Electricity's rising dominance in NZX 50 may spur funds to seek wider benchmark

Thursday 24th October 2013

The electricity sector's rising dominance in New Zealand's NZX 50 benchmark stock index may prompt investors to adopt a wider benchmark to avoid having too great an exposure to the industry.

Government moves to partially privatise state-owned electricity companies including MightyRiverPower, Meridian Energy and Genesis Energy are boosting listings on the exchange and increasing the weighting of the electricity sector on the benchmark index.

Brokerage Craigs Investment Partners estimates utilities' index weighting may rise to about 13 percent, from 11 percent currently, following the inclusion of the first tranche of Meridian in December and increase to about 16 percent with the second tranche of Meridian and the likely inclusion of Genesis Energy next year.

That could elevate utilities to the second-largest sector in the index after cyclical consumer goods & services, which includes Fletcher Building, Sky Network Television, SkyCity Entertainment and retailers such as Warehouse Group, based on Reuters data. Industrials are currently second ranked by index weighting, though the weighting will likely reduce as utilities grows.

"Electricity is clearly becoming a big part of the index," said Phil Anderson, an energy analyst at Devon Funds Management. "Investors need to be aware that just having a New Zealand focused benchmark is potentially not getting the full benefits of diversification."

Using a more diversified trans-Tasman benchmark with Australia's S&P/ASX 200 Index adds exposure to the banking and resources sectors, he said. "When we put our clients' money to work we think a lot about concentration risk and try and have a more diverse portfolio."

New Zealand's benchmark index has long been skewed toward single companies or sectors, reflecting the bourse of an economy dominated by small and medium-sized businesses and with key industries such as dairy and meat processing under-represented. Telecom Corp, now split from is network arm Chorus, once made up a quarter of the index.

Annuitas Management, which has $330 million of Government Superannuation Fund money invested in New Zealand equities and $80 million of National Provident Fund money, said sectoral concentration is one of the issues it considers when deciding asset allocation.

"The idea is obviously to have a diversified portfolio," said Annuitas chief executive Simon Tyler. "If they did become very concentrated in one sector that would be something which we would have to look at. Hopefully if we look in 10 years' time it will be more diversified, but at the moment it has got a bit of electricity in it."

Annuitas undertakes strategic reviews every couple of years and should it become concerned about sector concentration, it could allocate out of domestic equities into international stocks or change to a hybrid benchmark spanning Australia and New Zealand, Tyler said.

Utilities on the index have averaged a negative 5.03 percent return so far this year, compared with a 19.9 percent gain for the NZX 50.

Meridian will list on Oct 29, joining MightyRiverPower, also partially privatised in May, and Contact Energy, which was sold 100 percent in private investors' hands in 1999. Meridian shares will be issued at a listing price of $1.50 to some 62,000 New Zealand investors, with the float raising $1.88 billion, the government said yesterday.

Individual investors who are just putting their toe back in the share market through government privatisations may not be so aware of the need for diversification and may be exposing themselves to more sector specific risks through MightyRiverPower and Meridian, Devon's Anderson said.

"You hope that as the economy grows and the current momentum that the stock exchange has got that it can keep growing and eventually be a larger more diversified market," Anderson said "It's going to take time for other companies that have different business models to come and list in New Zealand."

BusinessDesk.co.nz

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