Newbies spark investor trust interest

By Peter V O'Brien

Friday 6th August 2004

The recent listing of two local equity investment companies should increase awareness of the overseas-based investment trust companies already traded on the NZX.

The 12 in the table, which compares recent prices with those on January 30, were a sample of the mainly UK-based organisations because a full list occupied excessive space. Price changes were subject to factors other than the companies' operating performance, with currency fluctuations being significant.

The New Zealand dollar appreciated 7.5% against sterling over the past year but depreciated 6.1% between January 30 and last week. Company investment specialisation had a second currency influence, differing between particular organisations.

For example, an investment trust company with activities in "emerging markets" would translate share values in those markets to sterling, unless the stocks were bought as sterling securities. There would be a subsequent translation of the investment group's share price from sterling to New Zealand dollars for stock traded here.

The UK companies' shares are traded in modest volume on the NZX, the 12 companies in the table accounting for 569,500 shares last week, with a value about $1.89 million. It was unknown how many were dealt in London on behalf of New Zealanders, nor the value, assuming some numbers were not reported as NZX transactions.

The UK companies have noted the emergence of the two new, local investment companies; Kingfish and Salvus Strategic Investments.

New Zealand Investment Trust chairman Donald Campbell referred to it in the trust's interim report for the six months ended April, saying the companies represented new opportunities for investors.

Their success would draw more attention to the type of investment company that Campbell said the trust pioneered in New Zealand.

"Investors finding the new companies of interest will tend to look also at us and will be attracted by the ability to buy shares in a proven entity."

He added (perhaps as an almost apologetic aside) that investors in mid-June had the opportunity to buy shares in New Zealand Investment Trust at a discount to net asset value.

Campbell also provided a clear and succinct distinction between investment trust companies and unit trusts or mutual funds.

"Listed investment companies are sometimes called closed-end funds, while unit trusts and mutual funds can be called open-end funds."

"This is because listed investment companies raise capital by issuing a specific number of shares. These shares then trade in a public market and this gives shareholders a means of cashing in their investment whenever they want."

"Open-end unit trusts and mutual funds raise their investment capital by accepting funds from new investors and they give their investors who wish to sell [a] liquidity by redeeming their investment."

"The problem for managers of open-end funds is that they cannot know how much money may come in for investment, nor how much cash they may need to pay redeeming investors."

Campbell made an important, but often overlooked, point when he said money tended to come to open-end funds during rising markets, making them buy even if values were overdone.

The money tended to "flee" when markets fell, forcing the funds to sell when market liquidity could disappear and valuations were becoming attractive.

Managers of closed-end companies knew that capital was available and were able to invest confidently in less liquid shares for longer-term returns.

Campbell could have added that the ebb and flow of capital was also one (of many) reason for the high volatility of returns in open-funds between bull and bear markets.

The arrival of Kingfish and Salvus will allow performance comparisons on the local market between open and closed-end operations where each has New Zealand equity investments.

Salvus has yet to prove itself.

Kingfish started well, with a 6.21% increase in net asset value in the three months ended June 30, coinciding with the first three months of the company's investment operations.

Kingfish, and/or its manager Fisher Funds, might have blown away the cautious, "protect the backside" philosophy of the nation's fund managers assuming it can maintain performance.

There were 17 stocks in the Kingfish portfolio on June 30, two of which were listed on the NZAX. Chairman Rob Challinor said the four biggest positions, comprising 40% of the portfolio, were Freightways, Metlifecare, Turners Auctions and Waste Management.

So much for benchmark index weighting as the way to increase a fund's value.

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