KEY POINTS:
The past three years have been particularly good ones for investors in the local and international stockmarkets with total returns, at 16.6 per cent and 13.1 per cent a year respectively, well ahead of their long-term historic averages.
However, bull markets don't last forever and the party ground
to a halt, at least as far as international equities are concerned, in the first quarter of 2007 with world sharemarkets rising by 1.5 per cent. That 1.5 per cent is before management fees, monitoring fees, trailing fees, platform fees etc.
Returns for the financial year ended March 31 are equally discouraging with world stockmarkets delivering a total return of just 2 per cent, again before disbursements to the fund management industry.
Currency movements take much of the blame. While the MSCI World Equity Index, in US dollar terms, increased by 16 per cent in the year, most of this gain was lost as the kiwi dollar, again confounding the forecasters, strengthened against the US dollar by a record 13.7 per cent.
Twelve months ago the kiwi bought US61.4c. Today you get around US72c, which sounds like a great deal until you realise that 40 years ago the kiwi bought US$1.39.
It is interesting to note, too, that the kiwi's strength is mainly against the greenback. Its gains against the euro and Australian dollar at 4.4 per cent and 2.7 per cent respectively are far more modest.
Consequently international equity investors who focused on the British, European and Australian stockmarkets have been able to achieve quite reasonable returns in the year at 9.3 per cent, 10.8 per cent and 17.5 per cent respectively.
These numbers look good but the reality is that most super funds and global equity trusts invest lots of funds in the US (about 50 per cent) which fell by 1.6 per cent in the period and thus brought the average down to just 2 per cent. Of the major markets Japan was the worst performer at -10 per cent.
April 1 also marks the start of the new Fair Dividend Tax system under which international shares will be taxed as if they pay a 5 per cent dividend irrespective of their actual dividend. While we haven't seen much comment from financial advisers on how they will react to the different tax environment, it seems certain that when Mum and Dad realise that many international share funds will not be producing enough cash flow after fees to pay their FDR tax let alone for that holiday on the Gold Coast, they will hastily be arranging a meeting with their financial adviser.
The metrics for prospective after-tax returns from international shares, which typically constitute more than one-third of balanced portfolios, have rarely looked worse: the dividend yield on your typical international managed fund will struggle to be more than 1 per cent after fund management fees.
International shares have historically grown their dividends at a rate 1 per cent higher than inflation (or 1 per cent lower than global GDP growth). If inflation is 4 per cent, that's a total return of 1 + 1 + 4 = 6 per cent, before tax. Historically tax on international shares has been zero - all the taxable income disappears in fees - hence Dr Cullen's FDR initiative. For most managed funds (those which are unlisted) the FDR tax will reduce that 6 per cent by a further 1.65 per cent irrespective of how high the annual fees are.
Despite the generally poor performance of the global stockmarket, March quarter portfolio reports from financial advisers will contain some good news - the local stockmarket, maligned 12 months ago as overvalued and with little leverage into an expected weaker kiwi, recorded a very useful 11.7 per cent gain for the year, in line with both its 10 and 80-year averages.
While a 12 per cent return from the broad market is very nice, the small and midcap sectors were where the real money was made, recording rises of 26.9 and 28.8 per cent respectively.
In contrast the index of the 10 biggest stocks rose by just 4.7 per cent. This sector was again dragged down by its biggest constituent, Telecom, which managed to fall by 4 per cent over the year.
Telecom's 10-year record is similarly uninspiring at just 5.2 per cent a year versus almost twice that for the market as a whole.
Large cap stars of the local bourse in the March year included Air NZ (+90 per cent), Fletcher Building (+32 per cent), Infratil (+37 per cent), Contact Energy (+24.9 per cent) and Kingfish (+42 per cent).
Mark Weldon may have missed out on the executive share scheme but he and his team will be well pleased with their NZ Exchange (NZX) shares which rose by 138 per cent in the 12 months. Warehouse shares also proved to be something of a bargain, rising by 84 per cent.
Besides shares, the average pension fund or balanced unit trust typically has about a 40 per cent weighting in NZ and global bonds. Neither area provided much excitement over the past 12 months with the former returning just 3.8 per cent as higher interest rates on medium-term bonds impacted on bond prices. Five-year government stock yields, which were 5.73 per cent a year ago, sold off to finish at 6.60 per cent.
Investors lucky enough to have a substantial exposure to the world's listed property markets have had a great year with global property returning 15 per cent and the New Zealand sector ahead by more than one-third. Much of the latter's extraordinary gain is due to the new tax rules which apply from October 2007 and will have the effect of materially reducing the tax payable on dividends from NZ listed property stocks.
The typical NZ balanced portfolio has on average only a 10 per cent weighting in property, however, and many investors both local and overseas are scrambling to increase their weightings in view of the excellent historic performance. But with dividends on property stocks in the US and Britain now barely reaching 3 per cent, the prospects for continued double-digit gains from international property look slim, to be charitable.
Put all these sectors together with the typical weightings of your average balanced fund and, if your fund manager was able to do as well as the index in each sector, total returns for the year ended March 31 would have been around 6.2 per cent pre-fees, pre-tax, pre-inflation. Welcome to the world of low returns.
* Brent Sheather is a Whakatane-based investment adviser
