Portfolio Performances, 2006
The year saw an out-performance across all asset classes - a satisfying performance.
Each year we present a review of 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 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. (Click here
for analysis of previous years' performance results)
| Portfolio
Performance Summary- Calendar Year and after tax and fee returns since 2003 |
| Portfolio
Type |
2003 |
2004 |
2005 |
2006 |
Average
out-performance over benchmark |
| Income |
9.0% |
9.1% |
7.5% |
11.2% |
|
| Benchmark |
0.3% |
2.0% |
6.4% |
7.2% |
|
| Out-performance |
8.7% |
7.2% |
1.1% |
4.0% |
5.2% |
| |
|
|
|
|
|
| Balanced |
12.6% |
10.8% |
11.2% |
14.6% |
|
| Benchmark |
2.2% |
2.0% |
9.2% |
10.6% |
|
| Out-performance |
10.4% |
8.8% |
2.1% |
4.0% |
6.3% |
| |
|
|
|
|
|
| Growth |
17.4% |
11.5% |
17.6% |
16.0% |
|
| Benchmark |
5.6% |
2.0% |
12.7% |
14.0% |
|
| Out-performance |
11.8% |
9.5% |
4.9% |
2.0% |
7.0% |
1. The Asset Classes
Each year we look at portfolio performance from two aspects - the performance of each
of the asset classes we identify (apart from cash) - fixed interest, income stocks, core
growth stocks and satellite growth stocks - and then the performance of client portfolios
themselves, which of course are a mix of the various asset classes, that mix driven by the
client's mandate and our own tactical management of asset class weightings as we try to
navigate the investment cycle.
This section deals with the asset classes, Section 3 will deal with the portfolios.
The graph below presents the average performance for client portfolios in each of the 4
investment asset classes we identify. The returns referred to in this section are net of
withholding taxes and brokerage.
Fixed Interest
It was a good year in terms of the return for the asset class, at 7.4% outperforming
its after-tax benchmark (a blend of NZ and international bonds) of 2.6%. This achievement
came about primarily from trading new issues of corporate-issued paper, taking advantage
of the generally bullish demand for such paper. Generally however we underweighted this
asset class through the year preferring the higher (and certain) cash rates available.
Income Stocks
2006 saw our income stocks selections post the most impressive returns (at 30%) and
out-performance (14% above benchmark). Our income stocks selections are New
Zealand-dominated for two reasons - NZ has the highest dividend yields and tax favours
NZ-residents investing in NZ income sources rather than overseas yield stocks. The strong
result for income stocks was a surprise to us as we'd been generally bearish on the NZ
market, it having had such a strong run over a number of previous years, and with the
slowdown in the economy we expected a continuation of the lacklustre performance this
sector posted in 2005. Consequently, and with the benefit of hindsight, we were
underweight income stocks as an asset class and so portfolios did not get full exposure to
this out-performance. Within the income asset class the stocks we'd over-weighted that
provided our income asset class with the out-performance were Fletcher Building, Contact
Energy, AMP NZ Office Trust and Nuplex.
Core Growth
Our core growth holdings performed on a par with the MSCI benchmark this year. While we
saw above-benchmark performance from a number of the UK Investment Trust holdings, our
absolute return large cap funds didn't fare so well in a strong equities environment. Of
course these funds we hold for the rainy day as insurance for weak global markets. In the
past that's when they've outshone.
Satellite Growth
Second most significant asset class out-performance came from Satellite Growth - our
theme-picking and stock-picking growth investments. This asset class managed a 23% return
compared to benchmark (MSCI) of 15.9%. Our investments in emerging markets and
over-weighting of Asia, plus some of our individual international finance sector
investments drove this performance.
2. Client Portfolio Returns
2006 client portfolio performance reflects a mix of the performances of the above asset
classes depending on
(a) the client's investment mandate,
(b) within the mandated constraints the extent to which we under- and over-weight
specific asset classes to reflect our own view of the outlook for the individual asset
classes. Being a discretionary manager we have scope (although it is limited under current
tax laws, which thankfully will be changed from April 1st 2007) to be tactical. The
returns referred to in this section are net of withholding taxes, fees and brokerage.
There are limitations on how many of the client portfolios we can include in this
performance analyses. We exclude
1. portfolios that haven't been with us for 12 months,
2. portfolios where the client has specified any specific instruments be held;
3. portfolios where the investment mandate has been changed in the last 12 months; and
4. portfolios where there has been a substantial amount of money added or withdrawn over
the year.
Together these restrictions eliminate a significant proportion (about half) of our
portfolios from consideration for this measurement exercise.
For this measurement exercise, we have considered the income portfolios group to
include those with more than 65% of the assets mandated to be in fixed interest or income
stocks; balanced to have between 35% and 65% of assets in fixed interest or income stocks
(the rest in growth stocks); and growth portfolios to have less than 35% of funds mandated
to fixed interest and income stocks (more than 65% in growth).
| 2006 Performance Summary |
Avg GMI Portfolio
Return |
Avg
Out-performance of benchmark |
Max GMI Portfolio
Return |
Min GMI Portfolio
Return |
No portfolios
eligible for sample |
| Growth mandates |
15.99% |
2.02% |
21.28% |
6.60% |
131 |
| Balanced |
14.62% |
4.04% |
23.29% |
9.96% |
73 |
| Income |
11.18% |
3.97% |
16.63% |
6.17% |
64 |
Growth Portfolios
These clients have a longer term horizon and our ultimate or strategic asset allocation
is for more than 65% of the book to be invested in growth (core plus satellite) stocks.
From these clients the directive is that they can tolerate full or near-full market
volatility of returns.
