Zeroing in on New Zealand's Equity Market
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Zeroing in on New Zealand’s Equity Market SIMPLE ACTIONS Symon Parish, Chief Investment Officer, Australasia Russell Investments Andrew Bascand, Managing Director and Portfolio Manager, Harbour Asset Management The New Zealand listed market is small and illiquid Value Traded on Exchanges ($m) - Australia vs New Zealand 2017 Average 2017 Minimum Market Cap to GDP Ratios - Selected Markets 250% 6000 200% 5000 150% 4000 100% 3000 50% 2000 0% 1000 0 NZX ASX Source: Russell Investments, World Bank, Bloomberg. Liquidity data in local currency. p.2 The New Zealand market is concentrated at the stock level, but well diversified by sector Market Concentration GICS Sector Exposures S&P/NZX50 S&P/ASX200 MSCI World S&P/NZX50 S&P/ASX200 MSCI World 120% 40% 100% 35% 30% 80% 25% 20% 60% 15% 40% 10% 5% 20% 0% 0% % of Market Cap in % of Market Cap in % of Market Cap in % of Market Cap in Top 5 Stocks Top 10 Stocks Top 20 Stocks Top 50 Stocks Source: Russell Investments, FactSet p.3 New Zealand listed companies are relatively young Proportion of Market Cap New to Being Listed New Zealand Market - IPOs and Deletions No of stocks IPOs Deletions S&P/NZX50 S&P/ASX200 MSCI World2 140 35% 120 30% 100 25% 80 20% 60 15% 40 10% 20 5% 0 0% % of cap not listed 5y ago % of cap not listed 10y ago -20 2013 2014 2015 2016 2017 Source: Russell Investments, FactSet, as at 28 Feb 2018. IPO data as end of each year. p.4 Active managers perform well in New Zealand Median Manager 12m Excess Return vs NZX50 Hit Rate Median 12m Excess Return 120% 12% 100% 10% 80% 8% 60% 6% 40% 4% 20% 2% 0% 0% -20% -2% -40% -4% -60% -6% Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Source: Russell Investments p.5 Introducing Russell Investments’ Factor Portfolios Low Growth Momentum Quality Value Volatility Size p.6 The NZ market favours different factors than what we see in other markets Russell Investments Factor Portfolio Excess Returns New Zealand Australia Global 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Growth Low Vol Momentum Quality Value -0.50% p.7 Source: Russell Investments, 30 Nov 2003 to 31 Jan 2018 The NZ market favours different factors than what we see in other markets Strategic Benchmark - Factor Allocations New Zealand Australia Global 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Value Momentum Quality Low Vol Growth Source: Russell Investments. Excess return data from 30 Nov 2003 to 31 Jan 2018 p.8 Performance of NZ active managers compared to factor portfolios Median 12m Excess Return vs S&P/NZX50 Median 12m Excess Return Strategic BM 12m Excess Return 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Source: Russell Investments p.9 Performance of NZ active managers compared to factor portfolios Excess Return vs S&P/NZX50 NZ Median Manager NZ Strategic Benchmark 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Jan 04 - Dec 17 Jan 04 - Dec 10 Jan 11 - Dec 17 Source: Russell Investments. Excess returns are annualised. p.10 The New Zealand weight in key regional and global indices is very small MSCI ACWI MSCI Asia Pacific ex Japan Index New Zealand Australia Rest of World New Zealand Australia Rest of World Source: MSCI, FactSet p.11 Offshore funds don’t need to allocate money to NZ, and when they do the weights are modest Region EAFE Asia Pacific ex Japan Australia Average NZ weight in manager portfolios 0.11% 0.38% 0.82% Benchmark NZ weight 0.17% 0.87% N/A Top six names held in manager portfolios EAFE Asia Pacific ex Japan Australia Spark New Zealand Spark New Zealand Fisher and Paykel Healthcare Air New Zealand Auckland International Airport A2 Milk Ryman Healthcare Xero Fletcher Building Z Energy Meridian Energy Trade Me Group A2 Milk Restaurant Brands New Zealand SKYCITY Entertainment Fisher and Paykel Healthcare Fletcher Building Chorus Source: Russell Investments p.12 Foreign investment in New Zealand companies is high, the question is how sustainable it is 55% 50000 50% 40000 45% 30000 40% 35% 20000 30% 10000 25% 20% 0 Value $,000 (RHS) Offshore ownership +1/-1 stdev (% S&P/NZX 50) Source: Forsyth Barr analysis, Statistics NZ, Bloomberg Source: Harbour Asset Management analysis p.13 Conclusions • The NZ market is small, concentrated and illiquid, but quite diversified by sector. • When selecting managers and building a portfolio it pays to understand the unique behaviour of the NZ market – growth and momentum investing work well here. • Factor based strategies should be considered for investors looking to save on costs. • Most overseas investors don’t need to invest here. • Foreign investment is high now due to the economic strength and the high yields. • This makes the NZ market vulnerable to outflows. p.14 Questions Disclaimer None of Russell Investment Group Limited, any member of the Russell Investments group of companies, their directors or any other person guarantees the repayment of your capital or the return of income. 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