Kingfish Limited — Management Reports 2017

Apr 13, 2017

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A word from the Manager — Once upon a time

Humans love stories. In ancient times, the only way to share knowledge was through story-telling, person to person and generation to generation. Stories help us visualise, understand concepts and build an emotional connection.

Investors particularly like investment stories. A tidy narrative can help us feel comfortable, and make something otherwise random seem logical and rational.

There are stock stories, like “the new CEO is going to turn the company around” or “the company is about to win a big contract” or “the business is ripe for a takeover”.

Then there are market stories: “stocks are overvalued and ready for a correction” or “the Federal Reserve is going to end quantitative easing” or “the market has broken through 20,000 on its way to 21,000”.

Once upon a time there was a Trump rally…

This has been the story of 2017 so far. It’s been quite an exciting story, with enough emotional drama to keep a large audience interested. And it has been handy in explaining why stocks that were supposedly poised to fall this year have instead gone from strength to strength.

However, the problem with this narrative is that it doesn’t really bear scrutiny. It belongs firmly in the fiction section.

The basic storyline is that the election of President Donald Trump will result in sweeping changes in trade, tax, infrastructure and spending that will benefit the US economy enormously. The US stock market has rallied with every page turn.

The kink in this storyline is that it doesn’t explain why France, Germany, Japan and other developed markets have also rallied since the presidential election in November. Trump’s policies shouldn’t drive the French or Japanese share markets higher, especially given that he is threatening a global trade war.

Then there’s the inconvenient fact that despite Trump’s struggles to put any of his significant promises into effect, markets have rallied anyway.

The story also falters when you consider that most global equity markets had been rallying in the months leading up to the November elections, so calling it a Trump rally is a bit of a stretch.

But really, what’s wrong with fabricating a story if it makes you feel good?

Well if enough people opt for comfort over reality, they won’t be prepared when the storyline eventually turns. If it is not a Trump rally but rather crowd momentum, animal spirits or blind faith with no fundamental basis, then someone will be left with the wrong investments when such behaviour stops.

Emotional stories can get in the way of intelligent investing. We’ve all seen strategists and economists get their forecasts wrong, only to offer a series of excuses for why. We’ve seen investors rationalising why they were right and the market was wrong. We’ve seen people prefer to put good money after bad, rather than admit they got it wrong.

The narrative that we’ve been following on your behalf is that politics are not the driving force behind markets or economies anymore.

It is quite possible that US politics will be dysfunctional and irrelevant for the next few years, and that Trump’s utterings neither hinder nor help business and consumer sentiment. Instead, the US economy will recover on its own at its own pace, and the Federal Reserve will do everything it can to support that economic recovery. Other economies will stage their own recoveries, and many ships will be lifted by the rising tide. But not all ships will rise, and not all tides will either.

Rather than invest where we think Trump’s policies will impact the most, we will continue to invest where quality, and the opportunity for consistent growth, exists. In following our own narrative we may end up zigging when markets are zagging, but at least we’ll be focused on the reality rather than the imagined. And if we get it wrong occasionally, at least we’ll have ourselves to blame rather than a character from a believable but ultimately fictitious yarn.

That way our portfolios can live happily ever after!

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Carmel Fisher Managing Director, Fisher Funds

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Key Details as at 31 March 2017

as at 31 March 2017

Sector Split

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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 $1.24 per share
SHARES ON ISSUE 158m
MARKET CAPITALISATION $203m
None (maximum permitted 20%
GEARING
of gross asset value)
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INFORMATION
TECHNOLOGY
CONSUMER
STAPLES 3 [%]
ENERGY
5 [%]
2 [%]
CONSUMER
DISCRETIONARY
HEALTHCARE
11 [%]
34 [%]
UTILITIES
11 [%] INDUSTRIALS
32 [%]
The Kingfish portfolio also holds cash.
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Performance

to 31 March 2017

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1 Month 3 Months 1 Year 3 Years 5 Years
(accumulated) (accumulated)
KFL Adjusted NAV +1.3% +6.2% +10.4% +33.2% +96.5%
Total Shareholder Return (1.0%) (3.2%) +8.1% +32.1% +117.2%
Gross Performance^ +1.7% +7.2% +13.3% +43.7% +129.5%
S&P/NZX50G Index +0.4% +4.6% +6.6% +40.0% +105.1%
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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 March 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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March’s Biggest Movers

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

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MICHAEL HILL VISTA GROUP FREIGHTWAYS METRO PERFORMANCE TEGEL GROUP
GLASS
+10 [%] +10 [%] +9 [%] -9 [%] -12 [%]
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5 Largest Portfolio Positions as at 31 March 2017

MAINFREIGHT FISHER & PAYKEL RYMAN HEALTHCARE FREIGHTWAYS INFRATIL HEALTHCARE 13[%] 11[%] 9[%] 9[%] 7[%]

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 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

• » 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

• » Final Exercise Price = $1.21

• » Exercise Date = 5 May 2017

• » The final Exercise Price was announced and an Exercise Form was posted to warrant holders on 3 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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