Welcome to 2009, the Chinese Year of the Ox.
Ox characteristics are dependable, patient, methodical and calm. We will need all these by the look of the way the beginning of the year has gone.
In between bouts of rain when I have been trying to prepare my roof for painting, I have been reading and contemplating what 2009 might bring and how to provide advice.
On one hand, a new American president should produce a feel-good environment for a while.
On the other, the high degree of worldwide debt has got to be overcome as personal and corporate equity declines with falling values.
Action being taken with reducing interest rates is hard on persons requiring income.
Share returns at lower prices are providing good yields but there is still considerable fear in the markets and volatility rules.
Normally, a fall in interest rates with bonds being correlated to shares would see shares rise in value.
Lack of demand as investors are overcautious has not seen any market reaction.
What to do? In my opinion, 2009 should be the year of the balanced fund.
A balanced fund contains all sectors of the market: cash, fixed interest (both local and international), shares (both domestic and international) and property.
In using a balanced fund you are hedging your bets in that you will be in the correct sector when one or the other responds to increased demand.
There is even benefit in a balanced fund from interest rates falling. This is because the fund is most likely holding longer-term maturity bonds in its fixed-interest sector.
As interest rates reduce, the capital value increases and can be sold before maturity at a profit as the yield rate falls below the coupon interest rate.
A typical balanced fund at the moment has an asset allocation of: cash 6%, New Zealand fixed interest 19%, international fixed interest 11%, New Zealand shares 19%, international shares 31% and listed property 12%.
Those who are more aggressive have little or no exposure to New Zealand shares. Fund managers can change this mix very quickly buying and selling.
Often action has been taken by the manager before it becomes public knowledge as to why.
The managers are not punters but they do need to have some skill at forecasting the likelihood of the direction of short and long-term trends in each sector.
Certain assets, such as currency, can be hedged.
All fund mangers in New Zealand have balanced funds.
Due to KiwiSaver and new funds for the Portfolio Investment Entity, the number has grown markedly in the past 18 months with some 220 balanced funds available.
These include all unit trusts, superannuation and insurance bonds.
What has been remarkable is that over time the balanced funds have been a steady plodder in returns through the fluctuations of the markets. Many are now over 20 years old.
For example, both the BNZ and AXA launched their balanced unit trusts in October 1987. Both since inception have achieved around 5% after tax as an annual average.
Despite the recent market declines, the past five-year average on all balanced funds is still positive as at December 31, 2008.
Some have even managed above-average due to exceptional returns before mid-2007. From here on in, I would expect the long-term average of 5%, tax paid, to be maintained.
Some years will be better but there may be further declines in the short term.
Thanks to KiwiSaver, many of the long-term prospects of the funds look excellent, as contributors will not be drawing on the funds for many years.
The main advantage of using a balanced fund is the lack of decision-making by the investor. You do not have to listen to the gossip from your relations or over the back fence as to what is hot and what is not.
All decisions are made for you. You can forget about economists' comments in the media.
The fund managers will listen but they have experience and will make their own decisions.
The fact that many balanced funds have managed a positive long-term average over the past 20 years suggests that the managers are getting it right most of the time.
Peter Smith is a certified financial planner and is the principal of Peter Smith Financial Services Ltd Dunedin.
Email: finance@petersmith.co.nz.
A disclosure document is available on request and free of charge.
