Market & Portfolio Update – for the month ending October 2014

Global Shares

Despite finishing the month up slightly, October was a dramatic time for global share markets. After rising strongly for much of the year, the United States S&P 500 Index was down 5% at one point during the month, before recovering to a new high. Other key markets generally experienced similar outcomes, while Chinese shares were

a bright spot rising 4% of the month overall. Some risk factors like potential concern over Ebola and investor touchiness heading into the end of the US Federal Reserve’s “Quantitative Easing” program contributed to the volatility. More generally, October’s experience reflects the occasional volatility that can occur in markets, particularly after several years of sustained gains. Despite the confirmed end of Quantitative Easing in the United States during the month, the overall stance of the world’s central banks remains very supportive. Japan extended its program of buying bonds at the end of October, while European policy looks set to expand heading into 2015 and interest rates remain low in much of the developed world to help support economic growth.

New Zealand Shares

For the first half of October, the New Zealand sharemarket was dragged lower by global markets before recovering to be up 2.5% for the month. This continues the New Zealand sharemarket’s strong performance for 2014, now up 14% for the year.

The electricity generators continued their appreciation following the re-election of a National Government; Meridian (+15%) and Mighty River Power (+10%) being the best performers of the sector. Freightways (+12%) announced an impressive first quarter result with net profit increasing by 37% compared to 2013. Xero (-27%) continued to move against the wider market after announcing two key management staff had resigned. The company has now fallen 65% from its high in March, however continues to achieve strong growth in sales.

Australian Shares

The Australian sharemarket rebounded from a disappointing September month to be up 4.4% for October. Similar to New Zealand and global markets, the Australian sharemarket began the month down 3% but recovered stronger to finish up 4.4%. The best performing sector of the Australian market was the banking sector (+6.4%), driven by profits above the expectations of the market and rebounding after poor performance during the month of September.

Interest Rates

Global bond yields declined over the month with the US 10 year bond rate falling 0.15% and finishing at 2.34%. However, during the volatile period it fell as low as 1.86%. With most central banks remaining very accommodative in policy stances whilst their economies lack signs of consistent growth, the outlook for long term interest rates heading into 2015 will focus on the forward guidance from the United States Federal Reserve around future cash rate increases.

Locally, the Reserve Bank of New Zealand kept the Official Cash Rate (OCR) at 3.5% in its October meeting, citing modest inflationary pressures since the last meeting and a weak global inflation. Governor Wheeler reiterated that a period of assessment is prudent before further policy adjustment is necessary. This will give some stability to short term interest rates until 2015.

Summary of Market Movements as at 31 October 2014

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 Summary of Market Indices as at 31 October 2014



Investment markets move in cycles, reflecting the underlying strength of the economy, political factors, industry trends and market sentiment. On any given day interest rate and inflation expectations, company profits, dividends, economic growth figures and the rise or fall of our dollar can influence share prices. Just as powerful are the effects of changes in domestic and international politics and the mood swings of investors. As history tells us, fear and greed can play a significant role in daily market movements. Time and time again unsustainable market prices, propped up by speculation, have come undone when investment fundamentals and common sense have prevailed.

In his Little Book of Common Sense Investing Jack Bogle draws on British economist Keynes to explain the long-term investment performance of the sharemarket. “The state of long-term expectation for stocks is a combination of enterprise (‘forecasting the prospective yield of assets over their whole life’) and speculation (‘forecasting the psychology of the market’).” The latter refers to the impact of changing price/earnings multiples on stock prices.

Dividends and earnings growth – the keys to market growth

Enterprise as Keynes described is derived from a company’s dividend yield and earnings growth and is one of the most fundamental drivers of long-term market growth. To calculate a share’s dividend yield you divide the annual dividend by the current share price and express it as a percentage. While long-term average dividend yields can provide an indication of expected long-term yields from the sharemarket, actual yields can change dramatically from year to year. If company profits are not growing at the same rate as the increase in their share price, then the dividend yield may fall. However, data from Bloomberg (compiled by Grosvenor Research) indicates that over the past 20 years, dividends have made up over half of the overall return on the New Zealand share market.

Beware of irrational exuberance

Irrational exuberance is a phrase coined by former Federal Reserve Board Chairman Alan Greenspan three years before the dot-com crash of March 2000. Greenspan was referring to how speculation was inflating asset values during the US technology stock market boom of the late 1990s. The dot-com era had begun with new start-ups emerging almost every day. Many of the start-ups were trading at values far beyond what their balance sheets and business plans warranted. The NASDAQ Composite Index more than tripled in value from late 1998 to March 2000, peaking at 5,048 points, only to fall 64 per cent in the following year. The NASDAQ has failed to gain its previous heights and at the time of writing is trading at less than half its March 2000 high.

