Month in a Minute: February 2023

Resilience – the capacity to withstand difficulties

After a strong January, shares and bonds saw modest retracements in February. Despite this, Milford Funds largely delivered flat to positive returns for the month, holding on to the gains in January.

Investors had been cheering falls in global inflation, but recent data indicates that inflation isn’t falling as fast as hoped. Furthermore, there is evidence of a resurgence in economic activity at the start of 2023. All of this means that central banks may have more work to do – the significant rise in interest rates over the past year seems to be having little impact so far. We had reduced our interest rate exposures in January and this cushioned against the recent falls in bonds.

Whilst stronger growth is usually good news for shares, the impact is more nuanced thanks to elevated valuations, the risk of higher interest rates and the potential for a deeper recession down the track. We had used the strength in shares early in the month to lighten our position, again cushioning Funds from the recent adverse moves. The NZ dollar was also much weaker for the month, benefitting our increased holdings of US dollars.

Stock selection also helped performance last month. Origin Energy in Australia is widely held across our Funds; last month saw positive progress on the takeover bid for the company and the shares were up 10.4% accordingly. Elsewhere, in January we made our first investment in Tesla. Whilst it was a small position, we have been rewarded with a 80% return to the end of February.

The investment backdrop continues to favour a nimble approach. Share markets are likely to remain broadly volatile, different types of companies are likely to experience vastly different fortunes and we have already seen reasonable swings in bonds and currencies this year. All this is to point out that there is a rich opportunity set for an active manager like ourselves. Looking ahead, we’re optimistic about the outlook for returns, even as we’re cautious on the outlook for the share market.