milford investment funds monthly review december 2020€¦ · ryman and a2 milk), and additions to...

Market and Economic ReviewNovember was a remarkable month for financial markets. The passing of two significant catalysts – the US election and evidence of effective COVID-19 vaccines, answered key questions for investors and set the stage for large share market rallies. Accordingly, Fund returns in November are broadly strong.

The US election is largely resolved with a Biden victory, coupled with a likely Republican retention of the Senate (pending two run-off races in Georgia on the 5th Jan). This outcome should deliver reasonable fiscal support policies (e.g. wage subsidies) but importantly, less likelihood of market unfriendly tax policies and increased business regulation.

The multiple phase III vaccine trial results released in the month indicate success in finding an effective COVID-19 vaccine. This encouraging news allows investors to focus on a timeline for the global economy to return to normal, breaking the link between virus cases and economic activity.

The reduction in uncertainty has emboldened investors to buy shares, sending global sharemarkets up over 12% in the month (MSCI world) – the largest monthly performance in over 40 years. Local sharemarkets also fared well, particularly Australia – up 10.2% and NZ, up 5.7%. Our funds have been fully invested (holding minimal cash balances), helping capture these large upside moves in the month.

Contemplating a post-COVID world has seen investors consider what type of companies might perform well during the economic recovery. The funds have been adding to ‘reopening’ stocks for a while and stocks like Kering (global luxury brands company), Safran and Transdigm (aeroplane parts manufacturers) and the Australian banks (particularly NAB) all performed well for our funds last month.

Looking ahead, a vaccine enabled recovery is a story for the second half of 2021. Virus impacted economies such as Europe and the US should experience a significant activity boom, driven by pent up demand. However, the short-term picture is less rosy. Rising virus cases have curtailed economic growth in Europe and the US recovery is also at risk. The vaccine allows us to look through these issues, but we look for further fiscal support as well as progress on a global mass vaccination plan to further support investor confidence.

Milford Investment FundsMonthly Review December 2020

Milford Asset ManagementLevel 28, 48 Shortland Street, Auckland, 1010Phone: 0800 662 345Email: [email protected]

http://www.milfordasset.com

Milford Investment Funds Monthly Review as at 30 November 2020

Actual investment mix 1

Effective Cash# 5.93%

New Zealand FixedInterest 23.88%International FixedInterest 50.62%New Zealand Equities2.85%

Australian Equities4.83%International Equities7.04%Listed Property 3.20%

Other* 1.65%

# The actual cash held by the Fund is 4.53%. EffectiveCash reported above is adjusted to reflect the Fund'snotional positions (e.g. derivatives used to increaseor reduce market exposure).

Conservative FundPortfolio Manager: Paul Morris

The Fund returned 1.4% in November. Positive vaccine news and a market favourable US election outcome supported investor risk appetite in November. This benefitted the Fund's increased share exposure, with notable gains from global and Australian shares, with NZ shares lagging somewhat.

Near term offshore economies need to navigate new lockdowns but looking medium term a likely vaccine deployment, combined with fiscal and monetary support, gave us confidence to increase share exposure. The improved outlook was a headwind for government bonds as markets contemplate an eventual, albeit distant, normalisation of monetary policy.

The Fund's global bonds did however contribute a strong return as the corporate bond focus significantly outperformed government bonds. Australian corporate bonds also delivered a reasonable return but NZ corporate and government bond prices generally fell as expectations for a negative Official Cash Rate receded.

Looking forward, the Fund's share exposure complemented by its corporate bond exposure should support moderate returns but given prevailing valuations we would reiterate these may be lower than in previous years. Valuations in corporate bonds are arguably fair but we still see some attractive opportunities, especially in some lower-rated and subordinated bonds. Valuations in parts of the equity market appear stretched but there remain myriad sectors (e.g. some income shares) where we believe they remain attractive and likely to benefit from the vaccine.

Diversified Income FundPortfolio Manager: David Lewis

The Fund rose by 3.3% in November and is up by 3.2% in the past year. Returns were very strong in share markets given positive vaccine news. Corporate bonds saw moderate gains in the US and Europe (c1-2%), and were close to flat in Australasia.

