MPS – Global Income, Core Inflation, Dividend & Growth Portfolios plus NZ Funds KiwiSaver Scheme Growth Strategy

 

Global Income Portfolio

The Portfolio returned -0.37% in December 2015, taking annual performance to 1.03%.

Low interest rates – the ‘new normal’

PIMCO, one of the managers we have used in this Portfolio, coined the phase the ‘new normal’ to explain the economic environment since 2008. This term suggests we are in a period of relatively low (but positive) economic growth and, importantly, low interest rates. In fact interest rates are back to their ‘old normal’. Prior to the period of high inflation in the 1970s, interest rates were typically around 3%. This is likely to be the average return achieved over the next ten years.

Over the past year we have refocused the Portfolio to this new reality. Around 70% of the Portfolio is invested in global investment grade companies. This exposure is both direct and through an external manager, Wellington. This has an expected yield of 6.0%. A further 20% of the Portfolio is invested in United States mortgage-backed bonds. This is one of the few fixed interest asset classes which we feel is offering higher than average risk adjusted returns. This exposure is through three managers – Doubleline, Blackrock and Semper. This portion is expected to yield 7.7%. The remaining 10% of the Portfolio is invested in an alternative manager, Harness, that looks to add value through active foreign currency management.

In developing this new strategy, we knew the Portfolio would be vulnerable to an increase in interest rates and/or an increase in credit spreads (this is the difference between the yield on a corporate and a government bond). This vulnerability was only an issue of timing, for as long as the bonds did not default, the initial unrealised loss would be offset by higher returns going forward. Unfortunately, just after the Portfolio was restructured, both interest rates and credit spreads widened resulting in an unrealised loss. However this initial loss is now resulting in a higher running yield on the Portfolio, with the return achieved over the last three months equal to an annualised return of over 6% pa which is its expected running yield.

 

Core Inflation Portfolio

The Portfolio returned -1.36% in December 2015, taking annual performance
to -0.31%.

Is low inflation here to stay?

The past year has seen inflation remain relatively low with New Zealand’s Consumers Price Index (CPI) increasing by just 0.4% in the year to September 2015. There are two schools of thought regarding why we may be experiencing low inflation. One suggests we are in a period of structurally low inflation as competitive forces drive prices lower. The development of the internet (which
removes some of the middlemen) and the emergence of cheaper labour from developing nations are the major explanations for this theory. The other school suggests that the world has been hit by a number of one-off shocks which have produced this low inflation result. The recent decline in the price of oil and other commodities would be among these shocks. As always, the truth is likely to
be somewhere in the middle, but the recent rise in global house prices shows that inflation is still alive, just not in the area of consumer prices. Therefore it is important not to become complacent as inflation could surprise on the upside just as it has surprised on the downside in the past year.

To mitigate the impact of inflation on your investments, the Portfolio looks to hold a diversified range of assets which should perform well in times of inflation. Over the past year, returns from these diversified assets have been mixed. The Portfolio has experienced below average returns from both fixed interest and shares, consistent with returns from these asset classes. The exposure to
foreign currency was beneficial but this has been more than offset by declines in commodities, particularly oil. While the aggregate result has been disappointing this year, it is consistent with the components of the inflation index. This gives us confidence that the construction of the Portfolio is correct for its objective. By definition, a sudden rise in the inflation rate will be due to a shock. It is important that the Portfolio is correctly constructed prior to the occurrence of any shock.

 

Dividend & Growth Portfolio

The Portfolio returned 1.76% in December 2015, taking annual performance
to 13.00%.

2015 – bouquets and brickbats

The Portfolio had another solid year to date in 2015, posting a return of 13.00%. This was helped by good performance from the New Zealand share market, offset to some extent by a weaker result from its Australian investments.

The biggest contributions to the Portfolio’s return came from two companies involved in the energy sector which were unaffected (even buoyed perhaps) by the lower global oil price. Z Energy continued to grow its earnings and announced a transformational takeover of Caltex New Zealand, while New Zealand Refining benefitted from a positive external environment and changes which management have made there over the past couple of years.

Meridian Energy remains the largest holding in the Portfolio and continues to perform well. Its earnings and dividend should continue to grow modestly over the next couple of years.

The biggest detractors from performance were two media companies, TwentyFirst Century Fox and Sky Network Television. Both are facing disruption from internet TV providers like Netflix. We are conscious of the threat to these businesses and continue to monitor the situation closely.

