When the country collectively entered lockdown under Covid-19 Level 4, Trust Management immediately activated its business continuity plans which seamlessly transitioned to a remote working environment. We are pleased to report there was no interruption in service to clients who rely on our day-to-day financial management.
With the shift to Covid-19 Level 2, Trust Management is pleased to re-open its offices to staff on Monday 18th May, however we will operate under special conditions.
We will work in two teams with one team in the office and the other working remotely on a weekly rotation. As such, it may be that when you make contact with one of our staff, they may be working remotely.
In order to maintain appropriate social distancing and to keep our staff safe, Trust Management will not host physical client meetings during Covid-19 Level 2 or accept visitors to the office.
You will, however, still be able to make contact with all staff by phone or email and we are able to meet you via Zoom or at an appropriate location outside of the office.
If you do meet with our staff in person, please be aware that our staff will be maintaining contact tracing details and a record will be keep of all persons our staff have contact with.
Although the information collected will be private to staff members, you should be aware it may need to be provided to the Ministry of Health in the event that a staff member, or someone which they have had contact with, is diagnosed with Covid-19.
Since the end of March, most financial markets have performed well. Share markets have continued to bounce back following the February/March Covid-19 related selling, while defensive assets such as bonds have also performed well as interest rates around the world and in New Zealand have continued to fall. The US share market (S&P 500 Index), for example, had its strongest monthly return since 1987, underscoring the importance of staying the course even in the midst of significant uncertainty and volatility.
The Trust Management Balanced Fund comprising bonds, shares and property, gained 3.9% in April 2020 (on a gross of fees basis), recovering a significant portion of the negative returns from the first quarter of the year. On a rolling 12 month basis, the Fund is up 5.3% to the end of April 2020.*
Supporting demand for shares has been an improvement in sentiment by investors. This occurred alongside data suggested a slowing in the rate of new infections in several hot spots, along with progress towards a vaccine (human trials underway) and the advancement of treatment options for the sick. A movement towards the gradual reopening of economies along with the announcement of additional stimulus measures also supported appetite for shares. Bonds meanwhile have continued to perform well mainly on the back of central bank action with policy makers vowing to keep interest rates low for an extended period of time.
At this stage it remains too early to tell whether the disruptive period for markets is over, particularly as evidence emerges in the data illustrating just how damaging the lockdowns have been on economies around the world. Accordingly, we continue to expect volatility to persist given the uncertain near-term outlook, creating an unsettling period for investors. We continue to recommend a well-balanced, high-quality portfolio, with a focus on sustainable income.
*The Trust Management PIE Funds ('PIE') were established on 1 April 2020, with the transfer of all assets and units from the Trust Investment Group Investment Funds ('GIF'), which closed on 31 March 2020. Returns represent a composite of the PIE Funds and the GIF Funds.
Portfolio Asset Valuations
With the change to a Portfolio Investment Entity (PIE) Fund from 1 April 2020, the Trust Management Property Fund property portfolio was revalued on 31 March 2020. By 31 March New Zealand had moved to Covid-19 Alert Level 4 so the updated valuations reflected the Covid-19 situation at the time. The Fund value as at 31 March was $226m.
As expected, the valuation of the portfolio dropped by 2.89% on a “like for like” basis over the first quarter of 2020. The Registered Valuers looked to modify their previous valuations to reflect the impact of Covid-19. It is noted that the valuations contain a “Material Valuation Uncertainty” provision which highlighted the challenge of undertaking valuations at this time. All major valuation firms are adopting this provision within their assessments to acknowledge the reduced certainty due to the future impact that Covid-19 might have on real estate markets.
When looking at the 12 month capital return the property portfolio, on a similar “like for like” basis, provided a positive capital increase of 1.92%.
Trust Management, as Manager of the Fund was pleased with the limited capital impact to 31 March. The conservative nature of the portfolio underpinned the performance. It is highlighted that Weighted Average Lease Term of the portfolio is over 9 years. Also the largest property sector exposure of the portfolio is to industrial properties – which continues to be a strong performing property sector.
Valuations will continue to be undertaken on a rotation basis over the year.
COVID-19 Rental Impact
As investors will appreciate, the country lockdown under Covid-19 Alert Levels has been unprecedented. While it has impacted on everyone, the impact on commercial tenants in the Property Fund has varied. The largest tenant in the Trust Management Property Fund portfolio is Countdown supermarkets (General Distributors Ltd), which contributes 26% of the portfolio income on a direct and indirect basis. Supermarkets being an essential service were very busy during the lockdown period so Countdown continued to pay full rental.
