Strategies & Performance

Income Strategy

Insights

KiwiSaver Income Strategy Insights Chart

NRG’s turnaround

NRG is a United States electricity ‘gentailer’ supplying three million customers from its portfolio of fossil fuel and renewable generation.

In 2014, a visionary CEO, David Crane, launched a plan to transform NRG into a ‘green energy’ company, investing heavily in renewables.

The strategy didn’t work well and NRG racked up debt and booked heavy losses. Moving forward to 2017 and activist hedge fund investor, Elliott Management, became involved, taking a 6% stake and a board seat in January 2017, alongside John Wilder, a corporate turnaround veteran.

The two prompted NRG to accelerate a transformational plan to cut costs and sell non-core assets, mostly in the renewable generation portfolio. The plan, announced on 12 July, was well-received by markets and the share price rallied by around 47%. It will, if all goes well, leave shareholders with a company with annual EBITDA (earnings before interest, tax, depreciation and amortisation) of $US1.8 billion and essentially no debt.

In this Strategy we hold NRG 7.25% 2026 bonds which, along with the shares, have traded extremely well since the announcement. We bought the bonds in 2016 at US$101.10. They now trade at US$106.00.

While this is no doubt an exceptional outcome for both equity and bondholders, the execution of NRG’s transformation plan is not without risk. Much depends on the scale and success of the company’s selldown of 85 million shares it holds in another publicly traded company, the renewables-focused NRG Yield. The plan envisaged a selldown of NRG’s entire stake which would, in our view, offer the cleanest way of addressing the problems the subsidiary presents in valuing NRG’s stock.

While upside is limited by call provisions attached to the bonds, they are still paying an outright yield of 6%. With a somewhat derisked balance sheet, NRG provides a high quality, high-yield portfolio position, and we retain our current holding.

NZ Funds is an active investment manager. Accordingly, any securities discussed above may or may not be held by the Strategy at any given point in time.
* Source: Bloomberg.

Performance

Performance since inception (31 October 2010) to 31 July 2017
KiwiSaver Income Strategy Chart KiwiSaver Income Strategy Performance Table

NZ Funds KiwiSaver Scheme Income Strategy

  • Pre tax returns are stated after Strategy fees and expenses, but before any advisory fees or investor tax. Post tax returns are stated after Strategy fees and expenses and investor tax at the highest Prescribed Investor Rate (PIR). Past performance is not necessarily an indication of future returns.

Comparative Index

  • The comparative index is the 'S&P/NZX 90 Day Bank Bills Total Return Index'.

    The after tax comparative index has been calculated by applying the highest PIR rate (currently 28%) to the comparative index.

Different calculation methodology

  • The performance graph for the Income Strategy and the comparative index is calculated and displayed on a pre tax, post Strategy fees basis.

    With regard to the comparative index, this is calculated on a different basis from that used in the Quarterly Fund Updates published for the Strategy. The calculation for the Quarterly Fund Update requires that the comparative index be calculated and displayed on a gross (before tax and Strategy fees and expenses) basis.

Maximum Decline and Risk

  • Returns should be looked at in conjunction with the level of risk associated with an investment. "Maximum decline" is a measure of risk. It represents the largest decline in value experienced during the last 12 months.
  • For more information on risk including the Strategy's risk indicator please see the NZ Funds KiwiSaver Scheme Product Disclosure Statement or the latest Fund Updates.

Note: Rounding may affect some numbers.

Portfolios


NZ Funds KiwiSaver Scheme Income Strategy

Indicative Strategy as at 31 July 2017
KiwiSaver Income Strategy Portfolio Table

1. The yield calculation represents an estimate of the yield on the Strategy, calculated using the most recent information provided by the external investment managers involved in managing the Strategy, hedged back to New Zealand dollars where appropriate. It is not calculated ‘as at’ any particular date as different external investment managers provide data at varying dates. As a result, in some instances the yields may lag the date of this Strategy summary. The yield is not the actual return on the Strategy, nor is it a projection or forecast. The Strategy’s return could be less than the Strategy’s yield. Details of the yield calculation are available on request from NZ Funds.
2. Net receivables include unrealised profit and loss and net receivables/payables. Although full cash backing is not required under the current futures exchange requirements, these figures assume that derivatives contracts are fully backed by cash unless used for leverage.
3. Total economic exposure represents the total economic value of a Strategy, which is the net asset value of the Strategy adjusted for the effect of direct derivative positions taken by the Strategy and indirect derivative positions taken other than via a fund including hedge funds. For more details on economic exposure, see the Other Material Information document on the Offer Register at www.companiesoffice.govt.nz/disclose.
Note: Rounding may affect any subtotals and totals.

