Nest Egg News May 2016

The one constant If I told every potential client that the one constant they should expect in our investing relationship is the risk of loss, I doubt they would become clients. Yet it is probably the most important message that I could deliver, in order that their expectations are appropriate from the outset. Markets can play mind games and as investors we spend a lot of time in a state of frustration and doubt, asking ourselves The problem is that while markets generally go up, they how we “coulda, woulda, shoulda” taken action to avoid loss. don’t go up every day, week, month or year. Markets have We would be far better to accept that we’re going to spend a historically been positive more than half the time (when big chunk of our investing lifetime in a loss situation. And as considered on a daily basis) but there are a lot of negative bleak as that sounds, it is okay because over time, the good days in between the positive ones. times prevail. Nobody can predict what future returns might be in the A presentation by former hedge fund manager and market, but it seems predicting future risk is relatively easy. quantitative analyst Robert Frey charted 180 years of US stock There’s always going to be some! Markets are going to market data and concluded that losses have been consistent fluctuate and we will experience losses (at least on paper, over each and every decade and economic environment. and for different periods — sometimes long, sometimes Losses really have been the one constant across all market short). The more we can understand this phenomenon, the cycles. Frey concluded that in share market investing “you are better prepared we’ll be. usually in a drawdown state” (a drawdown is a decline from a historical peak). Big, positive returns are harder to achieve in this environment of low inflation and low interest rates. The Another analyst considered data on the S&P500 Index going scarcity of investments that offer ‘reasonable’ returns is back to 1927 and reached a similar conclusion. leading investors the world over to accept more risk, ignore This analysis found that an investor would have been sitting poor fundamentals, and overreact when things don’t quite in a “loss situation” (with prices down from a prior peak) over go to plan. Risk might be a constant, but we can choose 70% of the time. Not only that, but over the past 90 years, the how much we’re prepared to accept. market has been in a bear market (down 20% or more) almost Of course, none of this seems important this month a quarter of the time; and half the time, investors have been because all our funds finished April ahead of their March down 5% or worse. closing prices. But this is precisely the time we should think about the potential risk and losses that we will experience S&P 500: 1927-2016 in the future. It’s easier to prepare for a cold winter when Drawdowns % of the Time the sun is shining! Carmel Fisher 5% to 10% 12.8% Managing Director 10% to 20% 13.1%

20% or Worse 23.1%

*Monthly Total Returns No wonder investors are seldom happy campers! Highlights and lowlights

A snapshot of the key factors driving the performance of markets and your funds last month.

In New Zealand, Michael Hill International achieved sales growth across all its geographic divisions, with its fledgling Emma & Roe brand showing real early promise. Abano Healthcare gave better than expected guidance for full year earnings and late in the month received an indicative bid for its 50% share of Bay Audio at a price significantly above its book value. Having risen strongly in 2016, the EBOS share price took a breather this month.

Our Australian portfolio again kept pace with the buoyant Australian market during the month. After we added to our position in Ansell last month, its price rallied a convincing 14%. Similarly CSG was up 11%, again following an increased weighting earlier in the year. Nanosonics was up 9% after reporting strong sales in the United States. Flight Centre (-10%) was weak after Qantas told investors that it expected route growth to slow in the future. Our research indicates that the areas affected are not relevant to Flight Centre. Toxfree Solutions (-7%) pulled back after a strong performance in February and March.

A stronger kiwi dollar pared the return from our international portfolio holdings for New Zealand investors. April heralds the start of the first quarter earnings season and a number of portfolio companies delivered good results. Expedia’s share price reacted positively to strong growth in hotel bookings and a positive operating environment. PayPal’s results reinforced the company’s strong position in the payments area. In Europe, Adidas had a stellar result with growth across all regions and most product categories. On the negative side, Alphabet’s share price fell slightly, despite reporting what we thought were strong results, as investors became pre-occupied with a very small revenue miss. Recent portfolio addition Stericycle delivered results below expectations and management guided for weaker 2016 earnings than previously expected, largely due to delayed synergies from a recent acquisition and weakness in their energy related hazardous waste business. We continue to believe the fundamentals in the business are strong.

