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Kiwisaver funds looking healthy? It's the ETF effect

By: Jamie Gray Business reporter, NZ Herald

If you are wondering why your Kiwisaver account is looking healthy, there's a good chance exchange trade funds (ETFs) are the cause.

New Zealand's power companies - which feature in most KiwiSaver accounts - have been on a rollercoaster ride this month.

They were already strong in 2020 - even with the threat of the Tiwai Point aluminium smelter closing this year.

The raw power of ETFs was this month there for all to see, driving Meridian and Contact, with their strong renewable energy credentials, to record highs.

BlackRock, the global ETF behemoth founded by Larry Fink in 1988, has disclosed a 13.3 per cent stake in Contact Energy.

In December, BlackRock revealed a 6 per cent stake in Meridian.

Meridian hit a record high of $9.40 on January 7 while Contact hit $10.75 the following day.

The share prices of both companies are well off their highs now after a big pullback this week, but they remain elevated.

Power companies were in strong demand last year because their dividends looked increasingly attractive relative to ultra-low interest rates.

ETFs are low-cost, passive funds that track specific sharemarket indices and trade on stock exchanges in their own right.

The clean energy ETFs found themselves in the spotlight last week, partly on the back of the Georgia runoff elections in the US which - against market expectations - went in the Democrats' favour.

A Democrat-led US administration is expected to adopt cleaner, greener policies than those of the outgoing administration.

Separately, it appears the market has become optimistic about Tiwai Point staying open, thanks to firm aluminium prices.

Matt Goodson, managing director at Salt Funds, said iShares clean energy funds - one listed in New York and the other in London (INRG) drove the big power companies' share prices this month.

Together the ETFs had US$2.5 billion in funds under management before Joe Biden's success in the US election, swelling to several times that in the aftermath.

Both funds are based on the S&P Global Clean Energy index, which has Meridian and Contact as constituents.

"Even (the NZ power companies) though they have zero benefit from directly from any clean energy initiatives in the US, they have been caught up in the desire for exposure," Goodson said.

"You get this circulating effect because money floods into the fund and the fund has to go out and buy the shares," he said.

"That drives the shares up and if the fund really performs well, money floods in again, so we have been in that phase with those two ETFs.

"At some point this will burn itself out because we are in a situation where the share prices are going up because they are going up, as opposed to share prices going up for sound fundamental reasons," Goodson said.

Meridian is a constituent of the highly influential MSCI index, which is also extensively used by passive ETF funds.

Contact is not, but the recent lift in its market cap may well make it a MSCI candidate.

Meanwhile, market indicators suggest Tiwai may stick around for a while yet.

Futures pricing has New Zealand electricity trading at $155 per megawatt hour - high by historical standards - in the third quarter of this year - mostly reflecting an expected decline in production from the key Pohukura gas field.

"Futures prices seem to be factoring in the smelter staying around longer than August, 2021," Energy Link managing director Greg Sise said.

"Maybe it's another two, three or four years away, but who knows?"

Sise said the futures market suggests price levels commensurate with dry conditions, due to exected gas supply constraints.

Meanwhile aluminium prices lifted 4.1 per cent in December, having risen by nearly 14 per cent in 2020.

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