Money walks as fund returns dwindle

By CATHERINE HARRIS

The savaging of AMP's share price over the past week, which wiped $2 billion from the company's value and forced the resignation of chief executive Paul Batchelor, was apparently due to capital problems with its British insurance unit, Pearl.

But it could also be viewed as a further sign that investors are disillusioned with the fund management industry.

Hit hard by falling global equities and a rising New Zealand dollar, managed funds have suffered two years of brutal returns. And New Zealanders - long advised to save for their retirement in this way - are voting with their feet.

Figures from monitoring agency Morningstar show the $16 billion industry's net funds flow - the amount of money being paid out by funds minus the amount they received - was negative $112 million for the June quarter and negative $35.8 million for the June year.

In other words, investors are being a lot more cautious about putting their money in managed funds, and much more is being redeemed.

It's the first negative trend in four or five years.

"It's a very challenging time for the industry," says Jay Kumar, a Morningstar analyst.

It's hard to say where this money is going, but it's likely that investors are directing some of it into more conservative, lower-risk investments. Mortgage funds, in particular, have done a roaring trade this year.

Compare that with balanced funds and international equities.

According to Morningstar, the average loss on returns from all balanced funds offered in New Zealand has been 8.42 per cent for one year and 0.96 per cent for three years.

But those who invested in international equities funds experienced a much steeper fall - 21.57 per cent for one year and 5.14 per cent for three years (to July 31, 2002).

"The point is, the balanced funds are doing what they are supposed to do: insulating you from huge shocks in the market place," says Kumar.

"Every now and then, it's normal for a balanced fund, or any fund, to report negative returns ... but they do that less often than an international equity fund."

It's certainly a tough time for the investment sector. AMP, the parent company of New Zealand's largest fund manager, AMP Henderson Global Investors, has watched its New Zealand share price tumble from $23 in April to $13.20 at yesterday's close.

Analysts point out that AMP's British investment, Pearl, and soaring insurance costs have had as much to do with this as poor returns.

But AMP has been accused of being overexposed to shares. In June, the company gave a breakdown showing that global equities were indeed its worst-performing sector. Active funds fell 12.5 per cent for the quarter and nearly 25 per cent over the June year.

Its New Zealand active equity funds did better, down 1.4 per cent for the quarter but up 1.3 per cent for the year.

The best returns, however, came from fixed interest and property investments. Global fixed interest topped the list with a 3.9 per cent quarterly and 8.8 per cent annual return before tax, followed by New Zealand fixed interest (2.5/7.2 per cent) and property (1.9/9.8 per cent).

"Even NZ equity hasn't done particularly well. On a relative basis, it's done well but in an absolute figure it hasn't done all that well," said Tim Anderson of FundSource, another independent fund research company.

Like equity-driven portfolios, superannuation funds are struggling to produce a decent return.

Morningstar figures show net flows down $59.8 million for the June quarter and $209.4 million for the June year.

In Australia, where compulsory superannuation has been operating for some years, people have been shocked to find their contributions over the past year are worth less now than a year ago.

Nevertheless, swapping to cash is not really an answer, says Michaela Anderson, director of policy and research at the Association of Superannuation Funds in Australia.

"You have to see this as long-term investment, and if you look at the last 10 years and look at the very high returns that you've had, I think you've got to put this downturn in the market into perspective."

Vance Arkinstall, chief executive for the investment industry body ISI (Investment, Savings and Insurance Association), says people worried about their superannuation funds can relax, depending on the time they entered their scheme.

"The markets have been exceptional for the last 10 years ... and if people have sought the right decisions, whilst it's disappointing to see the values are going backwards at this stage, they should be in a position that this shouldn't impact them too severely in the long term."

His advice is "don't panic", and remember that although mortgage funds and other lower-risk investments give more security, they will never provide the same growth.

"People are looking now to exit their managed funds at precisely the wrong time," he says.

"History shows that investment markets over time invariably go up, but during that growth there are periods of volatility."

So how long will the downturn last?

AMP Henderson is betting things will pick up within 10 years, an annualised 9 per cent for international equities and just over 10 per cent for local shares.

But it is urging investors not to expect things to quickly return to the bull years of 1991-2000.

"If you pay too much for an asset in the first place it's very difficult to recover your money afterwards," says chief investment officer Chris Wozniak.

"The likelihood that the Nasdaq could return to an index level of 5000 where it peaked at, I think, is impossible or at least impossible for literally decades.

"But that's not true of every equity market, and it's also not necessarily true for the broad equity market, for example, in the US."

Wozniak says AMP takes a long-term view and won't be changing the direction of its investments. He urges investors to think the same way, but says prepare for greater extremes.

"I would expect over time that you'll get a higher return from shares than you'll get from more conservative investments and it will be substantially higher, but that the ride will be much more volatile and uncertain."

New Zealanders are expected to continue doing well out of the fixed interest market, where interest rates are substantially higher than the United States.

Property is also expected to have a good run.

Wozniak says New Zealand has not had the strong rise in prices that almost every other major centre around the world had enjoyed, and it might well be ripe for an element of catch-up.

"Property prices in Sydney have doubled in the past five years. You can't say that about New Zealand. You've had a modest but steady growth in property prices, is how I'd describe it."

Already New Zealand property prices and turnover are on the rise, and there is increased turnover in big ticket property like office buildings.

But don't dismiss shares, says Tim Anderson of FundSource.

"If you put a hundred bucks into international equity two years ago, you're probably sitting with $60 or $70 now. But on the other hand if you had invested it 20 years ago, you would be up several hundred dollars.

"For me, for an investor who has a long-term horizon, then growth assets are the way to go, without a doubt."

- NZPA