"The reports Pascoe Barton provide are great. The taxation reports save our accountant a lot of time."

R & J

Winners and Losers in 2014

Over the past year the stand out performance area has been from shares with strong dividend streams. The share prices of listed property companies in general did very well. This is a trend that has continued for some time, and explains the popularity of Australasian Equity Income Funds. These types of investments can have a pretty wide investment mandate and provide a revenue stream typically well in excess of what can be obtained from bank deposits and a diversified range of bonds.

One of the interesting things is that despite the broader Australian share market having underperformed the New Zealand share market, there are Australian shares with strong dividend yields even allowing for the loss of Australian Franking credits (the Australian equivalent of imputation credits) for New Zealand investors.

International shares performed reasonably well, although there were strong headwinds for Australian dollar denominated funds, as the $A lost strength. This is an issue for many New Zealand investors because they invariably invest in funds or direct shares that are not hedged to the New Zealand dollar. The difference in terms of performance in New Zealand dollar terms between the fully hedged version of a fund and the unhedged version has been several percent per year.

The cross exchange rate between the Australain and New Zealand dollar has been a talking point. This has largely been because of around a six cent rise in the value of the New Zealand dollar since November. The Australian dollar has weakened against the US dollar because the Australian economy is weak. From a New Zealand perspective, we have been there before, as the following chart illustrates. As you can see since January 2000 the New Zealand dollar has been as low as A$0.73c and as high as it is now in November 2005, which was just before a significant fall again.

Fixed interest investing over the past year has been a mixed bag. New Zealand bond funds have had returns in excess of bank deposits. Funds with higher quality holdings such as government bonds performed better than those which invested solely in corporate bonds. This was despite the corporate bond funds having a higher yield.

Several banks decreased their deposit rates over the last quarter of 2014. Interest rates on new fixed rate mortgages also decreased. Why did this happen? Firstly the banks have no shortage of deposits. Many people are holding bank deposits waiting for interest rates to go up. While they will increase, it is a matter of when. This could be a year or more away. The second reason is that government bond rate yields in several countries declined after the United States Federal Reserve indicated that they were in no hurry to increase interest rates.

International fixed interest continued to perform well, largely on the back of a strong carry trade from the currency hedging into the New Zealand dollar. Individual investors and indeed most KiwiSaver funds tend to have only a small percentage of their fixed interest exposure in international fixed interest. This is quite different from a number of superannuation funds. With the increasing dominance of KiwiSaver Funds in the New Zealand fixed interest space and the general lack of good fixed interest issuance, it makes sense to invest in the much wider universe of international fixed interest that is actively being managed.

So if we were grading the performance of the various sectors for 2014, we would rate them as follows: Hedged International Shares, passed with merit. Unhedged International Shares: achieved. Australasian Equity Income and Property, passed with excellence. New Zealand Fixed Interest, achieved. International Fixed Interest, passed with excellence. With no sector failures, how well a diversified portfolio performed was very much dependent on asset allocation, investment selection and the hedging practice used.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.