NZ investors with the right mix of NZ milk stocks, unhedged global equities and a dash of bonds would’ve experienced a stellar June quarter – especially if they also avoided exposure to under-fire insurer, CBL, the latest Melville Jessup Weaver (MJW) quarterly investment survey shows.
According to the MJW report, diversified portfolios were “likely to have outperformed expectations, with equities generally strong and bonds providing small positive returns”.
“Steadily rising interest rates and expanding credit spreads are both positive because they build in a degree of downside protection to the defensive portion of the portfolio,” the survey says.
While the S&P/ASX200 index (in $A terms) provided the best returns (8.5 per cent) over the quarter, both unhedged global equities (8.4 per cent) and NZ shares (7.7 per cent) contributed to the quarterly boom.
Local bonds were up about 1 per cent for the quarter while global fixed income indices rose about 0.2 per cent, the report shows.
Ben Trollip, MJW principal, said changing currency conditions were particularly influential over the June quarter with returns from fully-hedged international shares 4.5 per cent behind the unhedged variety.
“The US dollar strength has really helped NZ investors with unhedged global shares,” Trollip said.
As NZ interest rates converge with the US, one of the key advantages of hedging international equities – forward points – has waned for local investors, the MJW report says.
“The currency hedging premium, which has averaged 2-2.5% pa over the last 30 years, is now worth perhaps 0.5-1% pa given the weighted average interest rate of global investment markets,” the survey says.
Meanwhile, NZ share investors experienced another spectacular quarter verging on 8 per cent (almost 19 per cent for the 12 months to June 30) with Synlait Milk, in particular, on the boil even as star NZX company, a2 Milk, cooled slightly.
Furthermore, fund managers that avoided – or had previously written down the stock to zero – the now in-administration insurer, CBL, would’ve seen a 40 basis point bump in performance from that decision alone, the MJW survey says.
Over all time periods, the median NZ equity manager in the MJW survey outperformed the benchmark NZX/S&P 50 before fees and tax.
Trollip said MJW also added BT Funds Management wholesale NZ bond funds to the survey this quarter after a long absence. While BT mostly acts as the investment manager for parent, Westpac, the group’s large NZ fixed income portfolios added detail to the competitive landscape, he said.
KiwiSaver growth and aggressive funds with a higher weighting to equities – particularly NZ shares – had a good quarter, the survey shows, with the AMP Aggressive fund topping the charts at 5.2 per cent. Over all time periods bar one, the average KiwiSaver fund across the risk categories in the MJW survey has performed in line with theory – ie those with higher weighting to equities have provided greater returns. Only the two high growth funds in the report – managed by Booster and Mercer – spoiled the perfect record, falling behind less risky funds slightly over the 10-year period.
The MJW report also notes KiwiSaver balanced funds have adopted a particularly high weighting to cash in their fixed income allocations.
“Exactly half of the balanced funds have more allocated to cash than to New Zealand bonds as at 30 June,” the survey says. “To the extent that this is a tactical view, this would have cost investors since bonds have outperformed cash over the last quarter and year.”
Furthermore, the report notes a divergence in bond strategies across conservative KiwiSaver funds with some – including ANZ, BNZ and Kiwi Wealth, tilting to global fixed income as others, such as ASB and Fisher Funds, favouring local bonds.
“Considering the sizable (domestic) cash holdings, this shows a marked bias towards local markets,” the survey says.