Response by Vance
Arkinstall, CEO, ISI
to Consumer Article on international equity funds
23 June 2004
Thank you for the opportunity to comment on the draft article for
the July edition of Consumer.
My overriding feeling is that by attempting to make a simple
presentation of the performance of international equity funds the article misrepresents
the role of international equities within an investment portfolio. That misrepresentation
is increased by a lack of background explanation and caveats in several important areas.
In the absence of adequate ‘advice and/or warning’ you are likely to mislead
readers.
It would be most unusual and it would be a very high-risk
strategy to invest in an international equity fund as the sole or only asset class and
expect that approach to solve future investment concerns. The presentation of your article
may lead readers to that conclusion, which is wrong.
International equity funds are one of a range of asset classes
available to investors to select as differing economic conditions emerge. At various
points over the decade international equities have produced outstanding results. At other
times they have performed not so well – this is the nature of investment markets.
Investors who have effectively utilised a range of managed fund
options, switching between funds and asset classes and rebalancing at various times, have
achieved very good results but your article gives no recognition to that fact or the
various options available.
Your concentration on international equities in the manner you
have, contains the serious risk that uninformed readers will be adversely influenced
regarding the important value of this asset class in a manner that is unrealistic.
Your section "Our Advice" at the end does bring some
balance to the article but by the time a reader gets to this, much damage may have been
done.
Overall, I feel you are missing a great opportunity to educate
and advise existing and potential investors/consumer readers. By ‘bagging’
international equity funds you may well gain publicity but you will not be assisting
investors.
The following are our specific comments:
- It is inappropriate to continue to use emotional catch phrases
such as "scandalously-poor performance of balanced savings funds." These funds
have followed the investment mandate contained in the marketing material and supporting
documentation supplied to investors. The "investment returns" reflect the
fluctuations in asset values resulting from market movements. It is simply untrue to use
terms such as ‘scandal’. The use of such terms has no place in responsible
financial reporting - unless there is evidence that investors have been deliberately
misled – clearly that is not the case.
- Are you absolutely certain that the funds you are surveying all
contain entry, exit and switching fees? I do not have access to the full information but I
suspect none of the funds surveyed have these charges. If they do not then you should
remove this reference.
- The variation in results of international equities across a number
of products and within fund managers is the result of investment markets emerging from
what is widely acknowledged as one of the most volatile periods in the history of
investment markets. Within the 10 year period measured, equities (especially international
equities) which have been particularly affected. The returns provided by international
equity funds in the survey cannot avoid being affected by this volatility. Your article
contains no recognition of the difficult and unique investment conditions that have
existed over this time.
- The article implies that fund managers are at fault for the
performance of the markets – they are not. Managed funds reflect the performance of
the markets in which they invest.
- The article implies that all current savers in international
equity funds have been subject to the results illustrated. This is simply not the case
– managed funds have grown steadily over the past decade as new investors have come
to appreciate the advantages of using collective investment vehicles for saving. Many
current investors would not have been members of these funds 10 years ago. Many will have
taken investment advice and switched between funds and other asset classes, recognising
changing market conditions. It is impossible to identify how many individual investors
would have held the products identified for the full 10 year period.
- As stated in the opening paragraphs, the serious flaw in the
article is that international equity is one of a number of separate asset classes. It is
unlikely that an informed investor would choose international equity as the sole asset
class for the long term. The greater reality is that an investor would choose several
asset classes and balance investment between this range of asset classes to suit their
personal appetite for risk, their individual circumstances and as economic conditions
change. Investors who have adopted this approach are likely to have benefited from
satisfactory results. Your article cannot hope to replicate that situation and this is the
difficulty you face.
- As a consequence you are unfairly ‘blackening’ the
reputation of international equity funds in the eyes of uninformed readers, when many of
these funds used effectively will have provided excellent outcomes.
- The performance of international equity managed funds have been
affected by complex taxation issues creating gains/losses on unrealised profits/losses.
Individual fund managers have responded in ways reflecting the nature of their investors
and in a manner to provide equity across different generations of investors. [ISI has
prepared guidelines to its members on this subject.] The availability of taxation credits
which will emerge over coming periods will provide significant value to investors that the
returns quoted in your article will not reflect. [This is a technical issue that is not
easily explained in a short and simple manner.]
- The taxation of managed funds is made more complicated for NZ
investors by the unusual tax basis that exists in this country. Fund managers cannot be
held responsible for this. I am pleased to report that as a consequence of the
industry’s on-going efforts, Government and Officials now recognise the urgent need
for change and are in the process of embarking upon a review.
- Your article gives no recognition to the importance of taking
advice and regular monitoring of existing decisions. International equities are a separate
sector, the results from which will fluctuate according to the state of the economic
cycles as they occur.
You would do readers a service by drawing attention to the
importance of good advice and regular monitoring when investing in individual sector
funds.
- Your insistence on comparing with 6 month term deposits is
disappointing. Historically, diversified portfolios and equities outperformed cash for
more than 80% of rolling ten year periods. Whilst it is true that in the period you are
measuring 6 month term deposits have outperformed some international equity funds, there
is no certainty/guarantee this will occur in the future.
- It is ‘wrong’ for you to lead your readers to believe
that they are better advised to choose term deposits as their preferred investment going
forward on the basis of recent history. Perfect hindsight has been shown to be poor when
applied as a strategy for investing – selecting prior years winners rarely succeeds.
- Your final comments applied to ‘passive funds’ creates
confusion in your article.
Passive funds have a place within the range of investment options
available but it comes down to the importance of matching the requirements and risk
profiles of investors with suitable investment sectors and products. Passive funds will
mirror their particular index as markets go up and also as they come down.
Passive funds can take many different forms and may be linked to
many different indexes. Your comments in the manner they are made are dangerous and risk
misleading investors.
Please let me know if I can help further.
Thanks for the chance to comment.
Vance Arkinstall
CHIEF EXECUTIVE
