the 'property sectors with structural tail winds' to be exploited by others.

I favour investment funds that are 'true to their label', but are willing to take some well reasoned bets outside of the index norm. The Harbour Property Fund fails on both these scores. But it is economically run, with a total annual management fee of just 0.78% of the value of the portfolio.

SNOOPY

Snoopy

15-09-2023, 11:21 AM

This is the lowest cost NZ Property investment fund I have found. It aims to mimic the market performance of the leading property market listed entities (mostly PIEs) and nothing more. NPF in itself is also a PIE. The mandate for the fund is to invest in the eight largest property companies listed on the NZX (actually all listed property investment entities with a market capitalisation > $300m, and an average daily volume trading (ADVT) of $200k over six months) ), as listed in the table below. There is no mandate to invest in any other entities, although the fund is allowed to hold up to 10% of its invested capital in cash. The NPF fund was valued at a total of approximately $150m on the 30-06-2023 balance date. (source https://smartshares.co.nz/types-of-funds/property-shares/nzpropertytrust). This is a not insignificant 11% of the capitalisation of the whole addressable market sector of NZ listed real estate.

Smartshares NPF Top Ten holding fund percentage (30/06/2023)
Smartsahres NPF Top Ten relative percentage (30/06/2023)
Smartshares Top Eight relative percentage (30/06/2023)
NZX50 capitalisation (30-06-2023) (key stakeholders removed) (1)
NZX50 Top Eight relative percentage (30-06-2023) (key stakeholders removed)
NZX50 capitalisation (30-06-2023)
NZX50 Top Eight relative percentage (30-06-2023)

Precinct Properties
17.37%
17.37%
17.54%
$2,046m
20.0%
$2,046m
17.7%

Stride Stapled Group
8.24%
8.24%
8.32%
$765m
7.47%
$765m
6.62%

][/
Property for Industry
12.85%
12.85%
12.98%
$1,188m
11.6%
$1,188m
10.3%

ANZ NZD Current Account
0.23%
0.23%
n.a.
n.a.
n.a.
n.a.
n.a.

Kiwi Property Group
15.48%
15.48%
15.64%
$1,439m
14.1%
$1,439m
12.4%

Goodman Property Trust
18.34%
18.34%
18.53%
$2,330m
22.8%
$3,115m
26.9%

Current Assets & Liabilities
0.77%
0.77%
n.a.
n.a.
n.a.
n.a.
n.a.nz

Vital Healthcare Property Trust
12.02%
12.02%
12.14%
$1,101m
10.7%
$1,544m
13.4%

Investore Property
4.58%
4.58%
4.63%
$424m
4.14%
$522m
4.51%

Argosy Property
10.22%
10.22%
10.32%
$945m
9.23%
$945m
8.17%

Total
100.0%
100%
100%
$10,238mfor 'ANZ Oneanswer' to claw back any potential 'management contract overspending' at Stride's 'strategic investment' (18.83% shareholding) Investore
100%
$11,564m
100%

[/TR]

Notes

1/ Key stakeholder shareholdings are:
1a/ Goodman Property Trust: Goodman Investment Holdings 19.82%, Goodman Funds Management 5.37% (Total 25.19%)
1b/ Investore: Stride Property Group 18.83%
1c/ Vital Healthcare Properties: Northwest Healthcare Properties 28.72%

--------------------------------

The return on this fund for the year ended 30-06-2023 was -1.31%. (from Fund update for the quarter ended 30 June 2023.) This is after the deduction of fund management fees (0.54% annually, spread out over the year) and tax. This management fee accrues daily as at each Net Asset Determination Time, and is deducted from the Net Asset Value of the Fund at the time each day that it accrues.

I was troubled analyzing this fund, because I thought it mimiced the defined S&P/NZX real estate index (this follows the eight companies in the table). But it is clear from the table above that it does not. Then I had a brainwave. I knew the NZX50 index considers just the free float of the index constituents, when defining the fraction of shares to be included. So maybe that methodology applied here too? I recalculated each company's market capitalisation, taking out those locked up key stakes where appropriate (see Note 1 above). The result looked better. But it wasn't giving me the actual proportional composition for NPF as declared. Further research:
https://www.spglobal.com/spdji/en/education/article/indexing-listed-property-stocks-in-new-zealand/

lead me to discover that the S&P/NZX real estate index was a 'capped' index.
"To reduce single stock concentration, the index employs a stock cap of 17.5%,"

At this point I would excuse any reader for 'scratching their head' as they note that the tabulated percentage holding of the Goodman Property Trust and Precinct Properties at at 30-06-2023 are both above that 17.5% cap figure. The solution to this quandary is that the 'cap' is only applied 'semi-annually', - at the end of March and the end of September. So any 'overgrowth' of a particular share, whether that be caused by the out-performance of the share in question, (or the under-performance of its comparative contemporaries), will be sorted out at the next forthcoming re-balancing date.

What I have found interesting about how NPF works is that the comparative Harbour Asset Real Estate fund (post 98, not strictly an index tracker, but targetting 87.5% NZ equities and 12.5% Australian equities) actually tracks the 'big 8' property investments better than NPF, because the Harbour Asset Real Estate fund does not cap any index constituents. Who would have imagined the official NZX sanctioned NZ property index fund NPF is 'out tracked' by another market player!

