Investment Risk Investment Return Risk Return Profile Asset Allocation Security Selection Taxation...

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1 January 2016 Introduction In this document we discuss the key aspects of investment risk and return, and outline how an understanding of these factors can help you to construct an investment portfolio to achieve your investment objectives. We observe that equities (shares) form the higher risk component of an investment portfolio and also have the potential to generate higher investment returns. Some investors buy equities ( shares ) when the markets are rising only to discover, when the markets later turn down, that they cannot tolerate the short-term volatility or decline in the market value of their equity portfolio. They learn that their tolerance to risk is less than they believed it to be and that they should have either avoided or constrained their exposure to volatile investments such as equities. An adverse experience with equities can lead to considerable unhappiness and may result in poor decisions being made such as selling a significant portion of their equity portfolio after equity markets have fallen materially in value effectively shutting the gate after the horse has bolted. Investors need to be aware that investment risk can be both friend and enemy. Directory Investment Risk... 2 Investment Return... 5 Risk Return Profile... 8 Asset Allocation... 9 Security Selection Taxation First NZ Capital Advisers First NZ Capital Securities Limited - NZX Firm 1

2 Investment Return (%) Investment Guide Investment Risk What do we mean by investment risk? Investment risk can best be described as the uncertainty as to what return an investment will generate over time. Very low risk investments, such as Government bonds, have highly certain investment returns. Conversely the investment return from a higher risk investment such as New Zealand equities is much more uncertain. Over a short time period the investment return of a high risk asset could be very high, but it could also result in a material loss. However, over the long term (say, 10 years plus) a portfolio of higher risk investments should deliver superior returns relative to a portfolio of low risk investments. It is important to realise that the ability to generate a high return requires the investment portfolio to have a higher level of risk, which exposes the portfolio to the possibility of producing a loss. Asset Class Investment Risk The typical way of measuring investment risk is to calculate the volatility or standard deviation of the investment returns generated by an asset or asset class. As volatility doesn t discriminate between investments generating positive returns and those generating negative returns, there are other risk measures which focus just on the risk of loss. However, to keep our discussion simple we will just focus on investment return volatility. The chart below shows the volatility of the monthly returns of NZ cash, NZ debt securities, NZ equities and global equities (in NZ dollars): 8.0% Monthly Investment Return 3.0% -2.0% -7.0% -12.0% Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 NZ Equity Cash NZ Debt Securities Global Equity (NZD) Source: IRESS, First NZ Capital First NZ Capital Securities Limited - NZX Firm 2

3 Volatility (%) Investment Guide Clearly the investment returns produced by global and NZ equities are subject to much larger swings, and hence greater uncertainty, than the investment returns delivered by NZ Government bonds and cash. Note the abnormally large changes in equity market values which occurred during the global financial crisis of 2008 and early 2009 and the generally lower volatility from 2009 onwards. Conversely low risk investments such as cash (for example, a bank call account investment) have provided relatively steady monthly returns over time and offer a very high degree of protection of the capital invested. The investment returns from a NZ debt security portfolio are more volatile, or less certain, than that of a bank call account as the market values of debt securities change in sympathy with market interest rate changes. While the coupon or the rate of interest paid on a bond remains unchanged, its yield to redemption will change as interest rates fluctuate in the market place, thus affecting its market value. The longer the term to maturity, the more sensitive the market value of the debt security is to changes in market interest rates. For example, a 1% change in the yield to maturity of a 2 year fixed interest security will result in a price change of around 2% whereas the price impact on a 7 year fixed interest security is around 6%. This is not particularly relevant to investors who hold the security to maturity, because although the market value of their fixed interest investment will vary over time, they will end up earning the yield to maturity at which they purchased the security. The chart below shows the annual volatility (measured as the standard deviation of investment returns) of the seven major asset classes (global equities and alternative strategies are shown in NZ dollars). New Zealand equities are nearly four times more volatile than the returns of New Zealand debt securities. Quantifying investment risk in this fashion is important in determining the riskiness of an investment portfolio. 20% Volatility - Major Asset Classes 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% NZ Cash NZ Debt Securities NZ Equity Australian Equity (NZD) Global Equity (NZD) Property Alternative Strategies(NZD) Source: First NZ Capital First NZ Capital Securities Limited - NZX Firm 3

