Pathfinder Asset Management

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1 Pathfinder Asset Management Review and Outlook 28 February Pathfinder Asset Management More transparency, less complexity

2 % growth in R&D Review and Outlook February 2015 Are we concerned about the events which are unfolding? Definitely Are we going to make any material changes to asset allocation? No. First NZ Capital, Investment Outlook March 2015 First NZ sum things up well there are plenty of concerning issues in the global economic and geopolitical environment. Equity markets are very high, interest rates exceptionally low. Europe fights deflation, China is slowing, the US Fed inches closer to raising rates. Add the uncertainty of Greece and Ukraine into the mix. However while asset prices are high, they can remain elevated for extended periods. It is not time for dramatic allocation changes. Lower US inflation: US inflation has slipped to a year on year rate of -0.1% - largely due to falling energy prices. Strip out energy and core inflation is 1.6% - slightly higher than expectations (but still below the Fed s 2% target). Deutsche believe that on the US economy s current trajectory (growing at 3.5%) it will possibly reach full capacity and full employment in H or H If/when this occurs inflation will re-appear to be ahead of the game we expect the Fed will raise rates in Q Benefits of lower oil: According to Capital Economics oil in a US$60 to US$70 range is a big boost for the world economy high enough to keep most oil producers in business but low enough to boost global activity (they estimate this would add 0.5% to global GDP in each of 2015 and 2016). In terms of global trade they believe each US$10 fall in the price of oil transfers annual income of US$330 billion (0.4% of world GDP) from oil producers to oil consumers. This partly explains the collapse of some currencies this year Nigeria (down 13%), Russia (down 34%) and Venezuela (down 61%). The dangers of short term forecasting: While investors need to have a view on the market, forecasting prices over short horizons is fraught with difficulty (dart throwing may produce better results). In November 2014 (when Brent Crude was US$85 a barrel) S&P Capital IQ surveyed energy experts for their forecast of whether the crude price on 1 January 2015 would be US$50, US$80 or US$100. The actual price in early Jan was US$$57 forecasting 2 months ahead only 2% of experts saw the dramatic price fall coming and picked $50. Almost 80% picked $80. Emerging markets: The head of Franklin Templeton emerging markets (Mark Mobius who oversees US$41 billion) shared some insights in the March edition of Fortune magazine: Emerging market stocks are roughly 40% cheaper than developed market stocks. Of the BRICs, Brazil is very risky but India and China are doing well (even with lower % growth in China the $ amount of growth is large per capita income continues to rise). Russia is cheap with many very well run companies - but high political risk. South Korea is interesting the traditional dominance of large conglomerates is weakening locally developed technology and proximity to the Chinese market are positive. NZ dollar movements: Over the last 6 months we have seen one of the sharpest falls since the NZD floated in From US$0.88 in July 2014 to US$0.72 (now US$0.75). The NZ dollar Trade Weighted Index (basket of currencies) remains elevated the weakness is really only against the US$. Westpac expect the NZD to rebound vs USD with a return to US$0.80 by September R&D lift off? The chart below from Deutsche Bank shows private sector R&D in the US growing at the fastest rate since the GFC. This is very positive for capex spending (and with it higher productivity and growth): 2 Pathfinder Asset Management More transparency, less complexity

3 Charts to think about. Central bank easing. The graphics below (courtesy of FNZ Capital) highlight the very different paths that central banks are heading down. Since we last published this in September 2014 (left graph) the ECB and Japan have adopted more extreme QE and easing policies to boost inflation and growth. Compare this to the US (Fed) and UK (BoE) where growth and the inflation outlook is stronger and they move further into tightening territory (see right graph). If NZ was on these graphs it would be ahead of the US. Meanwhile Australia (RBA) remains pretty much bang in the middle, with a very slight easing bias. September 2014 March 2015 Tech having a great run. The NASDAQ had a great run in the late 1990s it s frenzied bull market ended in March 2000 with a P/E multiple in excess of 500. When the bubble burst it was ugly (down 74% from peak to trough over 18 months). It has taken 13 years to recover the lost ground. It now finds itself on a more manageable (but still demanding) P/E of The extended length of time to recover to the previous high is not totally unique so far the Nikkei is still more than 50% down from its 1989 peak. NZ took around 20 years to get back to 1987 levels. Divergent growth. This chart (right) from Capital Economics is a great illustration of how the world is growing at different speeds. Remarkably, some major economies (Italy, Spain and Japan) have not recovered to their GDP level before the GFC. The UK, Germany and particularly US have had a sustained (but not spectacular) rebound. China is not on the chart if included it would make US growth look tepid. Source: Bloomberg, Pathfinder As part of this staggering tech run Apple Computers (the largest world s company) now finds itself with a market cap exceeding US$750 billion. To put this in context the NZX50 s market cap is only US$76 billion (NZ$102 billion). 3 Pathfinder Asset Management More transparency, less complexity