Ironically it is the NPF 'cap' that has resulted in a lower than expected holding in GMT. I see that as a good thing, but not because I don't like the company's business model. I see that Auckland will continue to be the logistics capital of New Zealand and that space in the right place, -which GMT has-, will continue to be a bankable commodity. My concern is that even with the 'superior touted rent increases' as 'under-rented contracts roll over', GMT is already very fully priced. PCT, an office tower owner, -with NPF being underweight- suits me too. I think the trend of working some days at home is entrenched and that government department offices will shrink over the next few years. This will reduce the growth pressure on office tower space, and also the pressure on the PCT share price to rise. So full marks to NPF for taking a below index exposure to GMT and PCT, even if it took a 'mechanical portfolio rule', rather than 'superior executive prowess' to see that adjustment done.

Despite my discovery of that 'cap' adjustment, this is fundamentally a large fund with a straightforward structure with managers 'doing what they say they will do'. It all sounds a bit boring. But in some investment circles 'being boring' is actually a badge of honour.

SNOOPY

Snoopy

17-09-2023, 07:54 PM

I have talked about the idea of an 'index plus' fund manager before. To reprise, this is someone who advertises themselves as an an 'active fund manager', but behaves in a somewhat timid way. Our arch-typical active fund manager is a 'middle aged white guy' (my apologies to the ethnics and the ladies reading, but this is how the story goes) tall, and handsome, with swagger. This is a guy that digs deep into research and makes the bold calls. He is ahead of the market and he has a 99% hit rate for making the right call at the right time. His biggest mistake made to date is ordering the wrong pie for lunch. EXCEPT

....when you dial down into the research, and start looking at longer time frames, there is no such person. In fact, as time goes on, our 'active manager' has a better and better chance of being beaten by, horror of horrors, an index fund: a brainless robot that does nothing more than track a particular stock index. Most fund managers know this tale, even if they don't admit it publicly. Yes they still want to dazzle investors with their bold calls, But they don't want to deviate too far from the index as they know how successful 'index man', sorry 'index bot', can be. This way if they end up a little bit above or a little bit below 'index bot', then they can still spin a good story, to you the investor. Hence you get our 'active fund manager' exhibiting what I call 'index plus' behavior.

An extreme version of this behaviour may be found amongst the NZ Property Fund managers who have a total constituent universe of just eight listed property entities to choose from. That is right, just eight. Not even enough to make a 'top ten'. I picture our group of 'NZ Fund Top Property Managers' like this.....

----------------------

Somewhere in downtown Auckland there is a faceless tower. On one floor of that tower is a long corridor. You get out of a lift and the corridor seems to stretch to infinity, except, right at the end you can see a tea room. The floor in front of you is a cloudy lino grey. The two walls on either side are painted white. Along each wall is a series of doors, each with a brass door handle, but all the doors are white as well. Behind each of those doors is an office. Inside each of those offices is a pristine white desk, and a brown leather office chair. Sitting at each of those desks is 'NZ Property Fund Manager man'. This is the guy I have described before.: tall, dapper, with a hint of grey flecking through his hair - not enough to allow an observer to question his virility, but enough for the fund unit holders to know that he wasn't plucked out of business school last week.

Now you might expect our man to have filing cabinets full of historical research and computer screens where he can follow the nuances of trading in his portfolio in real time . But you would be wrong. This is the 'head man', 'the big kahoona', He has underlings to take care of all that day to day stuff. Our man sits at his desk, with an old fashioned writing pad on it, staring at the white wall in front of him and clutching a pen. He sits there silent and motionless. What is he dreaming about? The 'executive express' in the underground car park downstairs, which he is waiting to unleash on the homeward run to the leafy suburbs where his wife and 2.1 children a gleefully awaiting his arrival for a communal hot dinner? Or is it which golf course he will be tackling on Saturday? No, it is neither of these things, which would be obvious if there really was an observer in his office. He has reached the level where he knows that all of that FA and TA on the stocks he must manage is BS. 'Index plus' is the plan and there is no finance tech needed to execute that. No, his face is stiff and white, as he knows morning tea time is approaching. He knows he must soon make the long trek down to the tea room at the end of the corridor to share a cuppa with all those other NZ property fund managers. He has a face that is struck by abject terror. He will soon have to speak to 'the others'. And this picture of visual terror has been framed by the agonizing thought that has just crossed his mind. That one of those deep thinking managers, with nothing to do all day but hold a pen above a blank paper pad and stare at a white wall might come up with - an original thought!

Can you imagine the downstream effect of that! It would mean our man might have to react. He might have to adjust his own investment strategy. Move his investment model an extra anxious step away from market index comfort. A fractional incremental return would be good, yes. But what if he got it wrong? What if his change lead to to fractional decrease in return! How would he ever face his unit holders!? Yikes! And he is in a modern sealed glass tower with no windows. No place to jump from, if all turns to custard....

