Fund watch

A more encouraging outlook for the retirement sector

The recent recovery in fund performance has been driven by a rebound in the retirement sector. Here’s why we expect it to continue.

Last year, investments in property, and funds that invest in property assets – such as the MFL Mutual Fund – had a tough time. Investors were worried about high inflation and rising interest rates, and the prospect that a slowdown in global growth could tip the world’s economies into recession.

The MFL Mutual Fund has a number of holdings in New Zealand and Australian retirement companies. While these aren’t commercial property companies in the true sense, they are investments which have a large property component associated with them and, like other listed property companies, are involved in the development and management of property assets.

In 2022, as well as broad weakness in the property sector for the reasons mentioned above, a slowing residential housing market had a significant impact on the retirement sector. For those looking to sell their home to move into a retirement property it was taking a lot longer, and the homeowner just wasn’t getting as much from its sale as they had hoped. This prompted some to put-off making the move, impacting sales of units in retirement villages and the outlook for the sector.

The fund’s holdings in retirement companies therefore proved to be a drag on its performance in 2022. This year however, we’ve seen a bit of a turnaround in the retirement sector, and during the last quarter, these have been amongst some of the fund’s best-performing holdings. Here, we look at the reasons behind this, and why we believe the outlook for the sector remains encouraging.

Interest rates appear to have peaked in New Zealand

First and foremost, in May, the Reserve Bank of New Zealand indicated it has probably done enough to bring inflation under control. Although the central bank raised interest rates a further quarter of a percent to 5.50% at this meeting, it said the peak in interest rates had now been reached.

What’s more, the market is now pricing in the chance of rate cuts in the first half of next year, with some economists predicting this could happen even sooner. We think this means there’s a chance mortgage rates will fall later this year, as the market adjusts ahead of the expected rate cuts next year.

The residential housing market may have bottomed

The retirement sector is very sensitive to sentiment around house prices. New Zealand house prices have fallen around 18% from their November 2021 highs, and perhaps by more in cities such as Wellington (-24%) and Auckland (-22%). In real terms, house prices have fallen by much more than this and are below pre-COVID levels – as inflation has been significantly above the 1-3% target level for at least the last two years.

However, in the last couple of months, we have seen housing market data improve, with days to sell reducing slightly and sales volumes picking up. The expectation now is that the worst is behind us in terms of house prices and we should see house prices make moderate gains over the next year. This should once again be positive for the retirement sector.

Ryman Healthcare’s capital raise created uncertainty

The retirement sector traded down to its lows in April this year following Ryman Healthcare’s announcement of a $900m capital raise to allow it to reduce its debt. This announcement created some uncertainty as it raised concern that Ryman Healthcare may not be the only retirement company struggling with debt. However, this was not the case. The capital raise was successful, proving investors still had faith in the long-term prospects for the company.

This combination of positive factors means the retirement sector has rebounded by around 20% off its April 2023 lows, although it is still around 15-20% below its levels from one year ago. And while there is still a lot of uncertainty around the outlook for the economy, sentiment towards this sector continues to improve following a few tough years.

The MFL Mutual Fund continues to favour its long-standing holdings in Ryman Healthcare, Summerset Group, Oceania Healthcare and Arvida Group. Of course, we remain focused on investing in quality listed property companies with strong management and a clear strategy for growing shareholder value – a philosophy that has benefited investors in the fund, as evidenced by its long-term track record.

This article has been prepared by ANZ New Zealand Investments Limited (‘ANZ Investments’) for information purposes only and it should not be treated as financial advice.

MFL Mutual Fund Limited is the issuer and manager of the MFL Mutual Fund. ANZ Investments is not an authorised deposit taking institution (ADI) under Australian law and investments in the scheme aren't deposits in or liabilities of ANZ Bank New Zealand Limited, Australia and New Zealand Banking Group Limited, or their subsidiaries (together 'ANZ Group'). ANZ Group doesn’t stand behind or guarantee ANZ Investments. Investments in the scheme are subject to investment risk, including possible delays in repayment, and loss of income and principal invested. ANZ Group won’t be liable to you for the capital value or performance of your investment.

Past performance does not indicate future performance, and performance can be negative as well as positive. This material is for information purposes only. We recommend seeking financial advice about your situation and goals before getting a financial product.

Investment and administration manager: ANZ New Zealand Investments Limited.