Market and Portfolio Update March 2022

Market Update

Global share markets gained 3% following strong economic data releases, investors understanding the economic implications of the Russian invasion better, and more clarity around the Federal Reserve’s hiking path over the remainder of 2022. The New Zealand share market gained as well, however, the Australian market was the strongest performer returning over 6% for the month. The Australian market has a higher allocation to commodity producers such as iron ore miners and natural gas, which have performed well as global commodity prices have risen since the war began.

The impacts of the war continue to keep commodity prices elevated, and inflation is rising globally. Here in New Zealand, the Reserve Bank’s job is to maintain price stability and inflation at 2% over the long term. With inflation running considerably higher than that at the moment, we are seeing an increased chance of the RBNZ raising interest rates by 0.5% at their next meeting.

Meanwhile, the US Federal Reserve raised its policy rate by 0.25%, with eight further hikes (2.2% in total) expected by the markets for the remainder of 2022. The Fed also discussed plans to reduce its $9 Trillion balance sheet over the coming months.

Growing the unlisted investment herd

Volatility continued throughout March as expectations of rising interest rates commanded headlines along with the continued Russian Invasion of Ukraine. Despite this volatility, Booster portfolios ended the month higher as investors began to better understand the limited impact the war will have on the global economy. The outcome of the war in Ukraine remains highly uncertain, although peace talks continue to progress and Russia has removed troops surrounding the capital Kyiv. One hopes these talks continue and a peaceful resolution is reached.

Five years ago, we began adding unlisted investments (investments that aren’t listed on publically traded exchanges) to Booster portfolios. When selected appropriately, these investments tend to offer attractive returns relative to the risks involved and help support the growth of New Zealand businesses. They also don’t experience the same volatility as listed investments. Listed investments experience short-term fluctuations due to any number of reasons, for example, irrational changes in investor sentiment. We added unlisted exposure through three specialist funds. The Tahi Fund aims to support unlisted NZ operating businesses. Our Private Land and Property Fund invests in NZ land and property, and the Booster Innovation Fund invests in promising NZ start-ups.

We are excited to announce we have recently made a new investment through the Tahi Fund in a highly regarded New Zealand dairy farming business called Canterbury Grasslands. Not only is Grasslands a high performing business with excellent management and values that align strongly with Boosters, but it also provides an opportunity for Booster portfolios to invest in New Zealand’s largest export sector and a sector where we have a strong competitive advantage in the global market.

A strong partner with an excellent operating record

Grasslands are impressive operators with a track record dating back over 21 years. Canterbury Grasslands operates around 7,500 Ha in New Zealand and 4,500 Ha in the US, utilising a low-cost approach that provides resilience in downturns. The NZ farms use a replicable model of high-quality, low-cost sustainable pastoral farming.

US farms are usually grain or corn-fed intensive barn farms with high production, high emissions and inferior milk quality. In contrast, Grasslands have replicated the NZ farming model in the US. Their US farms are grass-fed pasture-based with the goal of bringing high-quality branded/premium products to the US market. The business is well-positioned to take advantage of this niche market which is still underdeveloped.

Environmental issues are one talking point for dairy farming globally, and was a key point of focus for us when considering the Grasslands investment. Grasslands are among the leading farms on environmental issues. For example, their farms are some of the lowest emitting dairy farms globally. Grasslands have a good understanding of their carbon footprint and are proactively undertaking measures to minimise and offset their impact. They have a detailed emissions reduction plan, have been planting forests, and have been engaging in various on-farm technologies with the potential to reduce methane emissions significantly. Their proactive approach to environmental issues, such as emissions, gives us confidence they are well-positioned to reduce their impact on the world around them while continuing to deliver attractive investment returns.

After several years of a tough operating environment, we believe the NZ dairy sector is much better placed going forward. Combined with the uniqueness of investing in one of the top operators in the sector, Grasslands is a great addition to the unlisted investments in Booster portfolios. The unlisted investments continue to be an important part of Booster portfolios, and we expect to continue to broaden the allocation and support New Zealand businesses in the years ahead.

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