MELBOURNE AUSTRALIA 28 December 2006 – It is difficult to be crabby at fund managers when the Australian market looks like having another bumper year. Barring an catastrophes over the next two days, the All Ordinaries Index appears on target to achieve a 19%+ return for the year.
Should it do so, it will be an improvement on the 16.2% return that the index recorded last year. Roughly this time last year we asked our readers, “After two excellent years can the Aussie market push further ahead?” This answer to our own question was, “In simple terms, it can.”
Now, that’s not to say that we are going to claim ad infinitum that we picked and predicted the direction of the market. The fact is, this time last year things did look pretty good for the Aussie market both in historical and future terms.
Does it look promising for the next twelve months? Again, yes it does. But mainly because it appears difficult to pick where the negatives can come into play.
That, we would even argue ourselves is as good a reason as any to predict the end of the good times are drawing near. When someone, anyone, even your correspondent claims that things look too good for anything to go wrong, it is as sure a sign as any that something could very well go wrong.
As the market stands, the All Ordinaries is less than 400 points away from reaching 6,000 points. If it reaches that new magical figure by the middle of the year – not unrealistic – then it would only have taken four years for the index to have doubled to that level. In comparison, the time taken for the index to double from 2,500 to 5,000 was nine years.
And the doubling from 2,000 to 4,000 took the All Ordinaries eleven years. Could this shortening between landmark levels be another sign that the market has hit the summit? The next landmark to keep our eye on is the doubling from 3,500 to 7,000 points. The All Ordinaries first reached 3,500 in June 2004. Can it get to 7,000 before June 2008? It would seem difficult to bet against it at the moment. Even though that would equate to a 25% increase on yesterday’s closing level.
However, it is this kind of talk, this kind of complacency that should ring the biggest alarm bells. It also makes us wonder how much control those fund managers have over the decisions of where to invest client money.
We all know that the Australian stock market is tiny in comparison to the global market. We have all seen the statistic that tells us the Australian market only comprises around 2% of listed equity. And we all know that the availability and diversity of quality blue-chip investments is fairly limited. Once an investors portfolio is stocked with BHP Billiton (ASX: BHP) or Rio Tinto (ASX: RIO) (or both), a handful of banks, a couple of retailers and a few other bits and pieces, new investments in the blue chip range become harder to find.
Which brings us again to the subject of private equity and infrastructure funds. Bloomberg News reported yesterday that Sydney’s “Cross City Tunnel Motorway Pty… had a receiver appointed by banks owed about A$560 million.”
So much for the dependability and reliability of income from infrastructure funds. The Cross City Tunnel has a number of institutions listed as owners. Of course, in most cases they are merely the trustees holding the investment on behalf of one of a number of managed funds. Westpac (ASX: WBC) is believed to have a substantial holding in the Cross City Tunnel. Can there be any doubt that the bank has stuffed their managed funds full of shares in this project?
The New South Wales State Super scheme claims that its interest represents only around 0.2% of the $30 billion worth of funds it has under management. Even so this still amounts to $60 million worth of investments. The fund tells its members that “The Fund’s investment in the Tunnel has already been written down to zero so that the small impact of this asset on returns has already been fully reflected in Fund earnings and declared rates of return.”
It is all very well for the State Super to be blasé about this particular investment, however, given the lack of other investment opportunities in the Australian market and the recent reliance by many fund managers on infrastructure investments, they would do well to listen to some of those alarm bells.