Managing the risks

You can never be certain of the best time to invest. What you can do is be aware of the risks so you are prepared for volatile times in the markets. If history is anything to go by, learning not to panic during market downturns and keeping a long-term perspective are two of the most valuable investment lessons you can learn. Although risk is unavoidable when investing, one of the greatest risks can be not investing at all. Rising prices due to inflation can erode the real value, or purchasing power of your money.

Tips for volatile times and beyond - know what type of investor you are

Understanding your attitude to risk and return is arguably the most important insight you can gain when investing. You might be attracted to the prospect of great performance, but how much risk are you willing to take to achieve it? Are you likely to get caught up in market hype when markets are performing well, only to pull out when things turn sour? Sharemarket investors can expect a negative return once in every five years. Share investors need to look beyond annual performance data and focus on the long-term (five years plus). If you have trouble doing this perhaps you need to check that your investment strategy suits your risk profile. A long-term investment strategy should be based on your objectives, time horizon, risk tolerance and personal financial circumstances, and not determined by short-term market performance.

Keep your balance

Spreading your money across a range of investments such as shares, property, bonds and cash, is one of the best ways to reduce your exposure to market risk. This way you are not relying on the returns of a single class of investment. Finding the right balance is a matter of weighing your investment objectives, risk/return profile and investment timeframe.

“My advice to investors is to ignore the short-term noise of the emotions reflected in our financial markets and focus on the productive long-term economics of our corporate businesses.”

John C. Bogle on investing and emotions in his Little Book of Common Sense Investing.

This article has been produced in association with Vanguard Investments Australia. With about USD$3 trillion in global assets under management, Vanguard funds are used within the core “index” component of Grosvenor portfolios, to cost-effectively capture the broad movement of global markets. In respect of Vanguard investment products, the following general advice warning applies:


Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider yours and your clients' circumstances and our Product Disclosure Statements (PDSs) or Prospectus before making any investment decision. You can access our PDSs or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2014 Vanguard Investments Australia Ltd. All rights reserved.


Global Opportunities Portfolio

With October being a relatively volatile month for investment markets, this benefitted returns on the portfolio’s holding in the Volatility “VIX” ETF which at one point rose over 30% during the month. As volatility began showing signs of subsiding we took the opportunity to sell the ETF and lock in the value of this holding, having provided a valuable offset to weaker market returns.

Australian Shares Portfolio

During October we added a number of new holdings to broaden the portfolio’s allocation across industry sectors. The key changes were adding several businesses in the industrial and infrastructure sector, while increasing the portfolio’s allocation to healthcare through pathology provider Sonic Healthcare. Infrastructure firms Sydney Airport and Transurban (toll roads) have a stable base to underlying revenues, while the addition of Aurizon and Brambles give an allocation to the logistics sector that underpins activity in the Australian economy. The changes were funded by reducing the allocation to the more sensitive resource companies, selling explosives provider Orica as well as moderating the holdings in the major banks heading into the likely requirement for them to hold higher levels of capital, potentially affecting dividend yields.

New Zealand Shares Portfolio

During the month of October we made a number of changes to the New Zealand Shares Portfolio. We added two new holdings by the way of Ebos Group and Genesis Energy. Ebos had fallen to a price which is attractive and increases the portfolio’s exposure to healthcare. Now that the political risk of the implementation of a wholesale single electricity buyer has been removed, Genesis now offers an attractive yield. We also reduced the portfolio’s weight in Sky Television from 5% to 4%, given the increased competition of the industry. Another significant change was increasing the weights of Ryman Healthcare and Summerset Group, following recent pull backs in each of their share prices.

New Zealand Fixed Interest Portfolio

With the volatility in interest rates during the period, we lengthened the average maturity in the portfolio from 3.57 years to 3.88 years, which helped increase the running yield of the portfolio in this low interest rate environment. This was achieved by reducing our position to the shorter 2015 Government bond by 3.5%, and adding a 3.5% allocation to the 2027 Government bond.

Corporate Bond Portfolio

To replace the Vector Ltd October 2014 bonds (BBB rated) which matured during the period, we have added a 3% allocation to the new issue of Fonterra October 2017 bonds (A rated). With the continued contraction in credit spreads, it was appropriate to increase our average credit quality with a slightly reduced holding in BBB rated credit.

Article sourced from Grosvenor Financial Services Group Ltd

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