IPO: NZX brings FONZ to town

Thursday 11th November 2004

The New Zealand Exchange is launching a new exchange-traded fund (ETF) which will invest in stocks within the Top 50 index.

Called FONZ, or Fifty of New Zealand, the new fund will be passively managed and will track the Top 50 index except for the fact that the maximum weighting of each stock within the fund will be 5%. The weightings of each stock will be reset at the end of every quarter.

The exchange is aiming to raise about $35 million from the offer, which opens on November 15 and closes on December 3, but has capped the amount that can be raised at $50 million.

Geoff Brown, a director of NZX Funds Management, says that's so when the fund starts buying shares to replicate the index any distortion of the pricing of the smaller, less liquid stocks within it will be limited.

The fund is aimed primarily at first time investors in shares. It will allow for all dividends to be reinvested and investors also have the option of setting up a regular savings plan under which they can continue to add to their investment. The monthly plan allows for as little as $50 a month to be automatically withdrawn from the investor's bank account. The minimum initial investment is $1,500.

"ETFs are quite unusual in their ability to grow in size or contract in size," Brown says.

For example, the oldest of the exchange's ETFs, TENZ which was launched in 1996 and is based on the Top 10 index, raised $40 million from its float and peaked at about $180 million and is currently worth $81.7 million.

The exchange's other funds are MIDZ, based on mid-cap stocks outside the top 10 and currently worth $42.8 million, and MOZY, based on Australia's mid-cap index and currently worth $33.48 million. The latter was floated in September and raised $33.2 million.

So why the need for another fund? "In a number of markets our size, and what you get with TENZ, is the weighting is very much pushed to the larger stocks in the market - Telecom is the obvious example," Brown says. "It makes it a better investment spreading it across a wider number of companies."

Because it will be passively managed, FONZ won't have to pay capital gains tax when it makes a profit from selling stocks. However, its performance won't match that of the index it follows because the index includes the full value of dividends paid including their imputation credits. With FONZ, the 33% company tax will be deducted from the dividends before they are reinvested.

Brown says it was evident from the MOZY roadshow that investors are particularly hungry for high yields.

FONZ's investment statement shows the index it will follow increased about 67% between January 2001 and September 1, 2004, a pre-tax compound annual return of 14.74%.

While other fund managers might argue that actively managed share funds are currently out-performing the index, Brown says the experts don't always get it right. At the beginning of the year, the Dominion Post asked eight brokers for their best stocks. Six of them chose The Warehouse Group. Year-to-date, The Warehouse shares are down 22% while the index is up about 17%, he says.

Another advantage of FONZ is that its fees are much cheaper than actively managed funds - the investment statement says fees charged by actively managed funds can be up to three times more expensive.

The NZX is hoping to increase share ownership among retail investors through its ETFs. It estimates only 22% of "mums and dads" in New Zealand own shares compared with 46% of Australians. But over the last 70 years, New Zealand shares have recorded a 12.6% annual gain, more than any other investment class.

NZXFM is supporting the launch of this product with a unique investor presentation.

For details on the presentations and to save your seat go to www.smartshares.nzx.com/register

FONZ is open for investment applications from 15 November 2004 and closes on 3 December 2004. If you would like more information on investing in this unique New Zealand sharemarket opportunity download an investment statement and application form from www.smartshares.nzx.com

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