Market and Portfolio Update June 2022

Navigating a choppy first half of the year

Financial markets have experienced a volatile first half of the year. Inflation, which has risen to its highest level in 30 years, has been one of the key causes of the volatility. Elevated inflation levels have forced central banks to quickly increase interest rates to try to bring inflation back down towards their long-term targets. Raising interest rates encourages people to save and slow business investments, however it also likely results in slower economic growth.

This has created uncertainty for investors, and financial markets generally don’t like uncertainty. While times like these can be unnerving for investors, it does happen from time to time. It is important for investors to stay focused on their long-term financial goals, and not get spooked by the short-term volatility.

Built-in’ shock absorbers’ to cushion the effect of market volatility

The performance and sentiment in broader financial markets are a natural part of long-term investing and do affect the performance of investments in Booster portfolios. However, we construct and manage portfolios for different economic environments, including using three important ‘shock absorbers’.

  1. Firstly, we include an allocation to high-quality bond investments in portfolios. High-quality bond investments tend to perform well when share markets are experiencing volatility, helping cushion portfolio returns. However, this recent bout of volatility has been a bit different – as interest rates have risen, bonds have performed in a similar way to shares and have therefore not offered the same cushion that they historically have. In anticipation of this scenario, we reduced global bond investments in portfolios last year, and this has provided some protection against falling bond prices.
  2. The second shock absorber we include in portfolios, is leaving a portion of the foreign currency allocation within clients’ global share investments ‘unhedged’, meaning they are free to move with changes in the New Zealand dollar. The New Zealand dollar typically falls during periods of share market volatility, supporting the values of offshore investments that aren’t hedged when translated back into New Zealand dollars. This year has been a good example, where the falling New Zealand dollar has resulted in unhedged offshore investments performing 6% better than if the foreign currency rates were locked in.
  3. The third important shock absorber we include in portfolios is an allocation to unlisted investments (investments that are not listed on publically traded exchanges). Not only do unlisted investments typically offer more attractive valuations, but they also diversify away from some of the volatility and potential irrationality in listed markets. Through the Tahi Fund and Private Land and Property Fund, we allocate to private NZ businesses and productive NZ land investments. These include investments like vineyards, orchards, and farms, all of which deliver sustainable income streams and provide some protection against inflation. More recently, we added unlisted loans to Booster portfolios. These loans perform especially well when interest rates are rising because the interest income they pay adjusts higher.

Actively managing clients’ investments

As well as these important shock absorbers, we also make active management decisions to help manage risks and capture opportunities. Reducing global bond holdings is a good example. We identified a risk to portfolios and reduced the exposure to provide some protection against falling bond prices. We recently repurchased these bonds at much higher and more attractive yields – locking in higher returns than what they offered only a year or two ago and capturing a benefit from the volatility. Another example is positioning clients’ global share investments towards more ‘defensive’ sectors at the start of the year in the expectation that economic growth would slow and these sectors would perform better than the broader market.

Financial markets ebb and flow, and this is a natural part of capturing the gains from long-term investing. Within Booster portfolios, the ‘shock absorbers’ provide structural support during periods of market volatility, while we also aim to capture opportunities that result from volatile times and position portfolios towards areas of the market that we expect to perform better. Both of these working together have helped results over the past year, while also being a part of helping to manage our clients’ savings for long-term success.

The Booster KiwiSaver Scheme, Booster Investment Scheme and Booster SuperScheme are issued and managed by Booster Investment Management Ltd. For a copy of the Scheme product disclosure statements, go to