4 Diversification Holding a diversified portfolio of investments is a way of controlling risk particularly when investing in riskier investments such as property and equities. At different times different investments will produce different levels of return. Forecasting the investment return to be generated by an investment, particularly risky investments, over a particular time period is difficult. Consequently by holding a number of different investments at any time an investor can increase the chance of extracting an investment return from any particular investment. In addition, by holding a mix of investments which are likely to perform differently under particular economic conditions (termed uncorrelated investments ) can help ensure that there are always some assets which are producing sound investment returns in the portfolio. First NZ Capital Securities Limited - NZX Firm 4

5 Investment Return If an asset offers a high expected return, then it is safe to assume that it will possess high risk characteristics. Investors have to balance the expected return from an investment against the anticipated investment risk. The investment return should be expected to compensate the investor for the investment risk being taken. While riskier investments will, from time to time, underperform the safer ones, riskier investments generally outperform less risky investments over the longer term. Equities and property typically provide higher investment returns over the long term and are often referred to as growth assets. Equities should increase in value over time as company profits grow reflecting the company s progress and the growth of the economy. That is why successful long term equity investment relies upon selecting companies that are seen as having the ability to increase their future profits. Equities also provide protection against the negative effects of moderate inflation (up to around 4%pa) on the purchasing power of funds invested. While property investments provide a rental yield their value should increase over time as rents grow reflecting inflation and tenant ability to pay higher rents. Cash and debt securities typically provide lower investment returns over the long term and are often referred to as income assets. They usually deliver certain fixed rates of return over a finite period of time to maturity although their market values will fluctuate modestly over their life as market interest rates change. It should be noted that there have been times when debt securities have outperformed equities over periods as long as a decade but that is certainly far from the norm. Furthermore cash and fixed coupon debt securities cannot provide much protection against inflation. 550 Cumulative Investment Return (pre-tax) Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 NZ Equities Global Equities (local currency) NZ Cash NZ Debt Securities Global Equities (NZD) Source: IRESS, First NZ Capital First NZ Capital Securities Limited - NZX Firm 5

6 Percentage (%) Investment Guide The chart above shows the gross investment returns achieved by the major asset classes since January 1995 that is, the past 20 years. The drop in value of equities that occurred from October 2007 to March 2009 shows up in the sharp decline in the investment return lines of both NZ and global equities (in local currency) such periods are referred to as bear markets. The rebound from March 2009 and subsequent equity market rally (referred to as a bull market) are also shown on the chart. The difference between the yellow and green lines in the chart above shows the significant impact that changes in the value of the NZ dollar can have on the investment returns from global equities. In the period 1999 to 2002 changes in the value of the NZ dollar increased investment returns and investment return volatility of global equities. The same applies over the past 12 months. However, there were some fairly lengthy periods since the post global financial crisis trough in March 2009 when changes in the value of the NZ dollar reduced global investment returns and reduced the investment return volatility of global equities. The 2007/9 bear market was especially deep and led some to question the investment merits of equities as an asset class. Bear markets come along once every 6 years or so and there have been a total of 11 such markets since World War 2. Such market setbacks tend to act somewhat as a cleansing mechanism, removing overvaluation which can emerge after extended bull markets and they force financially or structurally weak companies to address their weaknesses. Refinancing (via the issue of new equity to reduce debt) was certainly a real feature of the last bear market. The 2009 equity market rebound reflected, in part, the greater comfort investors had in the much improved financial health of many listed companies here and globally. The subsequent equity market rally has been driven by a combination of company earnings growth and higher prices investors are prepared to pay for equities as investor confidence has grown. Equities are expected to deliver superior returns over time and time is something the equity investor must be prepared to give. The chart below shows rolling 20 year returns (assuming dividends are reinvested in the equity market in the year they are earned) from US shares after deducting inflation (referred to as real returns) over the past 121 years. It shows that the 20 year average annual real returns have fluctuated between -2% and 13% and averaged around 4.9%pa US Rolling 20 Year Real Equity Returns Source: Robert J. Shiller, First NZ Capital First NZ Capital Securities Limited - NZX Firm 6

