Polson Higgs
Welcome to our Wealth Management Winter Update 2011
Déjà vu? The more things change, the more they stay the same …
If you believed the general media at the moment the investment world is a very scary place indeed. The risks seem enormous. A number of clients have asked about it, worried by stories they’ve heard on the news.
I opened up my Winter Update 2010 sent to you this time last year and there it was – Greek government default and recession in the US!
What has changed? Very little! And yet over this ‘tumultuous’ year we have just had 10% returns from share markets (to the end of June 2011) - despite a pretty worrying year we still managed to get pretty good returns from shares.
What’s going on in the news day-to-day, week-to-week, seems very important at the time but has very little to do with long term investment decision-making.
The US is gripped by a compelling side-show at the moment - there is a lot of political brinkmanship going on as the politicians have until 2 August 2011 to come to an agreement on funding their debt. If they don’t come to an agreement there is the technical possibility of the US government defaulting on its debt.
This political posturing was always expected to go down to the wire before an acceptable resolution was found and at time of writing there is one week before the deadline for agreement is reached. But, the US is still the richest nation on earth and they are still the most popular country to lend money to.
We seem to forget that there is always bad news if we look for it. My response is to turn off the ‘popular’ news as it is mostly just ‘noise’ and hunt out critical commentary I need on the internet.
The Currency Impact
Since we last reported at 31 March 2011 we have had two negative impacts on returns in your portfolios –
- Share markets have fallen a bit (the blue bars in the graph that follows), but
- The New Zealand dollar has risen a lot against the currencies you are invested in (the green bars in the graph).
The currency impact is shown in the graph as a negative number. Although it represents the NZ dollar rising, a rising NZ dollar has a negative impact on your international share values. When the NZ dollar rises the value of your international shares are reduced in New Zealand dollars.
The graph above shows the impact of selected share markets and currencies since we last reported to you at 31 March 2011. We can see:
- The Japanese share market is the only market showing positive returns at 1%. But our currency has risen 5% against the Yen so the net impact is -4%.
- The average currency impact over this time for your international shares is about -6%.
- The overall share market impact for international shares is about -2% so the combined currency/market impact is -8%.
- New Zealand shares are the best performing share at 0% for the quarter.
Things were a little different when it came to your portfolios. Fixed interest earned about 3.5% in your portfolio for the quarter and cash about 1% helping to balance out some of the share and currency impact. International shares = -7.7% and Australian shares = -9.3% all in NZ dollars.
Overall a typical 30% income/70% growth portfolio has returned about -5% for the quarter.
Why aren’t our international shares hedged?
This is a fair question. Your international shares are fully un-hedged as far as the currency is concerned. Looking at the graph above, if we had been fully hedged there would be no negative green bars dragging down the overall return to international shares. You would have been considerably better off over this last quarter.
Very few investment managers would be 100% hedged on international shares and it is uncommon to hedge Australian shares. The typical manager has hedging of around 50%. Even at that level the negative green bars would be half as bad as they were for us in the graph above. The overall currency impact would have been -5.5% rather than -11%.
There are at least three reasons why we don’t hedge your currency exposure –
- It is impossible to successfully chop and change one’s currency hedging, having it on when our dollar is rising and having it off when our dollar is falling. It would either have to be ‘on’ or ‘off’ and hence the typical response is to hedge 50%.
- Rises and falls in the New Zealand currency balance each other out over time so the net effect is negligible.
- A good reason for having our currency un-hedged is that we get the full impact when the New Zealand dollar falls.
When the New Zealand dollar falls our overall wealth in terms of what we can buy on a world scale falls too. It all hinges on the fact that our overall lifestyle depends on imported goods and services and when our currency falls all those goods and services go up in cost and our overall standard-of-living falls. At that time, the only goodie that you will have in your basket that will be worth more as a result of the New Zealand dollar falling will be your un-hedged Australian and international shares. They will have gone up in value by the same percentage as the New Zealand dollar has fallen.
Un-hedged international investments are the great insurance policy if anything goes wrong with New Zealand, or, in a similar vein, if anything goes wrong overseas and foreigners decide to pull all their funds out of New Zealand. And that is the saving grace of un-hedged international investments.
We have attached a very well written piece on this topic by Anthony Edmonds called Foreign Reserves: Currency Lessons from St Tropez. I am sure you will enjoy it.
Economic Conditions & Investment Markets
While share markets are jittery, in the last week the American share market had its best day this year, up 1.6% in one day. Still, overall it is a ‘risk-off’ market, cautious and fearful. I love some of the jargon we get from the market watchers. The current ‘risk-off’ term means ‘no-one wants to take any risk’. The corollary is ‘risk-on’ and that’s when everyone jumps in. There will be plenty of risk-on moments left in the year ahead, I expect.
Another saying is that ‘a bull market climbs a wall of worry’. The year to 30 June 2011 produced a return of around 10% for international shares despite the ‘wall of worry’ during the year and this is a typical scenario to expect.
Inflation: The other hot news at the moment is the latest inflation result in New Zealand at 5.3% for the past year. Some of this is the result of GST going up around 2.2%.
Inflation is for many of our clients their biggest blind spot but it is something you shouldn’t ignore. It is the main reason most people need to leave the relative safety of the bank and take on some risk by investing in so-called ‘growth’ investments.
Bank Deposits: Even though today one can earn 4.5% for a one year term deposit at a decent bank, after tax of 1.5% that leaves 3%. Take off the current level of inflation of 5%, leaves a real return of -2%. That’s OK for the short term or if liquidity is needed but it can’t go on for too long.
Capital Gains Tax: A capital gains tax broadens the tax base and makes if fairer for everyone as some sectors in the economy are able to avoid income tax and live off capital gains.
In my opinion there would be a case for a capital gains tax if there was a reduction in income tax to off-set it at the same time. I don’t’ believe we need more taxes, just different taxes.
Christchurch Office Moves Back Into the CBD
Our Christchurch office has moved back to the 7th and 8th floors of HSBC Tower in the Christchurch CBD after very good reports back from engineers about the integrity of the building. We were hugely relieved to be back home again.
If you are invited back to the office for a review and you feel unsure about being in a high-rise building, don’t hesitate to tell us and we can come to your place.
Another New Staff Member in Christchurch
Sue McKenzie has joined us as Office Administrator of Polson Higgs Insurance Services Limited working with CEO and Senior Adviser Lachie Gunn. Welcome Sue!
Rhodes Donald, Authorised Financial Adviser, 22 July 2011
Last Updated: Thursday, 28 July 2011 | 12:29:09 p.m.
