Less than six weeks after making its debut on the New Zealand sharemarket, the Fonterra Shareholders Fund has been inducted into the NZX 50 Index even as analysts advise investors to trim their holdings.
The NZX yesterday announced that under its latest index weighting adjustments the Fonterra Shareholders Fund would replace carpet maker Cavalier on the benchmark as of January 21, having met all the liquidity requirements for inclusion.
Earlier in the week, brokerage Forsyth Barr recommended investors reduce their Fonterra Shareholders Fund holdings in its inaugural brokerage report on the fund, saying a 33 per cent appreciation since November 30 appeared to have outstripped fundamentals.
"The fund units have performed strongly since listing at NZ$5.50 and are now trading above intrinsic value," said equity analyst Andy Bowley. "The units appear expensive even considering our above prospectus forecasts.
"We therefore rate Fonterra Shareholders Fund with a reduce recommendation."
Bowley said there were several issues that posed downside risks to the fund.
The first was farmer shareholders wanting higher milk prices, which represented an input cost for investors.
Bowley said Forsyth Barr expected the price of milk to rise in the near-term which would drag on the dairy giant's earnings.
Longer term, he believed Fonterra was facing structural challenges, such as the need to transition into a higher value-added dairy role, and the need to expand globally into high return markets.
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