Kingfish Limited — Interim / Quarterly Report 2017

Feb 16, 2017

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A word from the Manager — Making portfolios great

Welcome to 2017, it’s good to be talking to you again. We haven’t been in touch since mid-December; not that we would have got a word in, what with the countless column centimetres devoted to all things Trump.

With each passing week I am asked “what do you make of this Trump thing?” The question is asked not with a social or moral response in mind, but rather, what does Trump’s presidency mean for investment markets and economic matters? My response is usually short, “I don’t know, and neither does anyone.” I don’t mean to sound rude, but my view is by all means have an opinion on the man, his personality, his hairstyle and his utterings, but try not to let that opinion, or anyone else’s, spill into your investment thinking.

Of course Trump is big news; most newly elected US Presidents are. He’s controversial, but arguably, so was President Barack Obama when he took possession of the White House keys eight years ago.

Obama’s reign wasn’t expected to be good for share markets as he was not exactly pro-business. But guess what? The US share market lifted nearly 300% during his time in office.

There’s no denying Trump is pro-business, and that explains why the US share market rallied after his election. Though, as with all presidents, it’s the doing not the talking that matters in the end. So far, he’s walked the talk on several significant campaign issues such as the Mexican wall and immigration restrictions, but it remains to be seen whether — and how soon — Trump implements the corporate and personal tax cuts that should stimulate economic growth and underpin the US share market. We are going to be distracted by politics for a long while. Trump has only begun to unveil his policies and you just know there’s a lot of rhetoric to bombard us yet. We’ve got a few European elections happening this year, as well as our own domestic election now set for September, so political distractions are here to stay.

But being fixated with politics, just like being fixated with anything really, can lead to a loss of perspective and a focus on the wrong things, leaving the right things unattended.

One financial columnist said recently, “Trump’s stated objective is to Make America Great Again. Our objective should be to make our portfolios great, all the time.” I agree.

With that in mind, our focus has been on the businesses we own in your portfolios and asset classes that combine to give you diversification.

Each single investment and each asset class will at some point be affected by politics, as interest rates respond to economic trends and policies. Our goal is to be positioned correctly so that we are on the right side of the trend, or at least, if our investments temporarily fall out of favour, we remain confident that the intrinsic value is intact and they remain appropriate assets to own over the long term.

It pays to remember that just as we are getting our heads around the Trump effect on our clients’ portfolios, the managers of our portfolio companies are doing the same thing. They too will be positioning their businesses to ensure they remain competitive and that their strategies will withstand whatever comes out of a President’s mouth or keyboard.

I read recently that corporate leaders in the US are “learning to live with Mr Trump, or ‘normalising’, him in the current jargon”. This is partly necessity — his threats could do them damage — and it’s partly genuine enthusiasm as he plans to cut their personal and their corporate income taxes. While analysts, media and Democrats remain suspicious and even hostile towards Trump, I am at least pleased (with my investor hat on) that corporate America is coming to terms with the new political regime.

We don’t need to like Trump or his politics — and please do not read any political view into my comments; I don’t have one. Maybe we just need to ‘normalise’ him and return our focus to the more important parts of our lives.

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Carmel Fisher Managing Director, Fisher Funds

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as at 31 January 2017

Key Details as at 31 January 2017

Sector Split

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FUND TYPE Listed Investment Company INFORMATION
TECHNOLOGY
INVESTS IN Growing New Zealand companies
LISTING DATE 31 March 2004 CONSUMER
STAPLES 3 [%]
FINANCIAL YEAR END 31 March
ENERGY
TYPICAL PORTFOLIO SIZE 15-25 stocks
5 [%]
INVESTMENT CRITERIA Long-term growth 2 [%]
CONSUMER
PERFORMANCE Long-term growth of capital and DISCRETIONARY
OBJECTIVE dividends
TAX STATUS Portfolio Investment Entity (PIE) 11 [%]
Fisher Funds Management
MANAGER
Limited
1.25% of gross asset value
(reduced by 0.10% for every 1% of
MANAGEMENT
FEE RATE underperformance relative to the
change in the NZ 90 Day Bank Bill
Index with a floor of 0.75%)
PERFORMANCE Changes in the NZ 90 Day Bank
FEE HURDLE Bill Index + 7%
15% of returns in excess of
PERFORMANCE FEE
benchmark and high water mark HEALTHCARE
UTILITIES
HIGH WATER MARK $1.27 per share 34 [%]
SHARES ON ISSUE 156m
11 [%] INDUSTRIALS
MARKET CAPITALISATION $213m
GEARING None (maximum permitted 20% 33 [%]
of gross asset value)
The Kingfish portfolio also holds cash.
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Performance

to 31 January 2017

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1 Month 3 Months 1 Year 3 Years 5 Years
(accumulated) (accumulated)
KFL Adjusted NAV +3.4% +1.6% +14.4% +35.7% +101.8%
Total Shareholder Return +0.0% +3.2% +21.5% +39.3% +128.6%
Gross Performance^ +3.6% +2.1% +17.5% +46.1% +135.4%
S&P/NZX50G Index +2.5% +1.3% +14.3% +44.6% +113.9%
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• ^ Gross of fees and tax and adjusting for capital management initiatives

*Definitions of non-GAAP measures:

Adjusted Net Asset Value (Adjusted NAV)

The adjusted NAV per share represents the total assets of Kingfish (investments and cash) minus any liabilities (expenses and tax), divided by the number of shares on issue. It adds back dividends paid to shareholders and adjusts for:

• » the impact of shares issued under the dividend reinvestment plan at the discounted reinvestment price;

• » shares bought on-market (share buybacks) at a price different to the NAV, and;

• » warrants exercised at a price different to the NAV at the time exercised.