Within the share portfolio, we saw very strong gains from a number of companies in the property and travel sectors that stand to directly benefit from an eventual vaccine rollout. These included Australian property landlord and developer Mirvac (+22.3%), Sydney Airport (+23.1%), Getlink (owner of the Eurotunnel; +20.9%), and Atlas Arteria (owner of toll roads mainly in France; +14.9%). On the weaker side, our two holdings in gold miners fell (by 10.3%and 16.5%) as investors moved away from perceived safer areas of the market. Together they form a modest 0.5% of the Fund.

In fixed income, we saw strong gains (3-6%) from European bank hybrids (similar to preference shares), and corporate high yield in the US. Portfolio activity this month included several changes in our NZ share portfolio (reducing Meridian and Z Energy, while adding Ryman and a2 Milk), and additions to Telstra, Santos, and European bank hybrids. We remain active in new issues in the bond market, with new purchases this month including Chorus and National Australia Bank.

Looking into 2021 the economic growth outlook globally is promising given strong policy support and the expected vaccines. This suggests a reasonably positive outlook for returns next year, especially in shares and consistent with the 42.1% exposure to shares in the Fund currently. The biggest risk next year, which we continue to monitor closely, is an unexpected jump in interest rates, albeit we currently see this as a low probability.


New Zealand FixedInterest 9.19%International FixedInterest 41.76%New Zealand Equities10.39%

Australian Equities11.96%International Equities8.40%Listed Property11.30%

Other* 1.74%


*Other includes currency derivatives used to manage foreign exchange risk.1The actual investment mix incorporates the notional exposure value of equity derivatives and credit default swaps, where applicable.



Effective Cash#

10.98%New Zealand FixedInterest 4.58%International FixedInterest 22.76%New Zealand

Equities† 13.95%


Other* 1.51%


Balanced FundPortfolio Manager: Mark Riggall

The Fund returned 4.2% in November, bringing one year returns to 8.7%. Events in November removed two key issues that had kept us from investing more aggressively. The resolution of the US election and news of an effective COVID-19 vaccine now clears the path to think about how economies and profits might fare going into next year.

We added to investments over the course of the month to capture this upside, helping deliver the strong positive returns this month. A vaccine sets the stage for the global economy to return to normal sometime next year. The outlook for retailers, airlines and tourism stocks just got a lot brighter. We had considered this outcome ahead of the vaccine news and began investing in 'reopening' beneficiaries such as Spanish airport operator Aena (up 18% in November). Post the vaccine news, we continue to rotate the Fund to geographies and companies that will benefit.

With a brighter profit outlook, the Fund has been increasing exposure to shares particularly in Australia, over bonds and cash. Although the Australian market has been a laggard this year, we like exposure to cyclical companies such as banks and retail REIT's and there are plenty of high-quality stocks of this type to choose from in that market. With high valuations and already low interest rates, the longer-term outlook for shares in general is lacklustre. However, we think careful selection of companies and markets will help deliver reasonable returns going forward.

Active Growth FundPortfolio Manager: Jonathan Windust

The Fund rose 3.9% in November as share markets performed strongly in response to the Biden presidential win and very positive news around potential vaccines. This news significantly reduced uncertainty over the outlook for economies and company earnings.

Key positive global companies included those that had been hit by the virus including Virgin Money (+35.8%), LLoyds (+27.1%) and JP Morgan (+20.2%) and Spanish Airport operator AENA (+18.2%). Banks benefited from solid earnings results, lower potential bad debts and the possibility of restarting dividends. In NZ, Fletcher Building (+36.6%) was a key performer with a strong earnings upgrade due to a significant improvement in margins as a result of better activity and cost reductions. During the month, we increased investment in companies that will benefit from an economic recovery including Australian miner BHP. We believe BHP is attractively valued and will continue to benefit from strong demand and high prices.

Share markets remain supported by very strong stimulus measures from central banks and governments. Whilst COVID-19 cases remain high, the vaccine news has allowed markets to look past any short-term economic weakness. The key headwind for shares is high valuations although relative to low rates these look more attractive. Given reduced uncertainty and strong stimulus we increased our weight towards shares and reduced cash. The strategy of the Fund is to remain active to isolate those companies which we believe offer attractive risk adjusted returns.

Please note this Fund is closed to new investors.


