Who needs economists?

I agree with Chris Worthington’s contention (Dom Post 13/12/08 - "Super fund has no room for nationalism") that a Government directive to the NZ Super Fund would set a dangerous precedent.

But I question almost everything else in this article. Economics was never my strong point however, so maybe that’s why I have a few questions.

1. Is diversification the great free lunch of finance? See my thoughts on this.

2. Is it really true that over the long term, investment in NZ assets would have underperformed diversified international investment?As Chris himself admits, this has certainly not been true over the last 5 years and I doubt that it has been over the last 50 years either.

3. Are small countries unusually vulnerable to country-specific shock?The country specific shocks of the last year or so have generally hit larger countries the hardest. (I admit that Iceland is an unhelpful exception to my contention!) But if you look back over history I think you would be hard-pressed to come up with persuasive evidence that small countries are particularly vulnerable.

4. Is there really a rule-of-thumb that the correct allocation towards NZ assets should be less than 1% because our share of global assets is less than 1%?Since when has there been any evidence that asset allocation based on share of global assets has any relevance at all to investment performance? Quite apart from this, an investment strategy based on such a ‘rule-of-thumb’ would be totally impractical.

5. Is it really true that if NZSF invested more in NZ this would crowd existing investment into foreign markets?Evidence please Chris. And if it is true, why would that matter?

6. Are NZ assets really less desirable to the NZ Government than foreign assets, all else equal?Really? What precisely are all the things that have to remain equal? Will they? And if they don’t does that mean NZ assets aren’t less desirable for the NZ Government after all?

We all agree that we are in difficult times at present and if we are going to get things sorted, we need more than platitudes and perceived wisdom from those who, unlike me, do understand economics – if anyone does!

And what we don’t need are experts who have a bob each way. In October I questioned Rod Oram’s contention that the doomsayers have got it wrong. In this article Rod claimed that 'other countries are rejoicing at the stability similar schemes (to NZ Government’s bank deposit scheme) are bringing to their banking systems'. Now he is now telling us 'we don’t yet get the gravity of this crisis'.

Are you any the wiser?

This information is not a recommendation nor a statement of opinion. You should consult an independent financial adviser before making any decisions with respect to your shares in relation to the information that is presented in this article.

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