Brent Sheather: Rocketing share gains bypass many investors

By any measure the New Zealand sharemarket had a vintage year in 2004 with the broad market returning 25.8 per cent after tax on dividends.

Celebrations among the clients of financial advisers are likely to be restrained, however.

Unfortunately many mums and dads who invest in managed funds missed the boat, first because most portfolios have twice as much invested in the sluggish international equity sector as they have locally.

And second, because 15 of 17 New Zealand share funds underperformed the market anyway.

The boom in international shares, which ended in March 2000, continues to overhang many local investors' portfolios. 


Retail financial planners are not on their own in getting their clients' mix of local and international shares wrong: many of the country's largest institutional investors have been selling down New Zealand for years, in line with portfolio theory perhaps, but with disappointing results for many of their clients.

Returns on New Zealand share funds ranged from a high of 37.5 per cent recorded by the NZ Investment Trust to the 10 worst managers who trailed the market by an average of 10 percentage points.

The main reasons for this generally unremarkable relative performance was a combination of capital gains tax, high fees and, for a change, high returns from large companies such as Telecom, where fund managers are often underweight.

Nevertheless, as in previous years, performance improved as company size decreased. Returns from small companies at 36 per cent outperformed the gains from mid-sized companies at 28 per cent, which, in turn, beat an index of the 10 largest stocks at 20 per cent.

This trend, when it occurs, assists fund managers generally and smaller company specialists in particular as the New Zealand market index is always heavily weighted in large stocks.

Investors wanting a piece of New Zealand via a fund have the choice of three different types of vehicle locally - unit trusts, exchange-traded funds and listed funds.

Unit trusts are actively managed, often have high fees (not always easy to see) and can be subject to capital gains tax. In 2004, the 14 New Zealand equity unit trusts had combined assets of $500 million and returned an average of 18 per cent, underperforming the market by about 8 per cent.

The interests of the many mums and dads who typically invest in unit trusts are, in theory, represented by a trustee. However, their success in getting a good deal for unit holders, like getting rid of poor managers or keeping fees low, is pretty forgettable.

A cynic might also note that part of the reason for unit trusts' success is that the intermediaries who sell them get large initial commissions and ongoing trailing fees.

Exchange-traded funds are NZX listed, are passively managed by computer, aren't subject to capital gains tax and can be bought and sold reasonably cheaply. Two of the most popular ETFs are the TeNZ and Midcap index funds.

The last and smallest group are the actively managed, NZX-listed funds. There are three of these funds available. They have rather high annual fees but aren't subject to capital gains tax and the sector performed spectacularly last year.

These funds have boards of directors to represent shareholders but they vary in their independence from the fund manager.

To its credit, the NZ Investment Trust board has fired non-performing fund managers in the past but whether this shuffling of the deck will beat the index funds is open to debate.

But, given the varying results from different fund managers, common sense would suggest the safest way to ride the winners in 2004 was to keep costs and taxes low, ignore brokers' tips and trade in most fund managers for a computer.

A no-brainer portfolio with half in the NZX's Tenz Fund, which invests in the top 10 stocks, and half in the Midcap index fund, which invests in the next 30 stocks by size, returned 20.9 per cent in 2004.

That was good enough to beat nearly all their more popular unit trust cousins.

* Brent Sheather is a Whakatane-based investment adviser