By Eric Dutram
With many developed markets experiencing great levels of uncertainty—and high correlation rates—some are looking to move beyond traditional investment destinations to those further off the beaten path. By doing this, investors are hoping to broaden portfolios while at the same time reducing country specific risk. While there are a number of developing countries that could accomplish this—albeit with extreme volatility—there are very few choices left for those looking for industrialized exposure with these characteristics. In fact, one of the only ones that seems to fit these stipulations is New Zealand, a small island nation in the Pacific.
New Zealand, with its small size and heavy levels of geographic isolation, is an increasingly attractive destination for investors’ capital in these uncertain times. The country has little exposure to European issues and its small size ensures that the country can easily export to its much more populous trading partners no matter what happens in their economies. Beyond these strengths, the country also has one of the lowest tax burdens in the developed world, is perceived to be the least corrupt, and has a relatively low unemployment rate by industrialized nation standards. Thanks to these factors, the country looks to remain an attractive destination for businesses and a solid choice for investors seeking a place where it is easy to do business and keep as much of the capital as possible (read First Trust Planning More AlphaDEX ETFs).
Yet, despite these positives, there are also some concerns building over the health of the New Zealand economy. Recent reports suggest that the country’s economy is slowing down but could skirt by without falling into a recession this year. "The momentum we had built up in the first half of the year is fading," Shamubeel Eaqub, principal economist of the New Zealand Institute of Economic Research said. "We're not talking about out-right contraction," rather a slowdown in trading activity. Additionally, factors beyond the nation’s control such as earthquakes or a property bubble bursting in China or Australia, could play a significant role in the country’s fortunes in the months ahead so some degree of caution needs to be taken with this small market no matter what investors think about buying securities in the nation (read Australia Bond ETF Showdown).
Nevertheless, the impressive strength of the country’s business system—a global competitive survey ranked the nation in the top 25 overall and in the top ten for a variety of individual factors—looks to overcome the issues outlined above over the long run. Additionally, investors should note that the country has a relatively high discount rate so if the economy needs more easing it is certainly within the toolkit, unlike many other developed nations. So for investors who are intrigued by the potential of the country, a closer look at the only pure play option in the space could make sense; the iShares MSCI New Zealand Investable Market Index Fund (NYSEARCA:ENZL).
ENZL In Focus
ENZL tracks the MSCI New Zealand Investable Market Index which looks to measure the performance of equities in the nation. With this focus, the fund holds 24 securities in total while charging investors 51 basis points a year in fees. The fund is still pretty young—a little over 15 months old—but has amassed a decent following since its debut as it now holds close to $95 million in assets while doing volume of 46,000 shares a day.
In terms of holdings, Fletcher Building takes the top spot at 14.7% and it is closely trailed by Telecom Corporation of New Zealand (NZT) which accounts for another 14% of the holdings. Overall, the fund manages to be quite diversified despite its relatively low amount of overall holdings as the product devotes at least 14.9% to three sectors—industrials, materials, and telecoms—while giving at least 12.8% to three more—utilities, financials, and consumer discretionary (read Ten Best New ETFs Of 2011).
For performance, ENZL has done well despite the global economic uncertainty as the fund has gained about 1.8% in the past year and roughly 13.6% since inception. However, the real selling point of the fund comes from its value tilt and its potential as a high dividend play. ENZL has a beta of just 0.6 with the S&P 500 while the P/E is below 20 and the P/B is below 1.8. Additionally, the 30 Day SEC Yield is quite robust, coming in at an impressive 5.0% for the most recent reading. Obviously, this level is far greater than many other country funds, and even some bond ETFs, a factor which should help to soften the blow if losses do hit the fund this year.
So for investors looking for a new way to play the Asia-Pacific region, while keeping correlations low and dividends high, ENZL could be a good pick. New Zealand remains well positioned to benefit in 2012 and beyond, and a small allocation to the nation—which is often overlooked by many regional funds—could make sense for internationally focused investors this year. The country is not without its risks, but in my opinion, the strengths of New Zealand greatly outweigh the weaknesses over the long term, especially if Australia and emerging Asia continue to soar higher or at least avoid a hard landing.
Disclosure: Author is long ENZL.
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