The December quarter saw some sharp reversals in fund manager rankings as asset allocation calls were answered during a hectic period for markets, according to the latest Melville Jessup Weaver (MJW) investment survey.
Most notably in the KiwiSaver space, the government-owned Kiwi Wealth scheme jumped from bottom-dwelling over the one-year period to top or podium finishes in all three of the risk categories it competes in – primarily due to the manager’s heavy weighting to international shares, winner of the best-performance in an asset class for the December 2016 quarter.
Conversely, KiwiSaver managers with high exposure to New Zealand shares – which fell 6.4 per cent in the December quarter as global equities rose 6.2 per cent on an unhedged basis – suffered over the three-month period.
“For example, Milford’s Active Growth fund (which has 58% in domestic shares and just 10% in global shares) fell 0.9% over the quarter, while KiwiWealth (which has almost all of its equities invested offshore) rose 4.3%,” the MJW survey says. “This dynamic, of course, reverses when longer term returns are considered. Milford is first in its group over five and nine year periods.”
AMP also staged a comeback in all of the KiwiSaver risk profiles measured by MJW, particularly in the conservative sector where its almost $1.3 billion default fund was one of only two to report a positive return over the quarter.
“For the conservative funds, the losses [median fund down 0.7 per cent] reflect the generally large weightings to fixed income; the average allocation to bonds is a sizeable 57%,” the MJW report says. “The top performing conservative fund this quarter was AMP – Default, which has almost 50% of its assets in cash.”
The MJW survey reveals a similar dynamic in the wholesale market with the 12-month top-performing NZ equities fund, the Castle Point Trans-Tasman strategy, almost exactly swapping positions with the December quarter king, Salt Funds Focus Share, which was the worst-performer over the year – albeit with all local share managers in negative territory for the three-month period (median return -5.1 per cent).
“Over the quarter, the New Zealand share market gave back a significant proportion of its previous gains,” the MJW report says. “This, too, was largely driven by bond yields; the desirability of New Zealand stocks is strongly linked to their relatively high dividends. So, as bond yields rise, investors leave our share market and return to bonds.”
However, Australian shares rose strongly over the quarter, reversing a long-standing trend versus the NZX and bringing both markets close to parity for the 12-month period.
“The S&P/NZX 50 has returned 10.1% compared to the S&P/ASX 200’s 9.2% (NZ dollar terms),” the MJW survey says. “With that said, the Australian share market does have some way to go to catch up to the NZX. The three-year figures show a difference of almost 10% pa between the two.”
Rising bond yields were, though, the most significant factor for investment markets over the previous three months, according to the MJW report authored by investment consultant, Ben Trollip.
The NZ fixed income index dropped 3.4 per cent in the December quarter as global bond benchmark (fully-hedged) fell 2 per cent over the period.
While yields have been climbing steadily over the year, the election of US president Donald Trump – and the expectation he will stoke inflation – accelerated the trend. The benchmark US 10-year Treasury yield jumped more than 40 per cent over six weeks late in 2016, rising from 1.8 per cent on US election day to 2.6 per cent as at December 15.
“While these losses in fixed income were painful, longer term results remain healthy,” the MJW report says. “Even allowing for the December quarter, the domestic and global bond indices have returned 5.5% pa and 7.1% pa respectively over the last three years – well above the result from cash (3.1% pa).
“We may well be at a turning point for yields but the bond bears should hold off their gloating just yet.”