Kingfish Limited — Interim / Quarterly Report 2018

Jun 15, 2017

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Crying wolf

A ‘seminal’ decision by an Australian fund manager last month to exit his investments and return funds to clients caused ripples amongst retail investors and competing fund managers. Altair Asset Management chair Philip Parker announced his firm was liquidating all portfolios, reportedly returning millions of dollars to clients, and revisiting markets in six to twelve months’ time, after what he believes will be a major share market and property correction in Australia.

When given the choice, apparently 95 percent of Altair’s clients chose to be paid out in cash. Mind you, who wouldn’t be tempted after being warned of dire market conditions similar to the housing calamity of the late eighties and early nineties? Some media comments suggested the Fund’s lackluster performance might have contributed to Parker’s clients wanting out.

Parker cited a number of factors that led to his decision to exit the Australian share market including “the Australian east coast property market bubble, China property and debt issues, the overvalued Australian share markets, oversized geopolitical risks and an unpredictable US political environment”.

Other fund managers were critical of Altair’s move arguing the role of a fund manager is to manage client assets in good times and bad. Several also suggested the risks cited by Parker had prevailed for a long time yet smart investors had found ways to make money, and that an overheated property market had little direct relevance for individual listed companies.

Whether Altair’s ‘sell everything’ call is clever or reckless will only be known in time.

Having managed client assets in tricky market conditions and at times where good buying opportunities were thin on the ground, I can fully understand the temptation to cash up and lock in previous gains.

However I also know how dangerous it is to believe we can accurately and consistently pinpoint the right time to enter and exit markets or individual investments. In our portfolios we have from time to time sold too early or too late, been fully invested when a cash buffer would have been preferable, and had too much cash in a rising market.

Often the most damaging aspect of a sell call is the reverse; recognising when it is time to buy back in. Investors can sometimes enjoy the short-term rewards of cashing up but then miss out on subsequent and significant gains over the longer-term.

Economic, political and market risks certainly feel bigger and harder to manage today than they did say five years ago, when central banks and governments were largely in synch in their efforts to achieve an orderly global economic recovery.

But arguably the risks feel more onerous simply because we hear about them so often; it’s not like the risks have changed significantly.

We’ve heard about China’s hard landing for years; politicians are forever changing seats; the pace of economic growth is never constant; left-field events often throw markets into turmoil momentarily and asset bubbles appear reasonably frequently but often deflate before bursting or doing any real damage.

Is the current environment one that warrants a ‘sell everything’ approach? We think not, and trust that time will again prove us correct.

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Carmel Fisher Director, Kingfish Limited

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as at 31 May 2017

Key Details

Sector Split

as at 31 May 2017

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FUND TYPE Listed Investment Company
INVESTS IN Growing New Zealand companies
LISTING DATE 31 March 2004
FINANCIAL YEAR END 31 March
TYPICAL PORTFOLIO SIZE 15-25 stocks
INVESTMENT CRITERIA Long-term growth
PERFORMANCE Long-term growth of capital and
OBJECTIVE dividends
TAX STATUS Portfolio Investment Entity (PIE)
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
HIGH WATER MARK $1.37 per share
SHARES ON ISSUE 187m
MARKET CAPITALISATION $243m
None (maximum permitted 20%
GEARING
of gross asset value)
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CONSUMER
STAPLES
INFORMATION
TECHNOLOGY 3 [%]
3 [%] ENERGY
2 [%]
UTILITIES
HEALTHCARE
12 [%]
31 [%]
CONSUMER
DISCRETIONARY
12 [%] INDUSTRIALS
27 [%]
The Kingfish portfolio also holds cash.
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Performance

to 31 May 2017

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1 Month 3 Months 1 Year 3 Years 5 Years
(accumulated) (accumulated)
KFL Adjusted NAV +1.4% +2.5% +5.0% +34.6% +98.0%
Total Shareholder Return +5.6% +0.7% +1.6% +28.3% +109.8%
Gross Performance^ +1.6% +3.4% +7.6% +44.5% +131.5%
S&P/NZX50G Index +0.5% +3.5% +5.4% +43.3% +112.7%
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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.

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.

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.

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Total Shareholder Return

to 31 May 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 Mar
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Share Price/Total Shareholder Return
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May’s Biggest Movers

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

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PORT OF TAURANGA RESTAURANT BRANDS FISHER & PAYKEL SUMMERSET TEGEL GROUP
HEALTHCARE
+9 [%] +7 [%] +6 [%] -6 [%] -11 [%]
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5 Largest Portfolio Positions

as at 31 May 2017

FISHER & PAYKEL MAINFREIGHT FREIGHTWAYS HEALTHCARE 12[%] 11[%] 9[%]

RYMAN HEALTHCARE INFRATIL 8[%] 8[%]

The remaining portfolio is made up of another 14 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 quality 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. Sam Dickie (Senior Portfolio Manager), Zoie Regan (Senior Investment Analyst) and Matt Peek (Investment Analyst) have prime responsibility for managing the Kingfish portfolio. Together they have over 40 years combined experience and are very capable of researching and investing in the quality New Zealand companies that Kingfish targets. 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 (Chair), 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

• » Warrants put Kingfish in a better position to grow further, improve liquidity, operate efficiently and pursue other capital structure initiatives as appropriate

• » A warrant is the right, not the obligation, to purchase an ordinary share in Kingfish at a fixed price on a fixed date

• » There are currently no warrants on issue

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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