Beating the bear market

By Chris Barton

The outside reflections on the polished board room table - mainly cloud, some of it with foreboding grey undersides, and and a few glimpses of blue sky - seems entirely appropriate. While he's well aware that "no one has escaped the wrath of the markets", Peter Huljich is focused very much on the patches of blue.

"We sit in front of screens every day and there is just blood everywhere, but when you pick through there are opportunities and we are seeing more of those opportunities presenting themselves every day," says the chief investment officer of Huljich Wealth Management.

With about 20,000 customers, many of who have joined in the last three months, the company is a relatively small player in the Kiwisaver market looking after funds totalling about $14, million. But it has been a standout performer showing positive returns over the last year in all funds - conservative, balanced and growth - in a time when most of the market has been going backwards.

The secret to his success - including a 16.07 per cent return for the company's conservative fund - was an early move, "a no-brainer", to cash and fixed interest as opposed to shares.

As an active fund manager, Huljich says the company has more discretion than many about how it handles its funds' asset allocations. As volatility and uncertainty in the markets has grown in the past year, it has brought more of its assets back to New Zealand as opposed to holding them in international markets.

"It just makes good sense," he says referring to the fact it's the local market the company knows most about.

In such volatile times, Huljich is also not employing derivatives in any of the funds the company manages, although in fairer weather he's not opposed to their use as a tool to protect portfolios from large downswings.

"We certainly wouldn't do naked puts and we wouldn't short-sell for example. Right now, the risk of taking on debt or taking on leverage far outweighs the reward."

The company, which boasts former Reserve Bank Governor Don Brash as its chairman, also pushes its socially responsible investment policy which includes no investments in alcohol, tobacco or gambling.

Huljich acknowledges those sorts of stocks often rally during recessions, but believes staying away from them is what its clients expect. "We believe we can get as good returns from other opportunities within the market. I think you can be socially and environmentally considerate and also make a lot of money."

Looking to 2009, the company is quietly picking equities it believes have an upside when the market eventually picks up - something Huljich thinks is still some 18 months away. "There's good opportunities for the future. I'm quite excited with the re-rating of assets and prices coming - there are a lot of very sound companies out there."

Gareth Morgan Kiwisaver, with 33,000 members and $132 million of funds under management, is another company that's gone against the tide providing positive returns in its conservative and balanced funds and a minimal loss in its Growth fund.

Executive director Gareth Morgan is astonished that some conservative funds are showing negative returns. "I just cannot see how you can lose money. They're not supposed to if they are conservative."

Morgan says his funds are different from most because they allow him to use discretion when times are bad. "I can go as conservative as I like. The philosophy is, I would rather have an argument with you about not making you enough money than have to stand in front of you and say, 'Sorry I lost it all'." Which is why the company's growth fund is currently 57 per cent in cash and just 43 per cent in shares - a move that he made in late 2007.

"We are different to the industry. We don't keep our asset allocations in fixed bands. We're an active manager, scared s...less about losing members' money."

Morgan is also big on transparency - rejecting the industry standard of fund unit prices in favour of informing everyone every month exactly what securities they own. "That's the sort of standard I'm trying to yell from the rooftops."

When it comes to derivatives, Morgan says he's very old-fashioned. "Basically we don't use them. Some assets in the equity fund will have a hedge element to them. But I don't like counterparty risk. I don't know if the guy is going to pay. I've always felt like that. If I don't understand something I don't invest in it."

The Aon KiwiSaver Milford Aggressive fund stands out in the Kiwisaver market because it's one of the few growth funds giving a healthy 6.9 per cent return over the past 12 months. But like the Huljich and Gareth Morgan funds, its got there by an unusual route.

"In more normal times this type of fund would expect to have the majority of its investments in New Zealand shares, because that's where we've got a level of expertise, but these are not normal times and we identified that pretty early on," says Milford Asset Management Executive Director Anthony Quirk. "It doesn't sound aggressive to go to cash, but at the time it was quite a non-consensus view to take."

Quirk says rather than being beholden to asset allocation ranges as many funds are, it's much better to have the flexibility to move if needed because of changing market circumstances.

"We think this winter could be the low point for the New Zealand economy." For that reason the fund has holdings that are predominantly New Zealand cash and also bonds held with a view to interest rates coming down.

Quirk says the other difference in the Aggressive fund is how its goal is to get a 10 per cent return for its members. "We haven't been paid a performance fee because we haven't quite hit that performance hurdle," says Quirk. Compare that approach to funds that have been set up to try to beat an index like the New Zealand sharemarket index.

"They say the market is down 25 per cent and we're only down 20 per cent, so haven't we done a good job? A lot of investors don't think like that."

Quirk points out that in the current environment "just buying and holding and hoping" doesn't work. "The underlying forces here are very long term and wide-ranging and will impact markets for quite some time. You can't necessarily assume the market will go up. You need to have active managers who will add value for you."

Quirk says there is no derivative exposure in any of Milford's products, but he isn't totally opposed to them. "If done correctly and sensibly they have a place."

The standout Kiwisaver fund for ING New Zealand is its SIL International Fixed Interest Fund which has 12.21 per cent return over the past 12 months and 9.3 per cent over the past six. "It delivers a return in line with the performance of global government bond markets which have been the most highly sought after asset in the world during this crisis period," says ING chief investment officer Philip Houghton-Brown.

But tempting as it might seem for investors to switch from a poorly performing fund to one like this, Houghton-Brown says it's important for investors not to make assessments on which fund they should be invested in by looking at the past 12 months' returns.

"It's often referred to as investing through the rear view mirror." As he points out, many studies have shown that the best performing assets in a single year are unlikely to be the best performing assets in the following year.

Unlike the active fund managers like Huljich, Gareth Morgan and Milford, ING sticks to the asset allocation bands of the various funds it manages. "We have ranges in place and we want the product to be true to its label.

But that said, ING does employ across-the-board strategies to minimise losses in difficult times. For its balanced funds, for example, which gave returns of around minus 10 per cent, Houghton-Brown says that included being "underweight in equities", having more foreign currency exposure than its benchmark levels and within equity portfolios having a bias towards more defensive companies.

ING does use derivatives to a limited extent to manage portfolios efficiently.

Houghton-Brown says in the current market the valuations of many assets look very, very cheap.

"That's not to say they are about to turn around tomorrow, but for longer term investors this is actually a terrific opportunity."

- NZ Herald

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