7 An appreciation of the impact that risk or investment return volatility is vital and investors should try to determine what tolerance they have to the short-term volatility of investment returns. At First NZ Capital we have developed a questionnaire from which we can provide an assessment of an investor s risk tolerance and also their ability to take on investment risk. The overall mix of growth (equities and property) and income (cash and debt securities) assets you choose for your portfolio will have a major influence on the level of risk accepted and the investment returns achieved. First NZ Capital Securities Limited - NZX Firm 7

8 Risk Return Profile Before constructing an investment portfolio investors need to determine their risk return profile. This requires: 1. Quantifying how much investment risk they are willing to bear. This will be influenced by factors such as: Investment time horizon (which typically reflects an investors age); The ability to accept potential losses resulting from the possible fall in the market value of investments (this is typically influenced by the level of income and wealth); The amount of other assets owned; and the ability to accept a potential reduction in the investment income. 2. Quantifying the investment time horizon and potential liquidity requirements. 3. Quantifying the level of investment return (both capital gain and income) needed to meet the investment objective. 4. Make sure that the investment time horizon, potential liquidity requirements, level of investment return needed and level of investment risk the investor is prepared to accept are consistent. Where they are inconsistent the investor will either need to accept a lower level of return or be prepared to take on a higher level of risk. Your First NZ Capital wealth management adviser can assist you in determining your risk return profile. First NZ Capital Securities Limited - NZX Firm 8

9 Asset Allocation Strategic Asset Allocation Once an investor has determined their risk return profile they can now determine their strategic asset allocation (the asset mix which they expect to hold over the long term), that best reflects their risk profile and investment return objectives. Different asset classes (see the appendix for definitions of the asset classes we use) can be combined in various proportions to achieve portfolios with reasonably well-defined risk return characteristics. Once that has been decided, the investor should stick with it and not change course at the first obstacle. We are firm believers in the old adage that it is time in the market and not timing of the market that will deliver attractive investment returns over the medium to long term. Selling equities after a market decline to lower one s risk profile is akin to shutting the gate after the horse has bolted. Importantly, quitting after a major equity market decline will most likely result in the investor not participating in the inevitable recovery. While periodic reviews of the strategic asset allocation should be done to take account of material changes in an investor s circumstances, we caution against a knee jerk reaction to the undoubted financial discomfort caused by a severe market decline. A blend of cash, debt securities, New Zealand, Australian and global equities provides diversification and, therefore, reduces risk. During periods of financial market stability which is the norm rather than the exception - it is unusual for the various equity markets of the world to be all moving in the same direction to the same extent at the same time. A low level of correlation of investment returns has the effect of smoothing out investment results without impinging on long term investment performance. It does this by increasing the chance of having at least some of the portfolio invested in assets which are performing well at any point in time. Having various foreign currency exposures as a result of investing in global equities also adds to diversification and hence also reduces risk. Of course, during the 2007/9 global financial crisis equity markets around the world fell in unison. The reason for that is that the financial crisis, which began in the US, went global. The strong correlation of investment returns seen over that period is normal during times of extreme financial uncertainty and instability. Under normal financial market conditions investment returns do not exhibit such a strong correlation. Adding property and alternatives strategies (hedge funds) adds to the level of diversification in a portfolio. Alternatives strategies have historically come into their own during periods of heightened financial uncertainty. For example, in 2008 when NZ, Australian and global equities in NZ dollars fell by 31%, 38% and 22% respectively, the average return from all alternative strategies in NZ dollars was positive 7% while the return from macro strategies (the best performing alternative strategy over that period) in NZ dollars was an impressive positive 39%. It is worth noting that, just as investment returns change over time so does the level of risk or investment return volatility and correlation of investment returns. By way of illustration between 2003 and 2005 the volatility of NZ equity investment returns was 7.2%pa while from 2008 to 2010 it was significantly higher at 18.6%pa. Consequently in setting the expected investment returns, volatility and correlations we use the longest data set available to calculate historical measures and overlay this with our expectations based on investment theory. It is worth highlighting that the expected returns, volatility and probability of a negative return are all based on the assumption that investment returns are normally distributed, which unfortunately is not the case. Despite this First NZ Capital Securities Limited - NZX Firm 9

