Summer Conservative Selection

March was a strong month for investment returns across all asset classes in the Conservative selection.

Fixed interest returns benefited from confirmation by global central banks, including the Reserve Bank of New Zealand, that interest rates should be high enough to bring inflation down to target levels over the next 12 months.

The listed property market received help from seeing some properties being sold near their last valuation. The listed property vehicles, apart from those exposed to industrial real estate (freight hubs), are trading below their historic asset valuations. Actual transactions around book value are therefore supportive of future returns.

Equity markets globally were supported by robust GDP growth in the cases of the US, Japan and Australia, whilst those with weaker current economic activity, such as New Zealand, built in some anticipation of an economic recovery.

The international fixed interest segment of the Conservative selection is hedged to the NZ dollar. The fund’s currency exposure to the Australian dollar comes from investing in Australian equities either directly or via the Australian Equities and the Listed Property funds. The NZ dollar fell -2.02% against the Australian dollar during February.

For further commentary on each asset class in the Conservative selection, refer to the relevant single-asset class funds.  

The Conservative selection delivered a return net of fees and before tax of 1.92% for March. For the 12 months to the end of March, the fund delivered a return net of fees and before tax of 7.98%.

Compared to their market indices, all funds we utilise in the Conservative selection outperformed their market index during March.

Almost 40% of the fund is invested in directly held Australasian equities. Holdings in Arvida Group, Manawa Energy, and Santos added to performance, whilst holdings in Ebos Group, Spark, and Tourism Holdings detracted from performance.

We actively manage the fund’s currency exposures. As of 31 March 2024, these exposures represented 18.28% of the value of the fund. After allowing for foreign currency hedges in place, approximately 9.71% of the value of the fund was unhedged and exposed to foreign currency risk.

We calculate the current running yield of the securities held within the Conservative selection as 5.04%.  

The recent increase in interest rates globally has reflected a stronger economic backdrop than we and the market had expected in the US, along with an unwinding of some over exuberance in global fixed interest markets expected pace of inflation declines and the timing of interest rate cuts.

We have held a view for some time that both the NZ and the US equity markets were overvalued. We had an expectation of economic weakness leading to weaker profits and job losses – which of course feeds into even weaker demand and profits. Fixed interest markets would benefit from falling inflation and lower interest rates; hence we have been over allocated to fixed interest markets and under allocated to NZ and global equity markets.

For the New Zealand equity market, that view has been confirmed. As such, in April we are removing our tactical underweight allocation and moving to our long-term strategic weighting. We are not moving overweight yet as valuation is only fair and the next six months is unlikely to show much earnings growth. The NZ fixed interest market has adopted a more aggressive cash rate cutting path that the RBNZ has proposed, and the ten-year yield is now closer to our view of fair value. We have therefore funded the increase in NZ equity allocation by lowering our NZ fixed interest allocation, whilst still retaining an overweight allocation.

In global equities, our thesis has been challenged by a slowing but still robust economic backdrop in the critical US market. This has seen profit margins hold up better than we thought, and that has flowed through to stronger share prices. US fixed interest has also started to price a ‘stronger for longer’ view. We remain of the opinion that the US equity market is significantly overvalued. As it makes up a large share of the total global equity market, we are comfortable retaining our modest underweight allocation to global shares. We think there is still some upside to the valuation of global fixed interest, and so also maintain our modest overweight to that asset class.

April sees the start of the next US centric profit reporting season. We expect modest growth to be reported, but a continued fade in future expectations and ongoing caution as to the operating outlook.