Brent Sheather: Shares lead slow-boat convoy

Some three years ago, many commentators were forecasting the end of the era of big returns from share and bond markets and the beginning of a period of more moderate, single-digit returns.

Predictably, over the following 12 months the US sharemarket rallied by 44 per cent.

However, midway through 2005 most financial markets are now well and truly in the doldrums with most returns comprising dividend income and little in the way of capital growth.

International shares lead the slow-boats with a 2.1 per cent return for the first six months of 2005, but New Zealand shares haven't offered much respite either with a 3.5 per cent gain in the half year, most of which will be due to dividends.

Global bonds, which can often be relied on to perform when shares don't, have really let the side down with the index off by 1.5 per cent in the period.

And what of hedge-funds, which promised so much - high returns with low risk? The CSFB Tremont Hedge Fund index is also becalmed, up only 2 per cent in the five months to May 31.

Of the 13 distinct hedge funds' strategies, five were underwater as at May 31.

Hedge funds even managed to underperform that most maligned of asset classes, US equities, which have surprised with a 3.2 per cent gain.

If the experts running hedge funds can't make a living on the market, what chance have lesser mortals managing retirement funds and balanced unit trusts?

The average balanced fund in New Zealand has about 40 per cent of its money in bonds, 10 per cent or so in property and 50 per cent in shares.

Applying these weightings to the performance of the respective indices in the half year you get a 3 per cent pre-tax return.

But this is before fees. Subtract 1 per cent or so in fees in the half year and the odds are the average retirement plan hasn't produced much in the way of a return thus far in 2005.

Twelve-month returns, again pre-tax and pre-fees, look a bit better at 7.5 per cent.

It must also be remembered that these numbers are estimates - some managers will have done better than the index and some worse but, one thing is for sure, 5.5 per cent after fees but before tax over 12 months isn't going to attract too much money away from bank deposits offering a risk-free 6 per cent to 7 per cent.

New Zealand's high short-term interest rates remain, with high annual fees, major disincentives to sensible, long-term retirement savings plans.

So where should you have had your money in the first half of 2005?

While New Zealand bonds chugged along delivering a 3.9 per cent gain, the big money, relatively anyway, was to be had in listed property just about anywhere, while in the shares sector, Australia and emerging markets were the top performers.

In Australia, the sharemarket rocketed away with a 10.7 per cent return as international investors saw its high dividend/growth story as more attractive than an overvalued US market and a slowing Europe. In the 12 months, Australian shares are up by about one-quarter versus a gain of 1 per cent for the rest of the world.

Longer-term Australian shares have been good value too - London Business School economists Dimson, Marsh and Staunton in their 2005 Global Investment Yearbook put Australia as the top-performing Western sharemarket over the last 100 years with an average 7.6 per cent a year real (after inflation) return versus 6.6 per cent for the US and 4.2 per cent for Japan.

The standout asset class in the first half of 2005, however, has been the listed property sector. In New Zealand, Europe and the US, it has outperformed their respective sharemarkets as investors, retail and institutions have focused on the high dividends on offer.

In New Zealand, the listed property sector returned 6.5 per cent and in the US real estate investment trusts were up by 8 per cent. Despite this performance, many local institutions have minimal property exposure - some as low as 5 per cent.

With a 3.5 per cent overall return, it has been slim pickings on the local sharemarket but it was possible to get into double digits - on the upside and the downside.

Among the leading stocks, Ports of Auckland and Contact stood out with gains of 21 per cent and 22 per cent respectively.

At the other end of the spectrum, Feltex, whose share price fell 57 per cent, got the wooden spoon, by some margin.

If there are any lessons to be learned from the sorry Feltex saga, it is that IPOs aren't a licence to make money unless perhaps you are doing the selling.

If mum and dad held 10 stocks, nine of which did as well as the average and the other was Feltex, the total return for the half year would have been minus 2.5 per cent versus a 3.5 per cent gain for the index.

But if you aren't confident in picking the best asset class every six months and, let's be honest, it's not all that easy, what can you do to make some headway when sharemarkets are only dishing up 6 per cent per annum?

The answer is to keep fees low, turnover to a minimum and, where possible, avoid capital gains tax.

While that strategy might sound easy, the simple fact remains that in New Zealand, like the rest of the world, far more money is invested in products paying high management and trailing fees than in low-cost funds.

With markets in the doldrums, a low-fee strategy is more relevant than ever.

On the subject of investment strategies, the latest version of the Barclays Capital Equity Gilt study had some interesting quotes, one of which is relevant to this discussion: "Finance is the art of passing money from hand to hand until it finally disappears."

* Brent Sheather is a Whakatane-based financial adviser.