Talk Money with Tony Field – September 16, 2015


The New Zealand Superannuation Fund has been outperforming the market. But it has warned those returns cannot go on indefinitely.

The Guardians of New Zealand Super has released their annual report. The Fund grew by 14.64 percent to $29.54 billion in the year to June 30th. The increase of $3.1 billion came after costs, but before tax was paid on its investments.

Chairman Gavin Walker says the result was an excellent one, with returns of 16.8 percent per annum over the last five years. He says that is the result of "disciplined and consistent investing".

"Returns in the 10 percent to 20 percent range are at the higher end of our expectations," he says.

The Fund expects in the longer term to deliver returns of 8-9 percent on average.

The global markets have been very volatile since June. Last month world markets fell by 6.9 percent.

"It is normal to see considerable volatility in our monthly and indeed annual returns," says the Fund's chief executive Adrian Orr.

But he says they remain committed to their long-term strategies. This includes a mix of 80 percent growth assets (shares) and 20 percent fixed income (bonds).

"As an agile and highly liquid investor, we are well positioned to manage short-term volatility, and will look to take advantage of market disruptions as they occur," says Mr Orr.

The Fund says it exceeded its passive reference portfolio benchmark by $1.15 billion (4.45 percent) over the year. That is above the 1 percent per annum the Guardians expect over the long-term.

The last five years have been good times for world markets. But the Fund believes its active investment strategies have added $4.54 billion in value, or 3.65 percent per year.

"These results provide a strong endorsement of the Guardians' ability to add value, after all costs, compared to a purely passive approach to funds management," says Mr Orr.

The Fund also exceeded its second performance benchmark, the Treasury Bill return, by $2.90 billion (11.14 percent) over the year. The Treasury Bill benchmark is a measure of the cost to the New Zealand Government of contributing capital to the Fund instead of paying down debt.

This might be a good moment to look at an ongoing debate in the investment world – passive versus active investment.

Passive investing involves buying and holding stocks for lengthy periods of time. In some cases a passive fund will simply own the entire market, for example the S&P500 index or the Wilshire Global 5000. The only buying and selling that goes on is to make sure the fund correctly mirrors the relevant index or market.

Active investment involves picking specific stocks or other investments in an attempt to generate above-market returns.

Active investors say that passive investing is essentially accepting that you are happy with average returns. They argue that some managers can outperform through careful stock selection and/or by identifying stocks or segments of the market that are not correctly priced.

Passive investors argue that very few investors can outperform the markets for sustained periods of time. It is also extremely difficult to know in advance which manager is going to be able to deliver the best results over the next five, 10 or 20 years.

There will be plenty of people wondering what lessons they can learn from the way the Fund manages its investments. Some have gone a step further and called to ask if they can invest their KiwiSaver money with the Fund. The answer to that is no.

The Fund has some advantages over individual investors. For one thing its sheer size allows it to negotiate good deals on the fees it pays the outside managers it employs to run some of the funds. It also manages much of the money itself, through its own research team and fund managers.

So, one lesson for all of us is that fees and costs do matter. The higher the costs they more they will eat into your returns in the long-term. Costs are something an investor can control.

That does not mean you should always pick the lowest cost fund. But you do need to consider fees and costs when investing.

Prices rose again at this morning's global dairy auction.

The GlobalDairyTrade (GDT) price index leapt 16.5 percent. That is its largest increase in five years.

Whole milk powder had the biggest increase, leaping 20.6 percent. Skim milk powder prices were up 17 percent.

So, what does this mean for Fonterra's current forecast payout to farmers of $3.85 per kilogram of milk solids?

Fonterra said last week that its milk collection volumes will fall by 2-3 percent this season.

Economists at Westpac say a big influence on where prices go from here will be the El Nino weather pattern this summer. It could lead to drought.

For now Westpac is sticking with its forecast of a $4.30 farmgate milk price. But it says there is the potential for this to rise further.

The analysts at AgriHQ have increased their Farmgate Milk Price by 46 cents to $4.65 per kilogram of milksolids.

AgriHQ dairy analyst Susan Kilsby says the NZX Dairy Derivatives market indicates that whole milk powder prices will increase by a further 11 percent by the end of the season. This is reflected in AgriHQ's price prediction.

The volume of whole milk powder offered at today's auction was 5 percent lower than the previous auction and is 43 percent less than a year ago.

"The lower volumes of product offered on GDT along with expectations that NZ milk production will fall this season are the factors pushing prices higher," says Kilsby.

"Buyers are aware that a drier than normal summer will slow milk output in New Zealand. Therefore we are starting to see a little more urgency from buyers wishing to secure purchases."

The New Zealand dollar has risen overnight.

It's about 0.4 percent higher against the US dollar at 63.57 cents.

The Kiwi is trading at 88.95 Australian cents.

It is almost 1 percent higher against the Pound at 41.44 British pence.

The Kiwi is trading at 76.54 Yen and 56.40 Euro cents.

US stocks rallied this morning, after promising retail numbers.

The Dow Jones Industrial Average rose 230 points, or 1.4 percent. At one point it was up 273 points.

The broader S&P500 and the Nasdaq were up just over 1 percent.

But it was another volatile day, with the Nasdaq down in early trading.

The European markets were all up, with Germany's DAX gaining 0.56 percent, London's FTSE rising 0.87 percent and France's CAC-40 the best performer, up 1.13 percent.

West Texas Oil gained 2.6 percent, rising to US$45.16.

Gold fell US$3.60 to $1104 an ounce.

It is the eve of the Federal Reserve's two day meeting where it will announce whether it is lifting its key lending rate from its near zero level. If it does hike it will be the first increase by the Federal Reserve in almost a decade.

A lift in rates is a 50-50 call. It depends on whether the Fed is convinced that it has seen enough evidence that the US economy is having a sustainable recovery.

The retail numbers are improving, but the latest manufacturing figures disappointed (largely due weaker car production numbers).

A concern for Janet Yellen is how the markets will react to a lift in rates. If there was an increase in the Fed's key lending rate it could send stocks down and drive up the value of the US dollar. The dollar would rise as investors pour money into the US to take advantage of higher deposit rates.

Higher interest be good for savers, but would lift borrowing costs for businesses and consumers. A higher dollar would make US exporters less competitive.

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