Portfolio Performances, 2004

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 last year’s (2003) performance results)

1. The Asset Classes

The graph below presents the average performance for client portfolios in each of the 4 investment asset classes we identify. A stark result is that 2004 was a year where global growth assets averaged the same market return as fixed interest. That confirms that cash was not a bad place to be.

Fixed Interest

The benchmark performance was affected by a rising NZ currency in a market of rising global short-term interest rates and largely unchanged long bond yields.

Corporate bond yields continued to rally on the back of intense investor appetite for yield. The result is that such bonds now offer very little in the way of compensation for the additional risk involved. We continued to reduce our corporate bond weightings in favor of cash, and have kept the average maturity of holdings quite short. The movement towards a negatively sloping yield curve makes cash relatively attractive in an environment where bond yields are unlikely to fall any further. An average return after tax and fees of 5.59% against a benchmark of 1.87% was achieved.

Income Stocks

At the start of the year very few analysts predicted income stocks would continue the rally of the previous year. Our income stock portfolios include New Zealand and global high yield shares. While we felt the NZD-USD cross rate was at a high we continued to overweight New Zealand income exposures as we felt the outlook here was still attractive compared to global alternatives. In the end our return was 19.45% after tax and fees against the global benchmark return of 1.96%. This followed the previous year’s average client portfolio return on income stocks of 28.8%. This has been the best performing asset class over the past 2 years. Going forward, we continue to have some confidence in this sector although expect returns to trend down. Past growth rates have been a great bonus. However they are no longer sustainable as stocks are becoming more expensive. Clients should anticipate dividend income streams exceeding capital growth going forward.

Core Growth

Our view on core growth exposure hasn’t changed from that at the start of the 2004 year. We still don’t expect any spectacular performance from this allocation. However some general global index share exposure is recommended primarily as a base for any global shares portfolio. As it turned out we were right over 2004. However despite this sector benchmark returning only 1.96% over 2004 we were able to position portfolios to add value with a return of 8.88% after tax and fees. We maintain our view that index investing will lead to lackluster returns and our bias continues to favor some exposure to absolute return funds where money can be made despite market volatility. $100 invested in the MSCI index in January 2000 would be worth $57.50 by the end of 2004. Our core growth portfolios have done well through over-weighting exposures to appreciating currencies, and stocks.

Satellite Growth

This is our preferred global exposure and represents our view of specific and focused growth opportunities and themes not captured above. The sector returned 16.76% after tax and fees against the global MSCI benchmark index return of 1.96%. This follows from 2003’s return of 30.8% against the benchmark of 5.6%.

2. The Client Portfolios

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 of our portfolios from consideration for this 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).

Growth Portfolios

Where the client mandate is for growth there is generally no directive to have year-to-year volatility any lower than the global stock-market average. These clients have a longer term horizon and our ultimate or strategic asset allocation is greater than 65% growth (core plus satellite) assets.

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 graph presents the 2004 performance of the 44 portfolios in the sample, with an allocation to growth of more than 65% that we have looked after for the full 12 months. You can see the average portfolio performance ranged from 6.47% to 15.70% with the average performance being 11.47% after tax fees, compared to a benchmark (MSCI) of 1.96%. The 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.

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. The returns ranged from 6.97% to 16.17% with the average performance of all 33 balanced portfolios being 10.8%

Income Portfolios

Our income portfolios are those where the client mandate is for less than 35% allocated to growth securities. There were 20 portfolios in the sample satisfying this criterion. The results are in the following graph.

The average return after tax and fees was 9.1% with the range in performance between 6.32% and 13.18%.