10 limitation the expected returns, volatility and probability of a negative return shown in the table below provide investors with a useful feel for the risk/return characteristics of the suggested asset allocations over the long term (around 10 years). The following shows five strategic asset allocations, with varying expected long run returns, expected volatility (investment return standard deviation) and probability of a negative return over any 12 month period: Return Volatility Probability of negative return 6.4%pa 4.6% 8 in 100 Return Volatility Probability of negative return 7.0%pa 6.0% 12 in 100 Return Volatility Probability of negative return 7.5%pa 7.6% 16 in 100 Return Volatility Probability of negative return 7.9%pa 8.7% 18 in 100 Source: First NZ Capital Return Volatility Probability of negative return 8.3%pa 9.9% 20 in 100 Notes: 1. Investment returns are before tax. 2. The expected investment return for NZ equities includes imputation credits. 3. The expected investment returns from Australian Equities, Global Equities and Alternative Strategies are in NZ dollars. First NZ Capital Securities Limited - NZX Firm 10

11 The following table shows various statistics from the period January 1998 to September 2015 which illustrates the relationship between increased risk and increased investment return for the asset allocations above. Conservative Balanced / Conservative Balanced Balanced / Aggressive Aggressive Best Historic 12 Month Return 15.2% 19.8% 24.6% 28.0% 31.6% Worst Historic 12 Month Return -1.9% -8.1% 13.8% 17.8% 21.6% Worst Peak to Trough Period Sept 07 Feb 08 Oct 07 - Mar 09 Oct 07 - Mar 09 Oct 07 - Mar 09 Oct 07 - Mar 09 Worst Peak to Trough Return -3.2% -9.3% -16.4% -21.3% -25.9% Time to recover to Previous Peak - months Best Trough to Peak Period Feb 08 Nov 15 Mar 09 Jul 15 Mar 09 Jul 15 Mar 09 Jul 15 Mar 09 Jul 15 Best Trough to Peak Return 67.9% 72.9% 82.2% 88.9% 96.2% Source: First NZ Capital Higher risk or investment return volatility is usually associated with higher expected returns. The expected investment return volatility, not surprisingly, increases with the inclusion of more volatile growth assets (equities, property and alternative assets). The chances of a negative overall investment return increases as the exposure to growth assets rises, but the expected investment return increases as well. Although the differences in expected annual investment returns may not be considered that great for the five risk profiles shown above, those annual return differences clearly increase when compounded over a number of years. For example, over a 20 year period $100,000 invested in the aggressive portfolio mix would be expected to have provided $145,000 (before tax) more than a portfolio invested in the conservative portfolio over the same period based on the return assumptions shown above. That is an extra 42% return on the initial investment reflecting the positive effects of the annual compounding of returns. This difference is even greater when looking at after tax returns a 59% higher return from investing in the aggressive portfolio relative to the conservative portfolio. This is due to cash and fixed interest returns being fully taxed while equity returns are only partially taxed dividends or a deemed dividend amount is taxed but capital gains generally are not. Higher investment returns cannot be achieved without accepting some risk or volatility in returns hence, risk should not be avoided for the simple reason of failing to understand how it impacts on investment returns. However, it should be stressed that risk has a split personality it can lead to poor investment returns and, if not well understood and managed, much disappointment. Tactical Asset Allocation Tactical asset allocation allows investors to take advantage of changes in expected asset class returns by deviating from the strategic asset allocation within certain predetermined ranges. These ranges can be narrow or wide depending on how far the investor wishes to deviate from their strategic asset allocation and hence how far they are willing to deviate from their long term risk/return profile. Changes in tactical asset allocation are unlikely to be dramatic and are typically reviewed quarterly, except in rare circumstances where a major event occurs which requires more immediate action. First NZ Capital Securities Limited - NZX Firm 11

