Money: Dark times for overseas funds

By MARK FRYER

Who'd want to be manager of an international share fund right now - or one of its customers?

The news has not been good for either group lately, as many managers face the task of explaining why their results have been so bad, while investors try to decide whether to stay the course or switch to less nerve-racking investments.

Behind all the nervousness are a lot of figures with minus signs in front of them.

In the 12 months to the end of March, the average fund manager lost 9.4 per cent on their overseas share investments, say actuaries and consultants Aon Consulting.

That fall is especially dramatic compared with the outstanding returns overseas shares produced until recently - 18.7 per cent a year for the past five years, on average, even taking the latest downturn into account (like all Aon's figures, those are before fees and taxes).

Take a look at how a few overseas funds fared in the 12 months to March. BT's International share fund: down 13.8 per cent. AMP's Winz fund: down 14.2 per cent. Armstrong Jones' International Share Fund: down 17.99 per cent. The ASB's World Shares fund: down 23.7 per cent.

All four produced positive returns over the longer term, but most investors who piled into international shares in the past year will have been sorely disappointed.

The damage is not limited to international share funds. "Diversified" or "balanced" funds have also suffered.

Many superannuation schemes whose financial year ended in March will have little or no interest to pay their members, while those whose year is yet to end will be hoping for a dramatic turnaround.

Investors have reacted by voting with their money. In the three months to the end of March, managed funds attracted $218 million in new investment, down a third on the previous three months.

Only $46.4 million of that flowed into international share funds, down from $147.5 million in the three months before.

Why all the bad news?

To some extent it's as simple as the fact that overseas markets have fallen sharply over the past year or so.

Some managers have done much worse than the market as a whole, because of their investment strategy.

Managers who thought high-tech shares were the way to go, for example, will have been sorely punished over the past year.

The year has also shown a sharp division between "value" managers - those who look for "cheap" shares - and "growth" managers - those who look for companies whose earnings and/or sales are growing.

While the growth approach had worked best in recent years, last year the value style produced much better returns.

The value strategy used by BNZ's overseas managers, for example, allowed its International Equity Trust to gain 8.8 per cent for the year, despite the general fall in share prices.

The question for investors is, what to do now?

Keep your eye on the long term, advises David van Schaardenburg, chairman of managed funds researcher FundSource.

"How does the short term change your long-term goals, and if you haven't changed your long-term goals should you be changing your strategy?" he asks.

"Probably not, but you may want to be changing the execution of your strategy.

"It's not so much changing it from an asset allocation point of view - it's more revisiting the implementation of the strategy and making sure you're comfortable with the particular manager you're investing through."

A kneejerk decision to pull out of overseas shares is not a great idea.

Not because markets are guaranteed to bounce back soon, but because history suggests that anyone who waits for a recovery before investing is likely to miss the boat.

However, this might be an opportune time to re-examine why you are investing, how long for, the investment mix and how much you are paying in fees and taxes.

Should you switch to the fund managers who have performed best?

Probably not, or at least not solely on the basis of their recent performance.

If you'd done that two years ago, you would have rushed out and put money into Armstrong Jones, which was the best overseas share manager in the 12 months to March 1999, according to Aon's figures. And where were they in the latest survey? Dead last.

You probably wouldn't have given your money to the BNZ, which was the worst overseas share manager two years ago, but took top place in the latest survey.

And whatever you decide about investing overseas, it might be worth remembering one warning.

It comes from legendary investor Warren Buffett, who last week said many investors were now unrealistic about the likely return on shares.

He was talking about the US market, but that represents about half of all the world's sharemarkets.

"Fifteen percent [return on shares] is a dream world," said Mr Buffett, nominating 6 or 7 per cent as a more realistic figure.

* Contact Personal Finance Editor Mark Fryer at: Business Herald, PO Box 32, Auckland. Phone: (09) 373-6400 ext 8833. Fax: (09) 373-6423. e-mail: mark_fryer@herald.co.nz.