Overview

Objective The objective of the Strategy is to provide exposure to income-orientated assets using an active investment management approach.
Risk & volatility Please see the NZ Funds KiwiSaver Scheme Product Disclosure Statement or the latest Fund Updates for information on risk.
LifeCycle allocation The LifeCycle Process allocates 5% of a member's funds to this Strategy. This allocation will remain constant until a member reaches age 60, from when it will gradually increase to 30% by age 65.
Minimum suggested investment timeframe 2 years +
Permitted investments The Strategy may invest in securities in the following asset classes:

• Cash and cash equivalents
• New Zealand fixed interest
• International fixed interest
• Foreign currency
• Alternative securities *

* 'Alternative securities' means asset classes not usually accessed by retail investors, for example, private equity, venture capital and hedge funds. These tend to be asset classes where valuation and liquidity may be uncertain and returns may be volatile.
Anticipated investment approach Over time, it is anticipated that the Strategy will hold a significant exposure to cash and cash equivalents, international fixed interest and/or New Zealand fixed interest.
Further information Further information is contained in the NZ Funds KiwiSaver Scheme Product Disclosure Statement

Inflation Strategy

Insights

KiwiSaver Inflation Strategy Insights Chart

Bluescope Steel – tempering our view

This Strategy has a 70% allocation to New Zealand and Australian shares. One of the best performing investments within this allocation recently has been Australian steelmaker Bluescope Steel, whose share price is up over 50% since its initial purchase in November last year.

At that time, the company had recovered only partially from the savage post-GFC downleg of the commodities cycle.

As we expected last November, the company has benefited from strong steel demand in Australia and the United States, buoyant steel prices, Chinese attempts to address their steel supply glut, and the culmination of a cost-cutting drive.

In terms of earnings, the improvement in external conditions has been amplified by the effects of management’s business improvement programme to cut costs and boost efficiency. Consequently, the Bluescope share price has substantially outperformed that of other steel producers internationally.

Longer term however, we are conscious that Bluescope operates in a highly competitive, commoditised and cyclical sector. Some of its core assets – Port Kembla Steelworks in New South Wales and the Glenbrook steel mill near Auckland – are aging, high-cost operations that will require substantial investment to maintain their competitiveness over time.

For these reasons, we have a shorter than usual investment horizon for Bluescope. Our analysis now suggests there is less cyclical upside potential for the company going forward, while earnings momentum has plateaued. Moreover, the volatility of the share price adds risk to the Strategy, and the dividend yield is weak.

That said, despite their rally, the shares remain among the cheapest of large Australian companies, relative to earnings.

We have substantially reduced the Strategy’s position, crystallising a strong capital gain but retaining a more modest exposure that may benefit from continued growth in global steel demand, and a further realignment of the market’s valuation.

NZ Funds is an active investment manager. Accordingly, any securities discussed above may or may not be held by the Strategy at any given point in time.
* Source: Bloomberg.

Performance

Performance since inception (31 October 2010) to 31 July 2017
KiwiSaver Inflation Strategy Chart KiwiSaver Inflation Strategy Performance Table

NZ Funds KiwiSaver Scheme Inflation Strategy

  • Pre tax returns are stated after Strategy fees and expenses, but before any advisory fees or investor tax. Post tax returns are stated after Strategy fees and expenses and investor tax at the highest Prescribed Investor Rate (PIR). Past performance is not necessarily an indication of future returns.

Comparative Index

  • The comparative index is made up of 50% of the ‘S&P/NZX 90 Day Bank Bills Total Return Index’ and 50% of the ‘MSCI All Countries World Index with net dividends in local currency’.

    A fee of 1.0% pa is deducted which is an estimate of the cost of obtaining a passive exposure through a Portfolio Investment Entity (PIE).

