The month of June saw strong returns across a range of sectors and in aggregate resulted in very good returns for investors in the Nikko AM diversified funds. The highest returns came from global equities (which bounced back from losses in May), but New Zealand equity securities also continued to rise particularly in the utility and property sectors. Since the start of the year, Government bond yields around the world have, unexpectedly, fallen sharply and this has been a material contributor to this surge in equity prices as well as providing bond investors with significant price gains. Unsurprisingly, with bond yields moving so much our Option fund has experienced losses and this has had a modestly negative impact on the diversified funds via their exposure to this strategy.
Whilst equity returns tend to dominate the headlines, in the current environment the more dominant factor driving markets and investor behaviour is interest rates (and therefore bond yields). The US 10 year yield has seen a substantial 0.7% fall since the start of the year dropping below 2%, and with longer dated bonds falling in yields around the world, more and more bonds are back in negative yield territory. Softening economic data, geopolitical tensions and late cycle worries all contribute towards this push lower in yields, with investors encouraged in this behaviour by central banks stating explicitly that they are seeing increased likelihood of rate cuts (and not just a pause in rate rises). It’s therefore unsurprising that we’re also observing some investors seeking yield in stable, cash generating companies offering attractive sustainable dividends and hence pushing the prices of those companies higher, and in some cases beyond valuation levels that may be considered acceptable on a more fundamental bottom up assessment.
The New Zealand dollar strengthened significantly during June and essentially reversed the May fall, and so assets which were unhedged over the month gave up some of the underlying performance in currency losses, but over the longer timeframe of a year currency hasn’t materially impacted returns either way. We continue to see the benefit of having some foreign currency exposure for diversification benefit, but we don’t take active currency positions within our diversified funds. Overall at the diversified fund level it was the funds with higher exposures to the equity markets that produced the stronger returns in June. Whilst we expect this to also be the case over the longer term, investors should be aware of market volatility and expect that over shorter time periods the more defensive funds should experience less ups and downs.