The Fund has a good level of diversification by property sector exposure as well as tenant and location diversification. The Weighted Average Lease Term of over 9 years provides good insulation against Covid19 as new leasing will be difficult given that the economic impact of the lockdown may be felt for some time to come.
The Property Management team has been working with tenants regarding rental relief claims. For both April and May over 70% of rental has been collected. Some tenants have paid rental as a gesture of goodwill while requesting rental relief. We continue to be in dialogue with a number of tenants. As an unpreceded event there are different elements to consider.
As a responsible landlord we have sought to approach the situation with empathy and understanding.
For investors, the first quarter distributions were made in early April. Covid-19 will impact on the distributions for investors in the second quarter (and maybe longer) and we will look to provide some guidance in June on the level of rental relief that has been granted and the impact that this will have on distributions.
Please contact Patrick O'Reilly, 09 550 4056, if have questions or would like to talk further about this issue.
The Balanced Fund invests in the other five sector funds. It maintains a moderate risk profile with a well-diversified target asset allocation of 35% Fixed Interest, 35% Shares and 30% Property. The Fund has a strong focus on the distribution of income with moderate levels of investment risk.
The Fund returned -5.5% for the March 2020 quarter, with weak returns from shares the primary reason for negative performance. The negative returns from equities was offset by positive performance from bonds, while property posted a small decline. The return for the twelve month period was +2.9%, while on a rolling five year basis, the Fund gained a strong +7.7% per annum.
The three months to March 2020 saw share markets around the world post steep declines as fears over the Covid-19 coronavirus outbreak took centre stage. All of the major share markets entered bear market territory before recovering late in the quarter. Central banks meanwhile cut official interest rates aggressively and engaged in other forms of non-conventional monetary policy, helping to support returns from bonds over the period. Returns from property were negatively impacted by uncertainty over valuations for commercial real estate in the current market environment.
We expect volatility across financial markets to remain a key feature as the uncertainty continues over the outlook for economies and companies. Longer term, returns from growth assets should be supported by the combination of low inflation, accommodative monetary policies, and a recovery in global growth expectations.
albeit gradually. We anticipate rather more modest returns across all asset classes.
To 31 March 2020
Inception Date 01/06/2006
While the commercial property sector has been significantly impacted by Covid-19, the defensive characteristics of the Property Fund has been highlighted, with the Fund overweight in the industrial sector which has a more limited Covid-19 impact than the office and speciality retail sectors. Further, the Property Fund’s largest tenant exposure is to supermarkets, comprising 23% of portfolio income with another 3% on an indirect basis.
The portfolio is well diversified with a high occupancy level, a portfolio of quality assets, with high tenant covenants and a long weighted average lease term (WALT). As at 31 March 2020, the portfolio was revalued, with the registered valuers highlighting the fluid nature of the Covid19 situation, noting that the assessments have been undertaken in an environment of “material valuation uncertainty”. The full impact on rental collection will not likely to be clear for a number of months.
The Fund has a strong emphasis on generating regular income for investors with quarterly distributions. The performance of the Fund is compared against the returns of the NZX 90 Day Bank Bill Index +2.5%.
To 31 March 2020
Inception Date 01/03/2001
SUSTAINABLE AUSTRALASIAN SHARE FUND
To 31 March 2020
The NZ equity market (as measured by the S&P/NZX 50 Portfolio Index) followed offshore markets lower for the quarter, falling 20%, but outperforming the Australian share market which fell 24% in local currency terms.
A key feature of the quarter was the dispersion of returns across listed companies. For the three months to March, only 3 companies generated positive share price returns, with F&P Healthcare (+37%) and the a2 Milk Company (+14%) the top performers. Companies in the tourism, retail and more cyclical sectors saw a sharp decline in share prices, as one after another either cut earnings forecasts or abandoned earnings guidance. Air New Zealand and Tourism Holdings were among the worst performers, falling 72% and 69% respectively for the quarter on earnings uncertainty.
The Fund performed in line with its benchmark for the quarter, but outperformed for the year and longer periods. On a rolling five year basis, the Fund returned +11.7% per annum (+9.4% per annum for the benchmark).
Underweight positions in underperformers Sky City (nil holding), Kiwi Property, Fletcher Building, Air New Zealand and Metlifecare assisted returns for the portfolio relative to the benchmark, while overweight investments in underperformers Kathmandu, Summerset, Vista Group, Serko and Ryman detracted from relative returns.
