27 Jul 2018

Quarter in Review

Positive momentum continued for the quarter.  While world shares were generally flat, strong gains in most developed markets offset an almost 10% decline in emerging market shares. Australian equities were particularly strong, with the ASX 200 rising 8.5% (including dividends) resulting in the best quarterly performance since March 2015. The local market wasn’t far behind, with the NZX 50 rising a very strong 7.5%.  All this despite increasing US interest rates, rising volatility, numerous global risks, higher oil prices, and declining business confidence in New Zealand. 

 

Ranger Fund 

The Ranger fund had a good quarter, up 3.2%.  Vista, Afterpay and Boom were the strongest performers, while Kogan.com, Michael Hill and Redbubble provided the strongest headwinds. 

 

Vista and Afterpay continued to provide the market with positive operating announcements, and even the extremely conservative Boom management team presented an optimistic outlook at a recent investor briefing.   

 

Kogan provided the market with a lesson on how not to sell down executive equity.  This has dented investor confidence in the short-term.  We reduced our exposure to Kogan earlier in the month as the significant rise in its share price meant short-term share price volatility was more likely.  While this has proven to be correct, we still believe that long-term value remains if management continue to execute as well as they have in the past.   

 

Red Bubble’s investor update in April disappointed investors, despite forecasting solid growth, but its share price is still substantially higher than twelve months ago.  Redbubble’s founder and CEOMartin Hosking, announced his retirement near the end of the quarter.  The transition appears to be orderly and Martin will remain on the Board.  We continue to be believers in the long-term potential of this business.   

Michael Hill has experienced some volatility in its share price as investors adjust to its changing strategic plan.  It remains, in our opinion, a very well-run business at an undemanding price. 

 

Apart from reducing our exposure to Kogan, no material changes were made to the portfolio. 

 

5 Oceans Fund 

The 5 Oceans Fund had a solid quarter, up 1.2% (after fees)Both the Ranger Fund and global focused Acadian Fund delivered positive returns, with Ranger up 3.2% and Acadian up over 6%, although much of this was due to the currency with the NZD under pressure over the quarter. The hedging in place tempered much of the global equity gains.  

 

We completed one of our first manager changes over the quarter, with the decision to replace Kapstream with two new global fixed interest managers. When we first invested in Kapstream the investment team owned 49% of the firm. Janus, who owned the other 51%, then agreed to merge with Henderson, creating a very large fund manager. The remaining 49% was also bought, leaving the investment team with no equity in the business.  We felt this led to poorer alignment and greater distraction for the key executives.  Also, assets under management has the potential to grow to quite large number due to increased global distribution capabilities of the group 

 

Well over a year ago we started evaluating alternative global fixed interest managers and met several investment candidates, both locally and overseasFrom this process we selected two managers Daintree and T Rowe Price. We feel both have great strategies, complement each other and meet the objective we are looking for in 5 Oceans. 

 

Daintree is a new boutique based in Sydney, established by Mark Mitchell (who used to be head of credit at Kapstream) and Justin Tyler who has a strong background in interest rates and currencies.  This entity, in our opinion, has the same attributes that attracted us to Kapstream initially - low volatility, capital preservation and income - but with better alignment and no fund size constraints 

 

T Rowe Price, although arguably better known for equities, has impressive bond capabilities and the Dynamic Global Bond strategy run by Arif Husain and his team (based in London and Baltimore) is, in our opinion, a very differentiated strategy. This strategy was built around providing sustainable income, capital preservation, and diversification from risk markets. These were the exact three aspects that we were looking for when we started the search, so to find these in a highly respected and well-resourced firm with only moderate assets under management under this strategy was very pleasing. It also has more of a sovereign focus which combines nicely with the credit focus of Daintree.  

 

We are very excited with this change and feel it has further enhanced and differentiated the 5 Oceans fund.  

 

Trans-Tasman Strategy 

The Trans-Tasman portfolio managed to keep up with a rampant New Zealand share market, up 7.9%, compared to the NZX 50 up 7.7% (pre-fees and including ICs).  Vista, Afterpay and Boom were the strongest performers, while Michael Hill and our underweight in Synlait provided the strongest headwinds. 

 

Vista and Afterpay continued to provide the market with positive operating announcements, and even the extremely conservative Boom management presented an optimistic outlook at a recent investor briefing.   

 

Michael Hill has experienced some volatility in its share price as investors adjust to its changing strategic plan.  It remains, in our opinion, a very well-run business at an undemanding valuation.  

 

Synlait continues to rally on strong earnings momentum but we see no long-term barriers to entry that might justify such a large price premium to its underlying assets. 

 

We reduced our exposure to Kogan earlier in the month as the significant rise in its share price meant short-term share price volatility was more likely.  Kogan then provided the market with a lesson on how not to sell down executive equity.  This has dented investor confidence in the short-term.  However, we still believe that long-term value remains if management continue to execute as well as they have in the past.  Apart from reducing our exposure to Kogan, no material changes were made to the portfolio.