    The after tax comparative index is calculated by applying the appropriate tax calculation for the asset class and the highest PIR tax rate (currently 28%).

Different calculation methodology

  • The performance graph for the Inflation Strategy and the comparative index is calculated and displayed on a pre tax, post Strategy fees basis.

    With regard to the comparative index, this is calculated on a different basis from that used in the Quarterly Fund Updates published for the Strategy. The calculation for the Quarterly Fund Update requires that the comparative index be calculated and displayed on a gross (before tax and Strategy fees and expenses) basis.

Maximum Decline and Risk

  • Returns should be looked at in conjunction with the level of risk associated with an investment. "Maximum decline" is a measure of risk. It represents the largest decline in value experienced during the last 12 months.
  • For more information on risk including the Strategy's risk indicator please see the NZ Funds KiwiSaver Scheme Product Disclosure Statement or the latest Fund Updates.

Note: Rounding may affect some numbers.

Portfolios


NZ Funds KiwiSaver Scheme Inflation Strategy

Indicative Strategy as at 31 July 2017
KiwiSaver Inflation Strategy Portfolios Table

1. The yield calculation represents an estimate of the yield on the Strategy, calculated using the most recent information provided by the external investment managers involved in managing the Strategy, hedged back to New Zealand dollars where appropriate. It is not calculated ‘as at’ any particular date as different external investment managers provide data at varying dates. As a result, in some instances the yields may lag the date of this Strategy summary. The yield is not the actual return on the Strategy, nor is it a projection or forecast. The Strategy’s return could be less than the Strategy’s yield. Details of the yield calculation are available on request from NZ Funds.
2. Price/Earnings is based on next year’s forecast earnings (NPAT) Source: Bloomberg.
3. Where a strategy is shown, the asset class reflects the predominant assets in the strategy. The strategy may include other assets including cash.
4. Net receivables include unrealised profit and loss and net receivables/payables. Although full cash backing is not required under the current futures exchange requirements, these figures assume that derivatives contracts are fully backed by cash unless used for leverage.
5. Total economic exposure represents the total economic value of a Strategy, which is the net asset value of the Strategy adjusted for the effect of direct derivative positions taken by the Strategy and indirect derivative positions taken other than via a fund including hedge funds. For more details on economic exposure, see the Other Material Information document on the Offer Register at www.companiesoffice.govt.nz/disclose.
Note: Rounding may affect any subtotals and totals.

Overview

Objective The objective of the Strategy is to mitigate the impact of inflation on your investment over the medium and/or long-term by investing in income-orientated assets and growth-orientated assets using an active investment management approach.
Risk & volatility Please see the NZ Funds KiwiSaver Scheme Product Disclosure Statement or the latest Fund Updates for information on risk.
LifeCycle allocation The LifeCycle Process allocates 10% of a member's funds to this Strategy until the member reaches the age of 46, from when their allocation will gradually increase.
Minimum suggested investment timeframe 5 years +
Permitted investments The Strategy may invest in securities in the following asset classes:

• Cash and cash equivalents
• New Zealand fixed interest
• International fixed interest
• Australasian equities
• International equities
• Listed property
• Foreign currency
• Commodities
• Alternative securities *

* 'Alternative securities' means asset classes not usually accessed by retail investors, for example, private equity, venture capital and hedge funds. These tend to be asset classes where valuation and liquidity may be uncertain and returns may be volatile.
Anticipated investment approach Over time, it is anticipated that the Strategy will hold a diversified range of assets expected to include cash and cash equivalents, New Zealand fixed interest, international fixed interest, Australasian equities, international equities, and/or commodities.
Further information Further information is contained in the NZ Funds KiwiSaver Scheme Product Disclosure Statement

Growth Strategy

Insights

KiwiSaver Growth Strategy Insights Chart

Cash is King

“Profit is a matter of opinion. Cash is a matter of fact.” This observation is frequently attributed to Warren Buffett; in fact, it has been around since at least the 1890s, and nobody knows who said it first.

It is an underlying tenet of the thinking of LSV, the Chicago-based global shares investor which manages around half the assets held in this Strategy.

LSV uses a quantitative investment approach, choosing undervalued shares with the potential for medium-term appreciation. In particular, it examines the quantum of cash a company is generating relative to its share price.

