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The Active Passive Debate Continues – With Active Management Well Ahead On Points

By Rebecca Thomas

In the COVID-19 era high volatility is the new reality but Rebecca Thomas, Chief Executive Officer Mint Asset Management, explains why investors need a steady hand in shaky markets. 

In what looks now like an exquisite piece of market timing, the Financial Markets Authority (FMA) ‘active v passive’ debate on February 19 this year coincided nearly exactly with the historical peak of the NZX50.

The following day the benchmark NZ share index topped 12,000 for the first time – a height it sustained for just one more trading session before tumbling, slowly at first and then in rapid freefall, to the rock-bottom of about 8,500 on March 23.

Investors used to the generally placid conditions of post-GFC markets would be in for the shock of their lives. The March volatility, triggered by the coronavirus economic lockdown, marked a new extreme even for experienced professional fund managers. NZX share prices came unhinged during the 30 per cent descent from peak to trough.

In theory, times of heightened volatility throw up more opportunities for active managers as quality stocks often hit bargain basement prices. However, it is not as simple as just buying everything that appears cheap – especially with so many unknowns still around COVID-19.

Active managers need a strong investment process to maintain buy-and-sell discipline in erratic markets and understand risk. Passive investors, of course, do not require discipline – but they are exposed to risk whether they like it or not.

Time runs out for momentum

As leader of the, winning, active team in the February FMA debate, I made the point that investors need to focus on risk-adjusted returns rather than the nominal benchmark figures.

However, despite coming out ahead on the night, NZ active managers in general have been on the losing side of the debate over the last year or so.

It has been very hard for active managers to outperform the NZX over the last couple of years as upwards momentum and stock-specific performance has dominated the market. This is commonplace in the latter stages of a long bull market.

Over 2019, for example, the median NZ wholesale equities fund underperformed the standard NZX50 index by about 1.3 per cent before fees, according to figures from consultancy firm Melville Jessup Weaver (MJW). For periods of three years or more, the average NZ shares manager either stayed on par or outperformed the benchmark.

Interestingly, during the bumper December 2019 quarter the median manager in both core NZ equities and

Australasian shares beat their respective indices, the MJW report shows. 

While investors might have been expecting a more subdued, but still upwards trend in the NZ share market through this year after a stellar 2019, the COVID-19 crisis abruptly halted the momentum complacency.

During March entire sectors (aviation, tourism, for example) faced wipe-out – at least in the short- to medium-term – as others, such as healthcare, received a potential boost.

Share prices reacted accordingly in March as investors, for better or worse, adjusted their portfolios in line with worst-case scenarios.

Indiscriminate buyers and sellers like passive funds were inevitably caught in the ebb-and-flow of market panic with no capacity to adjust portfolios in line with the major changes COVID-19 measures have wrought on the NZ economy and markets.

Fundamental reset for the long term

At a time like this, fundamentals become more important than ever as companies first battle for survival and then plot a strategy to thrive in what will certainly be a different operating environment for some time to come.

Active investors who can identify those firms likely to come through the crisis in better shape will be well-placed to create long-term outperforming portfolios.

And, the emphasis should be on the long term. Quarterly performance results won’t capture the full impact of the March market dislocation but they provide an insight into its unusualness. 

The just-released MJW March report shows the average manager underperformed the index over the three-month period in almost every asset class, including fixed income, which faced particularly extreme distortions as the global economy ground to a halt.

However, NZ shares was a stand-out sector for active managers during the March quarter where the median manager outperformed the benchmark by about 2 per cent, according to MJW. The average NZ shares fund did relatively well, “despite a smattering of Australian market exposures across the group which would have been a headwind”.

For example, the Mint Trans-Tasman Fund – the best-performing NZ shares strategy in the MJW table over the March quarter – was down just 8 per cent over the three months compared to about -15 per cent for the index. No one likes to lose capital but a focus on capital preservation and a clear understanding of a manager’s fiduciary obligations in turbulent times helps us to navigate our course.

On volatility watch

Higher market volatility is likely to roll on for months, or years, giving active investors the ability to accrue high-conviction stocks at low prices.

With so much uncertainty remaining as both the NZ and global economies adjust to the new coronavirus realities, share markets are unlikely to stabilise any time soon.

But patient, active investors with a well-defined strategy and robust implementation program have a better chance than most to come out in good shape on the other side of the storm.

