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Portfolio Performances, 2003Each year we present a review the returns our client portfolios have experienced over the year just passed. The purpose is to keep a track record of our performance as manager and to enable clients to both compare the rewards to their own book with other GMI portfolios and with the market overall, as well as consider the contributions to performance made by each of the asset classes.1. The Asset ClassesThe graph below presents the average performance for clients in each of the 4 investment asset classes we identify.
For 2003 we managed to provide returns for our clients in excess of the relevant benchmarks in all categories. Pleasingly 2003 was also a year of positive returns, making a nice change from the last two years where for the growth classes our mission has been to minimise the damage of the global meltdown. Satisfying though doing that may be for us as manager, positive returns across the board are a far more enjoyable experience for one and all. Asset Class: Fixed Interest Here the market average benchmark performance was a small negative due to two things – the rise in bond rates from mid-2003, but more importantly the huge rise in the NZ dollar, which meant returns on offshore bonds were obliterated. We managed to avoid this scenario by overweighting NZ bonds in our fixed interest portfolios and trading the long maturities to realise the capital profits from the fall in interest rates over the first half. Over the second half of the year all our fixed interest portfolios have been moved to shorter duration. An average return after tax and fees of 7.9% for the year is very satisfying, compared to the average NZ bill rate of 5.3% and bond rate of 5.7%. Looking forward we are likely to keep shortening our fixed interest maturities as opportunities allow, as well as reduce the over-weight in NZ instruments. Asset Class: Income Stocks This was really the star asset class for the year for us. The appropriate benchmark is the MSCI as income stocks are just a subset of the whole stocks universe, but year-to-year the decision we continually review within this class is whether to invest primarily in local or offshore income stocks. Tax and currency considerations play a role here, as well as the general investment cycle – whether expectations of growth are so high that investors are likely to neglect this asset class for the meanwhile. Of course property stocks are a major component of this asset class and at the start of 2003 they were fizzing. But as the prospects of interest rate rises loomed, the gloss went from that sector. We have been heavily over-weighting NZ income stocks for the last couple of years and over 2003 that strategy again paid off, with an average return in this asset class after tax of 28.8%. This was a solid extra after 2002’s 8.6% return. Looking forward we do not expect this asset class to perform so well and we are actively shifting emphasis to international income stocks now. Asset Class: Core Growth This asset class has been the one that has rendered most of the damage to investors internationally over the last few years, having been the star performer for most of the 1990’s. It became an area where simply investing in a clutch of the world’s largest companies (the mania of index investing) became the surest way to make large losses. Over the last few years we have been emphasising exposure to long-short managers in this space, so as we might benefit from the falls in stock values as well. The strategy has been successful and over 2003 this asset class returned 12.6% after tax on average for our clients. Compared to the 5.6% of the MSCI this was satisfying and certainly gave us a better feeling than over 2002 where our minus 23% for core growth compared to MSCI of minus 37.8%, was credible but gave not quite the same glow! Looking forward we see index investing as remaining hazardous in a world where we expect indexes to travel sideways. Call us over-cautious, but the nexus of global economic recovery, interest rates and stock valuations, leaves us feeling that some seismic shifts could be produced by the sheer global imbalances that persist between the US and those that fund its savings deficiency. Asset Class: Satellite Growth This asset class which really covers all themes or manager styles not captured by the above, has been one we have been overweighting as we have moved portfolios back towards ‘normal’ exposure to growth assets. Our hesitation about the returns available from a general incoming tide raising all boats, compels us to search therefore for those that will excel and to formulate rationale for why. Over 2003 we achieved an average return after tax of 30.8% in this asset class, compared to the MSCI benchmark of 5.6%. That reward built upon our 2002 performance where our average return was minus 12% (compared to MSCI of minus 37.8%). We expect to continue exploiting the satellite area in order to provide the best returns for risk we can in the growth arena. 2. The Client PortfoliosNext let’s consider the results achieved over 2003 for client portfolios, most of which are of course a combination of the asset classes discussed above. At this level of aggregation we’ll consider returns net of withholding tax and fees and brokerage. In the analyses below we consider only the performance our large portfolios and only those where the client has not specified any specific instruments be held. This way we can most closely use the results as a measure of our 2003 performance as manager.Firstly then the growth portfolios – those where the client mandate is for growth, where there is no directive to have a year-to-year volatility any lower than the global stockmarket average. These clients have a longer term horizon and our ultimate or strategic asset allocation is 100% growth (core plus satellite) assets. Of course as you all know, that may well be the ultimate goal but if we adopt a view in-house that the best way to out-perform the global stockmarket over the medium term, is to hold cash or fixed interest or income stocks then we will do that, all the time conscious that the mandate is that we have to out-perform the performance of a 100% stocks portfolio, where the MSCI is the relevant benchmark. Growth Portfolios The next graph presents the data of 2003 returns for the pure growth-mandate portfolios that we looked after for the full 12 months. 
We managed 26 portfolios (large and with no specific client-mandated instruments) for the whole of 2003 where the client was happy to have unresticted volatility. So for these clients the mandate was 100% growth assets (by far and away the majority of portfolios we manage are a combination of growth and income assets). The average performance for these portfolios was 17.4% after withholding tax and net of fees, compared to a benchmark (MSCI) of 5.6%. The range of performance was from 13% to 21.7%. Balanced Portfolios We have taken these to be any portfolio with a mandated asset mix of between 40/60 and 60/40 income/growth, that mandate not being altered in consultation with the client at all during the year. There were 14 portfolios that satisfied these criteria (large and with no client-mandated instruments), with an average return after tax and fees of 12.6% (benchmark = 2.2%), with a range of between 6.5% and 18.9%. 
Income Portfolios Finally consider the performance of the income-only portfolios. Here we have included only those portfolios where the mandate for growth is 20% or less. There were 7 portfolios satisfying this criteria (large and containing no client-mandated instruments) that we managed over the whole of 2003 and during which there was no change to the mandate by the client. The results are in the following graph; 
The average return after tax and fees was 9%, compared to the relevant benchmark of 0.3%, with a range of 6.5%-13.6%. |
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