Laying the Foundation
Financial markets continue to adjust to the reality of “higher for longer” interest rates. Over the past three months this has seen both bond and share markets adjust lower. Our funds have held cautious investment stances for a while now, and the experience of the past three months – including October – illustrate why. Whilst falling assets have not been helpful for recent performance, a cheaper asset valuation starting point is a prerequisite for strong, long-term future returns.
October returns were negative, driven by falling share and bond markets, but higher risk funds fell more as higher yields are cushioning the price falls in bonds (that lower risk funds hold more of). Illustrative of this, our bond funds were close to unchanged for the month. A lower exposure to shares helped cushion against the broader falls and a weaker NZ dollar also helped performance as we have maintained an increased exposure to foreign currencies.
With a broad fall in shares, many of our preferred holdings fell over the month. However, it was pleasing to see some notable exceptions. We have been increasing our investment in insurance broker Arthur J. Gallagher and have been rewarded with gains of 3.3% in October, building on strong stock performance over the past year. Elsewhere, strong results from Microsoft (+7.1%) and Amazon (+4.7%) helped propel their shares to gains in October.
New Zealand and Australian shares were broadly weak in October, and NZ shares have been persistently weak over the past three years. But our NZ holdings have performed much better than the broader market, for example large holding Spark rallied 3.3% against the NZ market which was down 4.8%.
A disparity in asset valuations and outlooks dictate how we are tilting our investment mix. Many company shares are now cheap, but they also face the uncertainty of a slowing global economy. Meanwhile, our corporate bond positions offer the kind of forward-looking returns that you would normally expect from shares, but with a much lower volatility and a muted impact from weaker economic growth. Furthermore, increasing divergences in economic outlooks for various economies is fertile ground for investment opportunities in currencies, interest rates and stock selection.