The NZ stock market has been a standout performer in recent years, achieving a whopping 22% return in 2017 alone. Although this was mostly helped by the three market darlings A2 Milk, Fisher & Paykel Healthcare and Xero, there is no escaping the fact that this was a phenomenal result.
The NZX50 reached an “all-time high” in mid-July before pulling back and dropping by 2.3% two weeks later. Many people started to question if this was the stock market overheating and was a sign that we were in for a correction or worse? When markets seem “too good to be true” it’s natural for investors to feel concerned, and media hype and speculation at such times only serve to unnecessarily exacerbate the situation. The market has since recovered this lost ground and continues to press onward through company reporting season.
The graph below shows that pullbacks on the NZX50 are frequent and often not at all stock market Armageddon as the newspapers would have you believe.
NZX 50 Index
Source: Google Finance
Although it can be harder for fund managers to find value when markets seem at their peak, it certainly does not mean we have ‘reached the ceiling’ with nowhere to go but down.
This is where the benefits of active management and diversification can be seen. A pullback in the market may cause jitters for the cautious investor, but great buying opportunities for an experienced, active manager who can act accordingly and make quick investment decisions for the fund.
The other great tool of an experienced fund manager is diversification. Diversification is the risk management technique of spreading your investments across a range of sectors, geographies and asset classes. The rationale behind this technique is that a portfolio made up of a good spread of asset classes can often have lower risk than holding one individual investment. By doing so, investors are able to buffer against the risks of having all their ‘eggs in one basket’.
The Milford Balanced Fund (below) is an example of a diversified fund with a good spread of geographies and asset classes. Comprised of Australasian shares, international shares and fixed interest (bonds and term deposits) in relatively equal measure (with some room for movement depending on market conditions). The diversification in this fund can assist to buffer the effects of market volatility.
Different asset classes can perform well in different markets, so it is prudent to have a mixture of investment types to capitalise on this strategy. For example, bonds and shares don’t always move in tandem, therefore owning both can cover you to some extent in most market cycles. When some markets appear to be ‘overheating’ active managers will steer their portfolios towards sectors and regions where they see more value, as not all regions expand in synchrony. At Milford our 23-strong investment team work tirelessly to research economic cycles on our client’s behalf. We do the analytical work so that you don’t have to, allowing you to spend more time doing what you enjoy in life.
Milford Asset Management is an active fund manager with a suite of funds ranging from the more conservative funds to that which are more aggressive and focussed on growth.
Speak to one of our team today to discuss our award-winning funds.