Double-digit funds soar high above lacklustre rivals

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THEY ARE the double-digit funds – those that have delivered annual returns of 10% or more over the past seven years.

But while not as rare as hen's teeth, they are not exactly common. Just 47 of 418 listed by FundSource as being in existence for seven years have made the grade.

Topping the list is the BT Natural Resources Fund, which managed to deliver 22.86% average returns to investors over each of the past seven years to the end of December.

The double-digit funds were also dominated by Australian share funds. Around a third invested primarily in shares from the lucky country, including the second-ranked fund, Fisher Funds' Australian Growth Fund, which returned 20.35% a year over the past seven years, and the third-placed BT Smaller Companies Funds.

Paul Richardson, chief investment officer at BT, which is owned by Westpac Bank, said Australian shares were increasingly making up a greater proportion of Kiwi investment portfolios due to the strength and depth of the Australian market compared to what was on offer in New Zealand.

Australia had been resilient in the face of the current financial crisis – its banks and its natural resources companies helped the economy to remain strong, and bolstered the sharemarket.

But there's comfort for Kiwi investors who have a large slice of their wealth invested in their home market, he said, because the New Zealand market tended to rise and fall roughly in tandem with Australia's.

"The long-running trend for New Zealand equities is for returns of 9-12%. That's what you would expect from a passive manager. An active manager should expect to do 2-4% better than that," Richardson said. "That's 11% to 16% or so over quite a long timeframe."

Not many funds managed that. The sector average over the past seven years for active NZ share funds was 9.66% at the end of November.

Seven years is the longest timeframe investors can reasonably use in choosing a manager, said FundSource, as after that the personnel and processes behind each fund were likely to have changed.

But it is enough time for investors to expect returns commensurate with the risk they are taking in the sharemarket.

Many investors did not enjoy such returns, however. Of the 418 funds, 308 underperformed the 90-day bank bill gross return of 6.74% a year over that time.

Even less impressively, 71 of the funds with a seven-year track record had failed to beat the annualised 2.87% rise in the Consumer Price Index over the past seven years. Among the worst performers were funds invested purely in North American, UK, European or Japanese shares, or in international share indices dominated by shares from those regions.

Many of the worst funds were also tiny, with investors having ditched them, leaving them susceptible to already poor returns being exacerbated by the expenses of running them.

But Richardson said sharemarket booms and busts seemed to come with increasing frequency, meaning a few months could be a long time in investing terms. Investors had to be aware of when a performance period had begun, and ended.

Second-placed Fisher Funds' Australian Growth fund may have returned 20.35% a year for the seven years to the end of November, but had this comparison been done at the end of December 2008, it would have been just 4.18%, dragged down by a market crash which saw the fund lose nearly 39% of its value in the previous 12 months.

Comparing that to the 78.16% rise the fund posted over the 12 months to the end of November last year illustrates the roller-coaster ride investors in funds have experienced.

But any seven-year period would catch at least one big bull and one big bear run, said Richardson, and the seven years to the end of November began when markets were in a trough, and had ended after a big rally from lows caused by the financial crisis.

While BT had three funds in the top 10 best-performers, Tower had four, and though none were now open to new investors, Tower's communications manager Michael Coote said the firm's new funds were managed along similar lines, often by the people responsible for the closed funds' track records. "We tend to stick with fund managers for long periods of time so in many cases the underlying fund managers and processes are the same," he said.

Coote said Tower's value investing philosophy – the practice of buying shares in strong, established businesses the manager thinks are undervalued by the market – had been a big asset. Growth managers – who are seeking rapidly growing companies – have performed far less well.

Fund managers have come in for a lot of flak for their performance in the past few years, said Richardson, and he thinks there's a peculiarly New Zealand tendency to attack the industry. A survey by the Sunday Star-Times in July last year showed 75% of respondents rated their trust in fund managers as one or a two out of a maximum five.

Richardson said that overseas, people did not call into question the entire industry at points of market collapses.

"The habit of savings and retirement plans in the UK and US is much more deeply ingrained. It is difficult to convince people here that we can't control the future.

"Funds management is at the mercy of market movements and global events."

- © Fairfax NZ News