SNOOPY

Snoopy

17-09-2023, 08:35 PM

NZ listed property fund managers tend to run what I term an 'index +' portfolio, as I have describer in post 100. The reference index, in this instance consists of just eight investment entities. I have listed these in the table below. A fund manager who wishes to put their own sparkle on their portfolio must deviate from the index, even if by only a small amount. 'Investment sparkle' is just a term I have coined to describe whether an investment manager decides to take an underweight or overweight position from any entity in our 'class of eight'. Whether these 'breakaway investment decisions' are successful (or not) is, in the fullness of time, determined by the market.

In summary, the two factors that determine the effect of a market position 'away from the index norm' are:

a/ The size of the piece of the entity our fund manager wants to 'overweight' or 'underweight' -multiplied by-
b/ The percentage change in the unit price of that entity over our investment time-frame (in this case between 30-06-2022 and 30-06-2023).

The table below is meant to demonstrate how a deviation from the index template might have affected individual fund managers performance over the 30-06-2022 to 30-06-2023 year. The table starts with changes in constituent share price movements over the period.

Share Price 30-06-2022 {A}
Share Price 30-06-2023 {B}
Percentage Change {{B}-{A}}/{A} or {C}
Relative Capitalisation 30-06-2023 (post 97)
Relative Capitalisation 30-06-2022 {D}
Weighted Percentage Change 30-06-2022 {C}x{D}
Normalised Weighted Percentage Change 30-06-2022 (3)

Precinct Properties
$1.37
$1.29
-5.84%
17.7%
18.1%
-1.057
-3.38

Stride Property Group
$1.66
$1.40
-15.7%
6.62%
7.56%
-1.186
-3.79

Property for Industry
$2.44
$2.365
-3.07%
10.3%
10.2%
-0.3131
-1.00

Kiwi Property Group
$0.975
$0.91
-6.66%
12.4%
12.8%
-0.8525
-2.72

Goodman Property Trust
$2.00
$2.22
+11.0%
26.9%
23.3%
+2.563
+8.19

Vital Healthcare Properties
$2.695
$2.34
-13.2%
13.4%
14.8%
-1.954
-6.24

Investore Property
$1.59
$1.40
-11.9%
4.51%
4.93%
-0.5868
-1.87

Argosy Property
$1.16
$1.115
-3.88%
8.17%
8.20%
-0.3182
-1.02

Total

100%
100%

Notes

1/ The above table does not account for cash issues during the year, nor dividend payouts.
2/ The stand out in the table above is the Goodman Property Trust, the only index constituent to make a capital gain during the year.
3/ Normalisation is based around the relative effect of holding Property for Industry (PFI). Changes away from the representative holding of PFI are the least impactful change you can make to a portfolio and so have been allocated the number '1' on the relative changes scale.
4/ Sample calculation for relative capitalisation for 30-06-2022, Precinct Properties:
Share price loss means the relative capitalisation for YE30-06-2023 has been reduced from its YE30-06-2023 level. What was the indicative relative portfolio position before the share price reduction?

P x (1 - 0.0584) =17.7% => P= 18.80%

If you do this exercise for all eight entities in the table, you will find the summed previous percentages, like the 18.8% I have calculated above, do not sum to 100. Let's say they sum to 10'x'%, where 'x' is a number greater than zero. That means you have to reduce the percentage figure 'P' calculated above by the fraction 100/10'x'. (Note that in this particular column-er example, the multiplication factor turns out to be 100/103.77, where 'x' is 3.77):

18.8% x 100/103.77 = 18.1%

------------------------

How does one use the table above? Choose a particular constituent company from any 'NZ property 'fund managers fund', expressing it in the form of a percentage of the fund total. Subtract that percentage from the same company figure in table column {D}. If the figure is positive, then this is the fund's overweight position in that share. If it is negative, then that represents the fund's underweight position.

The last two columns are there to show how the actual change in share prices during the period, affected overall portfolio composition, in relative terms.

SNOOPY

Snoopy

18-09-2023, 08:40 PM

Bare numbers summarized over a difficult property year:

30-06-2023 Year Return
add back Fees and Taxes
equals Underlying Return0574

ANZ Oneanswer NZ Property
-1.23%
-1.10%
-0.13%

Harbour Real Estate Fund
1.61%
-0.78%i
2.39%

Smartshares NZ Property ETF
-1.31%
-0.54%
-0.77%

How did Harbour Asset Management top our little table? Rather than being particularly great at picking winners, it looks like Harbour were significantly underweight in three of the biggest losers, being 'Vital Healthcare Property', 'Stride Property Group' and 'Investore'.
1a/ For VHP: capital saved was 14.0%-12.8% = 1.2 percentage points, or 1.2/14.8= 8.1% of a hypothetical index invested total.
0.081 x 14.0% x a 13.2 capital value percentage loss = 0.15 percentage points of portfolio capital loss saved
1b/ For SPG: capital saved was 6.92%-5.42% = 1.5 percentage points, or 1.5/6.92= 22% of a hypothetical index invested total.
0.22 x 6.92% x a 15.7 capital value percentage loss = 0.24 percentage points of portfolio capital loss saved
1c/ For IPL: capital saved was 'at least'(*) 4.51%-2.72% = 1.79 percentage points or 1.79/4.51 = 40% of a hypothetical index invested total.
0.4 x 4.51% x an 11.9 capital value percentage loss = 0.21 percentage points of portfolio capital loss saved.