New Zealand FixedInterest 0.82%International FixedInterest 11.19%New Zealand

Equities‡ 24.05%


Other* 1.73%






New Zealand Equities10.96%Australian Equities69.51%

International Equities1.00%Listed Property10.87%

Other* 2.44%


Australian Absolute Growth FundPortfolio Manager: William Curtayne & Wayne Gentle

The Fund had a very strong month as positive vaccine news saw share markets rise sharply. The Fund’s 4.9% return in November brings the calendar year return to 7.3%.

While our defensive investments such as gold miners and Woolworths had declines over the month, we made large gains in our cyclical and value investments which included the banks, Sydney Airport, Sealink Travel and Bluescope.

The positive vaccine news has large implications for our economic and market expectations over the coming few years which has resulted in portfolio changes over the month. Firstly, we materially reduced our gold miners as the improved economic certainty means a large gold hedge is not required. We have retained a smaller position as gold may do well again if inflation concerns flare up during the recovery. We continued to pick up more cyclical and value investments as we see more upside from these companies despite strong gains this month. These include Virgin Money UK, insurer IAG, toll road business Atlas Alteria and miners BHP, RIO and Fortescue Metals. These companies are priced at an attractive discount to our valuation and we expect this discount to close as the economic recovery progresses.

This results in a more fully invested portfolio weighted toward beneficiaries of the economic recovery and a cash holding of 5.2%. We are comfortable with this given the improved risk outlook and investment opportunities available following the vaccine developments.

Trans-Tasman Bond FundPortfolio Manager: Paul Morris

Rising Australasian government bond yields (prices lower) were a headwind in the month as the Fund posted a return of –0.2% in November, broadly in line with its benchmark. NZ government bonds underperformed Australia as market expectations for a negative Official Cash Rate diminished post the Reserve Bank of New Zealand’s (RBNZ) Monetary Policy Statement. This was irrespective of the announcement of the new Funding for Lending programme, designed to lower retail bank rates.

The increase in Australian government bond yield was less due to further loosening of monetary policy from the Reserve Bank of Australia, which cut their official cash rate and increased quantitative easing. Positively, the Fund is predominantly exposed to Australasian corporate bonds, rather than government bonds, which outperformed on promising announcements from COVID-19 vaccine trials and a more benign US election outcome. We remain constructive on further outperformance of corporate bonds and participated in new issuance from Chorus, Bendigo & Adelaide Bank, as well as subordinated issuance from National Australia Bank and Ampol (Australian fuel & service stations).

Looking forward, monetary policy will likely remain accommodative but incremental support will depend on the path of the economy. We are less confident of material falls in interest rates near term and instead believe interest rates will remain range bound, and support more moderate returns.


New Zealand FixedInterest 47.18%International FixedInterest 45.94%

Other* 0.33%






New Zealand FixedInterest 1.34%International FixedInterest 91.41%

Other* 4.81%


Global Corporate Bond FundPortfolio Manager: Paul Morris

The Fund posted a return of 1.7% in November, broadly in line with its benchmark. While government bond yields were higher (prices lower), the Fund benefitted from its exposure to corporate bonds. Corporate bonds outperformed governments as promising announcements from COVID-19 vaccine trials and a more benign outcome from the US election supported market sentiment.

The Fund’s performance was close to its benchmark despite a small underweight to high yield (HY) bonds which performed particularly strongly on the improving outlook. The Fund took profit on some of its low-risk investment grade (IG) bonds where we saw less upside, however, it retains an overweight exposure to IG. Amongst others, the Fund participated in new IG issuance from Verizon (US telco). We continue to see value in the subordinated bonds of IG corporates and better capitalised banks and also participated in subordinated issuance from Natwest (UK bank) and Ampol (Australian fuel & service stations), as well as BP plc in the secondary market.

Looking forward, while valuations cannot be considered cheap; monetary and fiscal policy support, combined with lower levels of issuance, should help deliver moderate medium-term corporate bond returns.

Cash FundPortfolio Manager: Paul Morris

November’s Reserve Bank of New Zealand (RBNZ) Monetary Policy Statement (MPS) saw the much-anticipated unveiling of its Funding for Lending Programme (FLP). The objective of the FLP is to lower retail bank lending rates through reducing the need for banks to retain more expensive forms of funding, namely term deposits and wholesale market funding. The expectation of the FLP had already seen many banks reduce their term deposit rates but we expect this trend to continue.

