Performance Detail
September was dominated by rising bond yields. Brent crude traded above US$100 a barrel at times on US-Iran tensions, and with inflation proving sticky, central banks moved to tighten. The US Federal Reserve raised rates for the first time since 2023, and the ECB, Bank of Japan and Reserve Bank of Australia all followed with increases of their own. The US 10-year Treasury yield briefly topped 5.3%, its highest level since 2002. Global equities fell modestly, though the headline masked very weak breadth. AI-related technology names advanced while nearly every other sector declined, and growth outperformed value by a wide margin.
Closer to home, the Reserve Bank of New Zealand lifted the OCR by 25 basis points to 2.75%, its second consecutive increase. The New Zealand share market fell, with the move in bond yields weighing on interest rate sensitive infrastructure, real estate and telecommunications companies, while election policy uncertainty and slow domestic activity dragged on cyclical growth shares.
Fisher & Paykel Healthcare was the notable exception, its 3.6% gain adding 0.7% to the index return, and a recovery in the gentailers alongside earnings upgrades from Fonterra and Hallenstein Glasson provided some support. The Australian market also fell, weighed down by RBA rate increases and earnings downgrades.
The New Zealand dollar weakened, and for New Zealand investors this accounted for all of the gain in international equities. In hedged terms global shares fell, and it was the unhedged half of the 50% hedged benchmark that lifted the asset class into positive territory. International equities therefore finished ahead of the domestic market, but reflecting currency effect rather than stronger global share markets. Our hedge ratio now sits above the benchmark, having been active in adding to it as the NZD fell against the USD, which gave back some of that currency gain in relative terms. That said, our overweight to international equities as a whole meant allocation within the asset class still finished slightly positive.
Manager results within international equities were mixed and largely netted out. Acadian, our core systematic manager, was the standout, finishing well ahead of its benchmark and making the largest contribution of any active manager. T. Rowe Price also finished clearly ahead, its growth orientation well suited to a month in which growth led and AI-related names outperformed. Epoch was among the larger individual underperformers. A quality approach usually finds it hard to keep up when gains are concentrated in a narrow group of technology leaders, and breadth in September was unusually weak. Antipodes also finished behind, with its value tilt out of step as value lagged growth. In our view, the narrowness of the AI rally explains most of the spread between our managers this month, with those leaning away from that group struggling to keep pace.
Hunter Global Private Equity was the largest underperformer in standalone terms. It delivered a positive return, although as this is reported on a one-month lagged basis, comparing to the most recent month’s return is a bit of a red herring. Over 12-months the return compares favourably to global equities, outperforming by over 4.5% on a gross basis. As a small position, its effect on the Fund this month was modest. The passive global equity sleeves finished modestly ahead of their benchmarks.
Outlook and Strategy
Globally, the outlook remains balanced between strong earnings growth and ongoing pressure from higher bond yields. The AI investment cycle should continue to be an important source of economic activity and earnings growth, although the benefits are unlikely to be shared evenly across sectors. Companies supplying the infrastructure required for AI remain well positioned while investors are increasingly assessing which businesses can use the technology to improve productivity and create sustainable earnings growth. Higher starting bond yields have also improved long-term return prospects for fixed income, although inflation, government borrowing requirements and refinancing needs are likely to create a wider range of outcomes across markets and issuers.
The New Zealand outlook remains mixed but is improving gradually. Economic activity has proven more resilient than many expected, led by exports and primary industries, while company earnings have generally held up better than feared. However, higher interest rates, a soft housing market and cautious consumers continue to weigh on domestic demand. With local share market valuations broadly in line with long-run averages, future returns are likely to depend increasingly on earnings growth rather than valuation expansion. Encouragingly, earnings expectations have begun to stabilise, although investors are likely to remain selective until there is greater confidence that growth is becoming more broad-based.
Australia faces a more challenging backdrop. While consensus earnings growth expectations remain relatively healthy, expectations have been trending lower as weaker consumer spending, softer housing activity and the effects of restrictive monetary policy become more evident. Company management teams are likely to remain cautious, with margin management and cost control continuing to play an important role in supporting profits. We expect greater divergence in earnings outcomes across the market, creating opportunities for selective stock picking, although broad market returns may remain more sensitive to interest rates and economic growth concerns than has been the case globally.
For the equity growth funds, our approach remains to be patient, position for a range of scenarios and to be selective, focusing on growth. We continue to focus on companies delivering earnings per share growth, particularly where that earnings growth has the potential to be higher and last for longer than consensus expectations allow for. We continue to see the secular tailwinds of digitisation, de-carbonisation, deglobalisation, and demographic changes as supporting company earnings. In that context, the portfolio retains an overweight position in healthcare, where we see attractive opportunities across New Zealand retirement villages and Australian pharmaceutical and diagnostic businesses with long-duration growth characteristics. We also remain overweight financials, reflecting exposure to companies such as Infratil, AMP and Macquarie that may benefit from data centre investment, alternative energy development and improved transaction activity. Within consumer staples, we continue to see upside in businesses such as a2 Milk and Scales, where company-specific drivers may support earnings growth. Offsetting these positions, the portfolio remains underweight utilities, communication services and real estate. In each case, we see a less compelling balance between valuations and earnings prospects, with gentailers facing higher earnings uncertainty, telecommunications operating in a competitive environment, and property companies generally offering more modest growth outlooks.
Australasian equities detracted at the Fund level. The underweight was a small positive as the market fell, but negative selection outweighed it. The Harbour Australasian Equity Fund finished well behind its benchmark and was the main source of that shortfall. Its overweight positions in Summerset, Xero and Ryman Healthcare all detracted, with the two retirement village operators exposed to the rise in interest rates and Xero caught up in the weakness in growth shares.
Overweight positions in AMP and CSL, and an underweight in Fletcher Building, recovered some of the ground. The passive New Zealand sleeve also finished behind, while the Harbour Australasian Equity Income Fund was close to its benchmark. Our domestic private equity holding, the Hunter Domestic Focus PE Fund, edged ahead of a falling market, although in a small position.
Fixed interest returns were negative as yields rose, and international bonds detracted. Our overweight to the asset class cost us as global bonds fell, and selection was also negative, almost entirely due to the Hunter Global Fixed Interest Fund finishing behind its benchmark. The fund’s higher duration than benchmark dragged on returns in a rising yield environment. Our passive global sovereign bond exposure tracked the benchmark closely. New Zealand fixed interest was close to neutral, with the Harbour NZ Core Fixed Interest Fund finishing marginally ahead of its benchmark.
