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Easing the pain

By Angela Jones

Monday 1st November 2004

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ACC's fund managers made $489 million for the accident insurer in the year ended June, defraying the cost of accidents on the rugby field and in the workplace. With almost $5.5 billion under management, the investors at ACC are responsible for one of New Zealand's three largest funds. What's their strategy?

Well, they invest in bonds, bonds and more bonds - the fixed-income instruments that do poorly when the economy does well. Government debt made up almost half of the insurer's funds at the end of June, wiping $120 million off the value of its portfolio during that 12-month period as a robust economy drove yields inexorably higher.

They're essentially obliged to invest heavily in bonds to match the long-term nature of their claims' liabilities. Nicholas Bagnall, ACC's investment strategist, says they're budgeting for a return of 6.5% for this year, down from an average of 10.8% for the 2003-04 period, when equity markets boomed.

"A lot of (stock) markets are fully priced, but not outrageously priced as we saw in 1999-2000. The chance of exceptional returns becomes less likely when markets are fully priced," says Bagnall.

The fund is also dabbling in the New Zealand private equity market - at the end of June it had $8 million in this sector, via direct investments in technology companies, and in four of the funds fostered by the New Zealand Venture Investment Fund.

"We're basically putting our toe in the market," Bagnall says. "We're learning from our experiences, and we're also going to make a decision as to whether we're going to step up that activity or get out completely." He says they've made investments in new tech businesses with varying degrees of success, but none have been as successful as Mooring Systems. ACC invested in the Christchurch-based company soon after it listed on the New Capital Market, though Bagnall says its early-stage nature means that it was similar to making a private equity placement.

Many equity markets around the world aren't going to provide compelling returns over the next few years, Bagnall reckons. The robust Kiwi dollar is likely to fall and very high interest rates may well mean that yields decline over the 2004-05 year. Local stocks are "fully priced", he says.

Will bonds make a comeback? The higher inflation outlook and higher short-term interest rates make short-term fixed interest assets more attractive than bonds, says Bagnall.

Management of its portfolio of large-cap Australian industrial stocks such as miner BHP Billiton is "more formulaic" and ACC plans to change that approach. "There's a lot of money following similar strategies in Australia, which makes it more difficult to outperform."

And holdings of New Zealand stocks, the largest of which are the likes of Fletcher Building and Fisher & Paykel Healthcare? "In both those cases, we're holding a greater than benchmark weight. We hope that we have a portfolio that will keep up with the market if the economy is strong, but would not be overly exposed to domestic demand in the event of a recession."

The R word? You read it here first.

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