4 Global Water Fund Fund Size: $5.8 million. NAV: Year Return +14.3% pa The fund s offshore equity return +2.31% Currency impact on the fund -4.23% Currency Hedging +2.71% Management Fee -0.13% Net Return (pre-tax, post fees) +0.66% Please note that we have changed the comparative benchmark for the portfolio to the Nasdaq OMX Global Water index (50% in NZD terms/50% in USD terms). This is a benchmark of 35 global water stocks, each of which must be classified as operating in the green economy as determined by SustainableBusiness.com LLC. This benchmark better reflects the SRI nature and types of companies/risks owned by the Global Water Fund. Returns for the MSCI ACWI benchmark can still be found on the World Equity Fund page. Please contact us if you would like additional information on this index. Number of holdings 69 Number of countries 17 Currency Hedging level 67% 1 year forward P/E ratio 19.1 Historic 5 year average P/E 21.9 GWF Returns (after fees, before tax) 1 Month 3 Month 6 Month 1 Year 2 Years 3 Years 4 Years GWF 0.7 % 1.4 % 5.6 % 5.9 % 15.5 % 14.3 % 7.7 % Benchmark 2.2 % 2.1 % 3.3 % 3.9 % 15.2 % 13.6 % 7.3 % GWF 1.9 % 7.8 % 29.1 % 13.4 % % 6.3 % Inception: 30/6/2010 Pentair PLC 6.75% USA Roper Industries Inc 4.79% USA Flowserve Corp 4.66% USA Pall Corp 4.10% USA Veolia Environnement 3.70% France Waters Corp 3.40% USA Geberit AG 3.38% USA Xylem Inc 3.18% USA American Water Works 2.97% USA United Utilities Group PL 2.49% UK Valmont Industries 2.48% USA Beijing Enterprises Wate 2.46% China Kurita Water Industries 2.28% Japan Severn Trent PLC 2.22% UK Aqua America Inc 2.06% USA Benchmark is Nasdaq OMX Global Water Index (50% NZD/50% USD) Forward Dividend Yield 2.0% 4 Pathfinder Asset Management More transparency, less complexity

5 World Equity Fund Fund Size: $32.5 million. NAV: Year Return +13.6% pa The fund s offshore equity return +4.56% Currency impact on the fund -3.42% Currency Hedging +2.32% Management Fee -0.10% Net Return (pre-tax, post fees) +3.36% The fund has performed very well in 2015 with an (after fee, pre-tax) return in the first two months of +7.1% bringing the 1 year return to +23.0%. Key positions include Europe, Japan, India and growth orientated sectors within the USA. The outlook for continued share price appreciation in major economies (US, Europe and Japan) seems positive, driven by currency weakness in Japan and Europe, and growth momentum driven by retail spending, higher employment, improved housing market and higher business investment in the USA. For a more depth description of our positioning, investors are welcome to call us. Number of underlying holdings 3,036 Number of countries 50 Currency Hedging level 60% 1 year forward P/E ratio 15.9 Historic 5 year average P/E 21.5 Forward Dividend Yield 2.5% WEF Returns (after fees, before tax) Top Holdings 1 Month 3 Month 6 Month 1 Year 2 Years 3 Years WEF 3.4 % 5.9 % 14.6 % 23.0 % 18.3 % 13.6 % Benchmark 3.5 % 4.9 % 9.2 % 16.9 % 17.3 % 15.3 % WEF 7.1 % 13.8 % 21.0 % 8.5 % -0.2 % Inception: 14/11/2011 Apple Inc 1.87% USA Johnson & Johnson 1.24% USA Coca Cola Co 0.92% USA Procter & Gamble 0.85% USA Bayer AG 0.81% Germany Pfizer Inc 0.77% USA Microsoft Inc 0.73% USA Wal Mart Stores Inc 0.72% USA Wells Fargo & Co 0.71% USA Toyota Motor Corp 0.65% Japan Daimler AG 0.61% Germany Pepsico 0.61% USA JP Morgan Chase 0.60% USA Merck & Co 0.59% USA BASF 0.59% Germany Benchmark is MSCI All Country World Index (50% NZD/50% Local Currency) Returns prior to 31/12/2013 for the World Equity fund assume an investment in the predecessor funds to obtain a 75% currency hedged position. 5 Pathfinder Asset Management More transparency, less complexity