Indeed, volatility management has always been central to the Mint investment philosophy, which carefully weighs risk against return.

We believe – based on research both offshore and here in NZ – that lower-volatility stocks actually produce better long-term returns. In this environment, volatility has increased across all stocks but relative price stability remains a key indicator of corporate health and long-term profitability.

For example, the MJW figures show the Mint Trans-Tasman portfolio reported the lowest five-year average volatility of all funds in the category – lower, even, than the index itself. 

Since the March 23 low, the NZX index has mounted a strong but somewhat fragile recovery, climbing to almost 10,800 in the third week of April, paring losses from the February peak to about 10 per cent.

Of course, the last couple of months would have been perfect for market-timers – but only perfect market-timers. 

Buying high quality stocks at the right price and being patient is a more sensible approach than trying to time the bottom. 

Disclaimer: Rebecca Thomas is Chief Executive Officer at Mint Asset Management Limited. The above article is intended to provide information and does not purport to give investment advice. Mint Asset Management is the issuer of the Mint Asset Management Funds. Download a copy of the product disclosure statement here

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The Great Disruption

By: Bevan Graham

Managing Director and Chief Economist, AMP Capital New Zealand

In 2020 global growth looks set to post its first negative result since the depths of the Global Financial Crisis and may even prove to be the weakest year of global growth in living memory. Unemployment rates are rising fast, underlining the widespread social harm.

Two things make this recession quite unlike any I’ve seen before. The first is the speed of the contraction in activity and the weakness in markets that has come with it. Secondly, this is not a recession borne of a prior build-up in economic imbalances. As regular readers will know, none of our traditional recession indicators have been flashing red, making this a classic ‘Black Swan’ event. The reason asset markets have taken this shock so hard is that many indicators were improving well into February. Shocks from outside the financial system are much harder to quantify and value in asset prices.

None of our traditional recession indicators have been flashing red, making this a classic ‘Black Swan’ event.

The deterioration in the economic outlook has been marked by significant and widespread policy easing across both the developed and developing world. Central banks have cut interest rates, and implemented or expanded asset purchase programmes. Indeed, the most recent multi-trillion dollar commitments by the US Federal Reserve (the Fed) have led commentators to note that in effect, the Fed now “controls interest rates and the broad bond market” for the first time in history.

As we have discussed many times before, given the lack of progress on monetary policy normalisation since the Great Recession, fiscal stimulus has also been widespread, though the quantum has varied from country to country. The lack of prior economic imbalances suggests that while the recession will be deep, the period of contraction will be relatively short – perhaps it’s better to describe this as more of an economic disruption or dislocation than anything else.

The pace at which activity resumes will be determined by the pace of the spread of the virus and the extent to which various economies re-open for business. The best example of this is here at home where it seems likely we will move gradually back down through the various alert levels with a gradual resumption of economic (and other) activity as we move through the levels. Of course, this path assumes sustained improvement in infection prevalence – any pattern of an initial apparent virus retreat followed by a second-wave resurgence in cases would be of graver concern.

So while the length of time economic activity contracts, we expect two to three quarters at most with most of the damage done in the current June quarter, and don’t expect a sudden bounce back to pre COVID-19 levels. We also need to bear in mind that it is not only the economic activity level in New Zealand that will be a decisive factor, but how well our major trading partners manage their own containment and recovery processes.

Indeed, recovery will be hampered by the extent of business failures during the shut-down. One characteristic of recessions is that clearly not all firms survive. The positive spin on that is that marginal firms fail during the recession, freeing up resources for new firms to emerge during the recovery.

We have not had a recession in more than 10 years as central banks all around the world have acted aggressively to stamp out even any hint of economic weakness. That has us concerned about the quantum of business failures we may see out of the current disruption in activity. For firms that went into the lock-down in an already fragile state, fiscal support may not be enough to save them. Mergers between firms out of necessity will become common across many sectors of the economy, as occurred in the financial sector during the severest phase of the GFC. This is a slow process.

That all means that while the drop in economic output and the rise in unemployment have been very sharp, the recovery back to pre-lockdown levels will take longer as demand AND supply will likely be constrained for some time. So while the drop in activity has been quite unusual in its scale and pace, the recovery may look more like a traditional recovery from recession.

If that is correct, we might start to see some outcomes that have been missing in the period of growth since the GFC. Depending on the relative extent of damage to supply and demand, we may see some inflation start to emerge. And given the way in which we are all now having to embrace technology, the recovery might come with gains in productivity.

