Global rally boosts Kiwi trusts

By Peter V O'Brien

Thursday 5th February 2004

New Zealand-listed overseas investment trusts and companies had another good six months between July last week (in terms of share price performance) and even better on an annual basis. Details are in the table.

The returns were unsurprising, given the rally in world share markets over the past year and the appreciation of the New Zealand dollar against sterling (in which most of the funds are quoted on the London exchange).

The New Zealand dollar gained 8.8% over the pound between January 22, 2003 and last Friday.

Emerging market funds outperformed other trusts and companies over the past six months and year. Performance figures for the 12 entities in the table are more than an esoteric exercise of interest only to market specialists.

Units/shares in the enterprises are traded in reasonable numbers on the NZX, albeit in volumes well below major companies.

Investors/traders in emerging market funds should and may realise their holdings have high volatility.

That has long been the case, because emerging markets are, by definition, a function of emerging economies.

The latter are subject to political and financial upheavals, including corruption as government officials and business people vie for trading and financial advantage.

It is a sad fact that peasants (used in the word's strict, non-derogatory, sense) rarely get a share of the generated wealth.

There is minimal "trickle-down" in third-world economies, which is one reason Marxist theory was popular in the 20th century. It is still popular among 21st century Marxist, anarchist and nihilist romantics in developed economies, including New Zealand.

Letters to the editor columns in the daily press are full of such utopian rhetoric, jostling for space with biblical fundamentalists.

Managers of emerging market trusts in the table explained why they did well in the past six months and year.

Their definition of "emerging markets" must be fluid, given current holdings.

F&C Emerging Markets Investment Trust's monthly report at December 31 showed 18.16% of global asset allocation was give to South Korea, 14.57% to Taiwan, 2.63% to the UK, 0.55% to Hong Kong and 0.64% to the US.

A fund with 31.55% of its investments in countries which few people would describe as "emerging markets" stretched credibility. Since when were the UK and US "emerging markets? Never mind; returns are the key factor for investors.

Similar comments applied to Templeton Emerging Markets Investment Trust's country allocation at December 31.

The trust had 20.83% of assets in South Korea, Hong Kong (including Singapore listings) and Taiwan.

Sophisticated international investors in Seoul, Hong Kong and Taipei could be surprised at the idea London fund managers reckon they were in emerging markets.

The same story applied to international investment funds as to Australian-based managed funds.

Managers assess performance on relationship to benchmark index movements.

Performance better than the benchmark is hailed as top-drawer.

It seems immaterial that negative absolute performance in real terms can be justified, provided managers beat the benchmark.

Benchmarks are averages. Component fund managers should be better than average.

The table shows good performance for people involved in New Zealand-listed overseas investment trusts.

It leaves open the age-old question whether investors would be better off dealing on their own account, after allowing for the potential hassle of assessing markets, even hourly, when making decisions.

Fund managers would obviously disagree with the individual route thesis but these days have to explain the shady operations revealed in the US.

Anyone, outside the funds management industry, who accepts everything here is "clean" could also think we will get Father Christmas and the Easter Bunny in February.

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