6 Commodity Plus Fund Fund Size: $55.3 million. NAV: Commodities: 8.3% Cash holding: 91.7% Index return (NZD hedged) +0.30% Commodity Fund gross return +0.40% Management fee & fund costs -0.10% Net return (pre tax, post fees) +0.30% Tracking error (after fees) +0.00% Commodities and in particular Oil appears to have mostly stabilised since the large falls in H2 of Supply however still seems to be exceeding demand. The US Department of Energy releases weekly storage data which continues to climb: CPF Returns (after fees, before tax) 1 Month 3 Month 6 Month 1 Year 2 Years 3 Years 5 Years CPF 0.3% 0.8% 1.0% -0.4% -1.5% -4.2% -1.4% Benchmark 2.6% -8.4% -18.3% -22.8% -12.9% -11.2% -5.0% CPF -0.6 % -6.4 % -2.7 % -3.9 % 0.8 % 6.9 % Inception: 29/5/2009 Commodity weights in the mean reversion index Benchmark is Bloomberg Commodity Index Total Return Performance However, the US rig count (one of the most closely watched indicators in world oil markets) is now down by 469 (29 per cent) since October, and at its lowest level since December This indicates that US producers are reducing capital investment which will impact future supply. 6 Pathfinder Asset Management More transparency, less complexity

7 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Historic Data 5 Years of Monthly Data to 28 February 2015 Bloomberg Commodity Index S&P GSCI Index CPF Index (Hedged NZD) Commodity Plus Fund MSCI ACWI (NZD) - Developed & EM MSCI ACWI (Local) - Developed & EM World Equity Fund Global Water Fund NZ Bank Bill Index JPM US Agg Bond Index (Hedged NZD) Inception Date 29/05/ /10/ /06/ Month Return 2.58% 6.47% 0.30% 0.30% 1.34% 5.62% 3.36% 0.66% 0.28% -0.71% 3 Month Return -8.41% % 0.78% 0.77% 5.64% 4.25% 5.90% 1.43% 0.90% 2.50% 6 Month Return % % 0.97% 1.01% 11.61% 6.84% 14.59% 5.62% 1.84% 4.54% 1 Year return % % -0.50% -0.39% 19.29% 14.50% 22.99% 5.92% 3.50% 9.41% 2 Year Return (per annum) % % -1.48% -1.48% 17.91% 16.69% 18.28% 15.50% 3.09% 5.81% 3 Year Return (per annum) % % -3.80% -4.21% 15.52% 15.13% 13.60% 14.33% 2.96% 5.85% 5 Year return (per annum) -4.95% -6.30% -0.61% -1.35% 8.95% 12.07% % 7.34% 10 Year return (per annum) -2.71% -6.12% 6.91% % 6.84% % 8.28% Average Monthly Return -0.32% -0.39% 0.00% -0.06% 0.76% 1.01% 1.23% 0.77% 0.24% 0.60% Best Month (in last 5 years) 10.69% 9.75% 8.38% 8.29% 7.63% 8.62% 5.01% 6.50% 0.31% 2.77% Worst Month (in last 5 years) % % % % -7.58% -7.28% -6.22% -7.35% 0.20% -1.94% % positive months 52% 53% 53% 53% 63% 65% 72% 70% 100% 78% Average Positive Month 2.97% 3.58% 1.97% 1.90% 2.41% 2.96% 2.54% 2.35% 0.24% 0.93% % negative months 48% 47% 47% 47% 37% 35% 28% 30% 0% 22% Average Negative Month -3.85% -4.93% -2.25% -2.31% -2.11% -2.61% -2.13% -2.83% % 5 Yr Volatility (annualised) 15.34% 18.99% 11.07% 11.08% 9.75% 11.77% 9.00% 10.60% 0.11% 3.11% 5 YrDownside Volatility 12.36% 16.20% 8.66% 8.80% 5.94% 7.32% 4.21% 6.81% 0.00% 1.32% Ratio: Vol to downside vol (Higher is better) Year (or since inception date) Correlation to ACWI Rolling 12 Month Correlation Commodity Plus Fund Index vs Bloomberg Commodity Index Commodity Plus Fund Index vs ACWI (USD) Commodity Plus Fund Index vs JPM US Aggregate Bond Index ACWI (USD) vs JPM US Aggregate Bond Index Last 5 years of monthly data unless otherwise stated. All indices have net dividends reinvested and are shown with no fees or costs are deducted. Pathfinder funds are shown after fees, before tax. 7 Pathfinder Asset Management More transparency, less complexity