Portfolio Performances, 2007
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)
With world markets ending down 1% from the start of the year or 6% lower than the twin
peaks they reached in May and September, 2007 was a year for investors to forget. The fact
that sharemarkets go down one year in three was well and truly reinforced with 2007's
stagnant outcome.
As your investment manager however we aim as you know, to do better than the market
average, and be one of just 30% of investors who beat market average returns in any one
year. Further we try to do that repeatedly, and fall back into the pack as seldom as we
can. There is one constraint on that goal - not to achieve better-than-average returns by
raising the risk of clients losing money. Over the medium term, wealth preservation is our
primary objective, enhancement comes next. Inevitably there will still be years when
returns are negative.
We're pleased to report that 2007 was NOT one of those and across all portfolio types -
income, growth and balanced, the average GMI portfolio out-performed market benchmarks
(after tax & fees) by 4%. This is the ninth consecutive year we have managed that,
which is satisfying.
| Portfolio
Performance Summary- Calendar Year and after tax and fee returns since 2003 |
| Portfolio
Type |
2003 |
2004 |
2005 |
2006 |
2007 |
Average
out-performance over benchmark |
| Income |
9.00% |
9.10% |
7.50% |
11.20% |
3.80% |
|
| Benchmark |
0.30% |
2.00% |
6.40% |
7.20% |
0.90% |
|
| Out-performance |
8.70% |
7.10% |
1.10% |
4.00% |
2.90% |
4.76% |
|
|
|
|
|
|
|
| Balanced |
12.60% |
10.80% |
11.20% |
14.60% |
3.70% |
|
| Benchmark |
2.20% |
2.00% |
9.20% |
10.60% |
0.20% |
|
| Out-performance |
10.40% |
8.80% |
2.00% |
4.00% |
3.50% |
5.74% |
|
|
|
|
|
|
|
| Growth |
17.40% |
11.50% |
17.60% |
16.00% |
4.00% |
|
| Benchmark |
5.60% |
2.00% |
12.70% |
14.00% |
-0.50% |
|
| Out-performance |
11.80% |
9.50% |
4.90% |
2.00% |
4.50% |
6.54% |
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 2 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
While our average return of 3.7% was satisfactory, this asset class generally had a
weak year as travails in the credit markets took their toll. The after-tax benchmark (a
blend of NZ and international bonds) returned just 1.6%. Our out-performance came about
primarily from moving out of corporate-issued paper given the lack of return for risk,
avoiding NZ finance company paper, and weighting short term (90 day) corporate deposit
paper to pick up some extra yield. Generally however we underweighted this asset class
through the year preferring the higher (and certain) cash rates available.
Income Stocks
2007 saw our income stocks selections post returns in line with stock returns generally
- down 1% for the year. 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 NZX50 only managed a 4% loss for the
year so in that context we're satisfied that with the stocks we used we managed to
restrict the bleeding to 1%.
Core Growth
Our core growth holdings performed on a par with the MSCI benchmark this year - which
after all is what we expect them to do. As with world markets generally they got burned
off by the end of year global sell down.
Satellite Growth
Most satisfying asset class out-performance came from the satellite growth category -
our theme-picking and stock-picking growth investments. This asset class managed a 13.5%
return compared to benchmark (MSCI) of -0.8%. Our investments in emerging markets,
over-weighting of Asia, individual international finance sector investments and the
overweight of commodities drove this performance. Thankfully we'd abandoned the finance
sector by September so avoided most of the meltdown that's hit that sector.
2. Client Portfolio Returns
2007 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 were 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 significantly 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).
| 2007
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 |
4.00% |
4.50% |
8.00% |
-1.70% |
261 |
| Balanced |
3.70% |
3.40% |
6.40% |
0.00% |
71 |
| Income |
3.80% |
3.00% |
6.00% |
0.80% |
43 |
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 2007 performance of the 261 portfolios in the sample,
with an allocation to growth of more than 65%. You can see the portfolio performance
ranged from -1.7% to 8%, the average return was 4% with an average out-performance of the
relevant benchmark of 4.5%. 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.
A second reason is that older portfolios will have different stock mixes than newer
ones. This is a direct result of NZ tax law that until April 2007 meant that all equity
investments had to be treated on capital account as opposed to having all of their returns
fully taxable, and the investor must only sell when there is a change in material
circumstances. So portfolios that were initially invested in 2003 say, would have a
slightly different composition to those invested initially in 2006 - even though they had
the same investment mandate. Thankfully the introduction of the Fair Dividend Rate regime
from April 2007 has greatly reduced this influence on portfolios and from next year on
we'd expect the variance in portfolio performance to be much reduced.
The top graph is the absolute performance and the bottom shows out-performance or
performance above or below benchmark - remember for 100% growth mandates the benchmark is
100% MSCI, but for 65/35 growth/fixed interest say, the appropriate benchmark would be
different.
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. 71 portfolios qualified for this sample and the
returns ranged from 0% to 6.4%, the average performance being 3.7% and the average
out-performance of the relevant benchmark being 3.4%.
Income Portfolios
Our income portfolios are those where the client mandate is for less than 35% allocated
to growth securities. There were 43 portfolios in the sample satisfying this criterion.
The results are in the following graphs. The average return after tax and fees was 3.8%,
the range in performance between 1% and 6%, and the average out-performance of the
relevant benchmark being 3%.
3. 2007 Review - The Dynamics of the Year
2007 was the year of the tortoise and the hare - growth portfolios ended up with the
same return as income and balanced portfolios, only because the last two months of the
year saw half the gains for growth portfolios lost.
We spent 2007 building up the cash percentage of portfolios substantially. Typically
for growth portfolios we started the year with 15% in cash and ended it with 40% stashed
away in that asset class. Over the last three months of the year we became particularly
defensive, reversing the aggressive stance and the slippage in world sharemarkets then
(see MSCI track in the graph), coming as it did after a significant blow to markets
mid-year, validated our caution.
It's all very well moving to cash as a defensive action but then one has to consider
which currency it is best to hold that cash in. As the next graph illustrates the NZ
dollar displayed a fair share of volatility over the year which at times made the call to
hold it mainly in this currency a bit bold.
Against the US at least the NZ dollar rose 10% but with somewhat of a hiccup midstream
that made overweighting the Kiwi in our cash holdings look pretty vulnerable there for a
while. By year's end we were holding almost half of the free cash (that which clients
indicate can be held in whatever currency we think best) in NZ dollars as the interest
rate differentials between NZ and the rest of the world just keep growing. |
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