But there are also risks. In particular, we are concerned about the prospects of a prolonged period of higher unemployment and implications for the housing market. Consumer debt loads are historically high, and though mortgage servicing is aided by low interest rates, an unemployment spike would be problematic for many borrowers.

Our biggest concern since the Global Financial Crisis has been the lack of ability for monetary policy to respond to the next crisis. That concern has only been alleviated by the fact that many countries had at least some room to move on fiscal policy, though today we worry about any meaningful progress in achieving a cohesive regional Eurozone fiscal response.

As we come out of this period of extreme weakness, there will be a need to normalise monetary policy from even more extreme levels, but also to restore fiscal balances to more sustainable levels. In New Zealand we are expecting Crown net debt levels to rise from around 20% of GDP to 45% over the period ahead. Getting that back under control to prepare for the next crisis will require spending restraint at some point. Some countries may also need to consider higher taxes of some form. These are both long-term pieces of work leaving the global economy vulnerable until fiscal buffers are re-established.


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COVID-19 & Market Update

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…

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Effect On The Economy From Coronavirus Spreading Outside Of China

We expect you are noticing the media headlines regarding coronavirus and the higher levels of investment volatility. We want to reassure you that we continue to actively monitor your investments closely.

The effects of coronavirus spreading outside China will clearly have a negative impact on economic activity and share markets as the crisis is dealt with.

At Milford we have been monitoring the outbreak since it began. Recognising the rising economic risks, and also aware that share markets were likely to move downwards as investors digest the ongoing news, our diversified funds took action early to reduce some exposure to shares. This has already helped to cushion some of the impact of negative share markets over the past few days.

As active managers, we have the flexibility to adjust our portfolios in real time based on our assessment of the risks and rewards on offer. Market volatility such as what we are currently experiencing provides opportunity for us to deliver better outcomes for our investors over time.

We appreciate that trusting in the investment process can be challenging at times. Investment markets will both rise and fall over time – this is very normal. Investors should be wary of reacting to headlines and before making any major changes be sure to ask themselves if their investment objectives have changed or if they are simply feeling nervous due to news they’re hearing. It might help to review your risk appetite and investment time horizon.

Our investment team continues to monitor the situation in real time and is making decisions within the funds accordingly. Whilst there is uncertainty in the short term, we believe that in the long term it is likely that global economic growth will continue, supported by low interest rates and by governments poised to respond.


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2020 Morningstar New Zealand Award Finalists

Morningstar recently announced the finalists for the 2020 Morningstar New Zealand Awards and Mint Asset Management has again made the short list for the domestic equites award after winning the category last year.

Rebecca Thomas Chief Executive Officer & Executive Director said she was thrilled to once again see the Mint Australasian Equites Fund make the shortlist, which reflects the fundamental investment approach Mint has been delivering since the fund was established back in February 2007.

Aman Ramrakha, Morningstar Australasia’s Director of Manager Research Rating said in their media release “In 2019, all major asset classes had positive returns, in particular New Zealand equities, which set a high hurdle for active managers. As the pool of assets in New Zealand continues to grow steadily, Morningstar’s annual Awards highlight the quality of investments available to New Zealand investors. Being nominated for an award is a testament to the fund manager’s ability to offer consistent, high-performing investments that help investors reach their financial goals.”

Anthony Halls, Head of Investments at Mint, said the last 12 months to December was both challenging and very rewarding for investors and it’s a great reflection of the team approach and expertise at Mint to consistently deliver good returns while managing the portfolio with the least amount of risk.

Morningstar determines the winner based on a combination of qualitative research by its manager research analysts; risk-adjusted returns over medium- to long-term periods; and performance in the 2019 calendar year. Morningstar’s Manager Research analysts assess the track record for a fund based on Morningstar’s Risk-Adjusted Return measure over the one-, three-, five-, and ten-year periods. The objective is to screen for fund managers that have provided consistently strong returns, and not just reward those with the most impressive one-year return.


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Investors Have Their Noses To The Wind For The Source Of The Next Crisis

Investors have their noses to the wind for the source of the next crisis. The terrifyingly titled pile of debt, known as “leveraged loans”, could be starting to pong. At Harbour we remain vigilant, monitoring the US market, but taking comfort in the structure of markets down under.

