Market News 6 May 2024

Johnny Lee writes:

The listed Fisher Funds - Kingfish, Barramundi and Marlin - feature prominently across New Zealand retail investment portfolios, despite a general decline in usage since COVID, when growth stocks lost favour to more defensive assets.

Investors use these funds to combine two normally mutually exclusive characteristics: growth exposure and dividend income. 

Growth shares typically retain earnings rather than pay large dividends, focusing on using their profits to fuel future growth.

The Fisher Funds endeavour to return 8% of their net tangible assets in the form of dividends, meaning that as share prices rise, dividend income follows - and vice versa. Over the last few years, both capital value and dividends have been declining, leading many to exit the funds, often in favour of traditional utility stocks that lack the growth component but produce more predictable income.

The fund manager of these funds typically charges a management fee of 1.25%, although this can range between 0.75% and 2.5% based on relative performance.

Regular discounted warrant issues - effectively just options or long dated rights - ensure the funds continue to grow as investors can elect to purchase more shares. Lately, these warrant issues have offered little value, expiring unexercised, as the share price has lagged the exercise price on the warrants.

Complicating the fund structure further, the company offers an optional dividend reinvestment plan (issuing shares in lieu of paying a dividend) and often buys back its own shares on market when the shares trade at significant discounts to their underlying value.

With growth stocks generally out of favour in this environment, both share price performance and dividend income have struggled to keep pace with investor expectations. Despite this, they remain commonplace across investor portfolios, particularly those investors wanting an income generating diversified growth portfolio, but lacking the means to construct and maintain one themselves.

The underlying portfolios across the three funds have seen some evolution over the last few years.

Kingfish, the New Zealand fund, now sees half the fund comprising only three stocks - with Fisher and Paykel Healthcare, Infratil and Mainfreight now making up half the fund. The likes of A2 Milk, Freightways and Delegat Wines, which featured prominently when values were higher, are now relatively small positions within the portfolio and have less bearing on the overall performance of the fund.

Auckland Airport, Contact Energy, Summerset, EBOS and Vista Group are the next largest holdings.

The likes of Mercury Energy, Spark, Fletcher Building and Chorus are not included.

Kingfish’s year to date performance has been modestly higher than the index, with Fisher and Paykel’s 20% share price gain driving much of the outperformance. 

The Australian fund, Barramundi, offers similar traits but - being listed in Australia - it carries different sector exposures.

Barramundi’s largest positions are held in CSL Group, Wisetech and CAR Group.

CSL Group is a diversified biotechnology company based in Melbourne, and a supplier of various treatments and vaccines, including a seasonal influenza vaccine.

Wisetech is a logistics technology company, while CAR Group is a marketplace operator, with brands such as Carsales, providing motor vehicle owners a platform to trade.

Barramundi also has a holding in industry darling NextDC, a data centre owner and operator that has seen tremendous success during the data centre boom over the last few years.

The data centre sector has been one of the most exciting for growth investors, with long term supply agreements providing guaranteed revenue in an era where demand is expected to continue to grow.

The expansion of this sector has also led to opportunities in adjacent sectors, including construction and electricity generation.

The third listed Fisher fund is Marlin.

Marlin invests further abroad and its largest holdings are focused on the United States, with Microsoft, Amazon, Alphabet and Meta making up a third of the fund. 

Marlin has only a handful of positions outside of the US, including Chinese gaming giant Tencent, British food conglomerate Greggs, and Irish listed Clinical Research Organisation Icon.

Marlin has recently exited two large positions, namely AliBaba in China and PayPal in the US. This active management approach is intended to add value to shareholders, weeding out those companies which face worsening prospects, in favour of those with new tailwinds.

Other ETFs, like the Smartshares products, tend to invest alongside index weightings, charge lower fees and forgo dividend income in favour of capital growth. 

The three Fisher Funds, despite falling out of favour in the current high interest rate environment, have some unique characteristics that appeal to certain investors, particularly those without the means to build a portfolio themselves. The funds trade on the market like any other listed company, and pay dividends on a quarterly basis.

