Mercer survey of fund managers

Media Release

Friday 8 February 2008

Mercer survey of fund managers shows funds returned 1.7% for the December quarter, 5.7% for the December year.

While the median fund return for 2007 (December year) was ‘only’ 5.7%, the average fund return for the 5 years period was still a healthy 12.5% per annum. Investors now have volatility in returns back on their radar screens.

Superannuation funds delivered negative returns for the fourth quarter of 2007, recording a median return of -1.7% for New Zealand investors.

Published last week, Mercer’s Quarterly Survey of New Zealand Wholesale Superannuation FundManagers showed the highest performing fund for the quarter was Tower Asset Management which recorded a return of -0.4% before tax and fees while the lowest return was from Arcus Investment Management at -2.8%.  Over the full year AMP Capital Investors Superannuation Fund produced the highest return (at 6.9%)while BT Funds Management lagged the rest with a return of 1.0%. 

Fund managers with a lower than average allocation to New Zealand equities tended to perform better over the quarter.    

John Gallacher, Principal at Mercer, said: “The December quarter continued with the higher market volatility that started in the September quarter, with shares and property both showing negative returns over the quarter. The loss of confidence in financial assets of lower credit quality, sparked by troubles in the US sub-prime mortgage sector, continued to affect other asset classes, and these effects were compounded by uncertainty over whether (or to what extent) the US economy would move into a recession..  Short-term interest rates in New Zealand remained high. In the US, the Federal Reserve continued to lower the Federal Funds Rate to try and help restore liquidity and confidence.  The New Zealand dollar strengthened over the quarter finishing the period up nearly 1.5% in trade-weighted terms.” 

“Due to the falling market values of shares and property, Balanced Fund returns for the quarter across fund managers surveyed were all negative and in a relatively tight range – with most managers providing returns of -1 to -2%.  The level of individual Fund exposure to offshore currencies continues to be a notable driver of returns across shorter periods, but again the diversification of assets has been proving its worth in limiting damage to portfolios,” Mr Gallacher said.

Findings from the survey include the following:

§         Global stockmarkets, for hedged and unhedged New Zealand investors recorded negative returns over the quarter, with hedged investors benefiting from a rise in the NZ dollar.  Major international share markets delivered varying degrees of negative returns in local currency terms, with Japan delivering the worst returns for the quarter of -8.8%.

§         In US dollar terms the Dow Jones Industrial Average fell 4.5% over the quarter while the S&P500 and Nasdaq fell 3.8% and 1.8% respectively.  Emerging Markets ended the quarter up 2.6% while the MSCI Small Cap Index fell 5.8% (both in local currency terms).   

§         ‘Growth’ as an investment style performed better than 'Value' over the three month period, although still gave negative returns.

§         During the December quarter the domestic sharemarket fell 5.1%.   The NZ dollar was up 1.3% on a trade-weighted basis over the quarter. 

§         Tower Asset Management achieved the highest return for the quarter of -0.4%,followed by Tyndall Investment Management who returned -1.2% (returns before tax and fees). The median return for the quarter was -1.7%.

§         Returns for the past twelve months ranged between a gross return of 6.9% from AMP Captial Investors Superannuation Fund to a 1.0% return from BT Funds Management. The median return for the twelve months was 5.7% before tax and fees.

§         In terms of the asset allocation of discretionary balanced funds, the average exposure to growth assets as at 31 December 2007 was 63.7% (including allocations to alternative assets). The lowest exposure to overseas equities was 31.3% (Mercer Global Investments) with Arcus Investment Management holding the highest exposure at 44.3%. The highest exposure to domestic (or Trans-Tasman) equities was 20.2% (Arcus).

§         Comparing the asset allocations of the current fund managers with their allocations as at 31 December 2004, the average allocation to overseas equities is lower than that of three years ago (35.6% compared with 36.6% three years ago).  Two managers have increased their overseas equity exposure over this time. The average exposure to domestic equities has decreased from 16.9% at 31 December 2004 to 14.9% at the end of December 2007.  In December 2004 two funds had exposure to an alternative asset strategy.  In December 2007 five funds had allocations to alternative assets, ranging from 2.2% to 9.5% of the overall fund.    

§         Mercer has also compared the current managers’ three-year results from the December 2004 survey with those of the current survey.  In December 2004, Arcus Investment Management was the highest performing manager, with a return of 8.4% per annum.  At the end of December 2007 Arcus was also ranked first over three years with a return of 13.2% per annum.  The managers with three-year performance at or above median in both surveys were Arcus and Tower Asset Management.

§         The median return for the three year period to 31 December 2004 was 5.6% per annum.  For the three year period to 31 December 2007 the median return was 11.8% per annum.

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