Inception Date 01/12/2002
INTERNATIONAL SHARE FUND
All major share markets around the world fell sharply as fears over the Covid-19 virus caused steep declines in shares which started late February and continued into mid-March. All the major indices slipped into bear market territory, marking a decline from a previous peak of greater than 20%, abruptly ending the 12 year bull market for shares.
The Fund returned -14.6% for the March 2020 quarter, to give a return of -2.0% for the 12 month period. In local currency terms, the US share market (S&P 500 Index) fell 20% and European shares plunged more than 26%, with Spain closing down 29%. Technology and healthcare shares were among the strongest performing.
The flight to safety saw investors favouring hard currencies with the NZ dollar falling substantially against the major currencies, down 12% against the USD. This helped to offset the poor performance from international markets.
Stocks rebounded from their lows later in the quarter as investors appeared encouraged by further aggressive monetary policy actions and the passing of unprecedented fiscal stimulus measures. Company earnings will however be severely impacted by the slowdown in global growth which may weigh further on investor sentiment in the months ahead.
Looking ahead, share market returns will be supported by the combination of massive fiscal stimulus, easy monetary conditions, low inflation and low interest rates. While valuations for company shares have adjusted downwards on share price movements, it is too early to compute the likely impact the containment efforts will have on company profitability. We expect volatility across financial markets to continue.
The Fund invests in an indexed product that excludes companies involved in the manufacture of tobacco, controversial weapons or nuclear weapons. Relative to the MSCI World ex-Australia Index, the Fund also targets a 20% improvement in the ESG score as well as a 50% reduction in current and potential carbon emissions. The Fund’s foreign exchange exposures are 50% hedged to NZ dollars
To 31 March 2020
Inception Date 01/12/2005
NZ BOND FUND
The New Zealand fixed interest sector as measured by the S&P/ NZX NZ Government Bond Index delivered a solid return of +3.5% for the quarter. Corporate bonds underperformed government bonds as credit spreads widened with the S&P/ NZX Investment Grade Corporate Bond Index gaining 1.4% for the quarter.
January and February had delivered strong returns for the sector as long dated bond rates initially fell amid signs of a more cautious sentiment arising from the Covid-19 outbreak. March however saw significant volatility in long dated bond yields with the NZ 10-year government yield starting the month at 1.04%, before rising to 1.74% mid-month, and then settling back at 1.04% at where it started. The spike in New Zealand Government bond rates saw the RBNZ intervene in the market, announcing market liquidity measures, and a massive Quantitative Easing (asset purchasing) program. The RBNZ intends on purchasing around $30bn in NZ Government Bonds over the coming year. These activities helped settle the bond market towards the end of the quarter.
The Fund underperformed the S&P/ NZX Government Bond benchmark for the quarter and year, with the defensive duration positioning of the fund detracting from relative performance as government bond yields fell. The Fund continues to adopt a relatively defensive strategy, holding higher grade securities than the market as a whole and having a shorter maturity profile. With bond yields now at record low levels, there is a risk of capital loss over the medium term as bond markets eventually transition to a higher growth environment.
To 31 March 2020
Inception Date 01/09/2005
INTERNATIONAL BOND FUND
Global bond markets performed solidly for the March quarter amid a flight to safety with investors showing a preference for government bonds. Bonds started the year well, rallying amid signs of weakening slower global growth and more cautious sentiment arising from the Covid-19 outbreak. As many countries around the world went into lockdown in March, demand for bonds increased with investors preferring the safety of government issued debt securities over company shares.
Central bank action was significant. The US Federal Reserve cut interest rates to zero, and announced plans to buy at least US$700 billion in government and mortgage-related bonds as part of a wide-ranging emergency action to protect the economy from the impact of the coronavirus outbreak. It later revised its own plans, announcing it was setting no limit on its purchases of government bonds. Central banks elsewhere also followed suit in announcing massive stimulus measures.
High yield bonds were the major casualty during the quarter as investors sought higher quality bonds with stronger credit characteristics. Bonds in the below investment-grade segment were hampered by the sell-off in equity markets.
The Fund returned +3.9% for the quarter to give a strong return of +8.1% for the 12 month period. We expect short and long term yields are expected to remain anchored at low levels for some time to come given the high degree of monetary policy support.
The Fund invests in an index fund that invests only in sovereign securities. This product tracks the FTSE World ex-Australia Government Bond Index hedged to Australian dollars. A further hedge is applied to hedge the Fund’s Australian dollar exposure to NZ dollars. Returns tend to lag the benchmark slightly as the cost of hedging is excluded from the benchmark return calculation.
To 31 March 2020
Inception Date 01/09/2005
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