The fund market "down under" is anything but, as the Australia/ New Zealand fund market has been garnering positive attention as of late due to the region's prospects.

Often thought of for its breathtaking landscapes, exotic wildlife and colorful culture, Australia and New Zealand have been catching the eye of some fund managers lately. They are less concerned with kangaroos, dingoes or "shrimp on the Barbie", and more interested in the potential bargains to be found in the region. As the bear market has dragged on, managers have been scavenging every outpost in hopes of finding compelling stock picks.

"Australia and New Zealand have grabbed many fund investors' attention recently, as both Australia/New Zealand's equity funds and bond funds, in general, outperformed their international counterparts," said Jing Li, a Hong Kong-based Lipper Asia research manager. Li oversees the Asia Pacific (ex Japan) mutual funds development and performance.

She said Australia/New Zealand equity funds, on average, were up about 20% for the first half of 2003, and also accumulated about 130% gains over the last 10 years. The region's strengths lie in its relative safety and ability to provide yields, according to Li. Also, a stable political environment with good underlying economies and a lower correlation with global political and economic climates makes it relatively immune to global uncertainties. Also, the region's currency is stronger against the U.S. dollar, she added.

Gems in the Rough'

Robert Scharar, manager of the Commonwealth Australia/New Zealand fund, sees some interesting opportunities in the area. "There are a lot of small-cap offerings that get overlooked," he said. "You can still find some gems in the rough."

Scharar has been a long-time watcher of this area, as he is the fund's founder and advisor since its inception in 1991. The fund has a high expense ratio of 5.6% and a low net asset value of $22.61 million, according to Morningstar. However, the fund also is up 18.5% year to date and 25.55% in the last year. It has performed well over the long haul, as well, posting returns of 15.97% and 11.79% over the three- and five-year periods, respectively. The fund usually invests at least 65% of its assets in New Zealand securities that seem capable of capital appreciation and/or current income.

And despite usually being mentioned in the same breath with Asian economies, the Australia/New Zealand region is distinct and a good way to diversify a portfolio.

The Asia Pacific region contains both the Australasia - which consists of Australia, New Zealand and the neighboring South Pacific islands - and the Asia region classifications. Australasia is less correlated to the U.S. market movement, Li said. This makes it more attractive for those looking to diversify a portfolio. However, Asia is "closely tied up because the U.S. is the region's biggest export partner. Australasia could provide better defensive quality if Asia and the U.S. encountered any uncertainties and difficulties."

Natural Advantages'

Australia is a country rich with natural resources and exports many types of products, such as metals, minerals, fossil fuels and agricultural products. Timber is grown in New Zealand like corn crops are here in the U.S., according to Scharar. However, the Australian marketplace is not driven by body count, but by resources and developed activities, he said. "They're never going to be able to compete on labor. They have to look at places where they have natural advantages. Their advantages lie in their resources." Additionally, Scharar expects to keep on finding quality investments in the region because the countries are continually building out their infrastructure, their railroads and pipelines.

There are concerns making managers investing in the region take notice, though. The countries' housing situation, immigration and trade agreements are all considerations when determining the composition of a portfolio. Scharar said the countries are experiencing a residential property bubble, which could burst. However, a reduction in interest rates and immigration will help ease the effects, he said. Additionally, currencies have been strong, but that will be offset by a free trade agreement.

The region could be slowed by an increasing current accounts deficit and limited additional appetite for Australian and New Zealand dollars, Li said. "The additional source of exposure to the currencies is important, because the global appetite for Australian and New Zealand dollar financial assets is much more limited than the global appetite for euro and yen assets," Li said. "Offshore managers will overrun their portfolio benchmarks for Australian and New Zealand dollars long before they are seriously bothered by their holdings of yen and euro."

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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