Who would be in managed funds?

By Peter V O'Brien

Friday 8th November 2002

There was more evidence last week that New Zealand individuals could be better off handling their own investment than relying on managed funds.

Many must have decided that or switched to alternatives, particularly where their funds took the usual local/international asset spreads.

The continuing outflow of net funds under management was reported in The National Business Review last week for the three months ended September 30, after other redemptions earlier in the year.

Similar weak fund performance was seen internationally when Merrill Lynch European Investment Trust listed in New Zealand issued an interim report for the six months ended September 30.

Reports from other overseas-based investment trusts and companies will come through in the coming weeks and should show a similar pattern, having signalled relatively poor performance when issuing net asset values weekly and monthly.

That will happen irrespective of the funds' specialisations in Europe, Asia, developing markets or elsewhere, with possible exception of returns from New Zealand, which does not rate on an international basis.

The Merrill Lynch European was a combination of weak numbers, comments justifying the performance and nonsensical jargon about current strategy. The trust's net asset values fell 38.9%, undiluted for warrants, and 36.4% on a diluted basis in the half-year.

Its "FTSE World Europe ex-UK" benchmark index declined 36.4% in the period. The ordinary share price was down 40% and an "original package" (five shares and one warrant from the March 11, 1994 launch) gave shareholders a six months' loss of 42.5%.

The trust gave figures in each category from the launch. That is a common managed fund disguising practice. For example, the original package gained 12.7% since 1994. That was a wonderful, uncompounded increase of 1.5% a year in 8.5% years. Even UK-based bank returned better than that to people with fixed-interests deposits.

Trust chairman Peter Stormonth Darling referred to world markets experiencing one of their worst periods in recent history during the half-year.

He gave valid reasons for the decline but unfortunately added the traditional fund manager's bullish comments: " ... share valuations now look more attractive relative to historic levels and to the levels of bonds than for several years and we look forward for better prices in the medium term."

Maybe but Mr Darling ignored the possibility that global equities were still overvalued at September 30.

Merrill Lynch Investment Managers' Simon Flood wrapped it up on fund manager jargon: "We are looking to add selectively to investments in cyclical growth sectors where we believe structural momentum should be restored in an environment of low economic growth and where valuations are at historically low levels." He failed to explain "structural momentum."

Cynicism about fund managers increases during bear market phases but investors should remain cynical in bull markets. People involved in fund management display all the foibles of those they may consider lesser investment mortals, despite lofty jargon designed to protect their employment.

Individuals run managed funds. They should not be able to hide behind apparent famous names of international financial houses.

Back in New Zealand we saw good results from companies that made things or provided goods and services to satisfy consumer demand.

Industrial chemicals company Nuplex Industries' annual meeting was told the first-quarter "net surplus" was 50% ahead of the same position last year.

Chairman Fred Holland acknowledged the trend would not be maintained over the rest of the year as a raw material prices increased. The company should expect a "significantly better net surplus before abnormals than was achieved in the last financial year."

Electricity group TrustPower produced a $23.07 million profit for the six months ended September, compared with a $12.19 loss for the corresponding period last year, which suffered the effects of a severe winter.

Retailer Kirkcaldie & Stains confirmed a relatively strong retail sector when reporting a pre-tax gain of 12.7% for the year ended August 31. The final result of $1.61 million was 20.5% below last year's figure, due to a one-off tax liability "to recognise the future tax benefit of the rent underwriting fee paid to Hellaby Holdings."

Kirkcaldie & Stains might not be considered a typical retailer, given its image (particularly in northern regions) as a haven for Wellington's wealthy matrons. The store has long resented that tag, pointing to people of all income and "social status" groups who shop there, a valid point.

Returns from managed fund fell recently, while some companies forming the available equity investments for the funds did well.

A seeming paradox has an easy explanation. Fund managers deal in theory and mathematically-based assets allocations.

Companies included in those available for fund investment deal in reality.

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