12 Tactical asset allocation along these lines requires a lot of skill to be successful. It involves forming an assessment of the prospects for economic growth, inflation, interest rates, aggregate company profits, currencies and current valuations. Despite the challenges of tactical asset allocation even modest incremental investment returns can make a material difference over the long term. For example over a 20 year period a $200,000 investment becomes $932,000 at 8%p.a. while an extra 0.25%p.a. return results in an additional $44,000 or a 5% higher return over the period. First NZ Capital Securities Limited - NZX Firm 12

13 Security Selection Having determined an investor s asset allocation which reflects the investor s risk return profile the task of selecting specific investments or securities to build a diversified portfolio, having regard to their liquidity requirements, can be undertaken. Security selection requires considerable time and effort if successful results are to be achieved. The number of investment opportunities open to investors is truly enormous which makes selecting suitable securities to own in an investment portfolio a challenge. Research is an essential ingredient of successful investment outcomes. Highly successful investments may involve some luck but consistently delivering positive investment results, in keeping with investor expectations, comes from decisions based on sound research. An investor should think about the investments being made and should have an appreciation of what is expected from them. First NZ Capital s capabilities in economics, investment strategy, debt securities, UK investment trusts and equity research are available to help investors make investment decisions and undertake appropriate security selections. Our strategic alliance with Credit Suisse, gives us access to high quality research on global investment markets and global equity securities for New Zealand domiciled clients. Please contact your First NZ Capital wealth management adviser for our current views. First NZ Capital Securities Limited - NZX Firm 13

14 Taxation No discussion on investments is complete without some mention being made about tax. As Benjamin Franklin, the US politician and author, said nothing is certain but death and taxes. And that is so with tax on investment income. Specific legislation surrounds the tax payable on investment income derived by NZ resident tax payers and investors need to be aware of their obligations. Clients who opt for our AssetWatch and AssetKeep services receive a tax report at the end of each year which relates to the tax payable on the assets held in those client accounts. This alleviates the client s need to undertake the complex task of calculating the amount of taxable income. We briefly outline below the current tax rules applying to investment income derived by NZ resident taxpayers. This is provided for general information purposes only and does not constitute tax advice. Fixed Interest Security (Bond) Taxation Resident withholding tax ( RWT ) is deducted at source from interest income derived in NZ at the marginal tax rate chosen by the investor. If a rate is not selected, the default rate of 33% will be applied. Interest income earned outside NZ will, in most circumstances, be subject to non-resident withholding tax in the country in which it is earned. That tax will be able to offset tax payable in NZ on that overseas sourced income. For fixed interest securities (bonds) purchased at a discount to face value, the receipt of the gain on maturity must be declared as taxable income. For fixed interest securities purchased at a premium to face value the loss on maturity is deducted from taxable income in the year of maturity. Fixed interest securities are taxed on a cash received basis (as opposed to an accrual basis) only if i. the value of such securities is less than $1 million in value on every day of the income year; or ii. the annual income derived from such securities is $100,000 or less; and iii. the $40,000 deferral threshold (this is essentially the difference between accrued income and cash income received on such securities) is not breached. NZ Equities Taxation NZ does not tax dividend income twice. It operates a dividend imputation system. If the company pays tax to the Inland Revenue Department on profits earned in NZ that company will attach imputation credits to the dividends it declares. These credits represent the tax paid at the company tax rate on the post-tax dividend payment. Resident withholding tax is deducted at source. The amount of withholding tax is calculated as 33% of the gross dividend (cash dividend plus imputation credits) less the amount of imputation credits paid by the company. Realised capital gains from the sale of NZ shares and selected Australian shares are not subject to tax in NZ as long as the investor is not a share trader. A share trader is explained in the Income Tax Act as an investor who is in the business of trading shares and who purchased the shares for the purpose of realising a capital gain. First NZ Capital Securities Limited - NZX Firm 14

