Kingfish's Fisher says over-valued NZ shares have 'no room for earnings disappointment'
Fisher Funds sounded a note of caution to shareholders in the listed Kingfish investment firm it manages, that returns this financial year are likely to be lower than the previous year, particularly if any companies report earnings that disappoint investors in the over-valued New Zealand sharemarket.
Kingfish finished the 2016 financial year strongly with a net profit of $22.5 million, up 89 percent on last year. The portfolio of 21 New Zealand high growth companies returned 12.9 percent after adjustments for fees, tax, the 10.6 cents per share dividend and warrants exercised, which compares to 15.7 percent for the S&P/NZX 50 Index over the same period.
Fisher Funds founder Carmel Fisher told shareholders at Kingfish's annual meeting in Auckland today that a year ago the manager had called the New Zealand sharemarket fully valued and in some sectors certain companies were over-valued on the basis of their dividend yield rather than underlying earnings growth.
Since then the NZ sharemarket has outperformed many around the world and risen 20 percent higher and "is even more over-valued which means there is no room for earnings disappointment", Fisher said.
New Zealand's dividend payouts are among the highest in the world and the NZX 50 is trading at an average multiple of 19 times earnings compared to a 10-year average of 16 times, while in the US, the S&P 500 Index trades at 17.5 times and the Stoxx Europe 600 at 15.4 times.
Whether those high valuations continue hinges on the outcome of the upcoming earnings season next month, Fisher said.
"If earnings disappoint then those share prices will not just drift off, they will tumble. We've seen that happen before in the New Zealand sharemarket and internationally," she said. "When the market is priced for perfection, there is no room for slippage."
Even a 5 percent miss from shareholder expectations on earnings is likely to lead to a strong share price reaction, she said.
But the feedback her funds management company has had from Kiwi companies is one of "cautious optimism" on their earnings.
"We're not going to see a lot of double-digit earnings growth which would need a more buoyant domestic economy but the returns should on average be around 8 to 10 percent."
Fisher told Kingfish shareholders they had "nothing to grumble" about in terms of their returns last year with both capital growth and a good dividend but she wanted to "set expectations" for this financial year given companies' earnings growth to date hasn't been that stellar.
Kingfish reported it had achieved a five-year accumulated return of 88.1 percent compared to 96.3 percent for the NZX 50.
Although total shareholder returns were down to 3.3 percent from 18.2 percent the previous year due primarily to the fund's then flagging share price, this year's net asset value performance was good enough for the manager to be paid an outperformance fee of $1 million in shares and $1 million cash, on top of its 1.25 percent annual fee.
Kingfish sold out of Sky Network Television during the year after a disappointing performance although senior portfolio manager Murray Brown said the impact on the fund was relatively minor due to its low portfolio weighting. It has reduced its stake in NZX which was also one its poorest portfolio performers on a proportional basis but has stayed the course in another under-performer, jewellery retailer Michael Hill, which Brown said had since shown markedly improved returns.
The four best performers in the portfolio were Fisher & Paykel Healthcare, Ebos Group, Auckland International Airport and Summerset Group, with Brown saying the healthcare sector was one they were happy to invest in.
The fund also invested into Vista Group International during the year when the movie software company's shareholders sold down, bought into Kiwi poultry company Tegel Group during its May initial public offering mainly due its growing exports, and invested in Z Energy which he said had a positive near-term earnings outlook despite eventually being a sunset industry.