The other note from the MPS was a downplaying of the probability the RBNZ will cut the Official Cash Rate (OCR) into negative territory next year. This combined with better than expected local economic outcomes (including a surging housing market) saw us change our base case for the OCR next year to unchanged. If realised that should protect the Fund’s absolute return, however, we would still expect the impact of the FLP and large cash balances in the banking system to mean a lot of money will be chasing short-dated assets. This is likely to further diminish the excess return over the OCR the Fund can generate medium term.

We would however reiterate that these developments have not changed the portfolio management of the Fund which remains focussed on maintaining a low-risk strategy, built on a diversified portfolio of cash, short-dated debt securities and term deposits, to protect capital.

Effective Cash#

19.29%New Zealand FixedInterest 80.71%

Other* 0%

# The actual cash held by the Fund is 19.29%.Effective Cash reported above is adjusted to reflectthe Fund's notional positions (e.g. derivatives usedto increase or reduce market exposure).





International Equities94.58%

Listed Property 2.19%

Other* 0.76%


Global Equity FundPortfolio Manager: Felix Fok

The Fund rose 5.1% in November but lagged the index, as more economically sensitive companies like banks and energy companies rallied hard.

Key positive contributors included Indian private bank HDFC Bank (+20.1%), backing up the strong gains in October. The economic backdrop in India has improved materially with some economists now expecting double digit economic growth in 2021. Given its strong management, robust balance sheet, and technology leadership, we believe HDFC is well positioned to continue taking market share and sustaining growth. French aerospace company Safran (+35.1%) was another stand out, as positive news on a COVID-19 vaccine increases the likelihood of a gradual return to leisure and business travel sometime in 2021. US diversified industrial conglomerate Ametek posted strong gains (+20.7%) and continues to offer exposure to the expected ongoing industrial recovery.

Detractors from performance included Alibaba (-13.6%), giving back recent gains on disappointment over the suspension of the Ant Group IPO and the potential for new regulations for platform companies like Alibaba. The rotation away from quality businesses into more cyclical companies led to weakness in healthcare companies Danaher (-2.1%) and Thermo Fisher Scientific (-1.7%). Despite the short-term weakness, the long-term outlook for both companies remains favourable. We are more optimistic on the outlook given the positive vaccine developments, which provide light at the end of the tunnel.

Trans-Tasman Equity FundPortfolio Manager: Sam Trethewey

November was a very strong month for the Fund and the local markets given the US election outcome and positive COVID-19 vaccine announcements. The Fund returned 7.5% in November compared to a 5.7% return the NZX50 index and 10.2% return for the ASX200 index. The ASX200 outperformed NZX50 due to its composition. The ASX200 is far more exposed to cyclical or value stocks which were sought by investors following the vaccine announcements.

Key contributors included Mainfreight (+15.6%), energy exposure Santos (+30.2%) and Xero (+20.3%). Mainfreight confirmed a strong first half result; the company grew profits 23.4% despite the impact of COVID-19 and management spoke positively about current trading conditions. Xero was added to a large global index and received significant new buying interest; we reduced our position into the share price strength. Elsewhere we added to our holdings in the Australian banks and rotated our exposure in the Gentailers; trimming Meridian Energy and adding to Contact Energy and Mercury. The Fund’s investable universe increased this month with the news that an effective COVID-19 vaccine is likely. Prior to this there was a risk the companies may not have returned to normal. In the medium-term, the outlook of many companies will still be determined by the impact of COVID-19, in both a health and economic sense, over the coming year. Irrespective of short-term market performance, long-term returns will be heavily influenced by our stock selection.


New Zealand Equities43.66%Australian Equities46.47%

Listed Property 4.25%

Other* 1.22%




Dynamic FundPortfolio Manager: William Curtayne & Michael Higgins

Small capitalisation companies rallied strongly in November as the market gained confidencefollowing promising vaccine news combined with favourable policy conditions. The Fundreturned 5.9% for the month which lagged the ASX/S&P Small Ordinaries benchmark returnof 10.1%.

