Capital losses feature in dull year for overseas investment trusts

Friday 1st February 2002

But the ability of fund managers to turn setbacks into triumphs can certainly be seen, writes PETER V O'BRIEN

SELECTED FUNDS' SHARE PRICES IN NZ CENTS

Company/fund	Jan 29, 2002	Jan 30, 2001	Percentage change 2001/02

Anglos & Overseas	875	1115	-21.5
Bankers Investment Trust	1000	1100	-9.1
FCI Trust	755	930	-18.8
F&C Small Companies	700	850	-17.6
Fleming Overseas	1707	2016	-15.3
Henderson Far East Income	450	385	+16.9
Henderson TR Pacific	230	300	-23.3
Templeton Emerging Markets	350	400	-12.5

New Zealand investors in overseas-based investment trusts and companies listed on the Stock Exchange had a tough year in 2001.

Most of the shares and units suffered sizeable capital losses in the 12 months ended January 29.

A selection of companies' or funds' price movements over the past year are in the table.

Share prices in New Zealand dollars should be adjusted for variations in the exchange rate over the period but the New Zealand dollar-sterling relationship was almost the same in January 2001 as it was this week. The percentage price changes in the table reflect the true position.

Stocks in the table are only a selection of those listed on our Stock Exchange. It was impractical to include the lot. Those shown cover a range of investment types, related to the markets in which they specialise.

Recent reports, and those issued in 2001, showed difficult times and correspondingly weak fund performance over the past 12 months, including the period before the terrorist attacks of September 11.

Fund and company directors and executives attempted to reassure share and unitholders (and presumably themselves) with favourable relationships to benchmark indices.

The ability of fund managers to turn setbacks into triumphs was shown in the recent report of F&C Smaller companies plc for the six months ended October 31.

"In the first half of our financial year, stockmarkets around the world fell significantly. It is modest consolation to be able to report that we were ahead of our benchmark.

"The Extended Hoare Govett smaller companies index declined 20% during the first six months of our year, while your company's net asset value and share price both fell by 18.7% and 16.7% respectively."

It was irrelevant that the company was ahead of its benchmark. Shareholders' value, in terms of net asset value, fell 18.7% and the share price dropped 16.7% to reflect that fact.

It should be noted the reverse applies when the companies and funds outperform the indices during periods of strong gains. Anyone who is critical of a fund going down 18.7% and ignores the change in the index has to be consistent.

A movement in the index of, say 18%, when the fund improved 20% also has to be ignored.

The problem is that investors' anguish over losses outweighs their elation over gains.

F&C Smaller Companies' report confirmed the difficulties in world markets before September:

"Your company began the year well, but share prices were already weak before the tragic event of September 11 precipitated further falls. Markets have bounced back somewhat since [to December 17] in anticipation of a significant economic recovery in 2002.

"However, the outcome is still highly uncertain, as all the major regions of the world are displaying economic weakness."

The report then summed up a basic concept, applicable to any managed fund anywhere:

"The task for your board and its manager is to position the portfolio so as to provide protection from further downward shocks, without losing the ability to enjoy the benefits of recovery wherever it comes.

"In uncertain times, the broad geographic scope of your company's portfolio, combined with an increasingly international approach to allocation between industrial sectors, provides us with a potential advantage: it enables us to spread our exposure. When investing in smaller companies this spread is particularly important as, although the markets for major stocks are becoming increasingly globalised, there remains greater diversity in the performance of smaller companies."

F&C Smaller Companies' comments did not denote a special case. They were a succinct summary of principles applicable to all managed funds.

Risk has to be spread, geographically, industrially and across individual companies in the case of an equity fund. Diversification across asset classes is applicable to funds that are not confirmed to equities.

The investment companies and trusts listed in New Zealand may have performed poorly compared with the rest of our market, particularly local-based equities, but share buybacks over the past two years lessened the problem.

They helped reduce gaps between share prices and net asset value.

Most investment companies and trusts were dull over the past year.

Henderson Far East Income Trust was an exception, improving 16.9% in share-price terms over the year and enjoying an increase in net asset value.

There was little surprise in that. The company had 45.5% of its assets invested in Australia and New Zealand at the end of June, the date of the latest full report.

Both countries did well last year. Henderson Far East has outperformed its benchmark indices substantially over one, three and five years, although that is no guide to future performance.

The company seems to have been overweight in some areas recently compared with the indices.

New Zealand, for example, accounts for less than 11.9% of the FTSE World Pacific Basin and World Pacific Basin ex Japan indices but had that proportion of Henderson's portfolio.

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