As you are aware our in-house view may be more conservative than this. Where we feel
that holding cash or fixed interest or income stocks will lead to relative out-performance
then we consciously overweight these asset classes in order to outperform the relevant
benchmark- in this case 100% stocks as measured by the MSCI global shares index (NZD
terms).
The next two graphs present the 2006 performance of the 131 portfolios in the sample,
with an allocation to growth of more than 65%. You can see the portfolio performance
ranged from 7% to 21%, the average return was 16% with an average out-performance of the
relevant benchmark of 2%. Now obviously this is a wide range of results - here are the
reasons.
One reason for the range in performance is that we're including for this discussion,
portfolios allocated 65% growth and 35% fixed interest alongside those mandated 100%
growth.
The top graph is the absolute performance and the bottom shows out-performance or
performance above or below benchmark - remember for 100% growth mandate the benchmark is
100% MSCI, but for 65/35 growth/fixed interest say, the appropriate benchmark would be
different (and its return for 2006 lower). Now this year we've ordered the results by
length of time the client has been with us - so in the 2 graphs above and indeed for those
in the sections below, the most recent clients are on the right hand of the graphs, the
longest-suffering on the left hand side.
The growth results this year reveal a fact of life about portfolio performance over
2006. All of the good returns news occurred in the first 4 months of the calendar year,
since May portfolios have more or less flat-lined as the soaring NZ dollar has neutralised
the impact of good returns in offshore stocks. So those youngest portfolios in our growth
sample - those that were introduced from about November 2005 - tended not to be fully
invested in the first couple of months of 2006 when the bulk of the strong performance for
the year was scored. Consequently, their returns were closer to the 6% minimum performance
than the average 2% out-performance of the relevant benchmark for that mandate.
Balanced Portfolios
We have taken these to be any portfolio with a mandated asset mix of between 35% and
65% in income stocks or fixed interest. 73 portfolios qualified for this sample and the
returns ranged from 10% to 23%, the average performance being 15% and the average
out-performance of the relevant benchmark being 4%.
Income Portfolios
Our income portfolios are those where the client mandate is for less than 35% allocated
to growth securities. There were 64 portfolios in the sample satisfying this criterion.
The results are in the following graphs. The average return after tax and fees was 11%,
the range in performance between 6% and 17%, and the average out-performance of the
relevant benchmark being 4%.
3. 2006 Review - The Dynamics of the Year
2006 was a year when for growth assets in our portfolios, the returns for the whole
year were clustered around the first few months of the year. The following graph provides
the story for the 2006 portfolio performances.
From this the story of 2006 investment performance can be told. Really it was a year of
3 phases; January-April was full-on appreciation, May-August was a slide with half the
gains lost, and September- December was a resumption of recovery, albeit modest.
We started the year pretty underweight on Kiwi assets (those income stocks that in the
end were going to be doing quite well as it happened) and pretty underweight Kiwi dollars
in our cash holdings, preferring any currency but the NZD. We were in other words black on
New Zealand and pretty confident of ongoing growth in the developing world and also
positioned for an ongoing US recovery. Our belief in globalisation saw us continuing to
overweight commodities.
The year began with a roar with offshore equities doing well in particular
(commodities, Asia and the US) and the NZ dollar falling. So we had a double whammy -
asset prices and currency effects.
From May commodity prices started to falter as did the S&P500 (USA), the ASX200
(Australia) and emerging markets generally too. The fear in investment markets was that
the US Fed may have tightened too much and that economy was not going to be able to avoid
a hard landing.
And then to compound our difficulties, from July the NZ dollar began the sharp reversal
of its slide and like Lazarus emerged from the tomb of its depreciation and to this day,
continues to appreciate. The driver here was that the NZ economy wasn't slowing much, our
Reserve Bank doubled its forecast of inflation and further interest rate rises were
threatened. Suddenly the "carry-trade' - wherein people borrow in Japan (and that
economy and currency was faltering again, bringing to an end any nascent recovery), and
invest in the high-yielders - especially NZ.
The double-whammy we'd enjoyed for several months started to operate in reverse -
offshore sharemarkets falling and the NZ dollar strengthening.
The Rollercoaster NZ Dollar Ride
Thankfully firstly the S&P500 and ASX200 in September, followed by the NZX50 a
month later, switched back to recovery mode over the latter months of the year. But the NZ
dollar kept appreciating at a pretty strong clip, defying all predictions and forcing
those who were underweight to buy it back, adding to its appreciation. We were one of
those - we re-weighted our cash back to NZD at 64.5 cents in September, and we reduced our
underweight position of NZ stocks in September also (meaning we bought more NZ dollars in
doing so). Fortunately the offshore markets have been on a tear as well over the last
quarter of the year so that while the NZ dollar has appreciated, stock gains in those
markets have enabled our offshore holdings (of which we remain fully weighted) to hold
their (NZD) value.
Since September then our portfolios have moved back in to appreciating mode, albeit
modest compared to the giddying first few months of 2006.
Summary for clients.
The above analysis of the 2006 year describes how the year's performance came about.
The consequence is that for established portfolios, 2006 saw all the growth early in the
year and thereafter it's been a down and then back period. Overall however 2006 would have
been a satisfying year with benchmarks exceeded.
For new clients - those who came on board during 2006 - timing was everything. Those on
board from Day 1 would have had growth but not exceeded benchmarks as they would have been
in book-build mode during those rip-roaring months. Those who have come on board since
April will have had a disappointing year as the baptism of fire would have been
back-pedalling and then more lately some but not necessarily all of that would have been
recovered. Many of the newer portfolios will not be above water yet.
Welcome to the world of portfolio investing! |
FEATURES