This strategy has been successful because the gross index closed 2013 on 4737, compared with 2577 for the capital index, even though they were both on 1881 at the end of February 2003.
There has been a huge difference in the performance of the two indices even though they contain the identical 50 companies with similar weightings. The difference is wholly attributable to the inclusion of dividends, and the reinvestment of these dividends, in the gross index.
In capital terms the top 50 NZX companies had a positive return of 11.5 per cent for 2013 compared with 18 per cent for the previous year.
The five top-performing index companies in 2013, in capital terms, were: Xero plus 325 per cent, Kathmandu 76.4 per cent, Ryman Healthcare 72.5 per cent, Fisher & Paykel Healthcare 55.9 per cent and A2 Corporation 50.9 per cent.
The five worst-performing capital index companies were: Chorus down 51 per cent, OceanaGold minus 49.7 per cent, Diligent Board Member Services down 30.5 per cent, Hallenstein Glasson off 26.1 per cent and TrustPower had a negative 22.9 per cent return.
It is worth noting that four non-index companies had 2013 capital returns in excess of 100 per cent. These were Promisia Integrative (formerly Savoy Equities) 288.9 per cent, NZ Finance Holdings 223.3 per cent, Pacific Edge 163.3 per cent and Seeka Kiwifruit 133.3 per cent.
Only Bathurst Resources, which was down 58 per cent, and Postie Plus, minus 52.1 per cent, performed worse than Chorus.
A number of observations can be made about the NZX's main capital index:
• The index closed 2013 at 2577, still 35.1 per cent below its all time high of 3969 in September 1987.
• Since inception in January 1957 the index has had 34 positive and 23 negative years. By comparison Wall Street's Dow Jones Industrial Average (DJIA), also a capital index, had 40 positive and 17 negative years over the same period.
• Throughout most of the early 1980s the NZX's capital index had a higher value than the DJIA but the latter finished 2013 on 16,577 while our capital index was only on 2577.
• The NZX's best years were 1983 when it had a positive return of 116.8 per cent, 1986 plus 99.2 per cent and in 1980 it was up 53 per cent.
• The worst years were 1987 with a negative 48.5 per cent, 1990 minus 39.7 per cent and in 2008 the index fell 36.5 per cent.
The NZX underperformed most world sharemarkets in the two decades following the 1987 crash because domestic investors deserted the market and companies were reluctant to list because of negative experiences in the 1980s.
The NZX became dominated by former Crown-owned enterprises with limited growth prospects but relatively high dividend yields.
This column consistently criticised the decision to change the NZX benchmark index from capital to gross because it reinforced the view that the sharemarket was more about dividends than growth.
To a large extent this is correct because between February 2003, when the NZX gross benchmark index was launched, and the end of 2013 the NZX capital index appreciated by only 37 per cent.
Over the same 10-plus-year period the DJIA grew by 110 per cent and the ASX benchmark capital index added 92 per cent.
New Zealand house prices surged an impressive 107 per cent between February 2003 and December 2013. This was well in excess of the 37 per cent achieved by the NZX's capital index but less than the 152 per cent rise in the NZX 50 Gross Index.
These figures demonstrate why it is so difficult to compare the performance of shares and residential property.
Our emphasis on dividends, rather than capital growth, was reconfirmed by a number of brokers recommending Chorus to clients because of its high dividend yield as well as recent media reports that some fund managers want Xero removed from the NZX's benchmark index because it distorts the index and gives it an upward bias.
But Xero is exactly what the NZX needs, it represents a new generation of enterprising business people just as the investment companies did three decades ago.
There are huge risks associated with technology companies, as Diligent has demonstrated in recent months, but as far as this column is concerned the latest generation of businesspeople are more realistic, and their businesses more sustainable, than the new arrivals in the early 1980s.
With this in mind it is worth noting that the new wave of businesses had an extremely positive impact on the NZX in the late 1970s and early 1980s. The capital index had four consecutive positive years between 1978 and 1981, a negative 1982 followed by a further four positive years between 1983 and 1986.
In light of the poor performance of the domestic market between 2007 and 2011, followed by the arrival of Xero and a number of other growth-orientated companies, there are a number of general statements that can be made about the NZX in 2014. These are:
• There is absolutely no reason why the NZX should not have a third consecutive positive year.
• We can expect a huge deviation between the best and worst performing stocks as there was in 2013.
• Companies, particularly in the technology sector, that do not meet investor expectations will be severely punished.
• A number of younger generation business men and women will entice new investors to the market as did the previous generation in the early 1980s.
• There will be more emphasis on growth stocks than high dividend yield companies.
• There is expected to be an increase in the number of IPOs but these will be of varying quality.
• We can anticipate an uptick in merger and acquisition activity from the low levels in 2013.
• There will be a major focus on the year-end general election, particularly as far as the electricity generators and other regulated industries are concerned.
One of the more positive developments would be for investors to place greater emphasis on growth rather than dividends. To assist this development it is important the NZX changes its benchmark index back to capital from gross and make it easier for growth-oriented companies to list and be included in the capital benchmark index.
• Brian Gaynor is an executive director of Milford Asset Management, which holds shares in a number of the companies mentioned on behalf of clients.
