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AMP CI Reports |
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NZ Cash, Bonds underperform while Equities outperform
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| New Zealand Cash Fund Over the 31 March 2006 to 31 March 2007 period, indicators continued to suggest that the economy remained in good health with a buoyant housing market and strong domestic demand. This was of some concern to the Reserve Bank of New Zealand (RBNZ), given it had been relying on a slower economy to help bring inflation down. Hence, the RBNZ not only left the OCR at 7.25% for all of 2006, but also increased it 25 basis points (bps) to 7.50% in March 2007 and indicated that further tightening may be required. The benchmark, the NZX Bill Index, returned 7.8% for the year compared to the Fund which underperformed, returning 7.7%. Several times the portfolio was positioned to benefit from the expected end of the monetary policy tightening. This process has taken longer than expected, largely due to the continued strength in the housing sector. At 7.75% (from 26 April 2007), we believe the rate rises are either over or, at most, one rise away from completing this cycle’s tightening. The Manager is locking in these higher rates for terms longer than index, which should add value through the rest of 2007. The Fund returned 7.3% and 6.7% over the three- and five-year periods respectively, outperforming the benchmark by 10 bps in both cases. New Zealand Bonds Fund Bond returns were relatively low in New Zealand over the past year. This mainly reflected low running yields and also some capital losses as yields rose modestly. The benchmark for the Fund, the NZX NZ Government Stock Gross Return Index, returned 3.8% while the Fund returned 3.7%. The strong housing market has been a significant drag on fixed interest performance. With floating mortgage rates significantly higher than fixed rates, the majority of borrowing is occurring for terms of two years or longer. This puts strain on the gap between government rates and bank (or ‘swap’) rates. Bank rates move higher as banks borrow for terms to match their mortgage lending. This activity causes any non-government securities in your portfolio to underperform government securities. Around half the assets in your portfolio are in non-government securities. The Fund returned 5.3% and 6.8% for the three- and five-year periods respectively outperforming the benchmark, which returned 5.1% for the three-year period and 6.4% over five years.
New Zealand Equities Fund During 2006, New Zealand shares yet again managed to come in way ahead of most investors’ expectations. This was partly due to a wave of merger and acquisition activity, but also because of supportive equity markets globally and because company profits did not deteriorate too much given the relatively mild economic slowdown. New Zealand shares started 2007 a little slower, with New Zealand being one of the worst performing developed markets with disappointing earnings and earnings guidance hindering performance. The Fund returned 24.7% for the year, outperforming the benchmark (the NZX 50 Gross Index) by 11.7 percentage points, which returned 13%.The portfolio benefited from overweight positions in Rakon, Gulliver’s Travel and the Warehouse Group and an underweight position in Telecom New Zealand. Over the three-year period, the Fund returned 24.7% while the benchmark returned 17.7%, and over the five-year period, the Fund returned 20.5% outperforming the benchmark at 16.0%. |
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