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Trust investors benefit from rise in Russian stockmarket

By Peter V O'Brien

Friday 14th July 2000

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Overseas-based investment trusts and companies listed on the New Zealand Stock Exchange have done well while the rest of our market has been dull.

Price comparisons at the end of last week and in June 1998 for a selection of funds are in the table.

A currency translation is built into the prices but strong overseas markets, particularly in Japan and other Asian countries, were the main reason for the improvement.

The report of Foreign & Colonial Investment Trust (FCI) for the year ended December 1999 included stockmarket total returns in 1999 in sterling terms. Chairman John Sclater said almost every stockmarket in which FCI invested rose last year.

The best performer was Russia, up 220% in sterling terms and the worst was Roumania, down 26%.

Total returns of the most important market indices were:

Japan+77.8%
Pacific basin+44.8%
World ex UK+31.1%
North America+25.1%
UK+24.2%
Europe ex UK+19.9%

Mr Sclater said the world economy was far stronger than seemed likely a year earlier. That lay behind much of the recent strength in sharemarkets but share valuations also benefited from an abundance of money to invest.

Greater understanding of the long-term potential of equities had spread from the US to many other countries. Some of the greater demand produced had been channelled into "huge enthusiasm" for shares related to rapid technology, particularly the internet.

Mr Sclater was writing at the end of February, before the shakeout in high-tech shares, but his general observation was valid. He was cautious about Japan, where he said there had been some encouraging signs of economic growth, but the recovery remained fragile. Corporate restructuring had accelerated in the financial sector.

The interim report from Henderson Far East Income Trust contained similar comments. It said the six months ended February 29 saw favourable economic conditions with continued recovery in Asia and ongoing strength in Asia.

The interim report from another company in the Henderson stable - Henderson TR Pacific Investment Trust which specialises in investment in the Asian region - said last year saw a welcome upturn in most of the region's economies.

Chairman Iain Dale said the recovery in "Far Eastern" economies was expected to be sustained, helped by an expected strengthening in global growth. Exports should remain strong and domestic economies were expected to recover.

High borrowings capped some countries' prospects but there should be a generally favourable stockmarket environment spurred by further high growth in technology sectors.

The funds' optimism was in contrast to the situation two years ago when they reported negative returns, although in some cases taking the opportunity to impress investors with the news they had outperformed various indices.

Henderson Far East, for example, said its performance in the first half of 1998/99 was a negative return of 16.9% but it was relatively strong.

"The FT/S & P AWI Pacific Index, excluding Japan, declined by 20.2% over this period."

It was noted in The National Business Review (April 17, 1998) at the time, investors in managed funds cared little about what the managers referred to as "relative performance" (beating the index).

They saw a massive deterioration in the value of their investment and relative performance of, say, 1% or 2% was still bad for their money which could have eroded 20% in a year.

Investors in the funds would be happier these days with positive returns, whether in real terms or on the basis of relative performance.

They expressed their happiness with the price improvements noted in the table, although it is unlikely New Zealand-based buyers were responsible for the changes, given the stocks are thinly traded here.

Months can go by with little activity in the funds on the New Zealand exchange.

Most of the action is generated from overseas, particularly the UK, but a listing in New Zealand is convenient for local investors, irrespective of our brokers operating on a global basis.

There was considerable activity in funds buying back their shares/unit at the end of 1998.

Holders who wanted to get out rushed the managers but that was a short-term phenomenon.

Buybacks are still being arranged, as seen last week when UK-based Mercury European Investment Trust, which as the name suggests specialises in European stocks, passed a special resolution at its annual meeting to buy back 47.85 million ordinary shares.

The funds listed on the New Zealand exchange cover most of the world's market, including those classified as "emerging." They give our investors a chance to participate in overseas markets at lower risk than buying into a specific industrial company.

Selected funds share prices (NZc)
June 30, 1998July 7, 2000% change
FCI Trust635875+37.8
Fleming overseas12852080+61.9
Henderson Far East300370+23.3
Henderson TR Pacific145360+148.3
Templeton Emer mkt305415+36.1


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