Watch, worry and wait.
The new Reserve Bank of NZ monetary mantra might work for official interest rate-setters but the pat slogan offers little of value for investors, according to the June quarter Melville Jessup Weaver (MJW) investment.
Ben Trollip, MJW principal, says in the report published last week that a growing number of investors have been contemplating a market exit, or pause, amid gathering geopolitical risks and valuation concerns.
“However, what is often missed in these discussions is that this is usually the case,” Trollip says. “It would be a strange state of the world if there were no significant worries out there. In fact, such a scenario would likely cause seasoned investors to be cautious, since markets were possibly too blasé about risk (read: overvalued).”
Meanwhile, the MJW study shows the NZ equities market has fallen behind global peers over the last year but remains ahead over the long-term on a risk-adjusted basis.
According to the report, the S&P/NZX 50 lags global and Australian share indices over the 12 months to June 30, booking a particularly off-the-pace return of just 0.4 per cent in the latest quarter compared to more than 7 per cent for international equities.
But over the 10-year period, the standard NZ stock index has delivered an annualised 11.5 per cent performance in a result that puts it ahead of Australian shares and hedged global equities, the survey shows.
Only unhedged international shares – returning about 12 per cent per annum – beat the NZX benchmark for 10-year nominal returns but the result came with much higher annualised volatility of 15.4 per cent against the more sedate 12.2 per cent for local equities.
The study also debunks claims the NZ benchmark returns simply mirror the outperformance of a few large companies that dominate the market.
Both the more diverse S&P/NZX 50 Portfolio Index, which evens out some of the overweight stock imbalances, and the S&P/NZX Mid Cap Index that excludes larger firms returned more than 12 per cent annualised over the same 10-year period.
“Add to this the greater success of active management in the New Zealand share market, and there begins to be a strong case to allocate to the sector,” Trollip says in the report. “Indeed, the average KiwiSaver balanced fund in our survey has 13% in the domestic shares bucket, despite New Zealand being less than 1% of the MSCI World Index and less than 0.3% of global GDP.”
KiwiSaver growth funds covered by MJW exhibit even higher allocations to Australasian shares (many managers run funds combining NZ and Australian equities) with an average allocation of almost 21 per cent, ranging from 12.9 per cent for Kiwi Wealth to 25.7 per cent in the BNZ option.
While Kiwi Wealth (now part of Fisher Funds) has the lowest KiwiSaver growth fund allocation to Australian and NZ shares, the same strategy had less than 1 per cent in the local equities sector in June 2020.
Year-on-year most of the growth funds in the MJW KiwiSaver tables held Australasian equities allocations more-or-less the same, although Simplicity did pare back the asset class exposure to under 20 per cent from almost 27 per cent 12 months ago.
Performance-wise, Generate returned to top the KiwiSaver growth categories for the quarterly and 12-month periods while Kiwi Wealth did the same for the balanced and conservative sectors.
The relative underweight to Australasian shares may have also helped the Kiwi Wealth default KiwiSaver fund outperform (up 4 per cent) in the latest quarter while the Simplicity version came out ahead in a tightly contested top four arrangement over the 12 months to June 30, the MJW report shows: of the six default funds only SuperLife (7.9 per cent) and Westpac (6.8 per cent) failed to return above 9 per cent for the annual period.
Westpac was the most conservatively positioned of the default schemes with over 52 per cent in income assets while SuperLife reported almost 36 per cent in NZ bonds, equating to more than double all other funds in the category.
The NZX-owned SuperLife default scheme, boasting the cheapest all-in annual fee of just 0.2 per cent, is unique in holding a zero allocation to global bonds.
Unusually, too, SuperLife was the only default fund to see assets under management decline over the 12 months to June 30, falling to $227 million from $360 million at the same time in 2022, according to the MJW survey.
The average balanced fund, of which the default sector is now a subset, outperformed the median conservative KiwiSaver strategy in the MJW analysis by more than three-times in the June quarter and double the annual result.
“One needs to accept that risk is part of investing and waiting until there are no (apparent) risks out there is imprudent,” Trollip says.
“Whilst one is waiting, financial markets will get on with what they do best – paying those who do take risk.”