The start of the US reporting season brought good news for our Property & Infrastructure investments, with solid results from Crown Castle, Union Pacific and Norfolk Southern. The particular standout was Norfolk Southern, with its share price up 8% over the month, after the company reported stronger earnings despite a difficult economic environment for rail operators. Cell tower infrastructure owner, Crown Castle, reported another strong result with the company well on track to deliver their targeted 6-7% pa annual dividend growth. Our two US regulated utilities Aqua America and ONE Gas lagged slightly during the month, as increasing US interest rates put pressure on interest rate sensitive utility and REIT stocks.

A comparatively quieter month for news flow allowed fixed income markets to consolidate further in April. Yield-hungry investors, who have been starved of new corporate bond issues this year, returned to fixed income markets in their droves resulting in higher prices which benefited a range of investments in our fixed income portfolios. The Reserve Bank of New Zealand decided to keep the unchanged this month. This was a mild disappointment to fixed income investors who were hoping the recent rise in the NZ$ and a persistently weak inflation outlook would force the Bank to reduce the rate further. Our holdings in certain New Zealand government-issued bonds gave up some of their recent strong gains. FISHER FUNDS 2 NEST EGG NEWS Your KiwiSaver portfolios The greater fool By David McLeish, Portfolio Manager, Fixed Interest

A negative yielding bond is a very strange thing. It is a bond that if held until its term matures, will return you less money than you paid. The result? A guaranteed loss. Now who in the world would make such an investment? Funnily enough, a number of notable asset managers have recently been quoted saying they’ve been buying negative yielding bonds, and those who choose not to are the foolish ones. Make no mistake, these are not the (poor) investors who simply have to own these assets, like central banks who must hold such bonds as part of their foreign exchange reserves; or banks who need them to meet their liquidity requirements. These are asset managers who have a wide choice of investments to hold, the majority of which do not have negative yields. These managers may be hoping that central banks will keep There are a range of reasons, these managers say, as to why pushing interest rates further below zero. Or they may expect they expect to profit from such investments. But in essence that everything else is going to be more negative (the sky they all rely on one thing — finding a greater fool who will falling scenario) so a little negative is a good trade. Hmmm. buy their bonds from them at a higher price. We all know investing is about buying low and selling higher. But you Bloomberg now estimates that over 30% of all government really have to question an investment strategy that is based bonds on the planet (more than $10 trillion in all) are trading on buying an asset with a guaranteed negative return, in the with a negative yield. With this number growing by the hope that someone else is going to come along and accept day, you have to wonder just how many fools these asset an even more negative return from it. managers think are out there.

Time for Think Big round two? marks around the ability of quantitative easing and zero interest rates to jump start economic growth, infrastructure By Ashley Gardyne, Senior Investment Analyst, International may again be part of the solution. Many New Zealanders remember the Think Big infrastructure Recent research by the Federal Reserve shows that US programmes kicked off by our government in the early- highway spending doesn’t just increase GDP dollar-for- 1980s. The aim was to create jobs and help pull our dollar, but there is also a multiplier effect, with GDP typically floundering economy out of the doldrums. While the merits increasing by $1.5-$3 for every dollar spent on roading. The of these programmes are still hotly debated by some, multiplier effect results from the new infrastructure lifting the Think Big did create a hive of activity and employment productive capacity of the rest of the economy. Importantly, opportunities. the research showed that the multiplier effect is even stronger Fast forward 35 years and economic commentators and the during periods of low economic growth. International Monetary Fund are increasingly urging western Across the ditch, Australian politicians are already enthusiastic governments to turn on the infrastructure spending tap to about the potential for infrastructure spending to help spur revitalise economic growth. With ever-increasing question growth and offset economic weakness emanating from the mining sector. While the Australian government is directly funding a significant number of infrastructure projects in areas like roading and rail, they are also looking to the private sector to fund and deliver this development. An uplift in global infrastructure investment would provide a nice tailwind for a number of companies in our Property & Infrastructure Fund, but even with the status-quo, there are still good growth opportunities in infrastructure. Examples in our portfolio include toll road operator Transurban, which has a solid pipeline of roading projects in Melbourne and Sydney, or water distribution company Aqua America, with a long runway of water mains replacement work needed to repair ageing US water infrastructure. In a low growth world, there is a surprising amount of growth in infrastructure. FISHER FUNDS NEST EGG NEWS 3 Airports or airlines? By Murray Brown, Senior Portfolio Manager, NZ Equities

