Why the case for NZ shares isn't dead yet

It is no secret that the New Zealand market has struggled on many fronts. Performance being the primary one, though I can recall as a young analyst looking at the ten-year numbers of the US market, in a period which captured both the tech bubble and the global financial crisis, and wondering why one would invest there. How times have changed. While the performance issues of the New Zealand market are worth exploring and understanding, the more commonly cited reason which has brought the allocation to Australasian equities for the average KiwiSaver Balanced Fund in the MJW Investment Survey from 17.4% to 14.5% over the past five years, is the status of the New Zealand economy which has gone from being viewed as an outperformer to an economy facing major headwinds.

There is also the issue of market depth. Despite what is a burgeoning venture capital ecosystem in New Zealand which is spinning out exciting companies such as Crimson Education, Halter, Hnry, Mint Innovation, Auror and others, few seem destined to list on the New Zealand share market, preferring to list closer to their target markets where they are more likely to attract capital at more attractive multiples.

Given these challenges it is easy to see how one could be down on the local market, but could it be the case that we overlooking some of the structural advantages?

The performance of the New Zealand share market versus the global market

Firstly, addressing the elephant in the room, the S&P/NZX 50 Index has underperformed the MSCI ACWI (unhedged to NZD) by around 13% per annum over the past five years to the end of September and around 10% per annum in hedged terms. Clearly global shares have overdelivered over this time, with a large component down to multiple expansion and strong earnings growth. Though as shown below, in the decade preceding that, New Zealand shares more than held its own, significantly outperforming the global share market.

Source: MSCI, S&P. Ten year returns to 30/09/2020.

While we live in an increasingly globalised world, the New Zealand market is still different enough to march to the beat of its own drum. This has served investors well in the tech bubble in the early 2000’s where the New Zealand market rose modestly from late in the year 2000 to early 2003, while at the same time, the S&P 500 Total return index fell some 45%. Somewhat more famously, the Nasdaq Composite which hit a high in March 2000 took fifteen years to reclaim its previous high. Generally, the NZ market has held up well in times of crisis.

Source: MSCI, S&P. As at 30 September 2025.

But the New Zealand market provides diversification…but concentration

Much of the difference in return profile comes down to the different sectoral mix of the NZ market. We have a large amount of lower volatility, dividend rich companies in our market, which is dominated by industrials (mainly the large electricity generators), utilities and real estate. The New Zealand market also has a large weighting to healthcare sector, though this is primarily in two large capitalisation names, Fisher and Paykel Healthcare and Ebos. The healthcare sector globally has been a notable laggard in recent years, due to a mix of an unfavourable policy agenda in the US as well as GLP-1 drugs shaking up existing revenue lines for companies who have products which treat conditions related to obesity. The New Zealand market is underweight financials (which helped it in the GFC) and underweight technology and consumer discretionary, which on a global scale, is a technology heavy sector. These have been some of the stronger performing sectors in recent times.This makes New Zealand more heavily weighted towards value factors (lower price to book ratios overall and higher dividend yield) than growth factors (for example, return on invested capital and earnings growth rates). Global growth stock indices have outperformed value by circa 5% per annum over the past five years.

Source: MSCI, S&P as at 30 September 2025.

While there is plenty of concern at present around the concentration in the US market, with the weight the top ten stocks coming in at 39% (25% for the MSCI ACWI), NZ remains a very concentrated market with 66% of the index in the top 10 stocks. The largest of which, Fisher and Paykel Healthcare, comprising 16% of the index.

Tax

While fees tend to dominate the discourse in funds management, tax is often something viewed as too hard or met with the comment “I am not a tax advisor”. We are not either, though we have a fiduciary duty to deliver the best returns to clients, which they receive after they have paid the tax man.

The thing which many don’t appreciate is the tax efficiency of New Zealand shares. Dividends for many companies are fully imputed, and the tax rate paid, on a weighted average basis by the underlying companies in the index is c. 20%. This means that the additional tax paid by investors is minimal.

If we compare this to the global market, and for simplicity, let’s just focus on the USA since it makes up by far the biggest weight, there is no imputation regime. On top to that, there is a withholding tax of 30% applies to dividends. Now, assuming the correct forms are filled out, this falls to 15% under our double tax agreement from the US. And this 15% tax can be utilised by the underlying investor. Key message here is to ensure your fund is structured correctly, otherwise this is a leakage.

The other thing which often gets overlooked is that there is, though it isn’t called one, a quasi-capital gains tax on global shares. The FDR regime assumes income at 5% per annum, which for most funds, particularly ones which follow the global share indices which have a dividend yield of less than 2%, means the rest, essentially capital gains or losses is taxed.  5% is well above the NZX 50 dividend yield which is currently running around 3%.

Now some will point out that individuals have the benefit under the foreign investment fund (FIF) regime of being able to select the comparative value method for their offshore shares when their returns are negative.  This provides the benefit of having no tax liability in these negative return years.  However, the FIF tax regime comes with issues like not being able to get a tax deduction for any offshore management fees, plus not being able to use all foreign tax credits in full, or sometimes at all.  Also, a limitation of the FIF rules is that in any given year a person must use the same tax treatment for all their global shares. This is problematic when some global assets perform positively, while the investor’s overall global share return is negative.  This reflects that the CV tax liability on the positively performing assets is very aggressive and quickly adds up.  As a result, the industry has largely moved towards PIE funds, particularly since the top tax rate and the trust tax rate moved to 39% which is well above the PIE’s top tax rate of 28%.

If we construct a scenario where two investors are in PIE funds, get charged the same fee and get an 8% gross return, we calculate the difference in return after tax as being 1.2% per annum in favour of New Zealand shares. That assumes the global shares are invested in a tax effective structure, when they are not the divergence increases.  This is a large potential benefit to tax paying investors.

We also highlight that this analysis assumes that an investor holds their New Zealand shares in a PIE fund where capital gains are specifically exempt from tax. While the IRD in New Zealand doesn’t appear to place any focus on chasing individuals for tax on capital gains, this remains a risk none-the-less.

Where we land…

What we haven’t covered in this paper, which is also of extreme importance, is diversification.  Most New Zealanders have a large exposure to NZ through property or operating businesses. Similarly, foundations, councils, iwi and charities often have assets already in New Zealand or may be reliant on NZ donors, all factors which may temper allocations to New Zealand assets. Further, for non-taxpaying investors, not getting the benefit of imputation credits makes the case for New Zealand shares relatively weak, which should typically lead to a materially lower, or even no exposure, to NZ shares.

A combination of NZ's imputation credit regime and the fact that NZ shares PIE funds are specifically exempt from further tax on capital gains, means that the long term net-of-tax returns are extremely attractive when compared to global shares (taxed under the FIF and FDR) and other asset classes like fixed interest and cash (where the total return is taxed).  While these structural nuances may seem minor in years when returns between asset classes diverge significantly, in the long term they can compound into significant after-tax outcomes for tax paying investors. And while death and taxes may be life’s only certainties, in investment management factors like tax can help make a material difference to the legacy people leave when they face the former!