(*) The actual holding in Investore at the latest reference date is not disclosed. However we do know that it is a smaller position than the number 10 holding on the top ten list of investments.

Furthermore Harbour adjusted for the aforementioned 'underweightings' by overweight in one of the smallest losers - Argosy.

Was it the 'plus' bit of the 'index plus' strategy that helped?
2a/ Broadening the definition of 'real estate' to include 'retirement villages' certainly did not help. Ryman was down 26.1% for the year and Oceania was down 17.2%, although Summerset was basically steady (a loss of 0.1%).
2b/ Holding Infratil certainly helped with the head share up a massive 32% in the year under consideration. Albeit we have to remember Infratil made up a scant 2.72% of the Harbour Asset portfolio at years end for a gain of 2.72%-2.06%= 0.66 portfolio percentage points added to total return. (R x 1.32=2.72% => R= 2.06%).
2c/ Holding a stake the Australian listed 'Goodman Group' (a 3% holding at 30-06-2023) while its share price rose from $A17.84/0.9048=$NZ19.72 to $A20.07/0.9165=$NZ21.90, a rise of 11% was positive. This added 3.0%-.2.7%=0.3 percentage points to the overall portfolio total (R x 1.11 = 3.00% => R= 2.70%)

Adding up the savings of holding underweight positions in the biggest losers of the real estate investment index, coupled with the winnings from picking a couple of quasi property companies that sit out side the index, the total portfolio advantage to 'Harbour Asset Management' stretches out as follows:
(0.15%+0.24%+0.21%)+(0.66%+0.3%)= 1.56%

However, the actual 'winning margin' for Harbour over the Smartshares NPF fund was: 2.39%--0.77% = 3.16%.. Why the difference?

SNOOPY

Snoopy

19-09-2023, 10:40 AM

I have gone back into the Harbour archive, to see if we can learn a bit more about the Real Estate fund's out-performance.

The 30th June 2023 fund update is here:
https://www.harbourasset.co.nz/assets/Fund-Updates/Fund-Updates-Base-Folder/a985aa429d/Fund-Update-Harbour-Real-Estate-Investment-Fund.pdf

While the 30th June 2022 update is here:
https://www.harbourasset.co.nz/assets/Fund-Updates/All-Fund-Updates-Archive/b3cbf8fd8f/Fund-Update-ALL-FUNDS-June-2022.pdf

For good measure, I have also added in the three reporting periods in between. It is always good to learn what you can from the pros. This table gives we plebs the best chance of understanding what Solly and his team at Harbour Asset Management were up to.

Harbour Real Estate Top Ten holding fund percentage (30/06/2023)
Harbour Real Estate Top Ten holding fund percentage (31/03/2023)
Harbour Real Estate Top Ten holding fund percentage (31/12/2022)
Harbour Real Estate Top Ten holding fund percentage (30/09/2022)
Harbour Real Estate Top Ten holding fund percentage (30/06/2022)

Precinct Properties
12.61%
12.35%
12.22%
11.66%
11.94%

Stride Stapled Group
3.79%
3.53%
3.81%
4.46%
4.58%

the

Property for Industry
8.15%the
8.13%
8.21%
8.22%
7.89%

Ryman Healthcare
2.94%

Summerset

2.65%
2.74%

Kiwi Property Group
10.04%
10.25%
10.56%
9.72%
9.98%

Goodman Property Trust
19.05%
18.95%
17.88%
16.14%
14.30%

Goodman Group (AUS)
3.00%
3.12%
3.58%
2.94%
3.29%

Vital Healthcare Property Trust
8.94%
9.02%
8.88%
9.61%
9.54%

Infratil
2.72%

Investore

2.89%
3.17%
3.32%
3.67%

Argosy Property
7.39%
7.35%
7.47%
7.53%
7.45%

NZ Rural Land Company

2.84%
2.56%

Total
78.63%
78.44%
78.34%
76.3%
75.38%

[/TR]

Notes

1/ The Harbour Real Estate Fund has a much broader definition of 'property investment' than is generally understood by the market. In particular:
1a/ Ryman healthcare and Summerset are New Zealand retirement village operators. Traditionally, such operators have accumulated capital via the asset appreciation of properties within their villages to help fund their care model. However, retirement village operators are not property owning companies in the conventional sense.
1b/ Infratil is a global owner of global infrastructure assets. It is a reputable and well run company, but is not known as an owner of buildings, as such.
1c/ Goodman Group is a global property manager based out of Australia running a co-investment property ownership model (The Goodman Property Trust in New Zealand, GMT, is just one of these co-investment partners
1d/ NZ Rural Land Company is a farm owning entity, which rents out its land to farmers.
All five of these companies, despite their merits, are not really NZ property investments in any majorative sense.

-----------------------------

Discussions to come.

SNOOPY

Snoopy

20-09-2023, 08:05 PM

Adding up the savings of holding underweight positions in the biggest losers of the real estate investment index, coupled with the winnings from picking a couple of quasi property companies that sit out side the index, the total portfolio advantage to 'Harbour Asset Management' stretches out as follows:
(0.15%+0.24%+0.21%)+(0.66%+0.3%)= 1.56%

However, the actual 'winning margin' for Harbour over the Smartshares NPF fund was: 2.39%--0.77% = 3.16%.. Why the difference?

