Annual investment returns, as noted last week by the Financial Markets Authority (FMA), skewed upwards over the 12 months to March 31 during a statistically unusual period.
The FMA move to limit fund managers from exploiting the lucky numbers for marketing purposes may have divided opinion but the “base effect” has distorted a wide range of annual economic indicators, according to the March quarter Melville Jessup Weaver (MJW) investment survey.
Economic and market data for the latest 12-month period remain highly sensitive to the ultra-low base set in the first quarter of 2020, the study says.
“We are entering a period where scepticism needs to be applied to interpreting statistical results, especially those over the short-term,” the MJW report says.
For example, media reports highlighting an 18.3 per cent rebound in the Chinese economy over the 12 months to March 31 show the base effect in action.
“The March 2021 quarter was in fact weak by Chinese standards, at only 0.6% compared to a more typical rise of 1% to 2%,” the MJW study says. “What has happened is that the atrocious March 2020 quarter has dropped out of the rolling twelve months.”
Over the two-year period to March 31, GDP in China rose about 10.3 per cent – or about 5 per cent on an annual basis: OK “but perhaps surprisingly low in light of the aforementioned 18.3% figure”, MJW says.
The report, authored by MJW principal Ben Trollip, says annual investment returns over the period put up similar statistical red flags.
“While investors hardly need to be cautioned of the risks of basing decisions on short-term performance, this point in time provides vivid examples with many funds showing remarkable investment results for the last year,” Trollip says. “The FMA has already issued a notice cautioning that, ‘advertising phenomenal investment returns for the last year could mislead investors’ – a warning shot that investment managers will take note of.”
Consequently, all equity indices notched up impressive gains over the 12 months to March 31, ranging from about 26 per cent for NZ listed real estate to over 50 per cent for hedged global shares: most local and international fixed income benchmarks fell over the same period.
Offshore equities, in particular, held up over the entire 12-month stretch with the MJW figures showing the shift from ‘growth’ to ‘value’ stocks continues apace: on an unhedged basis the median value manager in the MJW survey returned 40.5 per cent and 13 per cent over the year and quarter, respectively, compared to 35.4 per cent and 5.1 per cent for the growth sector.
“… the cumulative outperformance of growth over value has reversed in recent months – although value still has a lot of ground to make up,” the report says.
While the value-growth rebalancing shows up to some extent in the Australasian equities category, the local market struggled in the March quarter with all NZ share managers in the red.
The median NZ equities manager was down -3.7 per cent for the three months to March 31 across a range of -5.1 per cent (Castle Point Trans Tasman fund) to -2.3 per cent (QuayStreet). But over longer periods NZ share managers have booked solid median returns of almost 31 per cent for one year and 15.6 per cent annualised 10-year performance.
The MJW figures include several examples of the ‘phenomenal’ annual returns the FMA wants managers to downplay. But the survey also shows some investors saw basement-level returns of late.
KiwiSaver conservative funds, for instance, were “mostly negative” for the March quarter with only Fisher Funds and Kiwi Wealth options in the sector eking out slightly positive or at-par returns.
“This is due to the higher weighting to fixed income sectors where asset values fell in the wake of rising interest rates,” the MJW report says. “While higher interest rates are good for the longer term return prospects, in the short term these losses will be a wake-up call for KiwiSaver members who may be less familiar with the risks of investment markets, even for funds branded as conservative.”