Overseas-based investment trusts bunker down

Friday 6th April 2001

By Peter O'Brien

The attitudes of managers of overseas-based investment trusts and companies listed on the New Zealand Stock Exchange (see table III) to world sharemarkets are virtually the same, irrespective of their particular regional or industry interests.

This was shown in recent reports. Investment managers for the Fleming Overseas Investment Trust plc reported three weeks ago on the trust's performance for the six months ended December 31.

Outlining reasons that the company's net asset value fell 10.1% in the period, compared with 8.8% decline in "The World (ex-UK) Index (in sterling terms)," the managers said the current environment was "extremely difficult."

"Although we expect interest rates around the world to be cut, leading to hope of improved economic growth, we continue to be concerned about the outlook for corporate profits. We face a daily barrage of companies announcing disappointing results and downward revisions to growth expectations: it is difficult for stock valuations to appreciate in this environment ...

"We continue to believe that it is too early to buy back technology stocks - many will never revisit their peak valuations, although there are some selective opportunities among the higher-quality businesses."

The managers went on to talk about investment in "defensive and cyclical businesses" that had already discounted a difficult economic environment.

That last bit was standard fund management jargon, but the use of a term such as "a daily barrage" was unusual and was a good indication of what has happened.

The reference to it being too early to buy back technology stocks suggested some funds got caught in the hype that sent the US Nasdaq index into blue-sky territory, before drawing in the red-ink sea of losses, writedowns and corporate crashes.

Anglo & Overseas Trust's report for February was equally gloomy. It was a "poor month" for UK equities, "another very difficult month" in the US, while the Japanese market "weakened significantly" and markets "remained weak" in Europe.

Not surprisingly, the company's net asset value fell 8.8% during the month, although the report said Anglo & Overseas believed markets were taking "too gloomy a view" and the company was maintaining a fully invested position.

Foreign & Colonial Investment Trust increased net asset value a share "marginally" (although part of that related to a share buyback) in the year ended December 31. The company also talked about "the bursting of the technology bubble."

Sharemarket performance in 2000 was summarised and showed a dismal situation, without taking account of what has happened since. Total returns in 2000 in sterling terms were:

Japan	-23.42%
Pacific	-14.30%
UK	-5.90%
World ex UK	-4.06%
North America	-0.52%
Europe ex UK	+1.71%

The figure for North America has changed considerably since December 31. These are not minor investors. Foreign & Colonial had assets worth £3.1 billion at December 31, Fleming Overseas £706.36 million and Anglo & Overseas £418.6 million.

Report from companies specialising in specific regions also took a cautious view. Henderson TR Pacific Investment Trust, for example, reported in early February on the year ended December 31.

It said Asian stockmarkets performed poorly in 2000 as investors adjusted valuations to reflect lower expectations from technology-related investment and uncertainties over the prospects for US economic growth this year.

After expressing a slightly optimistic view, the company said it had responded to the "unexpected move" to cut US interest rates by raising its investment exposure to Taiwan and Korea at the expense of China and Singapore. It had raised exposure to technology sectors again at the expense of investment in the property and energy sectors. (Best of luck to it, after what happened after the report was issued on February 7.)

Henderson said it expected Asia to suffer economic slowdown this year, but "conditions should improve as the year progresses and there is scope for widespread cuts in interest rates. In these circumstances, stockmarkets are expected to improve over the current year." The company could be right but when it reported in August, on the six months ended June, it said it believed Asia's long-term underperformance was ending.

Henderson TR Pacific is a relatively small fund although, again, part of a bigger overall stable. Total assets were £198 million at December 31, down from £284 million a year earlier and net asset value a share fell from 125.8p to 85.7p, mirroring the 31.85% decline in the MSCI (Morgan Stanley capital index) Far East Free ex Japan index.

This kind of fall hardly makes investors dance happily as, in the case of New Zealand dollar investors, it comes before taking account of the exchange rate. That point has to be set against the fact that investors in managed funds, irrespective of the vehicle, did well over the past few years, both absolutely and in terms of outperforming the benchmark indices.

Fund managers, as noted in the first part of this survey, consider investors should look at returns over periods longer than a year or a few months, particularly the people who invest in managed funds for the long haul.

Even so, there can be a tendency in the industry to concentrate on comparisons with the benchmark rather than absolute performance related to the fund's history.

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