With the strong growth in tourists coming into New Zealand recently (not to mention healthy net migration as well), what is the best way to capture this growth in a portfolio — through owning shares in the airport, or in the airlines themselves? Airport or Air New Zealand? Over the last two years, the share prices of both Auckland Airport and Air New Zealand have been buoyant, matching the surge in tourist flows. Auckland Airport has recorded 24 straight months of increases in international passenger numbers, with double-digit increases in tourists from many rentals). Generally, the more airlines that travel to and markets. Air New Zealand has expanded its route network within New Zealand, the better. and seat capacity over this same period, and has been The converse is true for Air New Zealand — it earns its able to fill these seats with additional passengers. The revenue predominantly from one source (airfares) and the profitability of both Auckland Airport and Air New Zealand fewer number of competing airlines that fly into and within are at record highs. New Zealand, the better it is for the company’s profitability. The share price of Auckland Airport has outperformed Air While airlines can be very good short term share price New Zealand over this time frame and in fact, over almost performers, our preference is to own shares in the airport any 3-5 year period (our investment time horizon). We (the same goes for our Property & Infrastructure Fund). believe most of this comes down to business models and Our view is that they have superior business models, their is reflected in our STEEPP scores for each. Airports tend earnings tend to be less volatile and forecasting earnings to have little competition, and earn revenue from multiple is easier — resulting in a higher STEEPP score. Auckland sources (airport charges, parking, retail and property Airport wins in our view.

King Kong vs Godzilla — coming to a screen near you By Roger Garrett, Senior Portfolio Manager, International

Like the many giants that have graced our screens over the So can Netflix prevail or will it be another business flattened years, Netflix has well-articulated plans to take over the world by the Godzilla that is Amazon? We think it is still too early to (well — the online streaming world). From humble origins as a pick a winner here, but continue to keep a very close eye on mail order DVD company, Netflix is now an internet giant with both companies. Less than half of US consumers subscribe to over 75 million global subscribers on its streaming television a streaming video service and the rest of the globe is yet to be platform and plans to expand into 130 more countries. conquered. With the average American watching almost five hours of television per day, there may be room for more than Television is gradually shifting away from the traditional format one winner. and more towards streaming services that can be watched on any device — anywhere, anytime. Netflix has been at the forefront of this change and is now synonymous with streaming television. However Amazon, the world’s largest online retailer has entered the fray, announcing its own monthly subscription service in the US. Amazon’s service will be cheaper than Netflix and Amazon will be pitching this to its very large user base. While lower price is one thing, in television, content is king. Good programmes and movies attract new customers; and companies are spending large. Last year Netflix spent $4 billion (or close to 70% of revenue) on content. Many in the industry have started producing their own content, such as Netflix’s House of Cards, further increasing costs.

But as Amazon has shown in the past, it is not afraid to spend However it plays out, this battle between these two giants will money to win market share. be worthy of the silver screen.

FISHER FUNDS 4 NEST EGG NEWS Even bad strategies will perform well We believe that knowing you will have to stomach short term volatility is a pre-requisite for achieving long term excess An abridged article by Corey Hoffstein, Newfound Research returns. Volatility in short term performance is necessary for the long run outperformance opportunity to exist. Asset management can be a frustrating business. What is supposed to work in the long run can often go wildly Just as a strategy that seems sure to outperform in the against you in the short run. Worse: what is supposed long term (like buying cheap stocks) must sometimes to not work in the long run can go through periods of underperform, a strategy that looks certain to fail in the exceptional performance, adding insult to injury when long term (like buying expensive stocks) must sometimes you’re underperforming. outperform. Even deeply entrenched strategies, like “buy cheap and Our hypothesis is simple: if any investment approach is sell expensive” can go through periods like the dot-com viewed as an easy way to outperform, then more investors bubble that can make the most devout follower question will do it. More investors using the same approach means his religion. more capital will chase the same opportunities, which will drive up valuations. As valuations increase, future expected returns will decrease, causing the opportunity to disappear. Outperformance is not about choosing the right strategy, like “buy cheap stocks”. It is about having the discipline required to continue to follow the strategy in the face of short term underperformance. Many investors can buy cheap stocks, but it takes discipline to hold them long enough to enjoy the gains, especially when the cheap stocks are becoming cheaper in the short term. For an investment approach to have long term expected outperformance, it has to be hard to stick with. The phrase, “if it were easy, everyone would do it” rings true.

