In early 2000 the new Labour Government delivered on its promise to pay $120 million in compensation for the ban on indigenous forest logging on the West Coast. It handed over $7 million each to the West Coast Regional Council, the Grey District Council, the Buller District Council and the Westland District Council. The balance of the money went to the West Coast Development Trust.
The fate of some of this money has been much publicised. The Westland District Council took advice from ASB and put 66% of its funds into equity markets. After 22 months they have lost $885,000. By comparison, the West Coast Development Trust has increased its $92 million to $100 million by holding off investing. It has had funds on deposit since receiving it. The Grey District Council has been similarly cautious and held its funds in bank deposits. They have increased their funds from $7 million to $7.8 million. The Buller District Council has increased its $7m by 1.7% by having half of its funds in New Zealand fixed interest and shares and half overseas.
One of the most unfortunate points about the Westland investment story is that all of the funds allocated to shares were apparently invested all at once. A much more prudent strategy would have been to employ dollar cost averaging. This would have seen the funds – about $3.5m we understand – being invested over 12-18 months taking out the effects of the falling markets and buying more as the price fell.
The short term affect of putting a large amount of money into shares in the fashion the Westland folk used has been unfortunate to say the least. It could be argued that the amount allocated to shares was far too high anyway for a fund such as this in the public domain. But, had the strategy been adopted with an understanding of the risks involved, the long term result is still likely to be superior to the risk averse approach.
Yes, the time needed to recover will be substantial. And, yes, it takes a lot of intestinal fortitude to sit tight. But, when a paper loss occurs, sometimes the worst thing to do is to sell at the low point and realise those losses.
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