After creating post 103, I have a reassessment to make.

Shane Solly in April 2022 from a review article.
https://www.harbourasset.co.nz/research-and-commentary/time-to-get-real-listed-real-estate-rate-hikes-and-real-returns/

"REIT investment universe is more diversified than was the case even five years ago with REITS now including investments in sectors such as logistics, healthcare and education which have structural tail winds."

One year on, how did the Harbour Real Estate Fund look in the shadow of this vision by Solly? The largest logistic company property managers in the portfolio are GMT (Harbour holding -1%ge point below index rating) and PFI (Harbour holding +1%ge point above index rating). That adds up to the fund having a neutral rating on logistics property. The only healthcare property company, Vital, is underweight by 1%ge point compared to the index rating. Furthermore, Harbour have not declared any real estate assets in the education sector, although with none listed in NZ, we can't blame Solly and his team for that.

Nevertheless it is extremely disappointing that Solly has not followed through on his vision and is leaving the 'property sectors with structural tail winds' to be exploited by others.

It looks like I owe Solly and his team at least a partial apology. Solly did indeed boost his fund's holding in the largest logistics player, GMT, after all in the ensuing year following his comment quoted above. GMT went from 14% to 19% of the portfolio in fact. What threw me was that at a 19% portfolio weighting (and without the benefit of portfolio accumulation hindsight that I now have), the GMT holding was barely up to index rating level, - possibly a bit below (before I had assumed was a constant state). So even though Solly's move to buy a lot more GMT was in hindsight 'a good strategy followed through', it looks like Mr Market got there ahead of him. He is a smart guy that 'Mr Market'!

Right, back to the 'Why the difference' discussion.

In my post 98, I considered that Harbour's holding in GMT was almost the same during the year under examination. But if Harbour had managed to increase the quantum of their GMT holding to 25% above the 30-06-2022 total at prices of around $2 per share (quite possible), then -indicatively- the Harbour portfolio gain over the 12 months would have increased by a an incremental further amount:

For GMT: 'extra capital acquired' was 19.05%-14.30% = 4.75 percentage points or 4.75/14.30 = 33% more than the assumed steady state investment total.
0.33 x 14.30% x an 11.0 (see post 101) capital value percentage gain = 0.52 percentage points of additional portfolio capital gained.

Other transient adjustments to the Harbour Asset Real Estate portfolio during the year under examination were less meaningful (refer post 103).
The already noticed under-weighting of Stride (post 98) looks like it was an active strategy during the year. So too the clinical sell down of the associated company Investore stake. I wonder what it is that Solly does not like about this duo?

Looking at the remainder of the 'big eight' (refer to post 98):
a/ Precinct Properties continues a slow march upwards towards index rating.
b/ Property for Industry maintains a slightly higher than index rating.
c/ Kiwi Property Group maintains a slightly higher than index rating.
d/ Vital Healthcare Property is held at a solid percentage point below where an index holding should be. This is interesting because Solly has identified the healthcare property sector as one with 'tailwinds'. Perhaps even with those tailwinds, Solly considers VHP relatively expensive?
e/ Argosy continues to be held at a level which is a solid two percentage point above where an 'index hugging manager' would sit.

That last overweight holding is interesting, because Argosy offers one of the highest dividend yields in our core of eight, with a gross dividend yield of 8.29%. This is effectively a full two percentage points higher than an index tracking portfolio, as derived in the link below:
https://www.sharetrader.co.nz/showthread.php?2157-Listed-Property-Trusts&p=1022016&viewfull=1#post1022016

So Harbour Asset Management through their 'real estate fund' gains extra income above the index gauge on their (10.56-8.56)/8.56 = 23% higher percentage point over-rating of ARG shares, multiplied by their contribution to portfolio income as follows:

0.23 x (8.29-6.33) x 12.2% = 0.05 incremental percentage point return.

Taking the gains over and above index holding identified in post 102, and adding the gains in this post we get:
(0.15%+0.24%+0.21%)+(0.66%+0.3%)+(0.52+0.05)= 2.13%

O.K., we are still a percentage point or so behind the 3,16% achieved. But we are working with incomplete information. Sometimes fund managers do a bit of trading during the year (notice that some of the holdings in post 103 go up and down a bit during a 12 month holding period). It could be that Solly has 'topped up his profits' from trading around the edges of the shares his portfolio holds.

The numbers game gives the win to Solly (post 102). My detective work gives investors a good idea of how the winning strategy was played out (posts 102 and 104). So we have a result! Solly and his Harbour Asset Management Real Estate Fund is the place to put your real estate capital!

Or is there more to consider?

SNOOPY

Snoopy

20-09-2023, 09:33 PM

The numbers game gives the win to Solly (post 102). My detective work gives investors a good idea of how the winning strategy was played out (posts 102 and 104). So we have a result! Solly and his Harbour Asset Management Real Estate Fund is the place to put your real estate capital!

Or is there more to consider?

