How Kiwis are directly hit by global equity market collapse

By Peter V O'Brien

Friday 19th July 2002

SELECTED FUNDS' SHARE PRICES (NZc)

Company/fund	July 12 2002	Jan 29 2002	Change Jan/July
Anglo & Overseas	620	875	-29.1%
Bankers Investment Trust	860	1000	-14%
* F&C EuroTrust	1365	1700	-19.7%
* F&C Emerging Markets	196	212	-7.5%
* F&C Investment	630	750	-16.5%
* F&C Smaller Companies	590	700	-15.7%
Fleming Japan	600	580	+3.5%
Fleming Overseas	1305	1707	-23.5%
Henderson Far East Income	440	450	-2.2%
Henderson TR Pacific	235	230	+2.2%
Schroder Emerging Countries	160	200	-20%
Templeton Emerging Markets	345	350	-1.4%

*F&C = Foreign & Colonial

Recent comments about the effect of the slump in international equity prices on New Zealand ignored the fate of local investors in overseas-based investments trusts and companies listed here.

The Stock Exchange list of "listed issuers" contains 20 such investment vehicles.

New Zealand prices last Friday for a representative 12 are in the table and compared with the situation in January, the last time the subject was considered (NBR, Feb 1).

Most overseas investment companies listed here are based in the UK, so market quotations and the actual sale price in New Zealand dollars are based on translations from sterling.

That affects the percentage change column, because there was a different exchange rate last week from in January, the New Zealand dollar having appreciated 5.4% between January 31 and July 12.

Basic price losses therefore benefited from the currency change but were still substantial, with four exceptions. Losses in some cases were much bigger than shown in the table when prices were taken back to January, 2001.

Anglo & Overseas Trust's shares sold in New Zealand at $11.15 on January 30, 2001. Last week's $6.20 was 44.4% lower, while Fleming Overseas Investment Trust's $13.05 was 35.3% below the $20.16 recorded 18 months earlier.

Other companies had bigger or smaller losses in the 18 months.

Only Henderson Far East Income Trust gained since January 2001.

Price movements for the funds are more than an academic exercise.

They affect New Zealanders who buy and sell on the local exchange, as opposed to those who trade (both ways) offshore.

Trade in the overseas-based investment funds for an average week would rarely cover a sizeable broker's office rent for a few days.

The number of shares traded in each of the funds in the table for the week ended July 12 were: Anglo & Overseas (22,517); Bankers (11,522); F&C EuroTrust (200); F&C Emerging Markets (nil); F&C Small Companies (4892); F&C Investment (70,350); Fleming Japan (3250); Fleming Overseas (19,627); Henderson Far East Income (nil); Henderson TR Pacific (10,020); Schroder Emerging Countries (nil); and Templeton Emerging Markets (6330).

There was no information on whether both sides of those trades were among New Zealanders buyer overseas and a local seller or a local buyer and an overseas seller. They went through the New Zealand exchange in one form or another.

The recent heavy falls in major world markets and their effect on international investment funds illustrates a flaw in the latter.

Rises and falls in equities in individual countries are expressed in changes to generally accepted benchmark indices.

The funds use the same indices as performance benchmarks and weight portfolio structured around that index.

Fund managers rhapsodise about how smart they were when report time comes around, although "outperformance" relative to the index might be negative (the portfolio improved less than the index).

The investor's problem occurs when the indices fall dramatically as in recent weeks.

Portfolios based on the indices suffer similar declines, unless managers see what was coming and move to cash, a tactic that, in many cases, can bring on the foreseen decline.

Managers' rhapsodies play to a different melody in such bear markets.

If the benchmark index fell, say 20%, in the year and the portfolio's value was down 19.98, much would be made of the 0.1% outperformance. But the net asset backing of the investor's holding is down 19.9%, a fact soon reflected in the share price.

The fund becomes a slave of the index. There are fund managers who do not believe in adherence to benchmark indices.

They consider benchmark-wedded operators have more interest in personal butt-protection, under the guise of minimising risk, than maximising returns to their investors.

Mavericks who reject benchmarks are a small proportion of all managers and may produce inferior performance over the long term.

Funds based on benchmarks usually have a percentage plus or minus discretionary range from the index.

The range can provide the opportunity to take relatively large positions in "hot" stocks that have low, or nil, weights in the index and keep going up (or have a low decline) when the index is sinking.

Individual investors always have that flexibility, to the extent of New Zealanders disposing of holdings in overseas-based international equity investment funds in general downturns and buying the funds on the rises.

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