Winning managers reckon cash is king
The old cliche in investment circles is that cash is king. Judging by fund managers the king has his butt firmly on the throne at present.
Sunday, May 21st 2000, 12:00AM
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1st |
2nd |
3rd |
3rd= |
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Overall winner |
Armstrong Jones |
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Multisector |
Armstrong Jones |
Colonial First State |
Tower |
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New Zealand Fixed Interest |
ANZ |
WestpacTrust |
BNZ |
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New Zealand Mortgages |
New Zealand Guardian Trust |
Equitable Life |
ANZ |
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New Zealand Property |
Tower |
New Zealand Guardian Trust |
Armstrong Jones |
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New Zealand/Australian Equities |
The National Bank |
Armstrong Jones |
Tower |
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International Fixed Interest |
BT Funds Management |
Colonial First State |
BNZ |
WestpacTrust |
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International Equities |
Armstrong Jones |
AMP |
WestpacTrust |
At the start of the year managers were hot on New Zealand and cautious on international assets and they were particularly wary of the United States sharemarket.
Now nothing but cash looks safe. Armstrong Jones, which has just won the 1999 Morningstar Fund Manager of the Year Award, is about 10 per cent overweight in cash and is shifting international sharemarket money from Europe, and to a lesser degree Asia and Japan, back to the US as a defensive move.
Armstrong Jones chief investment officer David McClatchy says there is concern about rising inflation, slowing global growth and the stretched valuation of technology stocks worldwide.
A year ago Armstrong Jones' funds moved away from the US to Japan, Asia and Europe which all experienced strong growth. Now it is reversing that trend.
McClatchy says stocks in Europe, Asia and Japan are more over-valued than those in the US, and a move back to the US is defensive.
He says returns on international shares have been very high in recent years due to the excess returns generated by technology stocks. Now though expects returns to drop back to more traditional levels.
However, he predicts that while returns will become more "normalised", the historical average return will start rising because of changes in makeup of the global economy.
He says the US is considered a safe haven as it has demonstrated proven earnings streams.
At the start of the year New Zealand shares were given top billing by experts at the Morningstar managed funds conference and Armstrong Jones was equally bullish of the sector.
Less than three months after the conference sentiment has changed significantly, however it's still positive.
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HOW THE AWARDS ARE DECIDED |
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The awards have two parts to them. First there is a process where a winner and finalists are selected in each of the seven main investment sectors. Then there is a process where the overall winner is selected. In each of the sectors Morningstar takes all the funds a manager may have in one sector (that can range from one through to about a seven), then it works out the average rating for all those funds in that sector. Therefore a manager with just one or two good funds in a sector will do better than a manager which has maybe two good funds and two poor funds in a sector. That situation arises with some of the larger and older managers that have legacy products. The overall winner is determined on the basis of the sector awards. A manager is given five points for a first placing, three for a second and one point for a third. The manager with the highest total points across the seven sectors is declared the fund manager of the year. Not all fund managers who offer products in New Zealand are eligible for the awards. To be eligible a manager has to be New Zealand-based, therefore the likes of Australian managers Rothschild and Dresdner are not considered. Also, a manager has to have its products rated by Morningstar. A number of managers are either not-yet-rated or declined-to-be rated by the company. The main two managers who are not included in these awards are New Zealand Funds Management, which is associated with rival researcher IPAC Securities, and Royal and SunAlliance (however New Zealand Guardian Trust, which was acquired by Royal and SunAlliance last year is covered in the awards). While the awards do not cover some managers, they also exclude two types of funds, namely index funds in the New Zealand/Australian equities sector, such as TeNZ and Tower Tortis Ozzy, and sector and thematic international share funds the like BT Funds Management's Pacific Basin fund, and the Sovereign Far East fund. |
AMP Asset Management portfolio manager Stephen Walker, who runs the National Bank's New Zealand Equity Growth Trust says New Zealand shares are a great buying opportunity at present.
"There are a lot of good companies which are conservatively financed, and have good management that you can buy at quite ridiculous prices."
That's a sentiment Armstrong Jones senior investment manager Amanda Smith agrees with.
She says there is good value to be had in New Zealand shares, however Armstrong Jones has downgraded expected New Zealand share returns from 16 per cent to 11 per cent.
