Between the lines: Diversify or suffer smaller rewards

New Zealand investors are mugs, may well have been the subscript to observations by AMP's head of investment strategy.

But Paul Dyer was less cutting, suggesting that New Zealanders had missed out on fantastic growth in international equities because they had relied too much on the local market.

Goodness knows why they would want to invest in New Zealand's sharemarket.

For most of the past decade, it has underperformed its global peers, in the five years after the 1987 crash slumping 28 per cent as global equities returned a cumulative 76 per cent.

Too often since, the New Zealand market has simply flatlined.

Of course, Mr Dyer has a reason to be bullish on diversification.

AMP is launching a range of diversified investment funds managed by its respected British fund management subsidiary, Henderson.

But the argument in favour of diversification is hard to ignore.

While one or two markets may struggle, in combination, global sharemarkets have the depth to withstand even severe shocks.

This year's technology stocks crash is a case in point.

While New York's technology oriented Nasdaq slumped 40 per cent in March and April, the broader US market did little more than flinch while some "old economy" sectors such as healthcare and utilities came back into fashion.

Diversification can take many forms, as an information-age fund distributed locally by the Public Trust demonstrates. It is based upon the Wired Index - a creation of the Silicon Valley-based Wired magazine.

The index has been developed as a foil to the Dow Jones Index, considered to have declining relevance to the technology oriented new economy.

But while Wired's top 40 of technology supremos include Lucent, Cisco, Microsoft and MCI WorldCom, there have been some distinctly old economy inclusions too. What could Daimler Chrysler and hotel group Marriott be doing in there?

The answer is that, by Wired's definition, technology companies are those who lead in globally networked information.

Old-style business activities, such as Federal Express' freight-forwarding business, qualify if they are run in modern ways.

Again, even this limited diversification has paid off. Over the 21 months following the index's creation in June 1998, investors would have been 194 per cent better off, while the Nasdaq ructions pushed returns sideways.

That's not to say the local market has been a disaster. Strip out Telecom's 18 per cent drop over the last quarter, and it would have been 10 per cent higher.

And AMP believes the outlook remains promising.

But one must sympathise with Mr Dyer who, after a barrage of journalists' questions about Telecom and Fletcher Energy, yesterday lamented that they would have done better to worry about the trends in global healthcare.