There are a few more NZ Real Estate Funds out there. I don't disown the 'index plus' approach to setting up these real estate funds. But I did wonder if there is anyone else out there running an NZ Property Fund based on a different strategy. The main problem with the three protagonists that I have looked at in detail is that together they account for around 30% of the total listed NZ real estate market (around 10% each). When you are that big, it is difficult to deviate too far from 'index plus'. I wondered if there were any smaller operators out there, pursuing a different strategy?

I came across 'Mint Asset Management'
https://www.mintasset.co.nz/our-funds/funds-overview/mint-australasian-property-fund/

Despite the name, the 'Australasian' property fund is heavily weighted towards NZ's 'big eight' listings (totalling 91.86% of the fund). But at just over $28m, it is less than one third the size of any of the other three protagonists examined so far. Yet if you click on the latest fund update and compare the fund composition with the NZ Real Estate index constituent rating (post 99), you will see that 'Mint Asset Management' is 'index plus' as well. For the record the Mint Management version of 'index plus' means a 2 percentage point underweight position in both KPG and VHP, with IPL also down 1.5 percentage points. PCT is up by a percentage point as is SPG. 'Rogue declarations' outside of the core eight are Charter Hall (real estate) and NEXTDC (data-centres) in Australia. The annual management fee at Mint was 0.98%

As an aside, Solly's previous employer was Mint. So you could say that in moving to Harbour Asset Management, this was for Solly merely an exercise in 'continuing to do everything he had been doing'. That means, the way I see things, it does come down to which of the 'index+' market players I see as best. Currently I hold none of the big eight underlying investments from which our respective fund managers make their lunch. So I feel I am in a position to judge the merit of the eight protagonists from a value perspective today without any 'anchor baggage'.

The most important thing to consider is how these property funds have positioned themselves for the future, not to get hung up on past success or under-performance. For that you need a vision of where DARP (Demand at a reasonable price) will come from.

My top preferred NZ property sector investments are:

1/ Property for Industry: Big box industrial and logistics (sectors I like) at a good yield from quality underlying earnings (a higher percentage of imputation credits earned than most). A good track record of 'sticking to their knitting'.
2/ Stride Property Group: Tarnished with their inability to sell down their office portfolio with the failed 'Fabric' float, Stride's long term aim is to be a 'management ticket clipper'. Others put up the equity to actually own the properties under management. It is such a profitable plan, that buying out profitable management contracts held by outsiders was lauded as the thing to do by many of the top eight market players over the last few years. Stride is not a full PIE which might put some property investors off. But for me tax matters are a consideration, not an over-ruling command for where I put my investment dollars.
3/ Argosy: Trying to cover all categories of property investing (office, industrial, large format retail). But the with tilt towards big box industrial (53% of the total portfolio) and some retail (9%) that attracts me. Leaving aside Kiwi Property, which has become more of a property developer and will likely reduce dividends soon to fund their 'live work and shop' at one site new development vision, Argosy gives investors the highest dividend yield.

Almost making my top 3 was Investore, as I like the recessionary proof big box grocery sector. Countdown (Inverstore's biggest tenant) does play 'hard ball' though, with their rent contracts. I got worried when Investore announces rental lease deals at rates below the cost of bank funding! I need to look into margins at Investore a bit further. Kiwi Property is a 'roll the dice' investment with lots of development and execution risk. Goodman Property Trust a great company in a good sector, but very fully valued. Ditto for Vital Healthcare. Precinct are the big player in office towers, which I see as a sector coming under pressure in the near term - with government departments set to shrink - and in the long term with greater acceptance of 'working from home.

And the fund winner is.......

SNOOPY

Snoopy

21-09-2023, 10:13 AM

And the fund winner is.......

Listed Property Fund Manager Comparison
Fund Annual Fee
Property for Industry holding Increment
Stride Property Group holding Increment
Argosy Property holding Increment
Sum Total Percentage Point deviation from Index
Absolute Total Percentage Point deviation from Index

Free Float Index Holding for Top Eight (Reference)
Not Applicable
11.6% (base)
7.47% (base)
9.23% (base)
0.0pp
0.0pp

1/ ANZ Oneanswer (Incremental Holding to Reference)
1.10%
+3.7pp
+5.6pp
-7.2pp
+2.1pp
16.5pp

2/ Harbour Asset Management (Incremental Holding to Reference)
0.78%
+0.85pp
-1.5pp
+2.0pp
+1.5pp
4.5pp

3/ Smartshares (Incremental Holding to Reference)
0.54%
+1.4pp
+0.85pp
+1.1pp
+3.4pp
3.4pp

I have created the above table to get an inkling of where our three protagonists might be going with my three preferred unit holdings, rather than the return they gave their unit holders in the financial year just gone. This is all based around my 'future vision' in post 105. Readers may have their own future vision across the different property sectors that is different to mine. That in turn may make them look at a fund manager from their own different perspective (a perfectly legitimate thing to do) and so come up with a different 'best' manager. Nevertheless, my own judgement is what follows.

