How did your portfolio perform?
The Trans-Tasman Equities Fund delivered a gross return of 2.73% during August, handily outperforming the fund’s benchmark return of 1.67% by 1.06%.
   
The main positive contributors to performance in August were our overweights in Sky Television (SKT) and Emeco Holdings. SKT delivered a positive dividend surprise and strong forward guidance for dividends over the next three years. Emeco rents heavy equipment to the resources sectors in Australia, with a solid result seeing some recent underperformance being recovered.  

Stocks that were a relative drag on performance were our overweight in Flight Centre and underweight in F&P Healthcare (FPH). Flight Centre had a tough June quarter, and the forecast timing of both revenue and profit recovery underwhelmed the market. FPH provided an update around their Annual Shareholders Meeting which confirmed strong ongoing demand for their latest product releases.  

Our Australian positions make up around 12.5% of the fund composition and contributed strongly to outperformance over the month. The Australian equity portion of the fund is fully hedged back to NZ Dollars. 

What happened in the markets you invest in
Reporting season dominated news flow and drove market movements during August. In aggregate, companies largely met market expectations and forward guidance, where provided, ended with a slightly positive skew. Whilst outlook statements reflected continued caution, perhaps the best indicator of improved confidence was a lift in the dividend payout ratio. Companies should not lift payments to shareholders if they don't have confidence that dividends will be sustainable into the future and backed by earnings growth.

The Australian economy is clearly slowing (outside of mining) and this will create a headwind for the large number of NZ stocks that have operations there. Retailers and stocks exposed to Australia’s residential housing market are perhaps most exposed. However, stock-specific impacts can vary, and both Hallenstein Glasson's and Freightways reported strong results from their Australian divisions. 

What are we thinking about the future?
There is a quietly positive tone to the general backdrop in our view, notwithstanding continued caution in company outlook statements. The quiet positive re-rating would likely move to a solid, positive sentient shift should we see resolution in the Middle East, a centre party dominated NZ election outcome, and further evidence that inflation is beginning to fall.

Many companies are still reporting profit margins well below historic norms – the opposite to what we are seeing in stronger economies such as the US. If anything, defensive stocks slightly disappointed in their profit updates this time around, yet they continue to trade at full valuations even with bond yields at cyclical highs. As such, we continue to see better valuation support in many smaller and economically exposed stocks, along with those where management are taking decisive action to address current areas of operating weakness. Heartland Bank and Michael Hill fit into that latter camp.

Whilst we have strong bottom-up support for all our Australian positions, the economic backdrop there is deteriorating. We are constantly reviewing the economic exposures of those holdings to ensure we are diversified and that they retain solid balance sheets.