16 Jan 2018

Year in review

Equities

It was a very good year for investors in general and for our funds.  It has been an incredibly benign year despite political events that might rock markets in other times.  The S&P 500 posted positive total returns in every month of the calendar year in 2017.  This is the first calendar year without a monthly loss going back 90 years! The S&P/NZ50 also shared this honour for 2017 (see next article NZ equities – a perfect 2017).  QE certainly appears to have done a good job of stabilising markets post the GFC.  The problem is it might have done too good a job.  Investors are hunting yield via increasingly derived products (leveraged short VIX ETFs for example), and bubbles are popping up in all sorts of places. 

Bitcoin is in a bubble.  This is evidenced most clearly by the fact that listed companies can affect a significant increase in share price by changing their names to something blockchain-esque.   According to Bloomberg, “Long Island Iced Tea Corp. shares rose as much as 289 percent after the unprofitable Hicksville, New York-based company rebranded itself Long Blockchain Corp. It’s the latest in a near-daily phenomenon sweeping the stock market, where obscure microcap companies reorient to focus on some aspect of the mania sparked by bitcoin’s 1,500 percent rally this year.”  Click here for the full article.

Ranger’s performance was therefore particularly pleasing given our conservative stance and the high level of cash that it is carrying.  If we include cash deployed in defensive debt instruments, this level has not dipped below 35% over the year.  This means performance has been driven by roughly the 65% of funds invested in equities.

 

Another pleasing outcome for both our equity strategies is their performance versus the NZX50, despite most of our overweight positions being investments in Australian companies.  The ASX200 has substantially lagged the NZX50 and the S&P500.  Our performance cannot be attributed to the performance of either market.

We believe that we are also beginning to show substance in our belief that taking a long-term perspective works.  Our performance lagged in 2015 due to our investment in mining services businesses.  We were convinced that they were very cheap if you took a long-term perspective and looked past the fear of weak near-term operating performance, and bought more.  Now that the operating performances of these businesses are starting to improve, so are their stock prices.  Boom and Macmahon were the largest contributors to performance in that category.

Performance in the Quality side was driven solely by our mid-cap growers.  Kogan and A2 were the standout contributors but Afterpay, Redbubble, Corporate Travel and Scott also contributed materially.

 

We have avoided investing in Moat businesses as they have been most favoured by the market. The prices of these businesses have been driven higher as investors have become more willing to accept any sort of yield.  Some of these companies have responded to investor appetite by keeping dividends higher than might be sustainable in the long term. It is our opinion that when interest rates start to rise these companies will be most affected.  This will be a great opportunity for us when that happens.

We have concentrated on finding great smaller businesses with excellent management teams and supportive industry dynamics.  And despite taking a conservative approach with our cash and investments, we still managed to find exciting investment opportunities over the year. 

Turnover was relatively low in the fund.  We added Afterpay and Kogan to our equity portfolios, both turning out to be early winners, and sold out of Scott Technology and Trustpower (removing the overweight in the case of Trans-Tasman).

In our NZX 50 benchmarked Trans-Tasman portfolio, we undertook a review of how we manage our index underweight positions.  Index stocks are used to fund our alpha stocks, the stocks we identify as having significant return potential when taking a long-term perspective.  The purpose of the review was to investigate how we might minimise the risk from being underweight a strong index performer.  We now quantitively and qualitatively rank each index stock based on its Value and Quality characteristics and avoid being underweight stocks that are close to getting through our alpha stock gates. 

A good example of this was our move to a neutral position on Xero.  Xero meets most of our mid-cap-grower criteria but fails on profitability.  As a result of this review we took Xero out of the underweight stock pool and this saved us some negative performance.  However, Xero still managed to be one of our largest detractors to performance due to a larger underweight in the first part of the year.  Chorus was the only other addition as part of this review.

While our mining services investments have performed strongly, our other value investments have lagged.  In our opinion, we see significant long-term potential in these businesses and in a further re-rating of our mining services businesses.  This along with expected strong operating performances from our growth company investments, and the new opportunities waiting to be found, gives us confidence in the potential of the portfolios for the year ahead.

5 Oceans

The 5 Oceans Fund commenced in October 2016, so 2017 was its first full calendar year and it was a very successful one with double digit return after fees and more importantly a moderate level of volatility – which is what the fund is designed to deliver. June was a slight negative month (-0.1%) but no one is perfect.

No changes to the fund were made during 2017, though that’s not to say no activity was undertaken. Both Portfolio Manager’s undertook overseas trips (London twice and Boston) to review current and potential managers to firstly ensure we remain comfortable with those managers currently utilised, have a strong bench of replacements if need arises, and evaluate if potentially improved manager combinations can be found.

Like our equity funds our approach aims to identify managers and strategies that align culturally and philosophically with our long-term quality and value focus. That way we can ensure the 5 Oceans Fund continues to provide a differentiated global investment approach and not just follow the herd like most balanced type funds.