Summer Conservative Selection

How did your portfolio perform? 

The Summer Conservative Selection (the fund) delivered a return after fees and before tax of -0.26% for the month of January. For the 12 months to the end of January, the fund delivered a return after fees and before tax of 5.78%.

In local currency terms global equities posted a solid monthly gain, but a rally in the NZ dollar saw returns reduced in NZ dollar terms. New Zealand and listed property equity markets posted modest losses while the Australian benchmark posted a solid gain. The NZ Fixed interest market also posted modestly negative returns, as medium-term interest rates rose over the month.

Six of our seven portfolio managers performed in-line or delivered a small beat over their asset class benchmarks in January. For details on the Conservative Fund's single asset class funds, see the relevant commentary.

We actively manage the fund’s foreign currency exposures and hedge the international fixed interest segment of the fund. The New Zealand dollar gained 5.18% against the US dollar and 0.13% against the Australian dollar.

What happened in the markets you invest in? 

January was characterised by significant volatility across several global market subsectors. Gold, silver, and a range of industrial materials rallied strongly. The typical explanation for such movements is that stronger economic growth leads to higher inflation that drives higher interest rates which, in turn, prompt renewed scrutiny of the sustainability of elevated US government debt. We believe the rally in precious metals and materials appears stretched and the sharp sell-off on the final trading day of January may indicate that momentum has already begun to reverse. We expect prices to unwind further.

The other major move was a dramatic fall in large parts of the tech sector exposed to AI disruption, along with huge increases in capex spending by the major players in AI model developers and data centres. Such investment ultimately requires meaningful revenue growth to justify it and during January the market appeared to assume that some of this revenue would be captured from established software providers such as Salesforce and Xero. No doubt technology will make it easier to disrupt some incumbents, but they will fight hard, including using AI themselves, to defend their market position.

What are we thinking about the future? 

Current economic data points to modest global GDP growth. However, inflation remains elevated in key markets, including New Zealand, Australia, and the United States. Without a meaningful decline in either growth or inflation, it will be difficult for interest rates to fall and provide additional support to economic activity.

The US equity market continues to appear both expensive and narrow. While the January reporting season is likely to deliver double-digit earnings growth overall, earnings outside the ‘Mag. Seven’ are not keeping pace with GDP growth, and consumer confidence remains subdued. The lower ~60% of US households are experiencing declining real (inflation adjusted) incomes, and it is still too early to see AI delivering meaningful productivity gains.

Listed property has underperformed for the past four months, worse than underlying fundamentals suggest. In our view, the sector is now offering attractive risk-adjusted returns, particularly relative to fixed income. Earnings in the New Zealand equity market have significant leverage to an emerging economic recovery. We consider such a recovery to be the most likely scenario and therefore maintain an overweight position in domestic equities.