15 Global Equities Taxation Global equities held by New Zealanders typically generate foreign investment fund (FIF) income for tax purposes. FIF income is calculated using the fair dividend rate (FDR) or comparative value (CV) method. Using the FDR FIF income equals 5% of the opening market value of the overseas portfolio as at 1 April each year. Equities bought during the year are ignored for the purpose of this calculation. Actual dividends received from companies falling under the FIF rules are ignored for the purposes of calculating FIF income. Applying the CV method FIF income is calculated as the change in value of the portfolio of global equities over the year to 31 March which were held at the start of the year plus dividends received. Equities bought during the year are ignored for the purpose of this calculation. FIF income is calculated as the minimum of the income calculated using the FDR and CV method and tax is payable on the FIF income. If the comparative value turns out to be negative, no tax would be payable on the global equities investments that financial year. There are also specific rules to deal with equities that are bought and sold in the same year - called quick sales. Essentially, trading gains that occur within a 12 month period are taxable whether or not the investor is deemed to be a share trader. Any non-resident withholding tax deductions are available as a tax credit in NZ. Individual investors holding less than $50,000 worth of global equities (the de minimis amount) do not need to comply with FIF income meaning dividends received remain taxable in NZ. Family trusts are not entitled to apply the de minimis test. Australian Equities Importantly, a number of Australian listed companies are exempt from the application of FIF income applicable to global equity portfolios. For Australian companies to be exempt from FIF income regime, those companies must be (1) residents of Australia, (2) maintain a franking account (reflecting tax paid within Australia), (3) must not be a stapled security and (4) must be included in the S&P/ASX All Ordinaries Index or the FTSE AFSA Australia Listed Investment Companies (LIC) Index. Your First NZ Capital adviser is able to refer you to a list of companies that are believed to fall within the exemption applying to certain Australian listed companies. The IRD has a list of Australian shares (IR 871) that it considers to be exempt. The IRD list no longer the LIC s as the composition of that index is no longer publicly available. Investors must check with the LIC or the FTSE to confirm whether the LIC is part of the FTSE AFSA Australia LIC Index (check the name of this index). The list as at July 2015 can be seen by using the following website link: Portfolio Investment Entities ( PIEs ) Portfolio Investment Entities ( PIEs ) are essentially NZ domiciled pooled funds managed by professional fund managers representing the collective interests of many individual investors. PIE status means that (1) tax on realised capital gains derived from NZ and selected Australian shares is no longer payable and (2) tax is paid on the investor s share of the PIE s investment income at the Prescribed Investor Rate ( PIR ) rather than the standard rate of 28%. The following PIR will apply to an individual investor: First NZ Capital Securities Limited - NZX Firm 15

16 Taxable Income Taxable Income and PIE Income PIE Tax Rate (PIR) $0 - $14,000 $0 - $48, % $0 - $14,000 $48,001 - $70, % $14,001 - $48,000 $0 - $70, % $48,001 and over Any taxable / PIE income 28% Any taxable income $70,001 and over 28% Investors with a top marginal tax rate of 33% will find that a PIE will shield the tax on the income their savings earn within a PIE equal to a maximum of 28%. Specific rules apply to listed property trusts that have elected to become PIEs. In short, they place the unit holder (investor) in the same tax position as a direct property owner in so far as tax is payable on income after deducting all allowable deductions, including depreciation on the building fit out (depreciation on the building shell is no longer tax deductible). That tax is levied at 28%. Importantly, as that is a final tax the distributions paid by the listed property PIEs (and all PIES for that matter) is not subject to further tax in the unit holder s hands. Updated January 2016 First NZ Capital Securities Limited - NZX Firm 16