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One of the smaller holdings within the Kingfish portfolio is winemaker Delegat Group.

While Delegat has had periods of fantastic performance, the company has had a horrid post-COVID hangover, losing almost half its share price value over the last five years. Profit growth has been very modest, while changes in consumer behaviour make forecasting and strategic decision-making difficult.

Its Oyster Bay brand remains popular in the US, but recent trends - people drinking ‘’less but better’’, while indulging in a broader range of beverages including spirits and seltzers - have changed the dynamics for the industry.

The rising cost of debt is also weighing on financial performance, particularly as the company looks to invest into its existing vineyards to increase volume.

Recent profit downgrades, and last week's harvest update suggest significantly lower volumes, and have sent the share price towards decade lows. Cold weather has been blamed, and has impacted local competitors at the same time.

Delegats is not the only company within the primary industry struggling - Seeka has this year reported a sharp decline in volumes and a large loss, while Scales apple division reported a decline in both volume and profit. Both have experienced significant declines in share price.

An additional problem, amongst all these market changes in the primary sector, has been the total lack of liquidity in Delegat shares, particularly on the buy side. Sellers have been forced to accept steep discounts, often completely unable to sell without finding a private buyer first. 

This often becomes a self-fulfilling concern, as new buyers become reluctant to become shareholders, fearing an inability to sell should the need arise. 

For holders like Fisher Funds, the lack of liquidity and subsequent market tension means exits need to be managed carefully. 

The primary sector stocks, including Delegats, are enduring tough conditions at present. Volumes are down, debt is expensive and investor confidence is low. Share prices have responded, and buying interest remains weak. Enduring these conditions will prove challenging, and careful strategic planning will be needed in the short-term.

Auckland Airport Senior Bond Offer

Auckland Airport (AIA) has announced that it plans to issue a new 6.5-year Senior Bond.

The interest rate has not been set but will likely be in the vicinity of 5.50% with a minimum investment size of $10,000.

AIA has a strong credit rating of A-.

AIA will not be paying the transaction costs for this offer. Accordingly, clients will be charged brokerage.

More details regarding the bonds, including a presentation, have been uploaded to our website below:

https://www.chrislee.co.nz/uploads//currentinvestments/AIA280.pdf

If you wish to request a firm allocation, please contact us promptly with the amount and the CSN number.

Please note that this investment offer closes this Wednesday at 9am, with payment due no later than 13 May.

Travel

Our advisors will be in the following locations on the dates below:

6 May – Cromwell – Chris Lee

7 May – Cromwell – Chris Lee

15 May - Auckland (Ellerslie) – Edward Lee

16 May – Auckland (Albany) – Edward Lee

17 May – Auckland (CBD) – Edward Lee

27 May (am) – Christchurch - Fraser Hunter

28 May – Christchurch – Chris Lee

29 May (am) – Christchurch – Chris Lee

30 May – Levin – David Colman

5 June – Nelson – Chris

6 June – Blenheim – Chris

11 June – Tauranga – Chris

19 June – Lower Hutt – David Colman

25 June – Napier – Chris

Please contact us to arrange a meeting office@chrislee.co.nz 

Seminars

Chris Lee will be holding a small number of investment seminars in May.

He will be discussing the economy – how to read the signals and avoid disasters – along with a presentation on a proposed gold mine in Bendigo, Central Otago, including the history of gold mining in the area and its plans for the future.

Location: Auckland

Date: Friday May 10

Time: 2.00pm

Venue: Milford Cruising Club

Location: Paraparaumu

Date: Monday May 20

Time: 11am

Venue: Southwards Car Museum

Location: Christchurch

Date: Monday May 27

Time: 1.30pm

Venue: Burnside Bowling Club

Reservations are required and can be made by emailing seminar@chrislee.co.nz or phoning 042961023.

Chris Lee

Chris Lee & Partners Limited