Money: Wide hunt for returns

By PHILIP MACALISTER

Award-winning fund managers are finding cash is king on the increasingly tricky path to high returns as global markets fluctuate and question marks hang over the local economy.


The old cliche in investment circles is that cash is king. Judging by fund managers the king has his butt firmly on the throne at present.

At the start of the year managers were hot on New Zealand and cautious on international assets and they were particularly wary of the United States sharemarket.

Now nothing but cash looks safe. Armstrong Jones, which has just won the 1999 Morningstar Fund Manager of the Year Award, is about 10 per cent overweight in cash and is shifting international sharemarket money from Europe, and to a lesser degree Asia and Japan, back to the US as a defensive move.

Armstrong Jones chief investment officer David McClatchy says there is concern about rising inflation, slowing global growth and the stretched valuation of technology stocks worldwide.

A year ago Armstrong Jones' funds moved away from the US to Japan, Asia and Europe which all experienced strong growth. Now it is reversing that trend.

Mr McClatchy says stocks in Europe, Asia and Japan are more over-valued than those in the US, and a move back to the US is defensive.

He says returns on international shares have been very high in recent years due to the excess returns generated by technology stocks. Now, though, he expects returns to drop back to more traditional levels.

However, he predicts that while returns will become more "normalised," the historical average return will start rising because of changes in makeup of the global economy.

The US is considered a safe haven as it has demonstrated proven earnings streams, he says.

At the start of the year New Zealand shares were given top billing by experts at the Morningstar managed funds conference and Armstrong Jones was equally bullish of the sector.

Less than three months after the conference sentiment has changed significantly, however it is still positive.

AMP Asset Management portfolio manager Stephen Walker, who runs the National Bank's New Zealand Equity Growth Trust, says New Zealand shares are a great buying opportunity at present.

"There are a lot of good companies which are conservatively financed, and have good management that you can buy at quite ridiculous prices."

That is a sentiment Armstrong Jones senior investment manager Amanda Smith agrees with.

She says there is good value to be had in New Zealand shares, however Armstrong Jones has downgraded expected New Zealand share returns from 16 per cent to 11 per cent.

The reason is solely to do with how international investors view New Zealand.

At the start of the year managers were positive because corporate earnings were forecast to be good, valuations were reasonable and confidence was up.

Despite the good outlook, international investors, who essentially control the market, decided to sell down although all the goodies promised have eventuated.

Ms Smith says the sell down is as much to do with concerns international investors face in their home markets, as opposed to changes proposed by the New Zealand Government.

She notes that some Government moves are no less draconian or audacious that what currently happens at home for offshore investors. What they do not like is a perceived change in direction.

"International interest in New Zealand really reached a low point in the first half of this year," she says.

Ms Smith says its got to the stage where the market would be dead if it wasn't for the rash of merger and acquisition activity going on such as the takeover of Fletcher Paper and Montana, moves by Telecom to buy into INL and rumours that Tower is in play.

Tower Asset Management managing director Paul Bevin says investors need to reign back their expectations of what property investments will deliver over the short and medium term.

In 1999 Tower, which won this section of the awards, achieved a weighted annual average return of just 3.44 per cent, while second and third placed managers Guardian Trust and Armstrong Jones produced 2.46 per cent and 2.27 per cent respectively.

Mr Bevin says investors should get used to low single digit returns for property as that is all that can be expected at present.

He says investors who have chased the double digit returns offered by property syndicators will find falling building values, in some cases quite rapidly.

Mr Bevin's advice to investors is that property is not a liquid asset (even if it is bought through listed securities), therefore investors should stick to their benchmark asset allocations for the sector.

"Property is not something you should be trying to time aggressively."

His two favoured property markets at present are retail (shopping centres and the like), and industrial.

With the New Zealand economy being "reasonably strong" people will keep spending, which is good for the malls. Likewise, the distribution centres are appealing because advances in technology and the internet shopping mean goods have to be moved around quickly.

His final advice is to buy good quality property with reasonable yields.

While the outlook for growth assets such as shares and property isn't particularly flash, nor is it with income earning investments such as fixed interest and mortgage funds.

The major driver here, and one where managers can see a juncture in the road is interest rates.

Moves by central banks worldwide, including our own Reserve Bank, to slow growth by gradually pumping up interest rates have caused losses, or at the best negligible returns for fixed interest funds.

Morningstar says ANZ, which won this sector of the awards, produced a net weighted average returns for its three funds of 2.07 per cent compared to 1.8 per cent and 1.01 per cent for the other two finalists.

As ANZ Funds Management managing director Graham Duston says fixed interest was a "tricky sector to navigate successfully" in 1999.

This year is going to be an equally difficult year for fixed interest funds as interest rates are still rising around the world, and any rally (fall in rates) is some way off.

The positive news is that managers reckon we will be at the peak of interest rate rises around the end of the year and then returns should accelerate.

This view of domestic bonds is reflected in the international sector that also had an unpleasant 1999.

Sector winner BT Funds Management reported an annual net return of -0.47 per cent in the 12 month period, Morningstar says.

However, BT Funds Management chief investment officer Craig Stobo says the funds they managed did well versus their competitors due to making good decisions about predicting where rates were going.

Bonds will rally later this year because global growth rates have peaked and rates will start to fall.

The other key income producing sector for New Zealand investors is mortgage funds.

The problem they have is that their rates tend to lag behind interest rate changes, so when rates rise investors can get a better deal in a cash fund which can put up its rates straight away. Mortgage managers have to give their lenders notice so are more constrained in their position.

Consequently all three finalists in this sector suffered significant net investment outflows, Morningstar says, with ANZ being the worst hit experiencing net outflows of $126.8 million.

However, Anthony Quirk, who now heads Guardian Trust Funds Management, says the worst appears to be over because rates are near their peak and will, hopefully begin falling towards the end of the year.

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