17 Appendix: Asset Classes How do investors go about obtaining exposure to the various asset classes? The following table provides a brief description of the sorts of assets that might comprise each asset class. Cash NZ Debt Securities NZ Equities Australian Equities Global Equities Property Alternative Investment Strategies Bank call, shorter term deposits, investment in a cash management facility (as offered by First NZ Capital) or a spread of high quality NZ dollar debt securities with up to 12 months to maturity. An appropriately diversified portfolio of selected maturities of fixed interest securities, possibly including floating rate securities and high yielding subordinated debt and hybrid securities. NZ is a small equity market, with a limited number of choices to invest in relative to that available globally. However, this disadvantage is compensated for by the fact that NZ resident tax payers receive imputation credits on the majority of dividends paid by NZ companies. Currently the NZ equity market has a median forecast cash dividend yield of 5.1% or 7.0% if grossed up for the tax benefit of imputation credits. Investors should consider proven large and medium sized companies complimented by selected smaller companies listed on the NZ stock exchange selected from a range of industry sectors. While the Australian equity market is not large in a global context, it provides exposure to industries not represented in NZ. NZ domiciled investors typically have a better understanding of Australian companies as many operate in NZ or are well known through their activities in Australia. Despite NZ investors not being able to obtain any benefit from franking credits attached to the dividends paid by Australian companies, many Australian listed companies have the advantage of not being subject to foreign investment fund income tax (refer Taxation on page 12). Changes in the value of the NZ dollar can have a material impact on Australian equity investment returns. While professional investors might manage this risk it is difficult for small investors to manage risk associated with changes in the value of the Australian dollar. Global equities provide an extremely wide range of investment opportunities. Selected UK and NZSX listed investment trusts or Exchange Traded Funds (ETFs) such as those offered by Blackrock (ishares), Vanguard and State Street Global Advisors (SPDR funds) provide investment exposure to specific countries, industries, investment strategies or investment styles. To this can be added selected individual equities from around the world. Changes in the value of the NZ dollar can have a significant impact on global equity investment returns. While professional investors might manage this risk it is more difficult for smaller investors to manage currency risk. Listed property securities on the NZSX and ASX which invest in stable portfolios of retail, office and industrial property located in New Zealand, Australia and elsewhere. Some also undertake more risky activities of property development and property portfolio management. Property securities listed on the NZSX are tax efficient Portfolio Investment Entities (PIEs). Selected hedge funds (equity long/short, macro, relative value and event driven), commodity funds and private equity funds with a proven track record. In particular, hedge funds provide another means to diversify risk. Many of these funds are not denominated in NZ dollars which means that changes in the value in the NZ dollar can have a significant impact on investment returns in NZ dollars. Unfortunately while there are many funds available globally they are generally difficult to access for NZ investors. Therefore, there are only an extremely limited number of funds available for clients to invest in. First NZ Capital Securities Limited - NZX Firm 17