The reason is solely to do with how international investors view New Zealand.
At the start of the year managers were positive because corporate earnings were forecast to be good, valuations were reasonable and confidence was up.
Despite the good outlook international investors, who essentially control the market, decided to sell down although all the goodies promised have eventuated.
Amanda Smith says the sell down is as much to do with concerns international investors face in their home markets, as opposed to changes proposed by the New Zealand government.
She notes that some of the changes actioned by the government are no less draconian or audacious that what currently happens in the home markets of offshore investors. What they don't like is a perceived change in direction.
"International interest in New Zealand really reached a low point in the first half of this year," she says.
Amanda Smith says its got to the stage where the market would be dead if it wasn't for the rash of merger and acquisition activity going on such as the takeover of Fletcher Paper and Montana, moves by Telecom to buy into INL and rumours that Tower is in play.
Tower Asset Management managing director Paul Bevin says investors need to reign back their expectations of what property investments will deliver over the short and medium term.
In the 1999 Tower, which won this section of the awards, achieved a weighted annual average return of just 3.44 per cent, while second and third placed managers Guardian Trust and Armstrong Jones produced 2.46 per cent and 2.27 per cent respectively.
Bevin says investors should get used to low single digit returns for property as that's all that can be expected at present.
He says investors who have chased the double digit returns offered by property syndicators are going to find that the values of their buildings are diminishing, and in some cases quite rapidly.
"The syndication market is obviously in some strife," he says.
Bevin's advice to investors is that property is an illiquid asset (even if it is bought through listed securities), therefore investors should stick to their benchmark asset allocations for the sector.
"Property is not something you should be trying to time aggressively."
His two favoured property markets at present are retail (shopping centres and the like), and industrial.
With the New Zealand economy being "reasonably strong" people will keep spending which is good for the malls. Likewise, the distribution centre part of the industrial property sector is appealing because advances in technology and the Internet shopping mean goods have to be moved around quickly.
His final advice is to buy good quality property with reasonable yields.
While the outlook for growth assets such as shares and property isn't particularly flash, nor is it with income earning investments such as fixed interest and mortgage funds.
The major driver here, and one where managers can see a juncture in the road is interest rates.
Moves by central banks worldwide, including our own Reserve Bank, to slow growth by gradually pumping up interest rates have caused losses, or at the best negligible returns for fixed interest funds.
Morningstar says ANZ, which won this sector of the awards, produced a net weighted average returns for its three funds of 2.07 per cent compared to 1.8 per cent and 1.01 per cent for the other two finalists.
As ANZ Funds Management managing director Graham Duston says fixed interest was a "tricky sector to navigate successfully" in 1999.
This year is going to be an equally difficult year for fixed interest funds as interest rates are still rising around the world, and any rally (fall in rates) is some way off.
The positive news is that managers reckon we will be at the peak of interest rate rises around the end of the year. After that the returns should really accelerate.
This view of domestic bonds is reflected in the international sector that also had an unpleasant 1999.
Sector winner BT Funds Management reported an annual net return of -0.47 per cent in the 12 month period, Morningstar says.
However, BT Funds Management chief investment officer Craig Stobo says the funds they managed did well versus their competitors due to making good decisions about predicting where rates were going.
Bonds will rally later this year because global growth rates have peaked and rates will start to fall.
"Global bonds should have a better year this year because we expect a rally in rates," Stobo says.
The other key income producing sector for New Zealand investors is mortgage funds.
The problem they have is that their rates tend to lag interest rate changes, so when rates rise investors can get a better deal in a cash fund which can put up its rates straight away. Mortgage managers have to give their lenders notice so are more constrained in their position.
Consequently all three finalists in this sector suffered significant net investment outflows, Morningstar says, with ANZ being the worst hit experiencing net outflows of $126.8 million.
However, Anthony Quirk who now heads Guardian Trust Funds Management says the worst appears to be over because rates are near their peak and will, hopefully begin falling towards the end of the year.
He expects the Reserve Bank to tighten monetary policy a couple more times this year and if it does that and inverts the yield curve and make short term rates higher than long term ones that is a plus as well because mortgage funds are priced off the short end.
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