Counting the cost of world shares

By MARK FRYER

Spring came early this year for investors with money in international share funds.

After more than two years of gloom, the sun reappeared around the end of February as overseas share prices finally began to rise.

Better hope the recovery lasts a good while yet; at the risk of being a party-pooper, an analysis of international share funds' recent performance shows just how far investors have to go before they get back to anything approaching the glory days of late 2000, when overseas shares were at their peak (as measured in NZ dollars).

To see how the funds performed, Weekend Money asked research company FundSource to help answer this question: if an investment in an international share fund was worth $1000 at the market's peak, how far did it fall by the time prices hit bottom and what is it worth now?

The answers, on average: about $520 at the worst, and about $600 now.

Or, to put it another way, the average international share fund still has to gain another 67 per cent before gets back to where it was some three years ago.

Those numbers are based on 16 unit trusts or group investment funds which invest in a spread of international shares, without being restricted to particular part of the world or certain types of shares.

Funds worth less than $10 million were excluded from the analysis.

A dozen of the funds are classified as "active", while the other four are "passive" or "index" funds. In total, the 16 funds look after investments worth about $1.2 billion.

Their returns - after tax and any ongoing fees, and including dividends - were compared with the MSCI World index, including dividends, which measures returns on a wide range of international shares, measured in New Zealand dollars.

To allow comparisons with fund returns, Fundsource started at the month-end nearest the peak in international share prices as measured in kiwi dollars - September 30, 2000 - then worked out the losses up to the month-end nearest to the market's low point - February 28 this year - then the gains to August 31.

Among the lessons:

* The mathematics of investment can be unforgiving when markets fall.

However many per cent your investment falls, it has to make a much bigger percentage gain to get back to where it started.

For example, the average fund fell by about 48 per cent. To get back to its peak value, that investment would have to grow not by 48 per cent but by 92 per cent.

* While plenty of research shows that passive funds beat active funds - on average and over the long run - the actively managed funds should at least be able to provide some comfort when prices fall.

That's because the tax advantage enjoyed by passive funds doesn't matter when prices are going down, and also because active funds have greater flexibility, including the ability to move some of their investments into other areas, such as cash in the bank, if the manager believes the markets are likely to fall.

And most passive funds did indeed fall by less than the market as a whole, and by less than their passive counterparts.

The average active fund was down 45 per cent from the peak to the bottom, while the market fell 56 per cent and the average passive fund was down by the same amount.

* Anyone counting their returns in kiwi dollars was particularly hard hit.

Measured in US dollars, the markets fell by "only" 40 per cent between the the end of September 2000 and the end of February this year. Converted into New Zealand currency, that became a 56 per cent fall.

Then, when the markets picked up, a 21 per cent rise in US dollar terms became only a 16 per cent increase in New Zealand dollars.

The success or otherwise of the fund managers may have had as much to do with how they "hedged", or insured against those currency movements, as it did with clever share picking or timing the markets.

* To contact Personal Finance Editor Mark Fryer write to: Weekend Herald, PO Box 32, Auckland. Email: Mark Fryer. Ph: (09) 373-6400 ext 8833. Fax: (09) 373-6423.