During May, many asset sectors that comprise the components of the diversified funds performed well – both at the market level and in terms of excess returns provided by our active management. However, in aggregate it was only the Conservative fund which produced a positive return (0.44%) whilst both the Balanced and Growth funds fell slightly in value (-0.25% and -0.74% respectively). This is partly explained by the losses from our ‘alternative’ exposures to the Option Fund and the multi-strategy hedge fund, but mostly as a result of the losses suffered in the global equity markets. In fact, by the end of May 2019, global equity markets in aggregate posted a negative return for the 12 month period with only NZ dollar weakness enabling unhedged investors to generate a positive return from global equities, i.e. despite the underlying equities losing value, the value of the unhedged foreign currency increased against the NZ dollar enabling an overall positive return.
There were many reasons for the weakness in equity markets, and some of the key items are well covered – the ongoing uncertainties created by the US/China stand-off on trade, political tensions in the middle east, and uncertain growth in the Eurozone. As noted in last month’s commentary the local equity market remains remarkably strong rising another 1% in May and taking the 12 month return to 18%. This has certainly led to a number of companies here being bid up in price, but at the same time the behaviour observed is also quite rational with foreign capital searching for quality businesses that will generate strong cashflows and profit well above the yields offered by many other countries and sectors. It’s worth being mindful though of the time when some of that capital will be repatriated and the NZ market may lose some of the demand which has been creating these tailwinds for performance.
As is often the case, when equity markets suffer a loss of confidence from investors, the ‘safe-haven’ assets see a surge in demand and therefore increased prices. It was certainly true that sovereign bonds saw a strong price increase during the month as investors bid down yields, and so we observed bond markets providing returns to investors of well in excess of 1% for the month. It is this combination of the much higher than expected return from bond markets and the fall in global equities which led to the result of the more defensively positioned portfolios outperforming the more risk seeking portfolios for the month and indeed over the past 12 month period. This dynamic is to be expected from time-to-time, and those investors who have a longer term timeframe should still expect the more equity biased portfolios to outperform in the longer term, but in the meantime it’s been a period of strength for the more defensively positioned investors.