Portfolio Performances, 2005

We are pleased to report that 2005 was again a year of out-performance across most asset classes.

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 (2004) 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. 2005 was a year where global growth assets came back to out-perform fixed interest – and for that matter, the NZ stockmarket.

Fixed Interest

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

The rally in corporate bond yields came to an end but still at levels where such bonds offer very little in the way of compensation for the additional risk involved. We had already reduced our exposure to the fixed interest sector in favour of cash, particularly NZ cash. An average return after tax and fees of 5.7% against a benchmark of 1.87% was achieved.

Income Stocks

The magical run of highly yielding NZ stocks came to a halt at last as we’d predicted and we continued to be very nervous about maintaining any over-exposure to what is still evolving as an economy highly vulnerable to a high currency/high interest rate squeeze.

We reduced exposures where changes in circumstances warranted and concentrated over 2005 in building up our offshore exposures. For income stocks the opportunities here are limited as tax inefficiency often leads to double taxation of dividends. For 2005 the income stocks asset class returned 9.5% which was below the MSCI benchmark of 13%.

Core Growth

This asset class made a comeback over 2005 after sub-par performances since its zenith in 1999. The core growth asset class of portfolios averaged 18% return compared to the 13% MSCI, a credible performance.

Satellite Growth

This remains our preferred global exposure and represents our view of specific and focused growth opportunities and themes not captured above. The sector averaged 24% after tax and fees in client portfolios over 2005 against the global MSCI benchmark index return of 13%. This out-performance was helped by our emphasis on the trio of infrastructure, commodities and industrializing country themes.

2. The Client Portfolios

2005 Client portfolio performance reflects a mix of the performances of the above asset classes depending on the client’s investment mandate, and within these mandated constraints - our view of the world as reflected in the clients’ actual asset allocation (our limited scope to be “tactical”). The returns 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 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 2005 performance of the 104 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 portfolio performance ranged from 9.97% to 23.22% with the average performance being 17.61% after tax fees, compared to a benchmark (MSCI) of 12.72%. 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 7.67% to 15.34% with the average performance of all 50 balanced portfolios being 11.22%

Income Portfolios

Our income portfolios are those where the client mandate is for less than 35% allocated to growth securities. There were 47 portfolios in the sample satisfying this criterion. The results are in the following graph. The average return after tax and fees was 7.5% with the range in performance between 3.15% and 12.62%.