18 Limitations and Disclaimer This publication has been prepared by First NZ Capital Securities Limited ( FNZCS ) for distribution to clients of FNZCS on the basis that no part of it will be reproduced, altered in any way, transmitted to, copied to or distributed to any other person without the prior express permission of FNZCS. The information, investment views and recommendations in this publication are provided for general information purposes only. To the extent that any such information, views, and recommendations constitute advice, they do not take into account any person s particular financial situation or goals and, accordingly, do not constitute personalised financial advice under the Financial Advisers Act 2008, nor do they constitute advice of a legal, tax, accounting or other nature to any person. We recommend that recipients seek advice specific to their circumstances from their adviser before making any investment decision or taking any action. This publication does not, and does not attempt to, contain all material or relevant information about the subject companies or other matters herein. The information is published in good faith and has been obtained from sources believed to be reliable, accurate and complete at the time of preparation, but its accuracy and completeness is not guaranteed (and no warranties or representations, express or implied, are given as to its accuracy or completeness). To the fullest extent permitted by law, no liability or responsibility is accepted for any loss or damage arising out of the use of or reliance on the information provided including without limitation, any loss of profit or any other damage, direct or consequential. Information, opinions and estimates contained herein reflect a judgement at the date of publication by FNZCS and are subject to change without notice. FNZCS is under no obligation to update or keep current any of the information on this publication. Research may include material sourced from Credit Suisse Group. To the fullest extent permitted by law, Credit Suisse Group shall have no liability to FNZCS or clients or prospective clients of FNZCS or any other person in relation to such research material. All investment involves risk. The bond market is volatile. Bonds carry interest rate risk (as interest rates rise, bond prices usually fall, and vice versa), inflation risk and issuer and credit default risks. Lower quality and unrated debt securities involve a greater risk of default and/or price changes due to potential changes in the credit quality of the issuer. The price, value and income derived from investments may fluctuate in that values can go down as well as up and investors may get back less than originally invested. Past performance is not indicative of future results, and no representation or warranty, express or implied, is made regarding future performance or investment returns. Reference to taxation or the impact of taxation does not constitute tax advice. The levels and bases of taxation may change. The value of any tax reliefs will depend on investors circumstances. Investors should consult their tax adviser in order to understand the impact of investment decisions on their tax position. Where an investment is denominated in a foreign currency, changes in rates of exchange may have adverse effect on the value, price or income of the investment. The market in certain investments may be unavailable and/or illiquid meaning that investors may be unable to purchase, sell or realise their investments at their preferred volume and/or price, or at all. FNZCS, its employees and persons associated with FNZCS may (i) have held or hold securities mentioned in this publication (or related securities) as principal for their own account, (ii) have provided investment advice or other investment services in relation to such securities within the last twelve months, and (iii) have other financial interests, including as a shareholder of the First NZ Capital group of companies, in the matters mentioned herein. Investors should assume that FNZCS, its related companies and affiliated persons and Credit Suisse Group, with whom First NZ Capital has a strategic alliance, do and seeks to do investment banking business with companies covered in its research reports. Specific additional disclosures will be made in relation to companies where First NZ Capital has a transaction role and publishes research. This publication is intended for distribution only to market professional, institutional investor and retail investor clients in New Zealand and other jurisdictions to whom, under relevant law, this publication lawfully may be distributed. It may not be distributed in any other jurisdiction or to any other persons. First NZ Capital Securities Limited is a NZX Firm. A Disclosure Statement is available on request, free of charge. Copyright: First NZ Capital Securities Limited and its related companies, All rights reserved. First NZ Capital Securities Limited - NZX Firm 18

19 First NZ Capital Contact Details Auckland Freephone Wellington Freephone Jeremy Ashcroft Tony Connolly Andrew Austin Rue Bourke Mark Gatward Murray Graham Scott Fowler Ralph Goodwin Rob Hawkins Jo Hikaka Philip Hunter Don Lewthwaite Andrew Horton Michael Jull Barry Lindsay Angus Marks Kristan Mines Brian Moss Graham Nelson Sam Stanley Simon Myhre Phil Picot Anton van der Wilt Glenn Wilson Martin Poulsen David Pretorius Chris West Simon Ravenscroft Roy Savage Brett Steven Chris White Nelson Freephone Steven Wright James Young Francis Gargiulo Greg Lillico Havelock North Freephone Research Brent Greig Sam Howard Tim Agar Gregory Fleming John Lockie Deborah Murdoch Peter Irwin John Norling Website: First NZ Capital Securities Limited - NZX Firm 19