LSV was founded in 1994 by three professors of finance – Josef Lakonishok, Andrei Shleifer and Robert Vishny. Lakonishok still heads the business as Chief Executive and Chief Investment Officer. The manager was established after the three professors undertook research and wrote a paper showing that buying a portfolio of unloved cashflow positive companies would over time outperform. They were so confident their research was right, they established the company to prove it.

This Strategy is invested in LSV’s Concentrated Fund. The repository of their ‘best ideas’, it nonetheless holds around 80 positions, following country or sector index weights as best they can, and therefore looking to add value by company selection. In essence, they look to find the best-valued companies within a sector or country.

At present, their largest holdings are pharmaceutical company Pfizer, aircraft maker Boeing and electronics giant Samsung.

In the current equity market environment LSV have underperformed the global index as they have not held loss-making ‘story’ companies (such as Tesla, which is now the most valuable car company in the world), although they have nonetheless delivered excellent returns over the longer term.

NZ Funds is an active investment manager. Accordingly, any securities discussed above may or may not be held by the Strategy at any given point in time.
* Source: LSV, MSCI, global equity markets are represented by MSCI ACWI in NZD index.

Performance

Performance since inception (31 October 2010) to 31 July 2017
KiwiSaver Growth Strategy Chart KiwiSaver Inflation Strategy Performance Table

NZ Funds KiwiSaver Scheme Growth Strategy

  • Pre tax returns are stated after Strategy fees and expenses, but before any advisory fees or investor tax. Post tax returns are stated after Strategy fees and expenses and investor tax at the highest Prescribed Investor Rate (PIR). Past performance is not necessarily an indication of future returns.

Comparative Index

  • The comparative index is the ‘MSCI All Country World Index with net dividends in local currency’ less a fee which is an estimate of the cost of obtaining a passive global share market exposure through a Portfolio Investment Entity (PIE).

    Since 1 October 2015 a fee estimate of 1% has been used, prior to 1 October 2015 a fee estimate of 1.75% pa was used.

    The after tax comparative index is calculated by applying the appropriate tax rates for the asset class and the highest PIR tax rate (currently 28%). This comparative index differs from that used in previous Portfolio Insights, and is based on the requirements of the Financial Markets Conduct Act 2013.

Maximum Decline and Risk

  • Returns should be looked at in conjunction with the level of risk associated with an investment. "Maximum decline" is a measure of risk. It represents the largest decline in value experienced during the last 12 months.
  • For more information on risk including the Strategy's risk indicator please see the NZ Funds KiwiSaver Scheme Product Disclosure Statement or the latest Fund Updates.

Note: Rounding may affect some numbers.

Portfolios


NZ Funds KiwiSaver Scheme Growth Strategy

Indicative Strategy as at 31 July 2017
KiwiSaver Growth Strategy Portfolio Table

1. The yield calculation represents an estimate of the yield on the Strategy, calculated using the most recent information provided by the external investment managers involved in managing the Strategy, hedged back to New Zealand dollars where appropriate. It is not calculated ‘as at’ any particular date as different external investment managers provide data at varying dates. As a result, in some instances the yields may lag the date of this Strategy summary. The yield is not the actual return on the Strategy, nor is it a projection or forecast. The Strategy’s return could be less than the Strategy’s yield. Details of the yield calculation are available on request from NZ Funds.
2. Price/Earnings is based on next year’s forecast earnings (NPAT) Source: Bloomberg.
3. Where a strategy is shown, the asset class reflects the predominant assets in the strategy. The strategy may include other assets including cash.
4. Net receivables include unrealised profit and loss and net receivables/payables. Although full cash backing is not required under the current futures exchange requirements, these figures assume that derivatives contracts are fully backed by cash unless used for leverage.
5. Total economic exposure represents the total economic value of a Strategy, which is the net asset value of the Strategy adjusted for the effect of direct derivative positions taken by the Strategy and indirect derivative positions taken other than via a fund including hedge funds. For more details on economic exposure, see the Other Material Information document on the Offer Register at www.companiesoffice.govt.nz/disclose.
Note: Rounding may affect any subtotals and totals.

