2010 was another exciting year for equity markets – although after the tumultuous events of 2008 and 2009 investors probably expected nothing less.
The prospects for 2010 looked good early in the year, with the global economy in recovery mode and stocks cheaply valued. However, the developing crisis in European sovereign debt markets derailed the initial enthusiasm, and pushed markets into negative territory. The US recovery also became bogged down, and fears of a double-dip recession intensified.
But the announcement of more US quantitative easing proved to be a circuit breaker for equity markets. US economic data strengthened over the last quarter, and world equity markets rallied 19% in the final four months of the year. For the year as a whole, markets finished 12% higher (in US dollar terms) – so after a rather circuitous journey returns ended up in the solidly positive territory we expected.
However, New Zealand dollar returns were fairly anaemic – our MSCI benchmark finished the year up just 1.7% as the Kiwi rallied to US 78c at the close of the year. This is the second year in a row where the New Zealand dollar has rallied in synch with equity markets, and soaked up most of the gains from the equity rebound.
GMI growth portfolios finished the year slightly above benchmarks (after tax and fees), continuing a 12-year streak in which we’ve exceeded this target goal. Balanced and Income portfolios also exceeded their respective benchmarks.
Strategy Review
In keeping with our optimistic outlook, we started 2010 fairly heavily invested (85%) and went as high as 90% invested before scaling back in the face of the Euro crisis. We finished the year at 87.5% invested.
Given the run in equities, clearly a fully-invested portfolio would have helped performance. But we are conservative by nature and like to protect against the downside – as this year showed it is easy to be blindsided by crises even in years with a positive macro environment and attractive valuations. In general our stock selections make up for being underinvested in bull (rising) markets and this was again true this year.
As 2010 progressed, we increased the amounts of hedging we use to protect against New Zealand dollar fluctuations. Although that decision initially backfired, by the end of the year hedging had made a small positive contribution to returns.
The vastly increased currency volatility over the 2007-2010 period has convinced us of the merits of holding a default level of hedging (in the region of 50%) to dampen the effects of short-term currency movements. However, our view remains that for growth investors, with a long-term horizon, the choice of a hedged or unhedged portfolio has little effect on returns.
Portfolio Performance Summary
Calendar Year and after all tax and fee returns since 2003.
Portfolio Performance Summary
Calendar Year and after tax and fee returns since 2003 |
|
Portfolio Type |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
Average out- performance
over
benchmark |
|
Income |
9.0% |
9.1% |
7.5% |
11.2% |
3.8% |
-4.0% |
3.6% |
4.0% |
|
|
Benchmark |
0.3% |
2.0% |
6.4% |
7.2% |
0.9% |
-4.9% |
0.2% |
3.1% |
|
|
Out-performance |
8.7% |
7.1% |
1.1% |
4.0% |
2.9% |
0.9% |
3.4% |
0.9% |
3.6% |
|
|
|
Balanced |
12.6% |
10.8% |
11.2% |
14.6% |
3.7% |
-8.9% |
3.7% |
3.5% |
|
|
Benchmark |
2.2% |
2.0% |
9.2% |
10.6% |
0.2% |
-13.6% |
1.4% |
2.5% |
|
|
Out-performance |
10.4% |
8.8% |
2.0% |
4.0% |
3.5% |
4.7% |
2.3% |
1.0% |
4.6% |
|
|
|
Growth |
17.4% |
11.5% |
17.6% |
16.0% |
4.0% |
-15.6% |
3.8% |
2.6% |
|
|
Benchmark |
5.6% |
2.0% |
12.7% |
14.0% |
-0.5% |
-23.2% |
2.7% |
1.8% |
|
|
Out-performance |
11.8% |
9.5% |
4.9% |
2.0% |
4.5% |
7.6% |
1.1% |
0.8% |
5.2% |
ASSET CLASSES
Each year we look at portfolio performance from two aspects:
-
The performance of each of the asset classes we identify – cash, fixed interest, income stocks, core growth stocks and satellite growth stocks.
-
The performance of client portfolios themselves, which of course are a mix of the various asset classes. That mix is driven by the client's mandate and our own tactical management of asset class weightings as we try to navigate the investment cycle.
This section deals with the asset classes, and the next section will deal with the portfolios. The graph below presents the average performance for client portfolios in each of the 5 investment asset classes we identify. The returns referred to in this section are only net of withholding taxes and brokerage.
Fixed Interest
Fixed interest assets climbed 5.6% in 2010, beating the benchmark return of 4.2%. The slow recovery from the credit crisis continued in 2010, with corporate spreads narrowing, benefitting our holdings of corporate bonds (as opposed to the government bonds in the benchmarks). Contrary, to our expectations, interest rates fell over the course of the year, meaning that the short-duration of our bond portfolio counted against us. Nevertheless, we are confident that the upwards correction in global interest rates will occur in 2011.