Rio Tinto shares suffered as the iron ore price continued to fall, but the company remains a best-in-class miner and should happily ride out this commodity cycle, as it has done many times before.

As you may know, we look to invest the Portfolio in a small number of high-quality companies and monitor them closely but hold them for the long term. As per this strategy, there were relatively few changes to the Portfolio during the year. We added two companies and sold out of four.

 

NZ Funds KiwiSaver Scheme Growth Strategy

The Strategy returned -4.24% in December 2015, taking annual performance
to 7.13%

2015 – return versus risk

After some years of strong returns, global share markets reported reasonably muted returns over 2015. To the end of November, global share markets rose on average by just under 5%. While this may seem disappointing, it actually bodes well for the future, as in previous years share market returns had outpaced the profit growth of the underlying companies. Over the year profit growth caught up, improving the valuation metrics of share markets.

One of the strongest regions over the 11 months to 30 November2015 was Europe which was up 15% on average. The Strategy maintained a large exposure to this region and this was one of the reasons the Strategy achieved a better return. Similarly, one of the worst performing regions was emerging markets (down 3.7%) which the Strategy had minimal exposure to over the year. Another major reason for the Strategy achieving a higher return was the active management of foreign currency exposure. Over the year we reduced the foreign currency hedging in the Strategy, taking active exposure to principally the United States dollar. This was beneficial to the Strategy.

Investing is not all about achieving high returns, as these can be followed by large negative returns. Managing risk is just as important. Over the year we were particularly pleased at our ability to preserve capital during share market declines. The largest decline the Strategy experienced over the 11 months to November2015 was 7.6%, compared with global share markets which on average experienced a decline of 13%. This means you, the client, has a smoother investment experience as well as achieving a higher return than a passive investment in global share markets.

 

Getting on top of it. 

If it transpired that your level of debt wouldn’t be paid off until after you retired then we’d have to do something. Sorting the finances seems a good idea. The credit card hangover notwithstanding, the mid year hibernation offers an opportune time for people to reassess their levels of debt, but anytime is a good time to start.

We like the saying ”tomorrow’s good, but today’s better”, meaning it’s important for people to think about their monetary situation and take action as soon as possible. Debt is one of the most significant factors that the average Kiwi needs to deal with. People should plan first, then make decisions about spending or investing. If you don’t have a plan you’re not in a position to make informed decisions about your lifestyle.

Money (or lack of it) can sometimes be a stressful subject therefore we as Authorised Financial Advisers sometimes become involved in a form of financial counselling. Often our partners/spouse might disagree. They come to the table with different views. There is an element of coaching involved. It’s easier said than done but remind yourself often ”The more you spend today, the less you have later”. It’s about changing habits, and it can take time.

Credit card or store debt is an issue for a lot of people. This is the highest-cost debt, and putting it on the mortgage is not ideal because that extends the debt period, so it is important to get that consumer debt out of the way.

Much of our time as advisers is taken up with the bigger picture, long-range financial planning. Mortgages and retirement savings are top of this list. If I was to sit down with you I’d look at your mortgage, your KiwiSaver situation, your age and your earnings up until when you expect you might retire. If it transpired that your level of debt wouldn’t be paid off until after you retired then we’d have to do something. That might include increasing debt repayments or taking a completely different decision – say, selling your house. We talk about people having a ‘mortgage pledge towards savings’. For instance, if a person paid a mortgage off in 18 years as opposed to, say, 25, and they then saved the same amount as they were paying on their mortgage, what would that mean for them?” Say you had a house worth $600,000 and a 20 year mortgage of $400,000 giving you equity of $200,000. If you were able to pay off the mortgage in 15 years instead of 20 years then you’d have an extra five years of pledged savings.

Let’s look at when you might retire. Take the notional age of 65, the age at which entitlement to KiwiSaver and New Zealand Superannuation begins. However, for the purpose of planning, let’s exclude superannuation because who knows what future governments might do. Now, work out what percentage of your current level of income you’d like to live on in your retirement, say, you are on $100,000 per year and thought you could live on $75,000 per year in your retirement; at 65, you would need to have saved around $1.5 million.

We have software which enables us to sit with you and illustrate your own situation in front of you, creating scenarios tailored to your own circumstances, and it’s free to anyone. For existing clients this software demonstration forms part of the annual review process. We would welcome enquiries and requests from anyone who might like to have their own situation demonstrated either here at our office or in your home, cost and obligation free.  

