Last year's 30 per cent gain on the New Zealand share market got too much for Australian investors to resist as they sold stock to book profits.
Wealth managers JB Were said foreign ownership of the local share market dropped by 1.7 per cent in 2019 to 37.7 per cent, driven by a reduction in investment from across the Tasman.
But JB Were, in its annual equity ownership survey, said the decline to 2017 ownership levels was partly offset by a small increase in investment from the rest of the world.
At the same time, the proportion of New Zealand equity ownership increased due to a greater level of representation of utilities and port assets in the overall market, and a number of these assets having majority or significant ownership stakes by the Government or by local government investment funds.
"Offshore investors, excluding Australian investors, increased, partially offsetting the reduction in Australian ownership, demonstrating that the appeal of the New Zealand equity market continued to resonate well with investors further abroad," the report, compiled by JB Were asset allocation specialist Harrison Knapp, said.
Elswhere in the report, JB Were said New Zealand retail participation in the market decreased by another 2.8 per cent to an historic low of 17.7 per cent.
"This decrease signals an acceleration of a three-year downward trend, likely the result of an increased level of NZ retail flows entering managed funds and significant inflows into KiwiSaver funds," it said.
The survey consisted of 64 companies, which accounts for 97 per cent of the S&P/NZX All Index based on total market capitalisation.
Of the 64 companies, 18 saw offshore ownership decreases of more than 1 per cent, five more than last year.
Seventeen saw increases of above 1 per cent, half the amount that increased last year. The remaining 24 were recorded as mostly unchanged.
There were five additional companies included in this year's survey that were not included in the 2018 survey.
The most significant driver of the decrease in offshore ownership was a reduction in Australian participation in the New Zealand market, Knapp said.
"The three per cent reduction in Australian ownership, from 16 per cent down to 13 per cent, can be linked to a combination of both Australian investors effectively trimming their NZ positions to lock in profits and a reduction/exit of some significant holdings," he said.
"Driven by their remarkable relative performance last year, there was a material increase in defensive style companies - utilities sector and infrastructure assets - representation within the market.
"Their performance was predominantly a result of the dramatic drop in bond yields this year and potential structural growth opportunities, making NZ equities – and their associated sustainable dividends – relatively attractive to investors," Knapp said.
This had the impact of lifting the proportion of New Zealand equity ownership, as a number of defensive large caps have either majority or significant ownership stakes held by the New Zealand Government or by local government investment funds.
Examples include, Auckland International Airport, Genesis Energy, Mercury, Meridian, Port of Tauranga and Napier Port Holdings, following its initial public offer.
In aggregate, their representation within the survey has increased to 27 per cent from 22 per cent last year.
"If we adjust for this, our analysis indicates that offshore ownership would have increased by about 1 per cent to 40 per cent," he said.
JB Were also noted an ongoing shift towards passive investment in the New Zealand sharemarket.
"With passive investment strategies growing in importance, globally fund flows that replicate indexes that these funds follow continue to have a material influence on our local market," JB Were said.
Elsewhere in the report, Knapp said New Zealand retail participation decreased another 2.8 per cent to an historic low of 17.7 per cent.
The decrease signalled an acceleration of a three-year downward trend, likely the result of an increased level of New Zealand retail flows entering managed funds and significant inflows into KiwiSaver funds, he said.