Income Stocks
The income stock asset class is designed to produce a steady income stream from dividends albeit with more risk (and more growth prospects) than fixed interest. GMI income stocks returned 3.9% in 2010, out-performing the benchmark return of 1.7%. Most of the positive return is due to the 100% hedged position of the income stock portfolio, with some of our New Zealand stock holdings dragging on the underlying equity returns.
Core Growth
The core asset class consists of managers we have selected to replicate the underlying exposure of the global equity benchmark, while adding a bit of extra performance through stock selection and tactical positions. Sub-manager performance was disappointing in 2010, with long-short manager Platinum failing to fire in a year where stocks rallied indiscriminately. Returns for the core asset class were 2%, compared to a benchmark of 1.7%. Core returns include the gains from hedging on core stocks.
Satellite Growth
The satellite asset class is used to express our macroeconomic themes through stocks we have identified as representing excellent value in their respective sectors. We have gradually been tilting the portfolio towards a higher satellite weighting (at the expense of core) as the opportunities we’ve identified have come to look more attractive than the vanilla returns of our core managers. Satellite enjoyed a successful year with stocks climbing 5.7% (including hedging), well ahead of the benchmark return of 1.7%.
Cash
The cash benchmark is the client’s overall portfolio benchmark. 2010 cash returns were -0.2%, reflecting the 7.6% appreciation of the New Zealand dollar on our foreign cash holdings, and the low cash interest rates globally. For portfolios with hedging requirements, free cash is now mostly held in New Zealand dollars to meet our New Zealand dollar hedging target.
CLIENT PORTFOLIO RETURNS
2010 client portfolio performance reflects a mix of the performances of the above asset classes depending on:
(a) the client's investment mandate;
(b) within the mandated constraints the extent to which we under- and over-weight specific asset classes to reflect our own view of the outlook for the individual asset classes. Being a discretionary manager we have scope to be tactical. The returns referred to in this section are net of all taxes, fees and brokerage. There are limitations on how many of the client portfolios we can include in this performance analysis. We exclude:
-
portfolios that haven't been with us for 12 months;
-
portfolios where the client has specified any specific instruments be held;
-
portfolios where the investment mandate has been changed significantly in the last 12 months; and
-
portfolios where there has been a substantial amount of money added or withdrawn over the year.
Together these restrictions eliminate around a third of our portfolios from consideration for this measurement exercise.
For this measurement exercise, we have considered the income portfolio group to include those with more than 65% of the assets mandated to be in fixed interest or income stocks; balanced to have between 35% and 65% of assets in fixed interest or income stocks (the rest in growth stocks); and growth portfolios to have less than 35% of funds mandated to fixed interest and income stocks (more than 65% in growth).
|
2010 Performance Summary |
|
Mandates |
Average
GMI Portfolio Return |
Average
out-performance of benchmark |
Max GMI Portfolio Return |
Min GMI Portfolio Return |
Number of portfolios eligible for sample |
|
Growth |
2.60% |
0.80% |
4.20% |
1.00% |
492 |
|
Balanced |
3.50% |
1.00% |
5.50% |
1.50% |
227 |
|
Income |
4.00% |
0.90% |
6.10% |
1.50% |
106 |
Growth portfolios
492 portfolios qualify for our growth sample, with mandates for between 65% and 100% growth assets. On average, these portfolios finished 2010 up 2.6%, 0.8% ahead of their benchmark. Portfolio returns range from between 4.2% and 1.0%. A strong market rally made it difficult to keep up with the benchmark in our Growth portfolios, which were 84% invested on average over 2010. However a solid performance from our satellite stock picks and gains from our forward foreign exchange contracts lifted performance ahead of benchmark.
Balanced portfolios
We have taken these to be any portfolio with a mandated asset mix of between 35% and 65% in income stocks or fixed interest. 227 portfolios qualified for this sample and the returns ranged from 5.5% to 1.5%, the average performance being 3.5% and the average out-performance of the relevant benchmark being 1.0%. With equities and fixed interest assets both outperforming their benchmarks by similar margins, balanced portfolios generally out-performed their benchmarks.
Income portfolios
Income portfolios had a solid year, outperforming their benchmark by 0.9% despite trying conditions for fixed interest investment. The average income portfolio return was 4.0%, with a range of between 6.1% and 1.5%. There were 106 portfolios in the sample satisfying this criterion for income of less than 35% allocated to growth securities. Our relatively short-duration portfolios made it difficult to add value this year as interest rates were generally flat or falling.