Overview

Objective The objective of the Strategy is to grow your investment over the long-term by investing in income-orientated assets and growth-orientated assets using an active investment management approach.
Risk & volatility Please see the NZ Funds KiwiSaver Scheme Product Disclosure Statement or the latest Fund Updates for information on risk.
LifeCycle allocation The LifeCycle Process allocates 85% of a member's funds to this Strategy until the member reaches the age of 46, from when their allocation will gradually decrease.
Minimum suggested investment timeframe 10 years +
Permitted investments The Strategy may invest in securities in the following asset classes:

• Cash and cash equivalents
• New Zealand fixed interest
• International fixed interest
• Australasian equities
• International equities
• Listed property
• Foreign currency
• Commodities
• Alternative securities *

* 'Alternative securities' means asset classes not usually accessed by retail investors, for example, private equity, venture capital and hedge funds. These tend to be asset classes where valuation and liquidity may be uncertain and returns may be volatile.
Anticipated investment approach Over time, it is anticipated that the Strategy will hold a significant exposure to Australasian equities, international equities, and/or alternative securities.
Further information Further information is contained in the NZ Funds KiwiSaver Scheme Product Disclosure Statement

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These Terms and Conditions are in addition to and do not replace, any specific terms and conditions applicable to any New Zealand Funds Management Limited product or service. To the extent that there is any conflict between these Terms and Conditions and those of any specific products or services, the terms applicable to those products or services will prevail.

Any reference to "NZ Funds", "we", "us" and "our" is a reference to New Zealand Funds Management Limited, its directors, employees and related parties.

Disclaimer

The content of the NZ Funds Website is general in nature, and for information purposes only. While care has been taken to supply information on the NZ Funds Website that is correct, accurate and up to date, we do not guarantee that this is the case, or that the information is relevant or suitable for your intended use. NZ Funds is not liable for any loss, liability or damage suffered by any person that may result from any errors, omissions, recommendations or opinions expressed on the NZ Funds Website. Accordingly, before making any investment or taking or refraining from taking any action based upon this information, we recommend that you first consult with an Authorised Financial Adviser.

Further, we do not guarantee the relevance or accuracy of any information in any other websites accessed through the NZ Funds Website or any information, opinions or projections included in articles sourced from third parties.

Neither NZ Funds nor any other party guarantees the performance of any product included on the NZ Funds Website. Any predictions or projections (including those made in any article that appears on the NZ Funds Website) are an expression of opinion only. Any information about past performance is not necessarily an indication as to future performance.

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For further information on any of the Portfolios included on the NZ Funds Website or to request a copy of the NZ Funds Managed Portfolio Service Product Disclosure Statement, the NZ Funds Managed Superannuation Service Product Disclosure Statement, or the NZ Funds KiwiSaver Scheme Product Disclosure Statement, you should contact NZ Funds on 0508 733 337 or by email to info@nzfunds.co.nz.

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These terms and conditions are governed by the laws of New Zealand and are subject to the non-exclusive jurisdiction of the Courts of New Zealand.



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Complaints


Client complaints

Our business philosophy is to establish and enhance long-term, positive relationships with all of our clients. We recognise though that from time to time, despite our very best efforts, clients may wish to make a complaint. It is important in such instances that clients have an efficient mechanism through which they can receive a fair consideration of their concerns.

If you have a complaint contact us:


Complaints Handling Officer
New Zealand Funds Management Limited
Private Bag 92163
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0508 733 337
info@nzfunds.co.nz

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Upon receipt of your complaint we will immediately log it into our complaints register and it will be forwarded to the appropriate staff member for consideration.

Within five working days of receipt, we will provide you with a letter of acknowledgement that your complaint has been received. We will endeavour to keep you notified and updated on the progress of our consideration.

If your complaint cannot be resolved to your satisfaction through our internal complaints process you can elect to take it up with NZ Funds' independent dispute resolutions scheme.


Financial Services Complaints Limited
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0800 347 257
info@fscl.org.nz


New Zealand Funds Management Limited is the issuer of the NZ Funds KiwiSaver Scheme, the NZ Funds Managed Portfolio Service and the NZ Funds Managed Superannuation Service. A product disclosure statement for each of the NZ Funds KiwiSaver Scheme, the NZ Funds Managed Portfolio Service, and the NZ Funds Managed Superannuation Service is available on this website or you may request a copy by contacting us.