Forum Archive Index - December 2001

["Peter" <pmaiden@xtra.co.nz>]

I have been compiling the Sharechat Growth Index (SGI) over the past year. I have finished tracking progress as at December 21st. Will (Bryant that is) will hopefully post the final chart on the  SGI page shortly.

 

Below are the final results and some observations. An interesting exercise and in some respects the outcomes have some learning associated with them. I have noted these (my opinions of course) below.

 

A lot can happen in a year and the results of this exercise prove this.

 

Hope you all have got some enjoyment out of this over the year.

 

Merry Christmas and a Prosperous Investing New Year.

 

Peter

 

 

Sharechatters outperformed by brokers and the benchmark 

 

The performance of the Sharechat Growth Index during 2001 was pretty dismal. We have to admit that the combined wisdom of sharechatters back in January 2001 was not all that brilliant. We were outperformed by the combined wisdom of brokers.

 

And to make matters worse investing in an index would have been the best result by a long way.  I hope that Mary Holm doesn't read this - her reaction doesn't bear thinking about.

 

Since January 12th the SGI fell by 20.9%. In the same period the Broker's Tips Index rose 0.4% while the benchmark NZSE40 Gross Index increased by 10.9%.  Dividends are included in all the indices.

 

 

SGI performance by selection

 

Of the stocks included in the SGI only Frucor had an appreciation in share price. From $1.83 at the beginning of the year it rose 26% to be $2.31 as at December 21st.

 

Telecom fell 3% during the year from $5.08 to $4.94 and as such did not do too much for the index except collecting a few dividends along the way.

 

The other three stocks in the portfolio were a disaster. ITC fell 68% from $0.17 to $0.055 even though it started the year off with a bang. The Fletcher Forest promise did not materialize and the price fell 34% from $0.35 to $0.23. Tourism Holdings continued their downward path and that saw their share price fall 39% from $1.84 to $1.12.

 

 

Brokers Tip selections

 

Because the Brokers were more divided over their selections the Brokers Tips Index ended up with seven stocks in it. The performance of their selections was also up and down.

 

The Brokers had good wins with Contact Energy (up 50%), Fletcher Building (up 31%), Sky TV (up 23%) and The Warehouse (up 9%) but these wins were all wiped out with the 34% drop in Fletcher Forests and the 80% drop (from $1.61 to $0.32) in Air New Zealand.. Telecom was also included in their portfolio.

 

If the brokers had picked an average performer instead of Air New Zealand they would have outperformed the benchmark. Thanks go Air to New Zealand whose performance stopped the brokers gloating about their performance. Even the brokers (three of them did pick Air New Zealand) can get it awfully wrong at times.

 

 

Contrarian investing style bought mixed results.

 

I can only surmise as to the rationale of why sharechatters made their selections. However it appears that the popular selections (except Frucor)  were picked on the basis of a recovery in company performance that would lead to an improved share price.  This probably was the reason for many of the brokers popular selections as well. Unfortunately for both sharechatters and brokers the performance of Air New Zealand, Fletcher Forest, Telecom, Tourism Holdings and ITC did not turn around.

 

Contact Energy and Fletcher Building were also probably picked as a recovery stock and these two managed to show good gains. However you have to say that a lot of the gains were driven from actual or speculation of takeover activity.

 

Mixed result for this type of investing style. Pity there was a dearth of real growth companies among the most popular selections to compare different styles of investing.

 

It will be interesting to see how the these 'losers" perform in the 2002 year. Will their performance eventually turn around or will they decline for another year?

 

 

Results showed the benefits of diversification

 

If nothing else the results confirmed the good old fashioned investment principles that a more diversified portfolio has less risk or volatility in it's returns then concentration on just a few stocks.

 

In the SGI portfolio of five stocks one good win was not enough to offset 3 disasters and a hefty decline in value resulted.

 

The brokers with seven selections almost had a total wipeout with Air New Zealand but the other six selections managed to recover the situation.

 

But as Mary Holm would say a broad portfolio of 40 stocks like the NZSE40 minimises the volatility in nreturns and this year she is proved correct. Except for ITC and Tourism Holdings (for part of the year) all the stocks in the SGI and BTI were in the NZSE40. That broader index managed a pretty solid return over the year.  The Capital Index rose 5.7% and with dividends included rose $10.9%.

 

Not surprising five stocks produced a large variance to the benchmark while seven stocks produced a lesser variance. That's what portfolio management theory would have predicted.