Wednesday 14th March 2018
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New Zealand has provided rich pickings for Australia's largest ethical investment fund, producing some of its best investments, according to the Kiwi who has managed its local equities for the past decade.
Wellington-born Andy Gracey has been portfolio manager for Australian Ethical Investment's flagship Australian Shares Fund since 2008. The fund screens out industries it deems negative, such as liquor firms, and will only invest in stocks deemed to be virtuous, such as renewable energy companies. Australian Ethical's superannuation fund was the fastest growing in terms of assets under management and membership in the latest KPMG 2017 Super Insights Report covering the 2016 year, and it says that growth continued last year.
"If there’s a good quality opportunity in New Zealand, we don’t differentiate between Australian and New Zealand companies," said Gracey, who has been based in Australia since 2001. "We will come over to the New Zealand market and engage management and maybe buy the stock."
Gracey said about 10 percent of his A$800 million Australian Shares Fund is invested in Kiwi firms, including some of its best investments, such as healthcare technology company Fisher & Paykel Healthcare, renewable energy companies Mercury NZ, Meridian Energy and Contact Energy, and technology companies Vista Group and Gentrack Group.
"Fisher & Paykel Healthcare has been a long-term investment, probably one of our best investments in the whole portfolio, and a fantastically run company," said Gracey. "If I looked at investment performance over five years I would say Fisher & Paykel Healthcare is probably the number one performer in the portfolio, it is just a very well run business. It has consistently delivered circa 20 percent earnings growth and it’s a global business as well."
The fund's holding in F&P Healthcare had reduced from its historical level due to the current valuation, with Reuters data showing that on the current stock price it is trading at a price to earnings ratio of 43, compared with a PE ratio of 18 for the benchmark S&P/NZX 50 Index.
Gracey also singled out New Zealand's renewable energy generation and retail companies as important stocks in his portfolio.
"In terms of really solid businesses, the gen-retailers are attractive," he said. "In terms of from a profitable, renewable energy-dominant product, there probably is more opportunity in New Zealand because in Australia, of any size, we have just got some wind generators. I think these businesses are more attractive, they are more vertically integrated, they have got a generation and a retail (arm), just more robust kind of business models."
He noted Australian Ethical had historically invested in gas as a transitional fuel towards a renewable future but divested investments in gas and gas pipelines from 2012 after deciding it didn't need gas and wanted to encourage renewables. This prevents it from investing in Australia's gen-tailer equivalent Origin Energy.
Gracey said an ethical fund tends to have an overweight position in healthcare on the basis of consumer happiness, and information technology on the grounds of efficiency, as well as holdings in core utilities, and won't invest in sectors it doesn't consider sustainable such as mining.
"We have got an interesting combination of boring dividend paying utilities and also emerging and interesting healthcare and technology companies.
"We have this ethical stream and that helps define the universe and then once that universe is defined we are really your typical investment team. We try and make as much money as we can within that screened universe," he said. "Once it gets to me I am all about investment returns and making sure that I have some conviction that it’s a solid investment. I don’t really need people explaining the virtues of their company from an ethical perspective because that’s a has-to-be anyway, I am really looking for a robust investment, something where I can see good returns for our investors. We are a pretty hard-headed investment team."
Gracey said he would like to see more emerging healthcare and pharmaceutical companies in New Zealand that he could invest in but notes Australia's research and development cash rebate system is more lucrative and encourages early-stage companies to set up over the Tasman, and the ASX has more depth in the market for this type of investment.
He is hopeful more software companies may emerge from New Zealand in the future following support from successive governments and an expanding broadband network.
"Maybe the more interesting plays in New Zealand are technology," he said. "The beauty of software is you can be a little country in the southern hemisphere and you can be a global leader so I think New Zealand is probably ahead of the curve there in terms of encouraging software and technology.
Gracey said ethical investment funds are expected to grow faster in the foreseeable future as people become more socially aware and want their superannuation to be invested in areas that they are comfortable with.
The latest New Zealand Responsible Investment Benchmark Report published last year noted that consumer demand combined with media and political pressure had significantly shifted more of the investment industry towards a responsible investment approach with assets under management up 67 percent to $131.3 billion in 2016 from $78.7 billion in 2015.
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