The Highs and Lows of the past Financial Year

As we move further into the new financial year, we thought we would look back to the last financial year from an investment perspective.  By this time last year, the major share markets were already into a great running following their low of around March 8.  The run was too quick for a lot of investors who were sitting on the sidelines, perhaps too stunned by the events over the previous eighteen months or so.

The good run continued over the quarter, and then took a bit of a breather.  However, the great run was really too selective for those invested primarily in index funds.  There needed to be exposure to financial sector stocks to gain the best returns.  These were of course the stocks that had been hit the hardest over the previous year or so.  And the reason they rocketed up, was because these companies had effectively been recapitalised largely by governmental bail outs.  When companies are trading at price earnings typically at a quarter or less than what they normally do, and economies have been stimulated, there are great forward looking prospects.  But not all banks survive.  We only need to look at what happened in the United States in the first quarter of 2010, when another 40 odd banks failed! It was a bit like shopping in a sale.  You needed to be selective to get the bargains, rather than those that were not fit for sale!

In the run up to the middle of last year in New Zealand, many investors who had invested into CDO based funds saw a little ray of sunshine when ING agreed to a compensation package.  Most investors accepted the offer, however there was rightly a lot of concern as a disclaimer needed to be signed, waiving the investors right to seek additional recourse from, for example, advisers.  Currently a former minister is proposing a private members bill that will overcome this obstacle.

For the thousands of investors who had invested in finance companies, as the year progressed there was further bad news from Receivers.  In virtually all cases, the receivers have reduced downwards the estimates of final recoveries.  Even the so called White Knight, Allied Farmers who took on the Hanover loan book, appeared to have been taken in by the last minute sweet heart deals done by the Directors.  Quite clearly, the regulations governing the financial sector in the past year have been shown to be woefully inadequate.  There has been little to protect the investors and essentially minimal deterrents for incompetent or devious managers and directors of financial institutions.   It seems the only compensation for a lot of investors in companies such as Bridgecorp, and Capital + Merchant will be the satisfaction of seeing directors nervously appearing in the current rounds of court proceedings facing charges brought by the Securities Commission.

One of the real highlights of the year has been the recovery of a number of bond issues.  Many investors had faced paper losses on these the previous year.  The recovery of capital values made for some high fixed interest returns.

The financial year finished with a couple of low points, where fraud was involved.  One case which affected just a few investors featured a rogue bank investment adviser with a penchant for expensive wine and prostitutes, whereas another investment fraud seems to have been committed by a couple of investment advisers who simply put it across a number of their clients, some of whom had been clients for years. 

Overall, most investors who had well structured diversified investment portfolios should feel pretty good about the past financial year.  A repeat performance would be great.  All will be revealed by this time next year.