Portfolio Talk: John Norling
The markets may use Y2K as a trigger to get worked up about other things, National Mutual equities manager John Norling warns.
Sunday, January 24th 1999, 12:00AM
Running National Mutual's New Zealand Select Markets equity trust has been a bit of an experiment for John Norling, however it has been a successful one. Just over a year ago it was decided to change the mandate of the trust from a strict buy-and-hold strategy to one which is based on buy and sell the best stocks and don't take any notice of the indices.
The idea being to make as much money as possible without worrying about indices.
In its first 12 months since the change the fund has outperformed the NZSE40 by more than 30 per cent. Naturally Norling and the National Mutual team are proud.
Norling says the rather unconventional style of this fund has been a big learning experience, but one which has helped him better manage some of the other mandates he is responsible for.
"It's made me more decisive and it's opened my eyes to what is possible," he says.
"Since I've been in the role I've learnt a hell of a lot. I've made mistakes, but hopefully I've learnt from them."
How do you manage the trust?This trust is fairly small ($7 million) and has a very aggressive style and pays no attention whatsoever to the index. With stocks that we like we put in weightings of 5 to 10 per cent (of the portfolio). It's mostly five per cent bets though.
We sit down each week and go through the trust look at what's in there and ask whether it's past its used by date. We ask which ones do we think are going to perform over the next month or so. Where stocks have run particularly hard we may trim back a bit.
With such a process the portfolio must turn over a lot. What's the rate?
It's big, probably between 200 and 300 per cent a year. (Under the old regime portfolio turnover was about 10 per cent).
How would you describe the style of this trust?
I wouldn't say we focus on any particular style. We buy some stocks on the basis of value and some on the basis of growth and some on special circumstances.
I find that whole concept of trying to pigeon-hole fund managers difficult. There's not a huge range of stocks you can invest in. For instance, if you say you're a value manager that cuts you out of a number of stocks. You just can't do that, especially in New Zealand.
What stocks do you like at the moment?
We are still pretty keen on tourism stocks and on New Zealand cyclicals. With New Zealand cyclicals when they go bad they go really bad, and when they go well they go really well.
We have done a lot of work in terms of modelling the tourism sector. There is a good amount of growth there and on top of which we are getting close to events (America's Cup, Sydney Olympics and the Millennium) that will keep things ticking along. You can pooh-pooh the America's Cup but it is going to be a positive, and there will be a spin-off from the Olympics.
These events support the macro-economic research we have done in this area.
Currently we are favourably disposed to the tourism stocks like Tourism Holdings and Air New Zealand (both A and B).
We are also quite keen on Telstra. It's still a good long-term hold.
Your portfolio tends to be dominated by larger cap stocks, why is that?
This varies from time to time and it just reflects the stocks at the current time!
The New Zealand sharemarket appears to be considered the place to be this year. What's your view on that?
We are still reasonably favourably disposed to New Zealand shares at the moment. The under-valuation that was in the market has gone and fair value is around the 2100-2200 mark.
To get above 2300 we have to see some growth in earnings to justify that. If earnings stay at current levels you'd have to say it's overvalued above 2300.
Currently though the indicators are saying the outlook is very good at this stage.
A number of people are saying 1999 is the make or break year for the United States sharemarket. What do you think?
I'm not 100 per cent sure to tell you the truth. Everything looks very fully valued and we are expecting there will be a slow down there this year.
The market keeps going up although the economy is slowing and earnings are lower. Liquidity is driving asset prices over there and if that eases the whole thing could come back.
If there is a correction and it is gradual it's not such a problem, but it's definitely something that we are going to have to watch more closely.
If there is a big step change, say 10 per cent in a short period, people will focus on it straight away.
An interesting point to note is that economists who have been the most bearish have become a bit more positive.
What are the risks facing the New Zealand market?
The risks that affect the US market can affect the New Zealand market. The easy way to think about it is that if the US market had a massive correction the New Zealand market will go down as well. If the US market drifts off the New Zealand market should be able to sustain itself. Overall we think the New Zealand market should outperform the US market.
One of the other things which maybe interesting towards the end of the year is the Y2K problem. It's really hard to know how the equity market is going to react to that. While companies in places like New Zealand and the United States have taken steps to deal with Y2K we are told that in other places (like Asia) companies are more worried about surviving tomorrow let alone 2000.
With Y2K it's not just a matter of a company saying they have their systems right, but ensuring their suppliers and customers have got it right too.
We hope that the world is worried enough about it to ensure there's not a problem.
As we get closer (to the end of the year) the markets may use (Y2K) as a trigger to get worked up about other things.
In terms of assessing the Y2K risk for the companies we follow all we can do is ask the questions, do a little bit of probing and see if the answers are realistic.
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