Market commentary: Sep 2022
Portfolio performance
Central banks all around the world are acting to dampen down inflation by forcing interest rates higher. They are signalling further increases. Rising interest rates have caused prices of bonds in the secondary market (existing bonds) to fall. Our clients will see negative returns in the fixed interest sector of their portfolio. These are unrealised losses and will reverse out as bonds mature and the full value is repaid.
On the equity side, investors are worried about high inflation and high interest rates impacting on the economy and company profits. Equity markets have fallen dramatically from the peak in January 2022. The US market (over half of total world markets) is down 16.2% for the year to end of September, and down 19.6% for the last 6 months (as measured by the S&P500). Although showing losses (unrealised), the good news is that our client portfolios have held up better than the overall market.
Currency hedging
The International Equity section of our client portfolios includes investments in foreign currencies (particularly US shares and bonds). Movements in the NZD/USD exchange rate create foreign exchange gains and losses in client portfolio valuations. These movements are often volatile and can trend long-term.
To reduce the impact of currency movements, we apply currency hedging. Up until recently 43% of our international equity strategy was hedged but given the recent dramatic fall in the price of the NZD against the USD, we are increasing hedging to 54%. This means that when the NZD rises in value, 54% of international equites will be protected from foreign exchange loss. On the flip side if the NZD falls further, we still have 46% unhedged which will benefit in that situation.
Managed funds
A managed fund is a type of investment where your money is pooled together with other investors. A fund manager then invests this on your behalf. Here at Kingston Wealth, we employ managed funds in all sectors of our clients portfolios as we believe it’s the best way to gain access to a wide range of investment specialists and research, and access to investments in both domestic and global markets. Ultimately this reduces investment risk and provides diversification.
Kingston Wealth works with a group of like-minded independent investment advisers. The TIAA group employs a consultant to research and recommend managed funds for inclusion in client portfolios. This entails analytical research and – more importantly – he regularly meets with the fund managers. Our consultant focusses on four areas; investment philosophy, fund performance, people, and process. This approach gives us confidence that our approved product list continues to be a diversified combination of quality managed funds.
Richard Grimes, Director and Financial Adviser