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Then then and now of world index funds

By Mary Holm

Monday 5th August 2002

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What a difference a couple of years makes.

I was looking through some old columns the other day, and came across one I wrote in January 2000.

"International share index funds - one of my favourite investments - have done so well that I'm almost reluctant to recommend them," I said then. "Readers might expect their recent growth to continue, and be disappointed if it doesn't."

The growth had, indeed, been impressive. AMP's WiNZ fund, for example, grew 38 per cent in 1998, followed by 31 per cent in 1999.

Much of that was thanks to the booming US share market. WiNZ, and other New Zealand-based world index funds, hold shares in the world's biggest companies. More than half are American, with the rest in the UK, Germany, Canada, Japan and Australia.

"Where will the US market go this year?" I asked back in 2000.

"Wise-sounding people have been predicting a drop for several years now. Perhaps this year it will happen.

"If it does, those who have been in the market for a few years will probably still have done well over their whole investment period.

"Newcomers, though, could end the year behind where they started. As always, they should stick with their investment for at least a few years.

Over ten years or so they will almost certainly do well."

Well, the drop did indeed happen in 2000, with WiNZ reporting a return of minus 4.5 per cent. And that was only the start. In 2001, the return was minus 20.7 per cent. So far this year, things have looked even worse.

In the midst of the gloom, it's useful to take a step or two backwards. Was I right, that investors over a few years have still done pretty well?

Not really. By historical standards, this is an unusually long bear run. Anyone who invested in WiNZ since its inception, in August 1997, has made an annual average return of a not very exciting 5 per cent, including dividends.

But I did say "probably"!

How about my other comment, that over ten years even those who bought recently "will almost certainly do well"?

It's way too early to tell. But I saw some data recently that made fascinating reading. It was 10-year returns on the MSCI index, which covers the world's biggest companies.

WiNZ and the other world index funds follow indexes similar to the MSCI. The advantage of MSCI data is that it's been around for a while, so I have numbers for every ten-year period from December 1969-79 through to June 1992-02.

Looking at average annual returns over all that data, there has never been a negative number. The worst was an average of 4.8 per cent a year, for March 1970-80.

The best was an average of 28.3 per cent a year, for May 1977-87.

But what impressed me more was the number of ten-year periods when average annual returns were in the double digits.

Since November 1973-83, average returns topped 10 per cent a year in a massive 91 per cent of the periods. And they topped 20 per cent a year in 37 per cent of the periods.

(For technical types, these numbers are in Kiwi dollars. In US dollars, there are only a few 10-year periods when average returns topped 20 per cent. But still, they topped 10 per cent in 90 per cent of the periods.)

What does all this mean?

I'm standing behind what I said in those happier days of early 2000. If you stay in a world index fund for ten years, I still reckon you'll do well.


Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached at maryh@pl.net. Sorry, but she cannot respond directly to readers.

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