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Market Review: May 2008 commentary

Tyndall's head of strategy, Peter Lynn, comments on the markets and on Investment Performance Surveys, concluding that they are nearing the end of their useful lives. Food for thought.

Tuesday, May 6th 2008, 2:18PM
The Markets
April saw some stability returning to markets, without the endless doom and gloom of continuous negative returns. There was still some volatility around – for example, the NZX 50 Index started out week one of the month with a very strong return, then gave back some of that gain, before going on a somewhat bumpy run to end the month with a very strong return. Of concern, though, was some of the inflation data coming out, both in New Zealand and, especially, Australia. These results mean that the RBA may indeed look for one more rate hike in their cycle, while any thoughts that the RBNZ would start to cut rates before October may now be questioned.

The New Zealand Government Stock Index had a negative month after the strength of the previous quarter. However, corporate bonds performed much better as swap spreads narrowed. The really strong returns, though, were in the equity classes, with the MSCI World local currency Index returning 6.1%. The NZX50 Gross Index was also strong, returning 4.5% for the April month. It was interesting to note that one of the drivers of NZ share returns over recent years continues. Corporate activity has been a dominant positive contributor to our market, formerly from the cash-rich pockets of hedge funds, but we are now witnessing other corporates continue with this takeover activity. Just in April alone we saw Vector selling its Wellington electricity network to Cheung Kong Infrastructure Holdings and BG Group announce a takeover bid for Origin Energy (Contact's majority shareholder). Both of these helped the two local stocks to returns of over 20% for the month.

Are Investment Performance Surveys Becoming Extinct?
At a conference last month, one asset manager (a former asset consultant) raised an issue about the future of investment performance surveys. As part of a much wider speech, he posited that the current format of these surveys are becoming extinct and surveys on KiwiSaver returns are likely to be much more relevant in the future. As someone who, in a former life, spent an inordinate amount of time producing investment performance surveys, I generally agree with this sentiment.

The traditional wholesale investment performance surveys in New Zealand are produced by actuarial firms to cover predominantly the performance of superannuation funds. The main surveys are, in no particular order, Mercer's Managed Fund and Sector Surveys, Aon's Investment Update, Melville Jessup Weaver's Investment Survey and the iPs, originally produced by Watson Wyatt and now Mercer.

There are other surveys out there, covering particular types of funds, such as Eriksen's Master Trust Survey and FundSource's retail surveys, for example. However, this comment is focused on the superannuation surveys. With the exception of the iPs, Mercer's, Aon's and MJW's surveys cover pretty much the same ground – that is, the main discretionary returns of fund managers in each sector. There are differing amounts of risk information shown and some take several pages to cover the information, while some take only three. Also, the two produced by Mercer require a subscription while the Aon and MJW Surveys are free.

It is hard to see the benefit of the iPs. This survey combines all of its subscribing superannuation funds, regardless of investment strategy into a universe that is then ranked. So, for example, currently a cash-heavy fund would rank far higher than one predominantly equity-based. Comparing "oranges" and "apples" does not really seem to make a lot of sense. The other surveys split the universes into balanced funds and the various asset sectors (and sometimes into sub-sectors, such as New Zealand-only shares and Australasian shares).

How are these surveys used? This is where there is a bit of controversy. Their target is presumably the trustees of superannuation schemes as a guide to how their manager(s) are performing. The Trustees can then tell whether their own managers are performing well in respect of their peers. However, what I suspect happens a lot is that these same trustees use these surveys to help select a new manager when one of their own is falling behind the pack. This is where the controversy arises because, as we know, past performance is absolutely no guide to future performance, yet I suspect that the survey rankings comprise a substantial part of a trustee's decision process or rationale for appointing a manager. It is a much easier sell to the scheme members if you appoint a top-performing manager, rather than the bottom-placed one. Of course, another common use of performance surveys is for some sort of one-up-manship between the fund managers that filters through into their marketing and, sometimes, into remuneration for some employees.

So, is the demise of these surveys nigh? You could always make a case that trustees will always want to know how the whole universe of managers is performing so that their own can be held accountable. However, their importance has seemingly diminished over time. When I first started working on these surveys (actually the very first day of my working life, compiling the Mercer December 1992 survey), their release was eagerly awaited by all and sundry. The results were published in the National Business Review (sometimes on the front page!) and the journalists used to make stories out of the commentary that attached to the release. I remember several occasions where fund managers were prepared to pay costs to republish a survey because they had missed the deadline or submitted incorrect information. These days, their release is eagerly awaited mainly by those with a vested interest, especially fund managers, but I don't sense the same desire among trustees and the business public to engage with the results on the day of their release. Trustees will undoubtedly consult their favourite survey just prior to a Trustee meeting, especially when there are concerns over a manager.

However, in thinking about surveys, I have found an arguably better use for them than as an aid to find your next manager. Looking back over the years at the surveys provides a useful history of the New Zealand investment management industry and a barometer to trends in the industry. When I think back to that first December 1992 survey I helped produce, the names involved are so different to what they are today. We only showed balanced funds (it was before the rise of sector specialisation) and life offices were separated from "superannuation fund managers". There were 22 managers (really!) in those days (there are 8 balanced managers today).

However, what is most telling about these old surveys is the names that are no longer present, having merged, been taken over or fallen by the wayside. Remember these names as investment managers in New Zealand: Pyrford, Leadenhall, Citibank, Westpac, ANZ, BNZ, Prudential? Southpac were the high flyers, although their mid-90s demise came very quickly. Tyndall itself is an amalgam of many of these former names – combine NZI Life, Guardian Trust, GRE (later Guardian Assurance), Norwich Union, SunAlliance (and later Royal & SunAlliance) and you have modern-day Tyndall. National Mutual Funds Management became AXA who became Alliance Capital and now AllianceBernstein as investment managers. AMP Investments became AMP Capital, Armstrong Jones became ING and BTFM has now withdrawn from the wholesale market. The only name that seems to have stayed the same is Tower Asset Management, although I think that had just changed from Government Life in 1992. We have seen the rise of new equity boutiques such as Brook, Mint, Milford and Walker Capital (also now gone). The old surveys help provide a history of the many changes that the industry has undergone.

However, the investment performance survey is nearing the end of its useful life just as the sun appears to be setting somewhat on the wholesale superannuation industry. The future does seem to be KiwiSaver, despite its lock-in, with its portability, Government assistance and IRD facilitation making it a very attractive way to offer employees the opportunity to save for their retirement. The investment performance survey of most interest to New Zealand in the future will be a KiwiSaver survey, particularly if it is produced by an independent party not offering a KiwiSaver scheme.

Retirement Symposium
Finally, while on the subject of superannuation, a word of congratulations should go to the organisers of the recent Retirement Symposium at the Auckland University's flash new Business School. This was an excellent day of (generally) interesting speakers, with a good turnout, strong organisation and it was, in contrast to just about every conference these days, very cheap.

Thanks to Michael Littlewood, Susan St John and others and let's hope this can become a regular symposium. New Zealand needs more of these sort of events.

Peter Lynn, CFA, Head of Strategy

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