Investment Returns

The quarter to the end of September 2008 was one of the worst on record.  Comparisons are being made with the depression of the 1930s.

Over  the  12  months,  growth  funds  returned –16.7%  (-10.8%),   balanced  funds  returned –9.9% (-4.8%), while conservative funds returned –0.7% (1.6%) after tax, expenses and fees were deducted (the previous quarter’s rolling twelve months are shown in brackets).  With inflation for the year having jumped to 5.1% real returns are now negative.

 The AMP Tyndall Balanced Fund was formerly managed by BT.  The returns shown are a composite of the BT and Tyndall earnings.  This shows current investors in the fund how it actually performed.  We have now included the back tested returns for the Tyndall fund as well, for the benefit of prospective investors in this option.

 The Sovereign Select Employer Retirement Plan is in the process of being wound up and so has been removed from the survey.

The widening credit crisis has now caused a recession in Europe and the U.S.  Although central banks are trying to soften the landing there is little they can do.  The U.S. Federal Reserve has cut its overnight rate by 0.5% to 1%.  The major concern is no longer the inflationary effects of excessive borrowing and consumption – but one of aversion to risk resulting in deflating asset prices and cash hoarding.  Falling incomes during a long and significant recession are also likely to reduce borrowing, as debt becomes harder to service.

Cash is now king and debt out of fashion.  A financial services industry which can only borrow from the state is now very careful who it lends to.  Nobody is very confident lending to banks who might not be able to pay the loan back, (and banks themselves are reluctant to lend cash cushions they might themselves need).  Money which is under mattresses rather than circulating will not boost spending.  If a lack of demand causes asset prices to fall, then they will become less attractive to potential buyers, so that in the extreme even zero interest rates fail to stimulate demand.   A liquidity trap like this can be hard to escape from, as evidenced by Japan in the 1980s and the U.S. in the 1930s.

The French Government is considering forcing its banks to lend.  Rebuilding liquidity is clearly necessary and this is one way of tackling the issue.  Another way might be to set up a state run bank like KiwiBank, with a mandate and funds to lend, to compete with the private sector.

We suggest investors think carefully before buying or selling significant assets.  Markets will bounce back but may take years, not months to do so.  Manage discretionary spending, reduce debt and be patient.