37% Health Care

27% Industrials

15% Consumer Discretionary

10% Financials

8% Utilities

3% Consumer Staples

Performance to 31/03/12

Since 1 Month 3 Months 6 Months 12 Months Inception

KFL Gross NAV* 2.8% 7.1% 9.9% 6.6% 62.4%

Relative Performance

NZ50 Gross Index (NZ50G) 5.6% 7.2% 5.0% 2.0% 35.3%

Total Shareholder Return* 3.5% 2.4% 9.6% 6.7% 43.1%

at a Glance as at 31/03/12

KFL Undiluted NAV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.11

KFL Diluted NAV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$1.06

Share Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$0.93

Discount (based on undiluted NAV) . . . . . . . . . . . . . . . . . . .16%

marcH’sBiGGest movers

23% Pumpkin Patch

10% Trade Me Ltd

8% Michael Hill International

-18% Kathmandu*Assumes all dividends are reinvested. Excludes imputation credits. **Accumulated performance since inception.

Industirlas 27.00%Consumer Discretioary 16.00%Consumer Staples 3.00%Health care 37.00%Financials 10.00%Utilities 8.00%

Indus&rlas  

Consumer  Discre&oary  

Consumer  Staples  

Health  care  

Financials  

U&li&es  

sector sPlit as at 31/03/12

market uPdateThe New Zealand equity market was up strongly for the month, well ahead of global equity markets (NZ50G +5.6%, MSCI World Index +1.3%). On balance macroeconomic news flow was largely positive over the month, but this is against a backdrop of the 4Q2011 GDP being below market consensus. House sales, job ads and PMI (purchasing managers index) all rose for the month, as did business confidence. Notwithstanding this, GDP forecasts continue to be trimmed back slightly as the timing of the Christchurch re-build gets pushed out.

March is reporting season for retailers to announce first half earnings. Generally results were disappointing despite increased sales. Price discounting and increased operating costs resulted in lower earnings, with Hallensteins the only exception.

NZX is moving to a free-float index from June this year. This move pre-empts the partial listings of SOE’s (state-owned enterprises) beginning later this year. ‘Gentailers’ will likely comprise ~18% of the NZ50 Index when all of the SOE’s are listed, but would have been almost double this amount if the current free-float criteria were maintained. This pending move has seen some early adjustment from passive funds and ‘index huggers’, with Contact Energy the most affected with its share price down 2% in March against a strong NZ50G.

Portfolio uPdatePumpkin Patch – Interim Result: This Pumpkin Patch interim result was messy, and disappointing – as expected. Following the closure of its loss-making USA stores, and more recently, the UK stores, Pumpkin Patch is an Australasian retailer again. What differentiates Pumpkin Patch now is its wholesale presence in a range of countries and its significant on-line revenues. On-line sales are expected to exceed $30m this year (~10% of total), and within two years on-line earnings are expected to exceed that of the NZ operation (currently ~17% of total).

Kathmandu – Interim Result: Notwithstanding that the company had already guided to lower first half earnings, the first half result was below expectations (-43%). Same store sales were strong at +8%, but due to high price discounting and higher operating expenses, operating margins fell heavily, particularly in Australia.

First half profitability is typically <40% of total so full year earnings will depend on the Easter and winter sales. The company is continuing with its store roll-out programme, with all new stores quickly becoming profitable to date.

Infratil – Investor Day: The company stated that due to strong operating performances from its investments (particularly Infratil Energy Australia and NZ Bus) earnings (EBITDAF) will be ‘substantially towards $500m’ compared to previous guidance of $460m-$490m (+4% to +11%) and is targeting a similar level of earnings growth of +5% to +10% for the 2013 year.

Infratil has increased shareholder returns by 17% compound over the last 18 years, and has an aspirational target of 20% pa. This has obviously been much harder to achieve over recent years, but the company is confident that it is in the strongest position it has been in since listing in 1994 with respect to its assets, people, strength of origin pipeline and access to capital. Closing the current 20%+ discount to NAV will be a key part to future returns.

Metlifecare – Back on the Development Cycle: Following the $45m capital raise late last year which shored up its balance sheet, Metlifecare has gone back into greenfield development mode with the purchase of a vacant land site in Glenfield. This will be a relatively small village (93 units), and gives new management a relatively low-risk project to exhibit its development skills. Outside of this, it has a number of greenfield developments at existing villages which are much less capital intensive, and have latent demand for new units/beds.

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updatemonthlyMarch 2012

WHy does tHe comPany undertake sHare BuyBacks?

a Word from tHe manaGerThe end of a quarter often prompts predictions about what lies ahead, and sure enough, the pundits have been out in force, half predicting a pullback and half expecting a continuation. We are relaxed either way because a pullback is very different to a collapse; in fact it mostly just means a pause before the journey continues.

