The Environment
There is not much we can say about Covid-19 that you won’t have already seen in the media. The spread of the infection and
the impact that it is having globally is, as everyone is now saying, unprecedented. That said, in most countries the rate of new
infections does appear to be slowing, and policy makers around the world are looking at how they can relax social distancing
measures (without incurring a second wave) and ease open parts of their economies.
Immunity and/or a vaccine are needed for the world to re-start properly though. Without which we expect our borders to
remain tightly controlled. There is some hope for a vaccine with Professor Sarah Gilbert of the University of Oxford stating
her group are in the early stages of a vaccine that, if it works, may start production in September. If it works is a big question,
but Professor Gilbert’s group has had success previously in rapid vaccine development.
Other highly experienced and well-resourced research groups are tackling the same problem – and many are sharing
information and data. So, being optimists, we think there is hope for rapid development of a vaccine. Even so, getting
medical confidence in a vaccine by September still leaves an enormous logistical question of it how can be produced in the
quantity the world needs and delivered across the globe.

The Markets
Last week saw a rally across the world as markets took heart from the early indications of a lower infection rate, and ongoing
fiscal and monetary stimulus efforts around the world.
The USA announced an additional US$2.3 trillion expansion of the Federal Reserve’s balance sheet (which will take it soon to
total assets of US$11 trillion). The additional allocation includes $500bn for municipalities, starting the Paycheck Protection
Plan liquidity facility, $600bn for the Main Street Lending program (loans to SMEs), and expanding the Primary and Secondary
Market Corporate Credit Facility and the Term Asset backed Securities Loan Facility to $850bn.
In conjunction with the fiscal packages, the USA is throwing unprecedented stimulus across most parts of their economy. This
won’t stop a sharp economic slowdown but it will make the trough a lot shallower – helping drive the rally last week in risk
One of the key indicators that we are watching is the growing number of job losses being registered in the USA. Jobless
claims rose over 6m for the second week in a row, bringing total claims to 17m for the past four weeks. This has marked one
of the most devastating periods in history for the American job market, as first-time claims for unemployment benefits have
surged more than 3,000% since early March.*
*CNN Business Report
Meanwhile another battle of sorts has been playing out on the backfields, namely oil, with OPEC+ eventually coming to an
agreement to reduce production by ~10m barrels per day for two months. Oil markets haven’t been particularly excited by
this agreement as there had been an expectation of larger / longer lasting production cuts. Estimates of 35m barrels per day
of demand destruction due to Covid-19 suggests that the 10m bpd production cut is insufficient by itself to stabilise the Oil.

The Diversified Funds
The equity hedge that we mentioned in the last report has been removed from the Growth fund and reduced by 3/4s in the
Income fund. Net growth asset exposure is 25% in the Income fund and 81% in the Growth fund.
We have used the big down cycle to start reinvesting the portfolios and, with the recent rally in growth assets over the past
week, the work continues to manage the daily swings in market volatility.
We continue to remain underweight bonds in the Income fund. We cannot justify owning bonds at the moment and, as a
consequence of this, cash levels remain fairly high.

Australasian and Property Equities
All of our portfolios have been taking the opportunity to reset weights in our high conviction stocks.
The Auckland Airport (AIA) placement early last week was a very good example, and an opportunity to lift our holding in the
airport from relatively low levels. While we think border controls will stay in place, and the earning environment over the
next few months will be difficult, the longer-term view is that we think this is still a great place to have some investment.
We continue to hold higher than normal cash allocations in the Australasian Equity fund and the Australasian Property
Securities Fund to take advantage of buying opportunities.
A case in point being Metlifecare (MET). The acquirer of Metlifecare issued a notice to the company that they are triggering
the Material Adverse Conditions clause in the takeover agreement and withdrawing from the deal. MET responded that there
is insufficient change in conditions for the clause to be triggered and that the deal should stand. This created quite
remarkable volatility, giving us the chance to add to our holding at very low levels.
Volatility remains fairly high, even though markets have bounced a bit from their lows in March.
As mentioned in our last update the negative impact of the Covid-19 pandemic on the property sector was swift and brutal.
The normally defensive attributes of the property sector were overlaid with the risk that many tenants (particularly retail)
will struggle to pay their rent, with a number already asking for rental reductions. The length of the lockdown in New
Zealand, and the move to lower restriction levels will be key to how the NZ property sector performs over the medium term.
The property portfolio was able to participate in both the AIA and MET opportunities discussed above.
As well, the property portfolio has re-weighted into Precinct and Kiwi Property Group – both well capitalised groups that had
been oversold.

Looking ahead
We anticipate that the Covid-19 rate of infection should continue to abate, due to the social distancing measures taken
across the world. However, without a vaccine, those same social distancing measures will need to remain in some form for
quite some time to keep the virus contained – even though Level 4 lockdown might be relaxed in coming weeks. Hence, the
economic implications still have some time to play out, and volatility across the markets will remain elevated. This creates a
dynamic environment for both risk and opportunity. At the risk of showing both my age and taste in entertainment – Lets be
careful out there…