Standout performers create fund distortions
Quite honestly I'm sick of being asked what we do with all our lovely milk in New Zealand.
Fed up being teased by the Brits and French that our fabulous countryside and dairy cows make powder that gets turned into brown, yellow and pink sugary milk for Asia. And I'm really not proud that we've perfected that bright yellow mozzarella made in six hours, which they buy for their pizzas.
Our camembert and brie? Yeah, it would bounce further than most tennis balls and we'd have more chance of selling it to Wimbledon than Waitrose.
But last week I finally realised we had something to be proud of. I was sitting in Wiltshire with a British farmer who was enjoying the cheese banter while we laughed about every cow in the paddock owning a EU passport. Seriously, they do. Except number 62 - we were frying that one on the BBQ.
Finally I had my moment to tell my old mates just how well we were doing out of A2 milk. It felt good to have a skite. A premium-priced Kiwi dairy product and a company experiencing global success. The local Morrison's supermarket even stocks the stuff. My farming friends were all ears over the share price.
The long neck giraffe
A2 Milk is the tallest drink in town and defied gravity in the last year soaring to become one of our largest companies.
If you've missed the story, ATM, as they're known in the sharemarket, divvies up the cows and only the milks the girls with a particular protein that's easier to digest. It seems to suit the lactose intolerant and just like the gluten-free trend, the health conscious like a new fad too.
It's selling like hot cakes in the Chinese market and making fast inroads in other international locations. A true New Zealand success story.
The share price has risen 170 per cent in a year, with a 52-week range of $3.92 to $14.62 and a current trading price around $10.60. Its share price is more than 50 times its earnings (translation; expensive, not a value stock).
Frothy milk
Yet despite my national pride in this company, I'm wary of its charms for investors. It struck me when an adviser worriedly confided she was meeting clients who had portfolios with more money in A2 milk than they had in Europe as an entire continent. They didn't even realise this was the case.
Tracker funds can often be thrown into a bit of disarray when companies like A2 punch above their weight.
Suddenly a smart little growth company is having a huge impact on the index. It's normal for a firm like this to suffer big swings as their market develops and new competitors appear – like Nestle just have. They don't mature instantly and there's much froth in their share price.
Yet in a tiny market like New Zealand, tracker funds can't hide from the risks. Diversification suffers and holders of trackers end up taking sizeable bets they're barely aware of.
Investors see our index rising 16 to 18 per cent a year and becoming a top performer on the world stage. Why diversify and have money in offshore funds when they're not doing as well as our protein-filled pastures?
Yet these very attractive returns are being earned in an erratic and risky fashion, with a handful of star performers driving a market. So many New Zealand firms have falling share prices, but one share can mask the risks and expose new investors to high levels of volatility.
When A2 Milk increases 170 per cent, it's not difficult to figure out many others must have been poor performers to drag the average back to 16 per cent.
Back-tracking
Personally I like tracker funds and their cheap fees, so I find myself in a tricky spot. I'm not advocating deserting your tracker – just be aware of what's driving it and how risks can become unbalanced. Think wider and more internationally with new money. Consider taking some gains from the Kiwi market to achieve a sensible asset allocation with much higher diversification.
If I'm honest, trackers based on market capitalisation are not ideal and I don't invest in them myself (i.e. the bigger companies having higher weightings). Back in the 1990s Professors Fama and French from Chicago University proved smaller companies outperform large over the longer-term and their academic research has been embedded in funds such as Dimensional, which are a personal preference for my own money.
Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.