Forsyth Barr's Premium Yield KiwiSaver fund bucks the trend and records a positive quarterly result; Australian equities still performing poorly

The latest data released for KiwiSaver performance as at June 30, 2013 is from Forsyth Barr (our story covering the returns to March 31, 2013 can be found here).

Forsyth Barr's New Zealand, global equity and listed property portfolios have been the best performers over the 12 months.

The New Zealand equity and Listed Property portfolios stand out as clear winners over the last three years.

Since the Forsyth Barr portfolios commenced the New Zealand equities portfolio has return just under 7% per annum to investors, while the three fixed interest funds have averaged between 5.8% and 6.8% per annum. 

Australian equities continues to lag their New Zealand and global counterpart over the past 12-months reflecting the difficult trading and economic environment across the Tasman.

While many of Forsyth Barr's KiwiSaver competitors have experienced substantial losses in their fixed interest portfolios, Forsyth Barr's fixed interest portfolios have proven reasonably resilient as a whole. The NZ Fixed Interest Fund was down -1.92% and their Local Authority Fund recorded -0.38%.

But what really caught our attention was the +0.35% return from the Premium Yield Fund which currently invests into Corporate Bonds, Local Authority Stock, SOE bonds and cash. Over the past month the Premium Yield Fund recorded a small loss (-0.4%), nonetheless, the quarterly result is very good considering the volatility which has hit fixed income markets of late.

As we mentioned in the last review from 1 April, the Manager increased the monthly account fee from $2.50 per month to $3 per month ($36 per annum) and this fee is in line with the market.

During the past quarter the manager has made some small changes to the composition of the New Zealand equity portfolio. Fletcher Building is the largest holding at 12.2% of the portfolio at the end of the quarter.

The Australian equity portfolio suffered losses for the second month running according to the managers report with resource stocks bearing the brunt of the sell-off. The rhetoric about a Chinese financial crisis and the weaker Australian dollar did not help the fund performance and adversely impacted the NZ$ portfolio returns.

Over the past three months this portfolio has beaten its benchmark in NZ$ terms, however it lags over the longer term and is fractionally negative since inception.

Global equities continued to correct in June as the market digests the implications of the US Federal Reserve's explicit message that a tapering of monetary support for the US economy was likely later this year if the economic recovery continued as forecast.

Poor returns from emerging markets, which makes up approximately 29% of the portfolio at the end of the quarter, have meant the global equity portfolio has not performed to its full potential. The portfolio continues to lag the Morgan Stanley Capital Index in NZ$ by a considerable margin across all time periods.

Forsyth Barr are biting the bullet and reducing their emerging markets exposure and have sold out of one emerging markets manager in favour of reinvesting the proceeds into the Magellan Global Fund. Magellan Global holds 20 - 40 names in the portfolio with the largest positions being five to 10.0 percent. This fund manager ignores sector and country index weights and cash can reach 20.0 percent of the total fund. This particular manager is highly respected in Australia and has a keen following from some financial advisers in New Zealand.

In the NZ Fixed Interest Fund the assets are principally defensive with core exposures to Government and Local Authority debt.

Within the Local Authority Fund Forsyth Barr invests into what it calls Tier one, Tier two and Tier three local authorities.

A bulk of the portfolio is held in the larger and possibly better quality local authorities (57%) with just on 7% held in Tier three local authority debt. The portfolio is given greater integrity from its large holdings in the Local Government Funding Agency bonds which comprise approximately 30% of the total holdings.

The Premium Yield Fund has approximately 21.5% held in cash which will have insulated the returns on the portfolio during the recent bond market sell-off. Local Authority stock makes up a further 24% of the fund and the weighted average credit quality of the fund is investment grade, that is equivalent to a Standard & Poor's rating of at least BBB-.

Forsyth Barr say that weak equity markets also impacted the Australasian listed property sector. The property portfolio was down 4.05% last month but still provided investors with a return of approximately 15.5% over the past 12-months. With the exception of the last year, the fund has underperformed the NZX Listed Property Index. The sector had been trading at large premiums to the underlying net asset value (NAV) (118%) and with this recent correction the premium to NAV has declined to approximately 108%. In effect what this means is investors are paying $108 for every $100 of assets - previously investors were paying on average $118 for every $100 worth of assets.

Forsyth Barr's Socially Responsible Investment Fund continues to perform strongly with the manager maintaining a bias towards developed markets. Avoiding the sell-off from emerging markets has meant the fund has continued to perform above the MSCI NZ$ index over all time periods. Glaxo shares were the only ones of those held in the portfolio to record a negative return for the month. Ninety three percent (93%) of the funds portfolio is held in 9 companies so the portfolio is very concentrated and will be susceptible to a reasonable degree of volatility during a broad market sell down.

The Balanced Portfolio is up 11.8% for the last 12 months. The large overweight position in listed property was a significant negative contributor to the relative performance as was the performance of the underlying global equity fund due to its exposure to emerging markets. The Balanced Portfolio remains underweight Cash and slightly overweight Fixed Income. Forsyth Barr remains positive about the economic outlook in New Zealand and the US in particular and remains overweight to growth assets including listed property (for yield and capital protection) and New Zealand equities. The Portfolio is slightly underweight Australian equities and close to benchmark for global equities.

Global equities benefited from a weaker New Zealand dollar while the fixed income markets also contributed negatively as local interest rates increased in line with global yields. While the Growth Portfolio lost 2.6% during June it remains up 15.2% for the last 12 months. The overweight position in listed property was a negative contributor to the relative performance as was the performance of the underlying global equity fund due to its exposure to emerging markets. The Growth Portfolio remains underweight Cash and Fixed Income. The Portfolio remains slightly overweight to Australian equities which have also been a negative contributor to the overall return due to underlying market performance and a stronger New Zealand dollar and Australian dollar.

Below is a table of the longer term performance of the Forsyth Barr funds. The return data is before tax and after fees and is as published by the managers. (No adjustments have been made to take into account those additional fees which scheme providers may charge and which are not included in calculating the fund performance. We do make such adjustments, but they will not be included until the full benchmarking is published.)

* 5 year returns are not available as the funds were established in June 2008.

More detailed performance reporting can be found here ».