Go West and Prosper
Philip Macalister explains why New Zealand share investors should consider Australasia their local market, rather than New Zealand.
Saturday, September 11th 1999, 12:00AM
Go West young man and find your fortune. That was the message to young folk during the American gold rush more than 150 years ago, and it is the same message New Zealand investors should now heed.
There is a strong and growing case for New Zealanders to place a greater proportion of their investment assets offshore, and to consider the Australian market as the local market.
One just has to look at the returns achieved by fund managers such as Tower Asset Management (formerly Tower Portfolio Management) which has been one of the earlier and stronger proponents of this advice.
Its balanced funds have long been top performers and they are only really competing with other managers who adopt the same approach for the top places in the performance tables.
TAM economist Sean Newman reckons the right mix is about 3:1 in favour of offshore assets and if wasn't for New Zealand's imputation credit regime the mix would even more strongly in favour of offshore assets.
"Without imputation credits it would be very hard to argue owning New Zealand shares," he says.
Factors going against the New Zealand sharemarket are its smallness, its illiquidity and its concentrated nature.
In total the New Zealand sharemarket makes up just 0.2 per cent of the total world sharemarket capitalisation - hardly even petty cash.
Also since it's illiquid, and controlled by offshore investors, it's very prone to being pushed around by international capital flows.
One analyst has described it as being like a telephone pole - a wooden post with phone lines on top, referring to the dominance of telecommunications and forestry stocks. (Telecom accounts for around a third of the market and forestry stocks about 12 per cent).
Newman says all these factors contribute to the New Zealand market's greater volatility and its poor relative returns.
He says the New Zealand market is 1.5 times more volatile than international ones, and over the past 10 years it has posted an average quarterly return of 1.9 per cent, compared to 3.5 per cent for international markets.
The other sobering fact is that the number of times it has performed five per cent worse than average is (on a quarterly basis over 10 years) 13/40 compared to 5/40 for international markets.
Clearly the statistics don't stack up well for the New Zealand market. This has forced a bit of an investment rethink by professional managers and advisers and lead to them taking a view Australasia is one market.
For instance Colonial has combined its New Zealand and Australian equity funds, Coronet Asset Management has the ability to invest in Australia as well as New Zealand, and smaller specialist managers, such as Calan Healthcare Trust, have changed its mandate so it can invest in both countries.
The Investment Planning Group, a Central North Island group of investment advisers that advises on more than $50 million has also made that decision.
One of the group, Ian Watson of Te Aroha-based Gilchrist Burns and Johnston, says in the past Australia has been viewed as a global investment.
"We believe it is now part of our backyard and we should invest in both countries as our home economy."
Watson says there are strong fundamental reasons for the move, as well as the statistical evidence produced by Newman.
Australia is our biggest trading partner and the destination for more than half of our exports. Many of our large listed companies source either the majority, or a significant portion of their revenue from Australia. For instance 57 per cent of Fisher and Paykel's revenue is ex-Australia, Lion Nathan gets 85 per cent of its income from across the Tasman, and the figure is 37 per cent and 65 per cent respectively for Fernz and Nuplex.
Additionally a growing number of companies are dual-listed on both the New Zealand and Australian Stock Exchanges.Many of New Zealand's large companies, such as Brierley Investment, the Fletcher Challenge letter stocks and Lion Nathan have been dual-listed for some time. Recently though Fernz Corporation has announced it is moving its listing to Australia, and Baycorp and Evergreen Forests plan to dual-list.
Added to this, the New Zealand dollar tends to mirror the Australian dollar, as they are seen as one country by international investors, and there is reasonably close economic co-operation.
From an investor's point of view combining the two markets provides a greater and more diverse universe of stocks to pick from. For instance, sectors which aren't well represented (or totally absent on the New Zealand market) such as resources and banking are available in Australia, and instead of having just two brewing stocks (Lion Nathan and DB) there are the likes of Fosters.
This all means an investor has greater choice.
Watson says another key factor to consider is that many New Zealand companies appear to be looking at shifting across the Tasman. By doing that they gain access to a greater pool of executive and boardroom talent than is available on this side of the Tasman.
He also expresses a view, which has been promoted by the likes of Lion Nathan's Doug Myers, that there is a poor quality of management in New Zealand.
All in all there are some compelling reasons for investors to look at Australia as home, and for the Stock Exchanges in both countries to combine.
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