Leveraged loans are simply private market borrowing by sub-investment grade companies[1]. The US leveraged loan marketplace provides well over $US1 trillion in funding for companies involved in private equity buy-outs, gearing their balance sheets or funding expansion. Banks provide around half of this funding with the remaining share going to institutional investors, hedge funds, insurance companies and non-bank finance companies[2]. Banks underpin support for a sizeable European market also; the New Zealand market is tiny in comparison. But we do have leveraged loans. For example, the debt funding used by a private equity firm to buy TradeMe is considered a leveraged loan.

Potential warning signs

  • Rapid growth: The US leveraged loan market has more than doubled in size since 2010, leading to greater corporate vulnerability via higher indebtedness.
  • Lax underwriting standards: In addition to accepting higher gearing levels from borrowers, lenders have increasingly permitted more aggressive accounting to weaken their covenants. For example, intangibles now make up a far greater percentage of assets in debt/asset ratios and management earnings adjustments, baking in yet-to-be realised earnings, make up a significant portion of earnings in debt/EBITDA ratios. Worse still, the portion of loans with lax covenant packages, known as “cov-lite” loans, has soared as shown below.

Leveraged loans v2
Source: LCD (A Standard & Poor’s company)

  • Loans for dividends: A large volume of leveraged loans have been used to fund dividends while business investment has remained subdued.
  • More securitisation: A greater portion of leveraged loans are finding homes in collateralised loan obligations (CLOs – the loan equivalent of Mortgage-Backed Securities).

The makings of a credit cycle

Poor quality loans are more likely to experience losses when corporate profitability dips. If losses are material enough, this can reduce banks’ broader appetite to lend as they recapitalise, thus impacting the real economy.

Leveraged loans2

There are reasons for optimism that the leveraged loan sector would not cause a banking crisis. We examine these along with our more balanced view:

Leveraged loans3
Source: FSB taken from banks’ supervisory filings.

The leveraged loan sector can be de-risked if US corporate profitability growth remains strong while the standards of new loans improves. We saw encouraging, but tentative, signs of this in Q4 2019.  Loan losses remain below long-term averages.  For now, we watch corporate profitability as a lead indicator for loan quality as well as continuing to monitor loan growth and underwriting standards.

The Harbour Income Fund has funded sub-investment grade borrowers via the Australasian high yield market.  The lack of issuance of bank capital securities has provided borrowers a favourable environment in New Zealand. Harbour has had limited participation in the few deals that have been issued in this market owing to issuer-friendly pricing (low yields) and generally weak investor protections.  Meanwhile, not only have we found spreads more rewarding in Australia, but covenants have also offered investors more protection.  For example, Australian payment technology firm Afterpay is not allowed to make any distributions to shareholders while our bonds remain outstanding. In another example, the bond documentation of Australian data centre owner-operator, NextDC, permits it to pay dividends only when net debt / EBITDA remains below 1.5x. Many of the recent New Zealand high-yield deals included no protection.


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Impact Of Viruses On The Economy

Key Points

  • Novel Coronavirus (2019-nCoV) is a more contagious coronavirus than Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS), but fortunately, has a lower fatality rate so far.
  • While we can look to SARS for the potential economic impact, China’s position in the global economy is far larger now than it was in 2002/03.
  • Equity markets have typically rallied once the number of new cases peaks. We are not yet at that stage and expect volatility until that happens.
  • We have added to some stocks with structural tailwinds that have been sold off as a result of the event. But otherwise, we are taking a vigilant stance continuing to emphasise longer term positive structural influences.
  • This is continually evolving, World Health Organisation (WHO) situation reports are being produced daily and are available online. In addition, cases are being tracked in real time here.


There are several types of coronaviruses which have impacted humans since the mid-1960s. The more recent versions of coronaviruses are Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS).

Each coronavirus tends to have different characteristics, and this latest coronavirus, Novel Coronavirus or 2019-nCoV, is no different. The data so far shows that 2019-nCoV is far more contagious than SARS or MERS, but fortunately is less deadly with a mortality rate of 2%, much lower than SARS (9.6%) and MERS (~35%). So far, the fatalities have been most prevalent among older males with existing respiratory issues such as emphysema.

According to the latest WHO report (February 3, 2020), there are 20,571 confirmed cases of 2019-nCoV, which has claimed the lives of 426 people (425 in China, 1 in the Philippines) so far. Somewhat critically, up until this point the number of new reported cases has continued to accelerate. As well as the severe human toll, there will of course be an economic impact resulting from reduced consumer confidence and activity, disruptions to supply chains and complications to logistics.

