Absolute return allows greater flexibility

Absolute return is the over-riding focus of the JB Were Transtasman Equity Unit Trust, says Paul Harrison, the investment manager responsible for investing more than $60 million for JBWere in New Zealand, $21 million of that in the Trans-Tasman Equity Unit Trust.

The objective of the trust is to give positive capital gain in rising markets and to protect capital in flat or falling markets. And it is a philosophy that has had considerable success in rewarding investors over the last three years. The fund has achieved an annual compound return of just under 14% for the three years to December 31 2001 and is rated five star by FundSource Research

Harrison believes that the absolute return focus allows a greater amount of flexibility and active trading when constructing the portfolio relative to many competing New Zealand and Australian unit trusts. Generally New Zealand and Australian fund managers look for comparative performance, say plus or minus 1%, over a period of time relative to a benchmark, such as the NZSE-40 Index. The difficulty with this approach is that a manager often feels compelled to hold a stock in the portfolio even though they may not like the stock.

The Trans-Tasman Equity Unit Trust does not allow the components or their weightings of the New Zealand and Australian indices to dictate what is included in the portfolio. Harrison says that the trust is managed more in line with how a well-informed investor would manage his or her own money.

"Indices are no more than a compilation of companies based purely on their size regardless of whether their prospects are good or bad. To hold more of, or even include a company in an investment portfolio just because it is large makes little common sense. We normally don’t hold more than 15% of the trust in any one company as it reduces the diversification of the portfolio and thereby increases the level of risk. In the New Zealand market Telecom makes up 22.5% of the NZSE40 and 38% of the NZSE10.

"We will never hold a "benchmark" weight in Telecom because it has too high a weighting. The performance of a portfolio based on these indices will be dominated by Telecom. If you want that, buy Telecom yourself."

The trust is more actively managed than most. This means that the portfolio may be changed relatively quickly, and can also place itself in a relatively defensive position if the market outlook is not particularly promising. The trust employs three philosophies in managing its investments:

The trust can be invested up to 50% in cash and at times has maintained this position.

By combining investment opportunities both within Australia and New Zealand the investment universe is considerably widened. For example, the trust currently holds or has held shares in Macquarie Bank, Cochlear, and Brambles. It not possible to gain exposure to companies like these in the New Zealand market. However Australia is not an easy market. The JBWere Trans-Tasman Trust is backed by the extensive resources of the JBWere Group (including JBWere Investment Management, winner of the 2001 Money Management/ASSIRT Australian Equities Fund Manager of the Year award) and benefits from Harrison’s experience in managing Australian equities. This experience includes company visits over the years ranging from a visit to the 1 kilometre depths of the Mt Isa mine, the Argyle diamond mine, the Qantas air side base in Sydney and Resmed’s high tech manufacturing plant.

The trust was a buyer of shares post September 11, and during the December quarter the profits on some of these purchases were realised. The manager also put in place an option strategy in Australia when it was felt that the market had rallied far enough. In order to provide some downside protection, call options were written over holdings in ANZ, BHP, National Australia Bank and News Corporation.

In New Zealand the trust took the opportunity to gain exposure at attractive prices, to Nuplex, Waste Management and Auckland International Airport as major shareholders sold their holdings at a discount.

The trust also took a stake in the Briscoes Group through its successful listing. Towards the end of the December quarter, significant positions were taken in Telecom and Carter Holt Harvey as the Manager believed they had become too cheap.

Equity markets deteriorated in the USA and globally after the September 11 terrorist attacks. However, encouraged by the release of better than expected economic data during the December quarter, global equity markets recovered. In particular a better than expected turn around in US consumer confidence and evidence of an improving US manufacturing sector provided some evidence that the US economy may be finding a bottom. Consequently confidence of a more robust US economy by the second half of 2002 has grown.

Going forward, Harrison believes the Australian and New Zealand sharemarkets remain well placed, as companies enjoy the benefits from improving global demand, competitive currencies, and firm domestic economic conditions supported by low interest rates.

However, uncertainty as to the strength of global economic recovery over 2002 is likely to remain and to be a source of volatility within sharemarkets until a clearer picture for company earnings has emerged. This environment is likely to provide good investment opportunities for the trust as the year progresses.

(For periods ending 31 December 2001)

The JB Were Trans Tasman Equity Unit Trust (TTEUT) returned 9.7%, after tax and fees for the three months ending 31 December 2001. This compares to 8.3% and 9.1% for the NZSE40G and ASX All Ordinaries (NZ$) respectively after tax. On a relative basis, the TTEUT outperformed a Trans Tasman Index by 1.0% over the quarter, on an after tax basis.

* Index performance is after Tax

Trans Tasman Index, 50%/50% NZSE40 Gross and the All Ordinaries