Investment trusts surprise

By Peter V O'Brien

Friday 18th July 2003

The gloomy outlook for investors in overseas-based investment trusts and companies listed in New Zealand failed to materialise, contrary to our prediction (NBR, Feb 24).

Price movements for the 13 in the table were 11 gains and two losses in the six months since January.

The improvement in the five funds whose prices appreciated more than 10% looked good at first glance but two matters dulled some of the shine.

There was a 6.7% gain in the New Zealand dollar's value against sterling between January 22 and July 14. New Zealand prices are translated from sterling, as most of the funds' base prices are expressed in the latter currency.

Even the biggest price gain over the past six months (Schroeders Emerging Countries Fund's 19.3%) left the July 14 level of 16.5% below the price at the end of January 2002.

The January 2002 price column was included in the table to show that recent movements had a long way to go to reverse the erosion of 2002.

Movements in the funds have more than academic interest for New Zealand investors, because their securities are traded regularly on the NZX.

The list in the table is representative of overseas funds listed here, not exhaustive.

There are limits to what can conveniently be included in a table.

Price improvements since January reflect in part the net gains in most sharemarkets in the period.

That brings up the second point relevant to the gains. The NZSX 40 capital index improved 4.6% in the past six months, so a portfolio based on stocks in the index would have outperformed four of the 13 funds and come close to another three.

A New Zealand investor in New Zealand stocks would not get the benefit of the dollar's against sterling, as was the case with the overseas funds.

This survey is based on the relatively short period of six months, with a lesser comparison going back another 12 months, and therefore glosses over the generally accepted point that fund investment should be considered on a long- term basis.

The funds adjust, or should adjust, investment mixes to take account of assessments of economic, political and sharemarket trends.

They often make silly statements in reports, possibly thinking that share/unitholders will accept the facile.

The preliminary report from Templeton Emerging Markets Investment Trust for the year ended April 30 was an example of how many funds put a good spin on bad news.

The statement from chairman Nicholas F Brady said: "Despite a decrease of 10.5% over the year in net asset value per ordinary share the company outperformed its benchmark, the MSCI (Morgan Stanley Capital Index) Emerging Markets Free Index, which on a total return basis fell 21.6% while the S&P/IFCI Composite Index decreased by 20.8%.

"The share price at April 30, 3003 was 107.25p, compared with 125p at the beginning of the fiscal year, a decrease of 14.2%."

Shareholders had a 10.5% reduction in their company's wealth during the year (the decline in net asset value) and suffered a 14.2% cut in the share price.

That was apparently not too bad, because the benchmark fell further. Templeton was not signed out for the quotes, because all fund managers waffle on about doing better than their benchmarks despite the obvious fact that people invest in funds, not benchmarks, and want gains.

Anyone who wants a stake in a benchmark should put their money in an index fund, which, by definition, is a tangible expression of a benchmark.

It is a pity fund operators find it necessary to make such comments, which investors immediately see through.

Their general assessments of markets and trends are usually sound, useful summaries for anyone involved in investments, irrespective of participation in the particular fund.

Having said that, Templeton Emerging Markets outperformed its benchmark since the fund's inception, having produced a 296.7% return compared with 140.9% for the benchmark, all the more reason that a fund should refrain from puffery when it has a downturn.

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