Source: Bloomberg, WHO, Johns Hopkins

Economic Impact

It is far too early to accurately estimate the economic impact of 2019-nCov. While past epidemics, such as the SARS outbreak in 2002/03, can offer some insight into the possible economic impact, direct comparisons will prove to be inexact. China’s share of global output today is over double what it was at the onset of SARS, and China’s share of global trade is around 2.5 times what it was in 2002. Consumption and services, areas likely to be most negatively impacted, are now a much larger share of China’s economy.

Another key factor around the economic impact is the swift steps taken by China to contain the virus. While widely criticised for the slow reaction to contain SARS, China’s response to contain 2019-nCov has been faster and more extensive this time. An outcome of this is that the reaction, which will save many human lives, will likely result in a larger short term hit to activity than SARS did. Chinese authorities, cognisant of this, have already announced a raft of stimulus measures to cushion the economic blow from 2019-nCoV. These include injecting liquidity, cutting central bank repurchase rates, lowering lending rates and fees for companies and regions most affected by the outbreak and encouraging banks to not call in loans to affected firms. Despite this, it is likely that we will see GDP growth expectations cut for the first half of 2020 and, globally, monetary policy will remain accommodative.

Market Impact

We have already seen sharp market movements as this situation has unfolded. China, commodity and tourism exposed stocks have been hit the hardest. Some healthcare stocks have benefitted from expected higher healthcare spending. Chinese A-shares, which resumed trading after an extended Chinese New Year break, closed down -7.9% on the first day of trading; albeit they continued to recover somewhat as new stimulus policy measures were announced.

Bond markets have benefitted from a flight to quality. Since confirmation of Novel Coronavirus on January 7th, the 10-year US Treasury yield has fallen 35 basis points (bp) to 1.52%, close to the September 2019 low of 1.42%. Expectations of rate cuts from the US Federal Reserve have doubled, from one rate cut over the next 12 months, to two. In New Zealand, our 10-year government bond yield has fallen 23bp to 1.23% over this time, and expectations of our Reserve Bank easing over the next 12 months has increased from 14bp to 22bp of cuts.

Global commodity prices have fallen more than 10% in response to the Coronavirus outbreak. The Commodity Research Bureau’s (CRB) Index is currently around its lowest levels since early 2016. Oil prices have dropped more than 20% since early January, with Dubai crude oil (the most relevant benchmark for New Zealand) currently USD55 per barrel. Milk futures provide a real-time gauge of the impact on New Zealand commodity prices, and they have fallen 3% since the Coronavirus outbreak.

In terms of the market impact, as opposed to economic impact, we believe history is a potential guide. In previous epidemics, markets only recovered after the number of new cases peaked. We recently heard from a coronavirus expert, who believes it may not be until mid- February, at the earliest, that this occurs.

Below we look at the impact SARS had on markets in 2003.

Source: Bloomberg, MSCI. Outbreak date February 6, 2003. “Low” is the low of the Hang Seng index.

How we are positioned

We do not profess to know more about 2019-nCov than anyone else. We have tapped our global research partners and contacts to learn more about the virus from experts, and have attempted to understand what the past can, and cannot, teach us.

Having a long-term investment focus, which aims to identify companies that will benefit from structural change, means that, at the margin, we have added to some stocks with structural tailwinds which have been sold off as a result of the event. But otherwise, we are taking a vigilant and patient stance.

Within fixed income, portfolios were structured for rising interest rates as forward-looking economic indicators and government spending plans are supportive for future growth. Following the disease outbreak, we have reduced this position, purchasing assets that will perform well if the Reserve Bank lowers the Official Cash Rate (OCR).

It would also be remiss to not mention that, prior to the outbreak of this unfortunate virus, we were seeing increasing evidence of a U-shaped rebound in global activity. Chinese activity indicators were improving, which was helping the European manufacturing sector to show signs of bottoming. The latest read of US Manufacturing PMI, released February 3rd, also showed a rebound in activity. So, while undoubtedly growth will be revised down for H1 2020, the silver lining may be that it did not hit during the period of economic weakness we saw in mid-2019.


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What is ESG?

Devon defines Responsible Investment as a strategy which aims to add value and improve risk management through the incorporation of Environmental, Social and Governance (ESG) factors into our financial analysis and investment decision-making.

