Money: Key numbers tell the story for investors

By MARK FRYER

Numbers, numbers numbers - they're everywhere in the investment business.

And sometimes the hardest thing can be working out what all the numbers really mean.

With that in mind, we've mined a stack of the latest investment surveys in an attempt to dig up a few trends.

Among the findings (all figures are to the end of June):

* Overseas shares? We love them

Fund managers have boosted the proportion of their customers' money that they put into overseas sharemarkets.

In a survey of 11 superannuation managers three years ago, only three had more than 30 per cent of their money in overseas shares. Now that is the bare minimum; none has less than 30 per cent in overseas shares.

The average manager's overseas share component is now more than twice as big as the proportion in local shares - 17 per cent local versus 37.2 per cent overseas.

* Our faith has been rewarded

Over the past decade, world sharemarkets have had impressive gains - 14.5 per cent a year on average, taking into account changes in the value of the New Zealand dollar.

That adds up - 14.5 per cent a year turns $1 into almost $4 in 10 years.

United States shares did even better than the world as a whole - up 19.5 per cent a year for 10 years. High-tech US shares were better again - up 26.3 per cent a year over 10 years, enough to turn that $1 into $10.

How much of that filtered through to New Zealand investors will vary wildly, but a lot of the good news did make it here. The average local fund manager earned 18.7 per cent a year on its overseas shares over the past five years.

* Lately, though, things have changed

If those gains seemed too good to last, they were.

In the latest year, world sharemarkets fell 7.2 per cent. US shares were down 2.8 per cent and those US high-tech shares plunged by, gulp, 43.4 per cent.

Those falls rubbed off locally. The average manager lost 7 per cent on its overseas shares in the latest year.

* Strategy matters

Some fund managers follow what is called the "value" strategy, which means they look for shares that are "cheap" by some measure. Others are "growth" managers, which means buying shares whose earnings are expected to grow rapidly, even if they are by no means cheap. Some managers try a bit of both, or follow other strategies.

Over the past 10 years the value approach produced the best returns on international sharemarkets. In the past five years, growth was ahead. But in the last year, growth shares plunged by almost a quarter, while value shares were up 11 per cent.

That goes a long way towards explaining the big variation in the returns local managers have earned on international shares in the past year - from Armstrong Jones' 23.9 per cent loss to BNZ's 12.8 per cent gain.

* Meanwhile, back home ...

The local sharemarket has performed better than it may seem. Over the past 10 years it produced gains of 11.7 per cent a year (including dividends), small and mid-sized companies being particularly strong.

In the past year, as world markets fell 7.2 per cent, local shares were up 6.7 per cent.

* Beating sharemarkets isn't easy

Looking at a dozen fund managers, in only one out of the past five years did the average manager's overseas share investments beat the relevant index - which measures the market's overall movement. And that was before subtracting fees and tax. After deducting those, the average manager failed to beat the index in any of the five years.

It was a different story for New Zealand shares, where the average manager did beat the market in the past five years, although tax would have meant that the margin was slim.

* Don't expect too much

Even in the comparatively benign climate of the past few years, not a lot trickles down to the individual investor.

Take a look at the return on diversified funds, which provide a reasonable measure of the returns an "average" investor would have earned, since they invest in a mix of things such as fixed interest, property, local and overseas shares.

Over the past three years, the average such fund produced returns of 4.2 per cent a year, ranging from 5.94 per cent (Colonial First State's Balanced Growth Trust) down to 2.32 per cent (Tower's Multi-Sector fund).

Those figures are after deducting tax and ongoing fees, but without taking into account any up-front fees, which will further reduce the return.

Take off inflation - about 1.6 per cent a year over the past three years - and no one is getting rich fast.

Which tells us first, not to expect too much from your investments and, second, with performance this low it is vital to keep investment costs down, by getting into funds with no or low up-front fees and by (legally) avoiding tax on your investment returns wherever possible.

* Sources: Mercer Investment Consulting, Private Asset Management, Aon Consulting, FundSource.

* 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