Even investment wolves are wary of this rollercoaster of market moods

VIEWPOINT

Reuters

MARKET ROLLERCOASTER: Even seasoned investors are wary of today's unpredictable market.

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OPINION: If you're having trouble making money in today's scary and unpredictable markets, you're in good company.

Stanley Druckenmiller, whom the London Financial Times describes as "a master of the investment universe", has found the past three years so tough he has given up, frustrated over his inability to make worthwhile money in today's global markets.

Executives and directors of the many Kiwi companies who have battled tough times and managed to produce better than expected performances and profits in the current reporting round, only to find the share prices have barely moved, should take heart from Stanley's experience.

While most of us will ask "Stanley who?", Mr Druckenmiller is famous in investment circles as George Soros' sidekick when he undertook the high-risk strategy of taking a huge currency bet against the British government in 1992. This forced sterling out of the European exchange rate mechanism and Mr Soros made what was then seen as an obscene US$1 billion (NZ$1.42b) profit.

Reporting on Mr Druckenmiller's retirement after heading hedge fund Duquesne Capital for 30 years, James McIntosh, a columnist in the Financial Times, said that if an investment wolf of this calibre can't make serious money in today's markets, lesser investors should beware.

Mr Druckenmiller's surprise retirement raises questions over the investment policies of the state-owned $16.4b New Zealand Superannuation Fund. This is a substantial investor in alternative asset managers, including private equity funds and commodity investors.

A fund critic, Auckland investment adviser Brent Sheather, calculates 18 per cent of the NZ Super Fund portfolio at June 30 was invested in alternative assets, excluding property. Such funds usually charge hefty performance fees.

These funds seek to make money dealing in currencies, bond markets and sharemarkets. Since the credit crisis these markets have become high risk and highly volatile.

While these conditions should provide a perfect hunting ground for these managers, the opposite has happened. Investors everywhere are wary and cautious. Markets are behaving capriciously, reacting to extremely short-term news developments.

One day prices bounce as confidence rebounds on some positive economic news; the next day they collapse on United States unemployment or housing statistics or news of the dire state of, say, Ireland's debt.

Few investors are prepared to take a long-term view, preferring the security of government and highly rated bonds, where yields are falling fast compared with shares and other assets.

Up to July the average hedge fund had lost 1.2 per cent in value. Global shares have fallen 5 per cent since January, while buyers of US 10-year bonds have made 10 per cent on their money, even if the actual yield on these bonds is derisory.

The NZ Super Fund has also had a patchy run since the credit crisis hit, including coping with the Government suspending taxpayer contributions to avoid increasing the national debt.

After two poor months its returns improved in July thanks to better equity returns.

At $16.44b the fund's value is down from a peak of $16.7b in April. It defends its investment strategies, saying that it is different from ordinary retail investors because it is unusual in having a very long-term investment horizon, no explicit liabilities and no capital outflows till 2031.

This means it can consider investment classes other investors cannot, and can make fee and other arrangements with investment managers that are not open to other investors.

Only time will tell if its strategies turn out to be astute. The fund managers are undeniably correct in saying a lot can change in investment markets over the next 20 years. We all hope they've picked the right fund managers.

Closer to normal investor time horizons, New Zealand companies have so far produced a surprisingly good run of results with no nasty surprises in this reporting round.

However, directors' commentaries have tended to be extremely cautious about the medium-term outlook, as befits the mood of the times.

Dividend increases have been few and far between as companies husband their financial resources.

With many dividend yields higher than bond returns, there has been little demand for increases from shareholders.

While most share prices showed little movement after the profit announcements, exceptions included Skellerup Industries, which is recovering well after setbacks when the global crisis hit. Skellerup will also be benefiting from the hands-on style of one of the country's most experienced and canny investors - Sir Selwyn Cushing, whose family is a major shareholder.

Other bonny results included Christchurch medical supplies company Ebos, which has been largely recession-proof, and infrastructure company Opus.

Nuplex has proved a winner for anyone who bought in cheaply during the crisis it faced last year. GPG subsidiary Coats confirmed it was doing better. Freightways, Contact Energy, Sky Network Television and Fletcher Building were among those to benefit from broker upgrades or positive broker sentiment.

However, some analysts tended to be wary about Fletcher's medium-term outlook.

Uncertainty weighs over several companies, including Telecom, and SkyCity Entertainment Group because of marked weakness at its Auckland casino, although it showed double digit growth at its Adelaide casino which for years was a miserable contributor to earnings.

- © Fairfax NZ News