We were very pleased with our strong absolute performance given the rotation away fromthe winners from prior months into the laggards. Performance was led by Sealink (+21.9%),video equipment manufacturer Atomos (58.3%) and payments provider EML Payments(+23.9%). Sealinks Marine and Tourism segment is exposed to in-demand island touristdestinations such as Rottnest, Magnet and Fraser Islands. Both anecdotal and industryfeedback suggests that tourism volumes have been strengthening despite internationalborders remaining closed. Detractors included gold companies Evolution (-10.3%) andSaracen (-16.5%) as the vaccine developments changed investors’ risk appetite.

As a potential vaccine also reduces the tail risk of a severe economic outcome, we took theopportunity to trim some of our gold exposure. We continue to adapt the portfolio byincreasing our exposure to recovery stocks where we can identify relative value. Our targetis to achieve a better balance given the broad array of economic uncertainties and scenariosin the months ahead.



New Zealand Equities12.03%

Listed Property14.51%

Other* 1.32%

Australian Equities65.18%

# The actual cash held by the Fund is 6.96%. Effective Cash reported above is adjusted to reflect the Fund's notional positions (e.g. derivatives used to increase or reduce market exposure).

Upcoming Distributions Target Payment Date

Conservative Fund 0.5 cents (Quarterly) 21/01/2021

Diversified Income Fund 1.1 cents (Quarterly) 18/02/2021

Trans-Tasman Bond Fund 0.45 cents (Quarterly) 17/12/2020

Global Corporate Bond Fund 0.45 cents (Quarterly) 17/12/2020

Trans-Tasman Equity Fund 1.5 cents (Biannually) 18/03/2021



Fund PerformancePast month 1 year 3 years (p.a.) 5 years (p.a.)

Since Fundinception (p.a.)

Unit price $ Fund size $

Multi-Asset Funds

Conservative Fund* 1.43% 5.37% 5.81% 6.63% 6.57% 1.2259 551.6 M

Diversified Income Fund* 3.31% 3.21% 6.90% 8.65% 10.74% 1.8290 2,431.7 M

Balanced Fund 4.16% 8.66% 8.57% 9.05% 9.99% 2.6559 1,026.8 M

Active Growth Fund# 3.87% 9.38% 10.35% 10.59% 12.46% 4.3766 1,357.0 M

Australian Absolute Growth Fund 4.91% 6.31% — — 8.08% 1.2339 229.5 M

Cash and Fixed Income Funds

Trans-Tasman Bond Fund*^ -0.24% 5.00% 5.10% 5.14% 5.62% 1.2154 824.7 M

Global Corporate Bond Fund*^ 1.68% 5.39% 4.58% — 5.31% 1.1097 808.2 M

Cash Fund 0.04% 0.75% — — 1.23% 1.0217 111.0 M

Equity Funds

Global Equity Fund† 5.13% 18.34% 11.19% 9.30% 9.86% 2.0300 946.0 M

Trans-Tasman Equity Fund* 7.50% 13.91% 14.92% 15.62% 12.10% 3.6271 640.8 M

Dynamic Fund 5.90% 13.98% 13.30% 13.59% 13.67% 2.4760 459.8 M

For details of how investment performance is calculated, and returns at each PIR please see www.milfordasset.com/funds-performance/view-performance#tab-performance.Performance figures are after total Fund charges have been deducted and at 0% PIR. Please note past performance is not a guarantee of future returns.Inception dates for the Funds: Active Growth Fund: 1 October 2007, Trans-Tasman Equity Fund: 1 October 2007, Balanced Fund: 1 April 2010, Diversified Income Fund:1 April 2010, Global Equity Fund: 12 April 2013, Dynamic Fund: 1 October 2013, Trans-Tasman Bond Fund: 2 December 2013, Conservative Fund: 1 September 2015, GlobalCorporate Bond Fund: 1 February 2017, Australian Absolute Growth Fund: 1 March 2018, Cash Fund: 1 March 2019.*Performance figures include the reinvestment of the Funds' distribution.^Returns prior to 1 March 2018 are from when the Fund was previously offered to wholesale investors only and have been adjusted for current Fund charges.†Returns prior to 1 October 2018 are from when the Fund was structured to achieve an absolute return.#The Active Growth Fund is closed to new investors.

