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AJ takes high ground with new fund

Armstrong Jones chief investment officer David McClatchy reckons that a number of New Zealand share funds are disguising their true performance by investing in Australian shares while keeping a NZSE benchmark.

Tuesday, June 12th 2001, 10:58PM

by Philip Macalister

Armstrong Jones chief investment officer David McClatchy reckons that a number of New Zealand share funds are disguising their true performance by investing in Australian shares while keeping a NZSE benchmark.

McClatchy says many NZ equity funds have changed their mandates so they can invest in Australia, yet they continue to use NZSE indices as benchmarks.

"It's absolute nonsense," he says. "You can't tell whether (a manager) is doing a great job."

This creep has lead to an increasingly wider range of returns reported by so-called NZ equity funds.

Also this creep has hit AJ's locally domiciled unit trust which continues to invest solely in New Zealand. Over the years its ranking against its peers has fallen, while the range of returns reported by NZ share funds has increased.

AJ is taking the high moral ground on this issue with the launch of its own Australasian share fund (which is an UK-based open-ended investment company managed by Edinburgh Fund Managers).

McClatchy says the fund is benchmarked against a composite index which is 50% NZSE40 and 50% ASX200.

The company studied various ways of developing a suitable benchmark including having one which was weighted on the relevant capitalisation of each market (such a benchmark would be heavily in Australia's favour as its market capitalisation is about A$700 billion compared to $42 billion in New Zealand).

Instead the benchmark was worked out on what would have provided the best performance over the past 20 years.

McClatchy says their research revealed that New Zealand had marginally outperformed Australia over the last two decades.

On an unhedged basis the optimal mix was 60:40 to New Zealand. However, on a hedged basis the result was the other way around.

McClatchy says that a 50:50 mix was "a prudent starting point".

Currently the fund is invested 50:50 between Australia and New Zealand, however McClatchy expects that the weighting will move in Australia's favour throughout the year.

In an unusual move AJ are offering an incentive for advisers to put their client's money into the fund.

For every $50,000 of new money put into the fund, advisers get one entry in the competition. First prize, valued at $11,000, is a trip for two to Edinburgh in Scotland with five night's accommodation, plus £500 spending money.

The second prize, valued at $5,000, is a trip for an adviser and one client to the Bledisloe Cup match in Sydney.

The prizes are being put up by Edinburgh.

AJ National sales manager Wayne Becker insists that advisers who enter this competition must disclose this fact to their clients.

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