The next 6 monthly Adviser Investment Day is in Auckland on 23 February.  Following this event we will be communicating with you again to share knowledge gained regarding the strategies our fund managers are intending to implement in order to help navigate what could be an interesting year in the investment markets.  The media are already talking up a “volatile year ahead” in the investment markets.

Our managers predicted the very predictable negative impact of the slowdown in China late last year and had already implemented mitigation strategies which resulted in halving the impact of that event on our clients’ portfolios.  These strategies remain in place, so it will be interesting to see whether our managers consider it necessary to take further measures to protect our clients’ hard earned life savings.

 

WHERE IS BILL HIDING???

Find Bill and let us know where he is hiding in the room of attendees.

At every review we will revisit your Risk Profile, and together with your age and any spending needs you advise us of, we apply that Risk Profile to our investment recommendations.   Each client portfolio is individually tailor made.  In every case there will be an appropriate allocation to defensive investment assets which means that any amount exposed to the Growth markets will be appropriate to you, your age and stage in life, and your circumstances.

 
Each of the 10 Portfolios we have access to across the NZ Funds Managed Portfolio Service investment platform have their own specific objectives, and it’s our job, following a review, to match your objectives with the appropriate portfolios and in the correct weighting in order to provide the best likelihood of you achieving your objectives.

We rely on you advising us of any change in your circumstances in between reviews.  We firmly believe that having a portfolio reviewed every 18 – 24 months is the best insurance against the ups and downs of the investment markets over the long term, and significantly improves the likelihood that you will be able to achieve the outcomes you desire from your portfolio in retirement.
It is also important to us that you fully understand the advice process and the assets you are invested in.

  
We will be in touch to ask you in for a review within our suggested timeframes however please always feel free to contact us if you would like a review anytime.  After all, you are paying an advice fee.

FMA-CFFC-Over-50s-Information-graphic.1[1]

150812-FMA-and-CFFC-survey-into-older-NZers-planning-and-expectations-for-and-experiences-of-retirement.1[1]

New survey asks how well New Zealand’s older population is planning for retirement

A new study shows that almost half of people over 50 years old have yet to figure out how they will reach their retirement goals. While four in ten people who have already retired, did so without a financial plan for their retirement.

A  joint survey, released today by the Commission for Financial Capability (CFFC) and the Financial Markets Authority (FMA) looked at how well older New Zealanders are preparing and investing for when they stop working.

The survey found that while some people are planning thoroughly for a comfortable retirement lifestyle, others are drifting towards a more frugal future. The research was commissioned to give some insights into the financial challenges and decisions facing New Zealanders, and some possible solutions, as the country’s population ages.

Only one in ten people over the age of 50 are certain they have enough money saved or invested to enjoy the lifestyle they want when they stop working.  And of those already retired, a quarter said they do not have the money to do the things they would like in retirement.

Among people in the survey approaching retirement, 54% said they had some form of financial plan. However the degree of planning varied, with only about a quarter having planned thoroughly.

42% of non-retirees have calculated the regular expenses they would need to cover, and 34% have worked out how much they would need on top of NZ Superannuation to give them the lifestyle they wanted.

David Boyle, CFFC general manager of investor capability, said “It’s encouraging to see that almost half of those approaching retirement have done either good or thorough planning, however the research shows that many are leaving their plans to the last minute.”

“There is also a big gap between the reality of lifestyle in retirement and the expectations of the over 50s age group in reaching their goals. At 50-years-old, when you have potentially 15 years to go before you stop working, there’s still time to make a big difference to your lifestyle choices in retirement.”

The experience of those who have already retired showed that while 28% have enough money to do all the things they want in retirement, 25% are just getting by and managing the basics. Retirees who had some form of plan for their retirement were far more likely to enjoy the kind of lifestyle they wanted.

When it comes to investment risk the overwhelming majority, 83%, said that higher risk investments were to be avoided and 71% said that in general people should choose more conservative investments. However only 24% of those surveyed had ever used a risk profile tool to help them think about what level of risk was appropriate for them.

Simone Robbers, FMA director of primary markets and investor resources, said these answers seemed to indicate a gut-instinct approach to retirement planning rather than well-informed decisions.

“We can see that if people take time to make a plan, they are generally more likely to choose a more diversified range of investments.”

“It’s essential for people to find out what kind of investor they are and to diversify their investment choices appropriately. That’ll help their investments grow, spread risk and leave them well placed for a better retirement,” said Ms Robbers.