IPOs By Manuel Greenland, Senior Portfolio Manager, Australia

The acronym “IPO” refers to an Initial Public Offering, the process by which shares in a company are sold to investors for the very first time. Conceptually there are two parties in an IPO; the issuer, being the company selling new shares, and the investors who buy the new shares. However, because issuers do not know how to best market their shares, an important intermediary emerges in the form of the investment banker, who ultimately profits by taking a fee for selling the company to investors. As investors we recently considered buying shares in an Australian IPO. An investment banker explained to us that as we don’t buy shares in every IPO, we had a slimmer chance of getting the shares we wanted in “the good IPO’s”. Our investment process is disciplined; companies price. So it seems that on average IPO’s have been, well, must meet our investment criteria; and we don’t seek to rather average. In contrast 70% of the IPO’s in which we have buy shares in new companies just because investment invested have delivered annualised returns above 15%, with bankers ask us to. While our investors have profited particularly pleasing performances from portfolio holdings from those IPO’s in which we have participated, we were Medibank (37%) and Link (52%). surprised at the idea that there could be “good” and Upon reflection we are pleased to be known as choosy “bad” IPO’s, which prompted us to do some research. investors who participate only in IPO’s which suit our We analysed all the Australian IPO’s from the beginning investment approach. Recent experience suggests that IPO of 2014 to late April. Around 40% of these had delivered a may in fact now stand for “It’s Probably Over-priced”! greater than 15% annual rate of return from their IPO offer

FISHER FUNDS NEST EGG NEWS 5 Managing your KiwiSaver account Do you know where your KiwiSaver money goes?

You may have read several articles last month about the Lax tax — Are you on the correct tax rate? No one likes large number of KiwiSaver members who don’t know what paying more tax than you need to. You can double check is happening with their hard-earned savings. Research your tax rate on our website (https://kiwisaver.fisherfunds. found that: co.nz/uploads/downloaded-forms/PIR-diagram-- oct10.pdf). If your current tax rate is incorrect, you can »» 77% of KiwiSaver members didn’t know what their amend it at any time by completing this form (http://www. KiwiSaver account would be worth when they retired fisherfunds.co.nz/images/pdfs/FF624-Update-Your-Details- »» 27% didn’t know what type of fund their KiwiSaver Form.pdf). account was invested in (cash, conservative, balanced, growth, etc) Pick up your $521 — For every $20 you contribute, the Government will give you $10 up to a maximum of $521.43 »» 31% had never reviewed the type of fund they had — this is known as the member tax credit. Too many people invested in to see if it was appropriate don’t maximize this. It’s the closest thing to “free money” »» 14% didn’t know who their KiwiSaver provider was so don’t leave yours lying on the ground. If $10 a week doesn’t motivate you, perhaps $24,507 will. That’s what It’s not the first time these types of statistics have been $10 per week adds up to over 47 years (joining at 18 and published and unfortunately they’re not too surprising. We contributing until 65). only have to look across the Tasman to see why playing detective with your KiwiSaver account matters. Lazy money — We all picture a lifestyle in retirement where we can attack our bucket list. But retirement can It is estimated that there is $17 billion of “lost super” in be more expensive that many retirees expect, reinforcing Australia. That is a staggering amount of wealth without the importance of making your savings work for you. Have a home. Some of that belongs to New Zealanders who’ve you reviewed how your money is being invested? Take lived and worked over there but it still begs the question, five minutes and run through our questionnaire (https:// why would you not care about money you’ve worked so kiwisaver.fisherfunds.co.nz/kiwisaver-investment-option) to hard to earn? see if you’re on the right path. Sure, retirement may seem like a long way off, but it pays to Our team is here to help you to make the most of KiwiSaver. devote a little bit of time and interest now, as mistakes now We’re only a phone call or an email away. can be costly over time:

