Money: Chasing gold in equity markets

In the true spirit of the Olympics, this week we have asked three fund managers to select their teams for the Equity Olympics 2000.

The managers, BT Funds Management, Spicers, and New Zealand Guardian Trust, were allowed to pick an Australian and a New Zealand team for the sprint and the marathon events of the Equity Olympics, and each team was allowed up to three players.

Their picks give an insight into what sectors are likely to be the best performers in the next 12 months and in the medium term. The managers were also asked to pick the form of each country.

Perhaps it is no great surprise that there is a considerable degree of unity among the selectors over the New Zealand team and some variation in the Australian team.

BT Funds Management New Zealand equity manager Andrew South says the choice of team members for New Zealand is quite small.

"We haven't got a very good team [to choose from]."

helvetrcTHE KIWI TEAMrd

The most favoured companies in the New Zealand team are Fletcher Energy and Genesis (which listed yesterday) in the sprint team, and Fisher and Paykel in the long-distance event.

Fletcher Energy is the beneficiary of several factors all coming into line at a convenient time.

First, it is on the market as part of the breakup of the Fletcher group, while at the same time oil prices are rising and look likely to go even further. The other big plus for the stock its investment in Nasdaq-listed Capstone.

While Fletcher Energy's share price has risen significantly in the past six months to around $8.60, it still has plenty of room to run, say Mr South and Spicers investment manager, Simon Botherway.

Mr South says BT's valuation of Fletcher Energy is well over the present share price because of the rising oil prices and because the Capstone investment is in the books at only half its current valuation.

The Fisher and Paykel story is different because its business is split into two core groups, whiteware and healthcare.

At present, healthcare is booming, and as Guardian Trust equity manager Ian Arkle points out, that fits with one of his general investment themes - find stocks which profit from demographic trends such as an ageing population.

A view expressed by many analysts is that Fisher and Paykel's whiteware business is struggling, and the company is having difficulty getting the necessary return on the capital invested in this part of the business. Yet it keeps having to put more capital in.

Some argue that the company should find some way of reducing this side of the business, perhaps through an arrangement with a larger overseas manufacturer, and leave Fisher and Paykel to focus on healthcare. One variation on this theme is that Fisher and Paykel could become a research laboratory for a bigger manufacturer, and that manufacturer would take over making the appliances.

On the other side of the business, healthcare continues to blossom and the margins are much fatter than in whiteware.

Another theme to come out of all the selections is the potential for benefits from reorganisation.

This is a theme carried on by other managers when they pick Carter Holt Harvey, Tourism Holdings and Tranz Rail as likely medallists.

Carter Holt boss Chris Liddell has a philosophy of "fix it or sell it" when it comes to addressing poorly performing parts of the empire.

Tranz Rail has gone through a management change and is clearly focused on getting a decent return on its capital and making full use of its network.

The same is true of Tourism Holdings, which has gone through changes that have got the big tick from analysts.

The other factor which is a big plus for Carter Holt, Tourism Holdings, Wilson & Horton, Air New Zealand, Frucor and GPG is that these companies generate most of their revenue abroad, and those earnings are turbo-charged when they come back to New Zealand because of the sinking dollar.

helvetrcTHE AUSTRALIAN TEAMrd

The Australian teams picked by our selectors illustrates the greater depth of talent available across the Tasman.

Of the 18 companies chosen, none was picked by two managers. But some clear themes emerged.

The most obvious one is the predisposition towards financial services companies, such as AXA, Macquarie, QBE Insurance, Westfield and Westpac.

The other themes that came through are the attraction of technology, telecommunications and media companies.

For instance, Hutchison, Telemedia, Data Advantage, Cable and Wireless and E-Serv are all involved in the broad telecommunications and technology sectors, and are what can in many cases be classified as service industries.

Mr Arkle favours the service sector because of its strong growth.

Others in the selections are Cochlear, Energy Developments, Austar, Novus Petroleum, Burns Philp, Mayne Nickless and Harvey Norman

They mimic some of the themes picked up in the New Zealand team.

Cochlear, which makes hearing aids, and Energy Developments, involved in energy generation from landfills, fit into the technology areas.

Austar is a regional pay TV company (similar to Sky TV) and Novus Petroleum is equivalent to Fletcher Energy.

Burns Philp and Mayne Nickless are turnaround stories with new management. That leaves Harvey Norman - which is indeed the odd one out. BT's Sydney-based Australian equity manager Mike Coop says the big retail chain is attractive as it has the ability to take market share off its competitors, and has a good product mix and a franchise formula which works well.

helvetrcMEDAL PROSPECTSrd

It is too early to say which team will have the winners in our Equity Olympics. Overall, the environment is more in favour of the Australian companies.

The Australian market has performed better than its transtasman counterpart over recent years and it is still looking more robust.

But Mr Botherway reckons picking the individual stocks and putting them into a portfolio is the key to success.

That leaves New Zealand in its traditional position as a country that can produce individual brilliance - the likes of Mark Todd, Barbara Kendall and Peter Snell.

So maybe some of the stocks picked by our selectors will thrash the Australians.

Of course the aim of the games, as the Australians are showing us in Sydney, is to collect as many medals as possible.

Picking individuals in each of the sprint and marathon events is one thing, but to get a swag of medals you need more than one or two winners.

As Mr South says, the best way to do this is to take a diversified approach and build a balanced portfolio of shares - sort of like having a track and field team which includes, runners, jumpers and throwers.

The other approach is to try and win the glamour event, the relay. One way to get on the dais of the Equity Olympics is to back an index fund.

There are plenty to choose from in the field, including TeNZ, AMP Tracker, NZSE40 fund and Tortis Ozzy.

Here you know you know you will have a team that that puts in a showing you can be proud of, but is not likely to bring home the gold medal.

*Philip Macalister is the editor of online money management magazine Good Returns www.goodreturns.co.nz
Good Returns provides news on managed funds, mortgages, superannuation, insurance and financial planning.