Tide starts to turn on overseas investments

It may be time to invest in foreign assets again, says experts.
By Rob Stock

INVEST OVERSEAS? You'd have to be mad!

You would have to have forgotten that international markets crashed in 2000-2001, and that the Kiwi dollar has tracked up 40% against the US dollar in the past few years, turning good returns on international sharemarkets into poor returns, and bad losses into awful ones.

And it would have to have slipped your mind that the New Zealand stockmarket returned more than 20% in each of the past two years, and that residential property is up 43% since December 2001.

That is what most Kiwis think when you suggest they should invest in overseas sharemarkets, says Jeff Matthews, a senior adviser with the Spicers financial planning group.

"Half of bugger all is invested off-shore by Kiwis, and after the past couple of years you can understand why." says Matthews.

A quick look at the flows of cash into managed international funds shows just how out of favour international investing has become (see chart below right), with the exception of Australia, which is almost a home market for Kiwi investors.

But, says Matthews, now may be the time for Kiwis to learn to love offshore markets again.

With the Kiwi dollar at an unsustainably high position against the US dollar, by general consensus now could be a great time to buy international equities.

That means any positive returns from the market should be boosted, and not ruined by changes in the exchange rate, Matthews says.

The 7%-8% anticipated return could perhaps be doubled, if the Kiwi dollar weakened, he says.

And anyone expecting 20%-plus from the New Zealand stockmarket is dreaming, says Tim Anderson, of FundSource.

Add to that the weakening housing market fuelled by dropping immigration, a surge in building consents and unsustainably low rental yields in centres such as Auckland, and the argument for investing everything in home assets looks weak.

Funds Flow
1999	Performance	31.95%
2000	Funds flow	$225.58m
2000	Performance	-7.66%
2001	Funds flow	$8.42m
2001	Performance	-11.36%
2002	Funds flow	-$23.29m
2002	Performance	-35.94%
2003	Funds flow	-$61.44m
2003	Performance	6.87%
2004	Funds flow	-$42.83m

We didn't always fear and loathe foreign markets, says Matthews.

But if history shows one thing, it is that until something awful happens to returns on New Zealand assets, investors here will not turn their eyes overseas again.

It wasn't always this way.  We once loved international sharemarkets.

In 1997, 1998, 2000 and 2001, we poured cash into them, but typically many Kiwis waited to invest until they had several really good years, missing out on the best returns, but buying into all the subsequent losses.

Before 1998, the New Zealand stockmarket had struggled, with investors' memories fresh and raw from the market collapse in the late 1980's.

Then, overseas was best, but now home is king.

It's a pattern that is sadly familiar, says Matthews: short memories and the greedy crowd chasing returns which have already departed.  "Ask people whether it's been a good summer, and they'll say it's been lovely." says Matthews.

"But that's because they are only thinking about the past six weeks.  They hav forgotten how depressing it was before Christmas."

So who is investing overseas now?

Well, Spicers investors for a start.

Typically the group's model investment portfolios have around 45% in overseas equities.

Also investing in overseas markets are sophisticated insitutional investors with long-term investment needs such as super funds and the Cullen Fund.  For them, foreign equities have the kinds of long-term track records they ned to pay out pensions in 30 and 40 years.  They can happily ride out short-term poor performance.

Consequently, they get the highs and lows of the market and everything in between which, over the long term, has been a winning strategy.

For some, such as The Earthquake Commission, investing assets overseas is essential.  Should it ever have to help rebuild Wellington or Napier or dig Aucklanders out from under a lava flow, it does not want to have its assets invested in a crashing New Zealand economy.  Retail investors should take a similar view of risks, says Matthews.

"If we ever had an outbreak of foot and mouth here, investors would all be saying, I knew I should have had money offshore," says Matthews.

Kiwis have apparently become a risk-averse nation of investors, says Anderson.

We now prefer fixed interest to shares as attested by the rate at which investors have poured money into fixed interest finance company debenture stocks.

But, says Anderson, much of that is Kiwis simply not understanding the equity-like risks of some finance companies, or that residential property markets do not always rise.

For super funds there is also the issue of the narrowness of the New Zealand stockmarket.

Take out Telecom and the poorly performing forestry companies and already the market is looking small.  Australian shares can help get greater diversity for Kiwi investors, but to get exposure to real technology stocks, huge pharmaceuticals, biotechnology and other global industries, investors really need to invest in overseas markets.

Some market commentators also think they can prove a diversified investment strategy is better for your financial health than trying to switch between markets looking for the best opportunities.

For FundSource's David van Schaardenburg, the results of trying to pick which investment will race away next and putting all your eggs in that basket is clear.

In 1997, when Kiwis still largely had an income focus in their investment, they would have achieved returns in the 7% arena.

A balanced fund would have returned around 25% because of its growth exposure.

But in 2000, having now become growth investors, Kiwis would have had miserable returns of 2.5% in growth assets, while balanced investors would have pocketed around 4.5%.

In 2003, the shift to income would have generated returns of 5.6% while the resurgence of growth investments would have seen balanced funds rise by more than 6%.

In each case, diversification smoothed the returns, though Matthews admits: "It's hard to stick with what looks like a losing strategy for years." Partly because of Kiwi investors' reluctance to invest offshore, Macquarie this week launched its Highpoint Notes (see Financial Product Money/D8).  The notes are designed to give investors a growth investment linked to overseas equities (in this case the world's 50 largest companies), while offering capital protction.

Kiwi operation Liontamer has also made a specialty of capital-protected products designed to tempt risk-averse investors back to the market, at times when it thinks gains are to be made.

Could anything else get ordinary Kiwi investors back into overseas investing?

History is clear.  If we had a huge spike in foreign prices, and poor onshore returns, we'd be back there like a shot, though that's not a scenario anyone is predicting.

But there may be other motivators on the horizon.

Dear to Finance Minister Michael Cullen's heart is the idea of giving as many Kiwis access to workplace super funds as possible.  He has hinted at plans to force many employers to offer them, but to do that he would have to level the playing field between residential property and directly held shares, which are not taxed on capital gains, and super funds, which are taxed.

He has hinted braodly that he is considering chopping capital gains tax from funds entirely, which in effect is simply a tax on those without much money or the ability to invest directly through a stockbroker.

Will it happen?  New Zealand has to hope so.