We’ve just had the best start to a year for US stocks in more than a decade, and the increased optimism has been infectious. After enjoying a double-digit return in the last three months, investors have begun questioning whether this is as good as it gets. And plenty of commentators have been prepared to answer that question. One that made its prediction sound quite scientific was Deutsche Bank who suggested that we should prepare for a short term pull back because markets have run ahead of themselves. They said that “the historic median rise in the S&P500 is 10% and lasts 56 days in between 5% sell offs. This latest market rally has run 20% over 80+ days and is thus due for some consolidation”. Because 10% corrections are atypical outside of recessions, Deutsche suggested a near term pull back is likely to be more modest, in the order of 3-5%. What is interesting is that a 3-5% fall is referred to as a pull back – gosh, we had that sort of movement routinely throughout the GFC, only then it was referred to as a daily movement!

The optimists on the other hand say that while the market might need to pause for breath, there is a good likelihood that things will keep getting better from here. According to Citibank, the rally we’ve seen in 2012 so far might be a baby bull market compared to what might come next. They made their prediction sound official too by referring to the Raging Bull secular rally thesis, which essentially says that greater business confidence will spur the market’s gentle trot into a gallop.

We don’t pay too much heed to these predictions because only time will tell, and this rally in particular is hard to read because it has been based largely on a rebound in US banks (with the Bank of America shares up more than 70%), homebuilders, and technology stocks, led by Apple which is now the world’s most valuable company.

The increasing Apple share price was responsible for 15%, or 22 points of the S&P500’s 151 point gain. The last time a single stock was so influential in a rally was in 1999 when Microsoft contributed 14% of a 10% move in the S&P500 index. It’s important not to make too much of one stock, despite it being easy to do with a celebrity business like Apple, but we should be aware of its influence on the market overall. Apple shares make up 3% of the portfolios of the 200 largest hedge funds, almost three times as much as any other single stock. And we know the influence that hedge funds have on market volatility and momentum. Apple shares are also held by small-cap funds, international funds and dividend-yield funds, so if Apple suffers a correction or ‘a pull back’ there could be a reasonable market reaction.

But, life does exist beyond Apple, and we’ve talked often about the gradual improvement of economic data in the US, the successful soft landing of China, and the absence of crisis headlines out of Europe that have helped fuel the market’s rally to date. If the good news continues, then the good market conditions might also continue. An immediate hurdle is the first-quarter profit results that will be released in the US starting this month.

If results are disappointing, the market might take the opportunity to bank some of the paper profits that have accrued in recent months. Although, if the results are very disappointing, the Federal Reserve might take the opportunity to introduce another round of quantitative easing in order to stimulate growth again, and we know that quantitative easing is generally positive for shares.

Of course there is no shortage of threats to the US recovery - high petrol prices, weaker growth in Europe and the possibility of a hard landing in China. However right now, the optimists have reason for feeling a little smug.

Kingfish Limited. PO Box 33549, Takapuna, Auckland 0740. Phone +64 9 489 7094. Fax +64 9 489 7139. Email: enquire@kingfish.co.nz. www.kingfish.co.nz

INVESTING 101

7%

7%

7%

13%

15%

toP 5 Portfolio Positionsas at 31/03/12

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Kingfish has a buyback programme in place allowing it (if it elects to do so) to acquire up to 4.68 million of its shares on market in the year to 31 October 2012.

Share buybacks work well in circumstances where excessive discounts to Net Asset Value (’NAV’) exist as they can increase the NAV applying to the remaining shares on issue. Shares bought back by the Company are held as treasury stock and are

available to be re-issued for the dividend reinvestment plan.

When the Company buys back shares, it does so on market through an appointed share broker and the sellers of the shares are not known to the Company. The aim is to participate in the market and not to lead the market therefore the volume of Kingfish buybacks is generally below 20% of the total market volume.

Disclaimer: The information in this update has been prepared as at the date noted on the front page. The information has been prepared as a general summary of the matters covered only, and it is by necessity brief. The information and opinions are based upon sources which are believed to be reliable, but Kingfish Limited and its officers and directors make no representation as to its accuracy or completeness. The update is not intended to constitute professional or investment advice and should not be relied upon in making any investment decisions. To the extent that the update contains data relating to the historical performance of Kingfish Limited or its portfolio companies, please note that fund performance can and will vary and that future results may have no correlation with results historically achieved.

“There are now four asset classes – stocks, bonds, commodities and Apple.”

An analyst quip on Twitter