We believe that companies that have strong Responsible Investing policies in place are more likely to act in the best interest of all their stakeholders, and are better positioned to deal with any challenges that arise. This will, in the long term, result in improved investment returns

Devon applies two Responsible Investing strategies when managing client’s funds: ESG integration and active ownership. ESG is an explicit part of our process. Following the detailed analysis of a business, we rate the potential investment on an ESG score. We rank each business on the following components – Environmental, Social & Governance. Our source data for the ranking includes our own views, media reports, regulatory reviews, government reports, annual reports and third party ESG research vendors – Devon’s provider is currently MSCI. For any businesses that we hold ESG concerns over, we evaluate whether to hold the position and engage with the company or to exit the position. We engage frequently with the companies that we own and those that we are analysing.

Devon is a signatory to the Principles for Responsible Investment. We have adopted these Principles (detailed below) and they have been incorporated into the Devon Compliance Guide.

The Principles for Responsible Investment

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). We also recognize that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:

1) We will incorporate ESG issues into our investment analysis and decision-making processes.

2) We will be active owners and incorporate ESG issues into our ownership policies and practices.

3) We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4) We will promote acceptance and implementation of the Principles within the investment industry.

5) We will work together to enhance our effectiveness in implementing the Principles.

6) We will report on our activities and progress towards implementing the Principles.

Guidelines on Environmental Factors

Devon incorporates Environmental factors into our decision making in order to understand all relevant long-term risks associated with the companies that we own and are analyzing. The following Environmental factors broadly represent what will be considered:

  • Climate change – e.g. carbon emissions, climate change
  • Natural capital – e.g. water stress, biodiversity and land use, raw material sourcing
  • Pollution and waste – e.g. toxic emissions and waste, packaging material and waste, electronic waste
  • Environmental opportunities – e.g. clean technology, green building, renewable energy

Guidelines on Social Factors

Devon incorporates Social factors into our decision making in order to understand all relevant long-term risks associated with the companies that we own and are analysing. The following Social factors broadly represent what will be considered:

  • Human capital –e.g.  labour management, health and safety, supply chain and labor standards
  • Community relations
  • Animal welfare
  • Product liability – e.g. product safety and quality, chemical safety, privacy and data security, health and demographic risk
  • Controversial sourcing

Guidelines on Governance Factors

Devon incorporates Governance factors into our decision making in order to understand all relevant long-term risks associated with the companies that we own and are analysing. The following Governance factors broadly represent what will be considered:

  • Corporate governance – e.g.: board, pay, ownership, accounting
  • Controversial investments
  • Corporate behavior – e.g. business ethics, anti-competitive practices, corruption and instability, tax transparency

Engagement Policy

Direct engagement with companies and their stakeholders is an important part of Devon’s investment process, and a key driver of our approach to Responsible Investment.

Engagement is typically with the CEO, CFO and other senior management and may take the form of face-to-face meetings, phone conversations or written communication. This engagement provides us with insights into the quality of a company’s management, strategy, market environment, operations, governance structure and their approach to ESG issues. We also engage with the Board of Directors to inform them of our view on a topic and to understand how a Board may be addressing a particular issue. If a concern is not being addressed to our satisfaction with management we will look at the option of escalating it to the Board.

We will collaborate with other fund managers through the New Zealand Corporate Governance Forum, of which we are a founding member, where we believe a collaborative approach will be in the best interests of our clients and achieve the greatest result.

Voting Policy

We are advocates for strong corporate governance structures, shareholder rights, and transparency. We vote all proxies on behalf of clients, unless the client has a preference to vote the proxies themselves. The objective in voting is to support proposals and director nominees that maximize the value of a portfolio’s investments over the long term. Factors considered include conflicts of interest, transparency, environmental impacts, social and governance issues and extraordinary meetings.

Each proposal must be evaluated on its merits, based on the particular facts and circumstances as presented. Our practice seeks to ensure that proxy voting decisions are suitable for individual portfolios. For most proxy proposals, the evaluation will result in the same position being taken across all of the portfolios and the portfolios together typically vote as a block.


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Magellan’s Chairman and CIO, Hamish Douglass, thoughts on the outlook for Global markets in 2020

Watch Magellan’s Chairman and CIO, Hamish Douglass, shares his thoughts on the outlook for Global markets in 2020, before taking stock of Magellan’s progress and considering what might be ahead for the business in the coming decade. (Viewing Time 20 Mins)


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