It’s now less than two months until the end of the To maximise your full MTC entitlement of $521.43 you need KiwiSaver year so it’s a good time to see if you are on to have contributed at least $1,042.86 (the equivalent of $20 track to make sure you get your annual government per week) into your KiwiSaver account. If you have not put in contribution of $521. at least this amount, you can top up your KiwiSaver account for the current KiwiSaver year but make sure you do it by As a reminder, for every $1 you contribute to your KiwiSaver Tuesday, 28 June 2016. account you’ll receive 50 cents from the government, up to a maximum of $521.43 — this generous KiwiSaver incentive You can read more online (https://kiwisaver.fisherfunds.co.nz/ is known as the member tax credit (MTC). Now that’s free mtc) about who is eligible for a MTC, how it is calculated and stuff worth having! how to make a payment.

FISHER FUNDS 6 NEST EGG NEWS Fund facts

Fund performance as at 30 April 2016 Returns Unit 1 3 1 2 3 5 Since fund Date of (after fees and before tax) Price $ Month Months Year Years* Years* Years* inception* Inception*

Growth 1.7037 1.3% 3.8% 6.7% 8.3% 10.4% 7.5% 6.4% 1/10/2007

Balanced** 1.0% 3.2% 5.9% 7.4% 8.2% 6.8% 7.6% 12/06/2009

Conservative 1.4507 0.7% 2.6% 5.1% 6.5% 6.3% 6.4% 5.6% 1/06/2009

* Annualised return before tax and after fees ** The Fisher Funds KiwiSaver Scheme does not have a separate Balanced Fund. A Balanced investment strategy is available and reflects a 55% weighting in our Conservative KiwiSaver Fund and a 45% weighting in our Growth KiwiSaver Fund. The above returns are based on the percentage change in the unit price of the fund for the period specified, they are not the returns individual investors will receive as this will depend on the prices at which units are purchased on the date of each individual contribution. Changes in the unit prices reflect changes in the market value of the assets of the fund. The above returns exclude government contributions and no allowance has been made for monthly administration fees. Returns displayed are after management fees but before tax.

Biggest holdings as at 31 March 2016

Growth Fund Conservative Fund

Cash Deposit (ANZ Bank) 2.9% Cash Deposit (ANZ Bank) 8.7%

Mainfreight Limited 2.6% NZGS 15/03/19 5.00% 4.5%

F & P Healthcare Crp 2.3% BNZ IRS 03/04/18 Rec 4.3%

Top 10 holdings 19.1% Top 10 holdings 40.3%

Further information about your KiwiSaver portfolios (including a full breakdown of the portfolio holdings, investment team profiles and current fund fact sheet) can be found athttp://kiwisaver.fisherfunds.co.nz .

The information and any opinions herein are based upon sources believed reliable, but the Company, its officers and directors make no representations as to its accuracy or completeness. All opinions reflect our judgement on the date of this report and are subject to change without notice. The information contained in this publication should not be used as a basis for making an investment decision about any particular company. Professional investment advice should be taken before making an investment. Past performance is not a reliable guide to future performance. For an investment statement on any of our funds, please go to our website or call us on 0508 FISHER (0508 347437).

with you all the way...

Fisher Funds Management Limited Registered Office | Fisher Funds Management Limited, Level 1, Crown Centre, 67-73 Hurstmere Road, Takapuna, Auckland 0622 Investor Enquiries | Level 1, Crown Centre, 67-73 Hurstmere Road, Takapuna, Auckland 0622 Postal Address Private Bag 93502, Takapuna, Auckland 0740 | Freephone 0800 FFKIWI (0800 335 494) Telephone 09 445 3377 | Facsimile 09 489 7139 | Email [email protected] | Website http://kiwisaver.fisherfunds.co.nz