Key Market IndicesPast month 1 year 3 years (p.a.) 5 years (p.a.) 7 years (p.a.)

S&P/NZX 50 Gross Index (with imputation credits) 5.68% 13.52% 16.98% 17.10% 16.29%

S&P/ASX 200 Accumulation Index (AUD) 10.21% -1.98% 6.94% 9.05% 7.31%

S&P/ASX 200 Accumulation Index (NZD) 8.69% -2.51% 5.03% 8.01% 6.31%

MSCI World Index (local currency)* 11.97% 12.13% 9.34% 10.32% 9.69%

MSCI World Index (NZD)* 6.06% 4.60% 8.65% 9.45% 11.21%

S&P/NZX 90-Day Bank Bill Rate 0.03% 0.74% 1.48% 1.81% 2.25%

Bloomberg Barclays Global Agg. Bond (USD-Hedged) 0.57% 5.04% 5.12% 4.36% 4.29%

S&P/NZX NZ Government Bond Index -1.79% 4.38% 5.43% 4.97% 5.53%

*With net dividends reinvested


Top Security Holdings (as a percentage of the Fund’s Net Asset Value)Multi-Asset Funds

Conservative Fund Diversified Income Fund Balanced Fund Active Growth FundAustralian AbsoluteGrowth Fund

Scentre Group 5.125%2080 1.44%

Contact Energy 2.47% Fisher & Paykel Healthcare2.26%

Fisher & Paykel Healthcare4.81%

National Australia Bank6.53%

NZLGFA 1.5% 2029 1.17% Spark New Zealand 2.27% Spark New Zealand 1.85% Spark New Zealand 3.81% BHP Group 5.49%

Housing NZ 3.36% 20251.14%

Scentre Group 5.125%2080 2.18%

Contact Energy 1.52% Summerset GroupHoldings 2.64%

Fisher & Paykel Healthcare5.00%

NAB Float 2030 1.11% Woolworths 1.64% a2 Milk Company 1.19% a2 Milk Company 2.07% Woolworths 4.63%

NZLGFA 3.5% 2033 1.07% Transurban Group 1.64% Scentre Group 5.125%2080 1.18%

Dr Horton 1.99% IAG 3.89%

Westpac 2.22% 20241.06%

Goodman Group 1.62% Alphabet 1.06% Contact Energy 1.80% ANZ Banking Group 3.69%

IBRD 0.625% 2027 0.99% Telstra Corp 1.53% Microsoft Corp 0.97% EBOS Group 1.72% Telstra Corp 3.45%

AusNet Float 2080 0.95% Wesfarmers 1.53% Woolworths 0.94% Scentre Group 5.125%2080 1.55%

Charter Hall Retail 3.00%

Transpower 1.735% 20250.92%

Meridian Energy 1.39% Telstra Corp 0.93% Alphabet 1.48% Wesfarmers 2.91%

ASB Bank 1.83% 20240.91%

Coles Group 1.37% Amazon 0.90% Kiwi Property Group 1.42% CSL 2.79%

Note: Fixed interest securities are reported in the following format: Issuer name, interest (coupon) rate, maturity year, size of fund holding (as % of total portfolio).

Cash and Fixed Income Funds

Trans-Tasman Bond Fund Global Corporate Bond Fund Cash Fund

Housing NZ 3.36% 2025 2.54% Seagate 4.091% 2029 1.73% Westpac 32 Day CMD 2020 10.46%

NZLGFA 1.5% 2029 2.52% American Tower 3.8% 2029 1.65% Kiwibank 0.6% 2021 8.56%

NZLGFA 3.5% 2033 2.39% Kerry Group 0.625% 2029 1.64% Meridian CD 2021 6.03%

Westpac 2.22% 2024 2.37% Danaher Corp 0.45% 2028 1.56% ANZ 1.15% 2020 4.51%

IBRD 0.625% 2027 2.21% Scentre Group 5.125% 2080 1.56% Port of Tauranga CD 2020 4.50%

Transpower 1.735% 2025 2.06% NXP BV 4.3% 2029 1.48% NZLGFA 0% 2021 4.50%

ASB Bank 1.83% 2024 2.03% McDonald's 3% 2024 1.46% Genesis Energy 0% 2021 4.50%

ANZ Bank Float 2024 1.91% NAB Float 2030 1.40% Contact CD 2021 4.50%

Macquarie Group Float 2025 1.81% Crown Castle 2.25% 2031 1.38% ANZ 0.45% 2021 3.60%

