Lately, I bet you've heard from more than one client who suggested, in language that I can't repeat here, that you should have put his or her cash under the mattress rather than into the stock market. Today we're going to look "down under" the mattress of our markets, and head to New Zealand and Australia for some long-term capital appreciation and current income from securities markets that few know much about. We'll talk to Robert Scharar, manager of the Commonwealth Australia/New Zealand Fund (CNZLX), which focuses on the New Zealand and, to some extent, Australian markets. Scharar runs a tiny (under $5 million in net assets) fund, and he's been beating his benchmark and, lately, the S&P 500–not just in relative terms, but in absolute ones.
No doubt they are relatively small, obscure markets, and there aren't many easy ways to make meaningful diversified investments in them. But the markets are certainly worth a look, with stable political and economic institutions, trading economies closely linked to the Asian/Pacific region, lower market volatility than the rest of the region, and cheap stock market valuations.
Australia and New Zealand are about as far from the U.S. as you can get. (If you dig a hole straight down from Kansas, you won't end up in China, but rather in the middle of the Indian ocean about 2,000 miles west of Australia's shores.) Nevertheless, they are, with the exception of Canada, more like the U.S. than any other country. They're English-speaking, and they're former British colonies. As with Canada, parting was peaceful, and while all three have parliamentary democracies, they share Queen Elizabeth II as head of state.
Australia's per capita GDP of $23,200 is virtually identical to that of the United King-dom, Canada, France, and Japan. New Zealand's figure is slightly lower at $17,700, but both numbers are impressive given the smaller populations of Australia and New Zealand (just under 20 million and 4 million, respectively) and their relative geographic isolation from other industrialized nations. Australia and New Zealand have benefited from commonwealth status and other political and legal ties to English-speaking nations, and naturally it's easier for U.S. investors to deal with picking stocks and following economic news under these conditions.
How best to invest in Australia and New Zealand? Despite the fact that even Americans can read their newspapers, stock reports, and financial filings–which is certainly a plus–for all but a few of the largest (and most involved) investors, the flexibility of choosing individual stocks will take a back seat to the professional management and diversification provided by a fund or ETF investment. This month we're raising two options from down under. An actively managed fund, Commonwealth Australia/New Zealand Fund (CNZLX), that's more heavily invested in New Zealand, and an unmanaged index exchange-traded fund (ETF), the iShares MSCI Australia Index Fund (EWA) that's weighted more to Australia. They complement each other.
We also recommend that you click into the main papers: the New Zealand Herald (www.nzherald.co.nz/) and the National Business Review (www.nbr.co.nz/) so that you can tell a Zack from a pinch of woffle dust when you're investing down under.
Scharar is based in Houston and has been investing in common stock in New Zealand and Aus- tralian companies with dominant market positions, reliable earnings, and exposure to exports. Scharar is president of FCA, and co-founded its predecessor, First Commonwealth Associates. Previously, he was an accounting professor at Bentley and Nichols Colleges, an officer of U.S. Trust Company, and a tax specialist at Coopers & Lybrand. Scharar is a member of the Florida and Massachusetts Bar Associations, as well as a certified public accountant.
The Commonwealth Australia/New Zealand Fund was launched in 1991 as Capstone New Zealand, and expanded its investment universe to include Australia in October of 2000.The fund is notable for its low $200 minimum initial investment and its very small size. While it is a no-load, the small size has put its annual expense ratio in the range of 6%. Despite this hindrance, it has so far shown a solid performance record–that's scarce as hen's teeth in this or any market.
Scharar essentially stays fully invested, sometimes holding a small position in the iShares MSCI Australia Index, basically a holding that's almost as liquid as cash, but that participates in the fund's benchmark equities. Its small-cap, value-oriented stock holdings are, by necessity, quite concentrated, with 46 total holdings (as of April 30, 2002), and 49.5% of assets in the top 10 holdings. His latest annual turnover was a minimal 10%.
When did you first invest down under? I think I invested $1,000 or $2,000 in New Zealand in the early 1980s–it was a lot for me because I was going to school, and scraping dollars together. By early 1990, I realized from reading and communications that New Zealand was going through immense changes. Here we had a very democratic country that was also very socialistic. There was a company called Capstone, which is another mutual fund group that was in Houston, and it had an international series, and I went to them and said, "Hey, I'd like to run a fund. Could I manage a New Zealand fund as a part of your series? I'll take responsibility for worrying about it. I just need somebody to house me."
I've managed the fund since its inception. A couple of years ago I renamed them Commonwealth Funds. I'm one of the older managers you'll ever talk to who's running a $7 or $8 million mutual fund. This is not all I do, mind you. I run an investment advisory firm; we have just under 40 people, we've been in business 27 years–same company essentially. We do a lot of other things besides this, but I've continued to shepherd this fund over that period and that has something to do with the style we use. We expanded to Australia about two years ago just because I felt we needed that additional diversification of opportunity if we were going to grow the fund size-wise, because that would reduce some of our operating costs obviously. And then we're rolling out a global fund in another month or so that will aid us in that process.
What are you thoughts about New Zealand's future? It certainly is a beautiful part of the world, and therein lies another one of its secrets for success as an economy: It's a nice place to be. And everybody has to be in Asia, I think. U.S. companies and others have to be a part of the Asian experience. The question is, where do you want to house your people and where do you want to put your assets if you want to play in the market but you don't necessarily physically want to re-staff or relocate everybody there? Australia and New Zealand both are in the right time zones, you can do business vertically throughout Asia and only be an hour or three off in terms of time-zone difference. For U.S. companies and other European companies that want to do business in the Asian Rim, it's a logical starting point to have activities in Australia and New Zealand.
And the economies? The economies are fairly strong because they do provide a lot of developed products that are desperately needed throughout Southern Asia, whether you go over as far as India, all the way up and around through China and Japan. And they provide raw resources, they provide technical assistance, they provide things like lumber, and other products of that sort; they provide food products. Fisher & Paykel, which is a maker of refrigerators and washing machines and so forth, even exports into the U.S. now.
