Panel takes a defensive approach to asset allocation

Overall the split between income assets and growth assets was 30:70 assuming property is considered as a growth asset. It can be argued the income/growth split is more like 40:60 as the panel favoured property due to its strong cash yields of 10 to 11 per cent, plus it is reasonable defensive.

However, one of the problems with an overweight position in property is that in these times of rising interest rates investors receive a strong yield while seeing their capital value diminish.

The panel chose to allocate none of the portfolio to New Zealand cash as bonds looked more attractive. Although bonds were losing capital value in the present rising interest rate environment, the panel took the optimistic position that Reserve Bank wouldn't tighten monetary policy much more.

Once the rises peak there is the potential for a rally in fixed interest.

Curtin says the Reserve Bank appears to be ahead of the curve in rising interest rates to inflation pressures from the growing economy, on a global basis New Zealand rates are quite high, and the market has already factored in future rate rises.

As for Australian bonds: "Nobody had a kind word to say about Australian fixed interest compared to New Zealand."

Curtin says there was much better value in New Zealand, consequently Australian fixed interest was reduced five per cent from 5 per cent to zero and New Zealand was increased five per cent to 10 per cent.

New Zealand equities also received the panel's blessing and were overweighted by five percent to make up 20 per cent of the portfolio.

"It's a good story fundamentally," Curtin says. New Zealand shares have good earnings momentum, the dividend yields remain strong which present a comfortable defensive characteristics and on a global basis the market looks cheap.

The problem is that international investors control the market and currently they are attracted to more sexy investment stories such as Asia and the technology sector.

Perhaps, the most interesting decision of the allocation was the panel's decision to underweight yet again in international equities.

Last year the asset allocation failed to add value because it took an underweight position with international shares, and further reduced that position in the last quarter as an insurance policy against fears of turmoil from the Y2K computer bug.

In reality international shares staged a major rally in the last quarter and the panel missed out on the ride.

The panel has been criticised for its decision to make changes due of Y2K as the market was fully aware of the problem and had priced in its impact.

In effect the panel were saying they didn't believe in the efficient market theory.

Curtin though defends the changes, saying he would do the same thing again in the same circumstances.

This year the panel flagged a number of risks (last year it raised lots of risks and most of those didn't eventuate) including the outlook for the technology sector, inflation and a shift in economic growth from the United States to Asia and Europe.

The question with the technology sector is that if it suffers a significant crash/correction how much will it contaminate other areas?

While there are three broad outcomes, ie no impact, some impact, full blown wipe out, the panel put the greatest probability on the middle scenario.

The panel took a neutral position on Australian equities, although the market performed well last year and the country is enjoying good economic growth.

Curtin says the panel quite liked the Australian story, however there were "a couple of iffy things" going on such as the impact of the introduction of GST, and the market's heavy weighting to two stocks.

In Australia News Corp and Telstra account for about a quarter of the market and News has recently seen a strong run up in price as it gets more involved in the technology sector. (New Zealand has a similar problem with Telecom accounting for about one third of the market).

"We couldn't get excited enough to go overweight."

Curtin says the panel liked the New Zealand story because the asset classes had "a good defensive flavour", the Reserve Bank will probably have to do less than people think to control inflation, and the dollar was low and not likely to go much lower.

The portfolio is a tactical allocation for a 40-year-old. This theoretical investor has a 20-year investment horizon and average risk tolerance.

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