Ausgrid Finance 1.814% 2027 1.69% John Deere 1.75% 2024 1.36% Housing NZ 0% 2020 3.60%



Top Security Holdings (as a percentage of the Fund’s Net Asset Value)

Equity Funds

Global Equity Fund Trans-Tasman Equity Fund Dynamic Fund

Alphabet 3.78% Fisher & Paykel Healthcare 8.20% Sealink Travel Group 4.42%

Amazon 3.57% a2 Milk Company 5.21% Fisher & Paykel Healthcare 4.28%

Microsoft Corp 3.38% Mainfreight 4.13% EML Payments 3.42%

Apple 3.11% Commonwealth Bank 3.54% Collins Foods 3.38%

Intercontinental Exchange 2.86% BHP Group 3.41% Seven Group Holdings 3.05%

HDFC Bank 2.72% CSL 3.40% Bapcor 3.02%

Transunion 2.48% Infratil 2.95% CSR 2.87%

Paypal Holdings 2.41% Xero 2.78% Lifestyle Communities 2.85%

Danaher 2.34% Auckland Airport 2.74% IPH 2.78%

CX Corporation 2.27% Ryman Healthcare 2.60% EQT Holdings 2.71%


Milford Investment Funds Monthly Review

Dan Simmonds Portfolio Manager

Investment Highlight - Atlas Arteria

Australian investors have two domestic stocks available to them in the toll-road sector. Transurban (TCL) is a market darling with a market cap of A$40bn, that owns roads in Sydney, Melbourne, Brisbane, and North America. The other is the less familiar Atlas Arteria (ALX), with a market cap of A$6bn, with roads in France, Germany, and the US. ALX has a raft of complexities that make analysis difficult, but we believe this complexity plus a COVID-19 overhang, has created an attractive investment opportunity.

ALX is less well known than TCL in part because of its size, but also because it has no Australian assets, meaning domestic investors have less “road-feel” for the assets. ALX’s main asset is APRR in France, a 2,318km road network connecting Paris to Lyon, which we estimate makes up ~90%of the intrinsic value of its share price.

With France returning to lockdown, traffic levels are tracking down 40% November vs. last year. We have seen that traffic levels are quick to recover post lockdowns, e.g. traffic was down 80% for APRR in March/April but recovered to flat vs. 2019 in the summer months. So, there is a light at the end of the tunnel.

Some further complexity is added through the ALX ownership structure. ALX owns 31.14% of APRR and the asset is therefore not consolidated in ALX’s financial accounts. Further, a dividend paid by APRR must pass through several trust entities with layers of debt, interest and management fees paid along the way, before ALX are paid their share.

While still complex, CEO Graeme Bevans has made significant improvements to the holding structure since he joined in April 2019. ALX raised equity of A$1.35bn in Nov 2019 and A$495m in May 2020, with the funds used to remove fee leakage paid to external consultants, improve governance and pay down A$603m of debt.

With regards to valuation, ALX has a 2022 consensus dividend yield of 6.1%, while TCL’s equivalent yield is 3.7%. But this is not comparing apples with apples, since ALX has a longer license to operate the roads and tolls than TCL. We estimate that ALX offers a high single digit internal rate of return which we see as attractive. There may also be upside from concession re-negotiations with the French government and from the US asset Dulles Greenway.

ALX is an example of the type of company we find attractive in the global real asset space. A high-quality monopolistic asset with stable future cashflows, that is currently trading at a depressed share price. The complexity of the organisation makes the stock somewhat difficult to understand but the steps the CEO is taking to simplify the structure should help to add value over the long term.

Disclaimer: This article is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.

Disclaimer: The Milford Monthly Review has been prepared by Milford Funds Limited. It is based on information believed to be accurate and reliablealthough no guarantee can be given that this is the case. No reproduction of any material either in part or in full is permitted without prior permission.For more information about the Funds please refer to the Product Disclosure Statement or the latest Quarterly Fund Update.

milford investment funds monthly review december 2020€¦ · ryman and a2 milk), and additions to...

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