Ms Robbers and Mr Boyle concluded that with so many people now accumulating wealth in KiwiSaver – and other investments – towards their retirement, it’s critical they get hold of the information and tools needed to help plan, prepare and make smarter investment choices. This will help people reach their retirement lifestyle goals and www.sorted.org.nz is a great place to start.

The survey was targeted at New Zealanders aged 50 years or more, including those approaching retirement and those who have already stopped working.

The questions in the survey were designed to cover the kinds of factors everyone needs to consider to help them plan, prepare and make good investment decisions. These factors, in turn, will have a major impact on the kind of lifestyle people have in retirement.

For full results go to www.fma.govt.nz and http://www.cffc.org.nz/

Notes:

The collaboration between the CFFC and the FMA is aligned to their shared focus on improving investor capability and decision-making to help New Zealanders get ahead financially.

The survey was conducted by Colmar Brunton between 10-22 April 2015. 1,052 people over 50 years old were involved in the survey, respondents were weighted for age, gender and income to represent New Zealand’s demographic spread.

Margin of error = +/- 3.0%.

Financial markets have been very volatile over the last few weeks. As of last valuation (28 Aug), the global equity market was down 6.6% month to date (in New Zealand dollars). That follows a bumpy few months with China, Greece, Puerto Rico, oil prices and equity (share) market valuations among the main sources of worry.

We construct client portfolios knowing that we will have to navigate these periods. We aim to build in to each client portfolio sufficient “protection” to enable them to remain confidently invested, despite the prevailing turmoil.

That “protection” comes at four levels:

• First and foremost, making sure that each client’s portfolio is suitably balanced between cash, income, inflation and growth assets, relative to their age, risk profile, income requirements and goals.
• Second, ensuring that each of the underlying portfolios is constructed with an appropriate diversity of assets and management styles.
• Third, actively managing the mix of assets and managers in each portfolio to reflect our view of the current environment.
• Fourth, allocating to investment strategies (for example currency, credit default swap or option positions) and/or managers who we expect to perform strongly when the broader market may not be.

This recent period of volatility provided a useful test of our current portfolio construction relative to that “protection” goal.

To be clear, we do not think it is a realistic goal to eliminate downside – at least not without eliminating the potential for upside as well! Rather we are trying to make periods of volatility more endurable for our clients – so they remain invested and get to reap the compounding benefits of being invested over the long run.

So, how have we done? Our model client portfolios are down 0.5% – 1.3 % month to date, in an environment where pretty much every asset class is in the red for the month, some deeply.

After a very strong July the investment team actively positioned the growth portfolios with lower equity exposure coming into this latest bout of volatility. As the market has declined, and our downside managers have responded positively, it has provided a nice backstop to enable us to lift equity exposure and participate in the spring back that occurred late in the month.

Our absolute return managers who predominantly use a long /short equity approach – Suvretta and TT – are down around half the market which is about what we would expect in a very sharp selloff.

Our absolute managers with a broader investing approach tracked really well during August. Odey, after having a tough start to 2015, came into their own, up around 7% for the month. ISAM is also up strongly, around 6.5% for the month. Both of these managers fulfilled exactly the role we appointed them for.

In most of our inflation and growth portfolios we also hold a position with a downside manager called Universa. Universa is what is known as a tail risk manager. They use option strategies to construct a portfolio which will pay off when markets decline deeply (typically by more than 10%) and when volatility spikes.

While we are still waiting for final valuations we estimate Universa was up 160% in August. This means that a portfolio with a 1% allocation to Universa will have seen that investment more than double in value over the month and make a net 1.6% positive contribution to the portfolio return.

While commodities have been a drag on performance year to date, the remarkable month end rally in oil (up 25% in the last three days) means that our commodity exposure will end the month up, providing another positive offset to the decline in equity markets.

So while the downward move has been sharp, markets needed a blow out after an extended uptrend with little volatility to speak of. Our portfolio construction has enabled clients to navigate that period with very modest losses, enabled us to build further confidence in our team of external managers and provided an opportunity to reset the portfolios for the next leg.

Most importantly, despite dramatic headlines, which can unsettle clients, the performance of your portfolio has hopefully made the period reasonably comfortable for you.

Our regular review meetings ensure that each client’s portfolio is suitably balanced between cash, income, inflation and growth assets, relative to their age, risk profile, income requirements and goals. We will happily meet with you and revisit your portfolio balance if you are concerned about its suitability. After all, this is why you pay an advice fee.