In the twelve months just gone under scrutiny, the 'best performance', was put in by Solly's Harbour Asset Management Team. This was helped by various 'one offs' like Solly's big push into logistics via GMT (which in actuality meant he just caught up to where the other fund market players were already) and a one off boost from a 32% capital appreciation (resulting in 0.66 percentage points being added over 12 months to the fund total return) from a minnow holding in Infratil. I sincerely doubt that either of these effects will be able to be repeated in the current financial year. Some say we might see a boost this year in the recovery of Harbour's Real Estate fund holdings in the three leading listed retirement villages. I think there could be a 2% total portfolio boost from such a sub sector recovery. But whether this will all occur over the 30-06-2023 to 30-06-2024 period alone is doubtful. Consequently I believe that after Solly's relatively favourable twelve months of portfolio management on behalf of investors, the current ensuing twelve months should see Solly's Harbour Asset Real Estate performance 'revert to the mean'.

My instinct in picking a winner is to go for ANZ Oneanswer, because they are the most overweight in the two property owning companies that fit into my own 'growth vision' going forwards. Interpreting from the table above, the largest potential gain will come from the 5.6 percentage point overweight holding above the 4.74% base index shareholding rate (this means that to start the year, the percentage of the portfolio in Stride is 5.6%+4.7% = a 10.3% of the ANZ Oneanswer Real Estate total portfolio stake. Nevertheless, this pumped up 10.3% stake is only 10.3% of a much larger 100% portfolio. And the 'incremental piece' is only 5.6% of a much larger 100% portfolio. Finally, any out-performance will rest on just what kind of capital gain (or otherwise) applies to that slender 5.6% of excess sized Stride stake. What I am saying here is that even with those out sized portfolio sizing decisions made by ANZ Oneanswer, a 20% advance in the share price of Stride (a quite extreme favourable performance) will only increase the value of the whole Oneanswer Real Estate fund by just over a single percentage point above fund index returns. This shows up our most independently thinking manager (ANZ Oneanswer) to still be hugging the real estate investment index remarkably closely. On a slightly different tack, I would be very interested to know why ANZ Onesaver are so negative on Argosy properties, while the other two protagonists are resoundingly positive. Don't get me wrong. If your own research says you should take a stand aside from the index, and minimise your exposure to Argosy (in this instance), then I am all for a fund manager doing just that. But I remain puzzled by ANZ Oneanswer's extremely negative views on a company with such a strong dividend yield and yet a perfectly acceptable lease rollover profile. I also have to bear in mind that the ANZ Oneanswer management charge the most of the three fund manager protagonists here for managing the portfolio of listed entities on the investor's behalf.

Finally we come to Smartshares, which, is touted as nothing more than a mimic for the NZ real estate listed index, Despite this, through a quirk of fund management policy ('the cap') , I find Smartshares overweight in all three of the property shares that I like best. This fund 'cap' prevents this fund holding more than 17.5% of its invested capital in any one listed share. That, as a result, I should find all three of my preferred investments overweight in what is ostensibly an index fund blows me away. The fact that this fund has the lowest management fees seals the deal . The Smartshares NZ Real estate fund (NPF) is my winner. Yet I still retain respect for the other two fund manager protagonists. When all managers play the 'index plus' share selection game you can almost be sure that it will be a 'photo finish' to decide the winner!

SNOOPY

Snoopy

26-05-2024, 10:15 AM

"Dolcile" in another place wrote:
I really like the idea of owning a good portfolio of NZ dividend paying stocks in retirement. The problem is I'm currently in the top tax bracket and the extra tax really takes the shine off the currently high yeilds from the likes of 2CC and TRA. I know tax shouldn't drive investment decision but it does make PIE funds quite attractive.

I'd love to hear other views on this.

Perhaps this one would suit?

https://smartshares.co.nz/types-of-funds/new-zealand-shares/nz-dividend

The 'smartshares' dividend fund.

The table shows holdings as at 30 April 2024. It is updated monthly.

[td]ISSUER
INDUSTRY
SECTOR
WEIGHTING

CEN NZ
Contact Energy Ltd
Utilities
12.62%

SPK NZ
Spark New Zealand Ltd
Telecommunication Services
10.71%

CNU NZ
Chorus Ltd
Telecommunication Services
9.95%

GNE NZ
Genesis Energy Ltd
Utilities
7.34%

SKC NZ
SKYCITY Entertainment Group Ltd
Consumer Discretionary
7.29%

KPG NZ
Kiwi Property Group Ltd
Financials
5.95%

FRW NZ
Freightways Group Ltd
Industrials
5.06%

PCT NZ
Precinct Properties Group
Financials
4.97%

HGH NZ
Heartland Group Holdings Ltd
Financials
4.62%

ARG NZ
Argosy Property Ltd
Financials
3.52%

Top ten TOTAL

72.03%

But do you like the composition?

SNOOPY

kiora

26-05-2024, 05:22 PM

"Is Investing for Dividends Bad for Long Term Wealth?"