• Adjusted NAV assumes all dividends are reinvested in the company’s dividend reinvestment plan and excludes imputation credits.

The directors believe this metric to be useful as it reflects the underlying performance of the investment portfolio adjusted for dividends, share buybacks and warrants, which are capital allocation decisions and not a reflection of the portfolio’s performance.

Total Shareholder Return (TSR)

The TSR combines the share price performance, the warrant price performance (when warrants are on issue), the net value of converting warrants into shares and dividends paid to shareholders. TSR assumes:

• » all dividends paid are reinvested in the company’s dividend reinvestment plan at the discounted reinvestment price and exclude imputation credits, and;

• » all shareholders that have received warrants (for free), have subsequently exercised their warrants at the warrant expiry date and bought shares (if they were in the money).

• The directors believe this metric to be useful as it reflects the return of an investor who reinvests their dividends and, if in the money, exercises their warrants at warrant maturity date for additional shares. No metric has been included for investors who choose other investment options.

Comparative information

Kingfish’s TSR and Adjusted NAV historical information has been restated. The restated values are based on the methodology described above. This methodology has resulted in some differences between the TSR and Adjusted NAV reported in this communication compared to previous communications. Please note this methodology will be used for all future communications.

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Total Shareholder Return

to 31 January 2017

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Share Price Total Shareholder Return
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar Mar
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Share Price/Total Shareholder Return
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January’s Biggest Movers

Typically the Kingfish portfolio will be invested 90% or more in equities.

AUCKLAND ABANO HEALTHCARE RESTAURANT BRANDS PORT OF TAURANGA RYMAN INTERNATIONAL AIRPORT GROUP NEW ZEALAND HEALTHCARE +9[%] +9[%] +9[%] +9[%] +7[%]

5 Largest Portfolio Positions as at 31 January 2017

MAINFREIGHT

12[%]

FISHER & PAYKEL RYMAN HEALTHCARE FREIGHTWAYS INFRATIL HEALTHCARE 10[%] 10[%] 9[%] 7[%]

The remaining portfolio is made up of another 15 stocks and cash.

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About Kingfish

Management

Board

Kingfish is an investment company listed on the New Zealand Stock Exchange. The company gives shareholders an opportunity to invest in a diversified portfolio of between 15 and 25 growing New Zealand companies through a single, professionally managed investment. The aim of Kingfish is to offer investors competitive returns through capital growth and dividends.

Kingfish’s portfolio is managed by Fisher Funds Management Limited. Murray Brown (senior portfolio manager) has recently retired. Murray’s successor, Sam Dickie, has been found and is due to start in early 2017. In the meantime, Ashley Gardyne (senior portfolio manager) is overseeing the prime management responsibilities. Ashley is highly experienced in researching and investing in New Zealand growth companies with over 10 years’ experience. Fisher Funds is based in Takapuna, Auckland.

The Manager has authority delegated to it from the Board to invest according to the Management Agreement and other written policies. The Board of Kingfish comprises independent directors Alistair Ryan (Chairman), Carol Campbell and Andy Coupe; and non-independent director Carmel Fisher.

Capital Management Strategies

Regular Dividends

• » Quarterly distribution policy introduced in June 2009

• » Under this policy, 2% of average NAV is targeted to be paid to shareholders quarterly

• » Dividends paid by Kingfish may include dividends received, interest income, investment gains and/or return of capital

• » This policy is well received by shareholders as it provides an attractive and regular return that is referable to the NAV

• » Shareholders who prefer to have increased capital rather than a regular income stream have the opportunity to participate in the company’s dividend reinvestment plan (DRP)

• » Shares issued to DRP participants are at a 3% discount to market price

• » Kingfish became a portfolio investment entity on 1 October 2007. As a result, dividends paid to New Zealand tax resident shareholders have not been subject to further tax

Share Buyback Programme

• » Kingfish has a buyback programme in place allowing it (if it elects to do so) to acquire up to 7.7m of its shares on market in the year to 31 October 2017

• » Shares bought back by the company are held as treasury stock

• » Shares held as treasury stock are available to be re-issued for the dividend reinvestment plan and to pay performance fees

Warrants

• » On 19 April 2016, a new issue of warrants (KFLWD) was announced

• » The warrants were issued at no cost to shareholders and in the ratio of one warrant for every four Kingfish shares held

• » Exercise Price = $1.32 per Share on the exercise of each Warrant (adjusted for dividends declared during the period up to the Exercise Date)

• » Exercise Date = 5 May 2017

• » The final Exercise Price will be announced and an Exercise Form will be posted to warrantholders in April 2017

Disclaimer: The information in this update has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered only, and it is by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Kingfish Limited and its officers and directors make no representation as to its accuracy or completeness. The update is not intended to constitute professional or investment advice and should not be relied upon in making any investment decisions. Professional financial advice from an authorised financial adviser should be taken before making an investment. To the extent that the update contains data relating to the historical performance of Kingfish Limited or its portfolio companies, please note that fund performance can and will vary and that future results may have no correlation with results historically achieved.

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Kingfish Limited Private Bag 93502, Takapuna, Auckland 0740 Phone: +64 9 489 7094 | Fax: +64 9 489 7139 Email: enquire@kingfish.co.nz | www.kingfish.co.nz

Computershare Investor Services Limited Private Bag 92119, Auckland 1142 Phone: +64 9 488 8777 | Fax: +64 9 488 8787 Email: enquiry@computershare.co.nz | www.computershare.com/nz

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