Short take:It depends on how long your retirement is going to be? " pre-retirees and retirees should consider their remaining life expectancy given their current age. After all, anybody who survives to their 50s and 60s is in a more exclusive “longevity club” compared to everyone who’s born."

https://www.forbes.com/sites/stevevernon/2024/02/01/life-expectancy-after-retirementheres-what-to-expect/?sh=53c9268a7f94

The benefits of compounding returns are likely to be reduced

https://kernelwealth.co.nz/blog/is-investing-for-dividends-bad-for-long-term-wealth?utm_campaign=The%20Seed&utm_medium=email&_hsenc=p2ANqtz-95J7YgsWI0M6xqrcK0P5xeFUWppHBiuH9nKg4boT25Ktbe9UMO 4X8oq1_uE29YTzPmF7S9G0BcMKk2ekCfXw4O3D7ucg&_hsmi=308546676&utm_content=308546674&utm_source=hs_email

Traderx

04-06-2024, 02:56 PM

Listed Property Fund Manager Comparison
Fund Annual Fee
Property for Industry holding Increment
Stride Property Group holding Increment
Argosy Property holding Increment
Sum Total Percentage Point deviation from Index
Absolute Total Percentage Point deviation from Index

Free Float Index Holding for Top Eight (Reference)
Not Applicable
11.6% (base)
7.47% (base)
9.23% (base)
0.0pp
0.0pp

1/ ANZ Oneanswer (Incremental Holding to Reference)
1.10%
+3.7pp
+5.6pp
-7.2pp
+2.1pp
16.5pp

2/ Harbour Asset Management (Incremental Holding to Reference)
0.78%
+0.85pp
-1.5pp
+2.0pp
+1.5pp
4.5pp

3/ Smartshares (Incremental Holding to Reference)
0.54%
+1.4pp
+0.85pp
+1.1pp
+3.4pp
3.4pp

I have created the above table to get an inkling of where our three protagonists might be going with my three preferred unit holdings, rather than the return they gave their unit holders in the financial year just gone. This is all based around my 'future vision' in post 105. Readers may have their own future vision across the different property sectors that is different to mine. That in turn may make them look at a fund manager from their own different perspective (a perfectly legitimate thing to do) and so come up with a different 'best' manager. Nevertheless, my own judgement is what follows.

In the twelve months just gone under scrutiny, the 'best performance', was put in by Solly's Harbour Asset Management Team. This was helped by various 'one offs' like Solly's big push into logistics via GMT (which in actuality meant he just caught up to where the other fund market players were already) and a one off boost from a 32% capital appreciation (resulting in 0.66 percentage points being added over 12 months to the fund total return) from a minnow holding in Infratil. I sincerely doubt that either of these effects will be able to be repeated in the current financial year. Some say we might see a boost this year in the recovery of Harbour's Real Estate fund holdings in the three leading listed retirement villages. I think there could be a 2% total portfolio boost from such a sub sector recovery. But whether this will all occur over the 30-06-2023 to 30-06-2024 period alone is doubtful. Consequently I believe that after Solly's relatively favourable twelve months of portfolio management on behalf of investors, the current ensuing twelve months should see Solly's Harbour Asset Real Estate performance 'revert to the mean'.

My instinct in picking a winner is to go for ANZ Oneanswer, because they are the most overweight in the two property owning companies that fit into my own 'growth vision' going forwards. Interpreting from the table above, the largest potential gain will come from the 5.6 percentage point overweight holding above the 4.74% base index shareholding rate (this means that to start the year, the percentage of the portfolio in Stride is 5.6%+4.7% = a 10.3% of the ANZ Oneanswer Real Estate total portfolio stake. Nevertheless, this pumped up 10.3% stake is only 10.3% of a much larger 100% portfolio. And the 'incremental piece' is only 5.6% of a much larger 100% portfolio. Finally, any out-performance will rest on just what kind of capital gain (or otherwise) applies to that slender 5.6% of excess sized Stride stake. What I am saying here is that even with those out sized portfolio sizing decisions made by ANZ Oneanswer, a 20% advance in the share price of Stride (a quite extreme favourable performance) will only increase the value of the whole Oneanswer Real Estate fund by just over a single percentage point above fund index returns. This shows up our most independently thinking manager (ANZ Oneanswer) to still be hugging the real estate investment index remarkably closely. On a slightly different tack, I would be very interested to know why ANZ Onesaver are so negative on Argosy properties, while the other two protagonists are resoundingly positive. Don't get me wrong. If your own research says you should take a stand aside from the index, and minimise your exposure to Argosy (in this instance), then I am all for a fund manager doing just that. But I remain puzzled by ANZ Oneanswer's extremely negative views on a company with such a strong dividend yield and yet a perfectly acceptable lease rollover profile. I also have to bear in mind that the ANZ Oneanswer management charge the most of the three fund manager protagonists here for managing the portfolio of listed entities on the investor's behalf.

Finally we come to Smartshares, which, is touted as nothing more than a mimic for the NZ real estate listed index, Despite this, through a quirk of fund management policy ('the cap') , I find Smartshares overweight in all three of the property shares that I like best. This fund 'cap' prevents this fund holding more than 17.5% of its invested capital in any one listed share. That, as a result, I should find all three of my preferred investments overweight in what is ostensibly an index fund blows me away. The fact that this fund has the lowest management fees seals the deal . The Smartshares NZ Real estate fund (NPF) is my winner. Yet I still retain respect for the other two fund manager protagonists. When all managers play the 'index plus' share selection game you can almost be sure that it will be a 'photo finish' to decide the winner!

SNOOPY

Hi Snoopy - what are your thoughts on the Salt Enhanced Property Fund - has an interesting approach that allows for a small amount of short selling and AU exposure. Has delivered >1% pa outperformance (after fees) since inception