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Since the inception of the fund, the New Zealand economy has met some extraordinarily difficult obstacles. The dividends are above average, but the sustainability of some of the holdings seems questionable. New Zealand has a stable, well managed economy in a region experiencing a severe economic contraction. One would expect that a newly emerged economy such as New Zealand to eventually reorient itself towards domestic growth. To be sure, New Zealand is still heavily dependent on exports; up to 40% of GDP, in fact. New Zealand’s government is not letting any grass grow under its feet, however, making every effort to diversify its GDP sectors. According to the government’s promotional website, New Zealand Now , the World Bank ranks New Zealand as ” the easiest place in the world to start a business ” and ranks it third in economic freedom, after Hong Kong and Singapore. Even the well respected Forbes magazine has noted that “… Over the past 20 years, the government has transformed New Zealand from an agrarian economy dependent on concessionary British market access to a more industrialized, free market economy that can compete globally…” However, this growth has not come easily. New Zealand’s 21st century economy has been turbulent. During the boom years of the early 2000s, New Zealand began to experience increasing inflation, requiring the Reserve Bank of New Zealand to raise the benchmark lending rate several times. This led to an economic slowdown even before the economic crises of 2008 began! Then, as New Zealand wrestled to get its economy back on track, two devastating earthquakes struck the island nation. The first, Canterbury quake, struck in September of 2010 and the second, Christchurch quake , in February 2011, resulting in loss of life, injuries and damages totaling more than US$40 billion. New Zealand’s export economy is greatly dependent on trade in the Asia-Pacific region which caused the economy to suffer an unexpected double blow in late 2014 and early 2015. The first was the rather sudden economic contraction in the region greatly affecting strategic commodities, particularly metal ore and petroleum. The second was the European Union’s decision to end the EU dairy quota system. A global chain reaction followed, flooding the market with dairy products, thus collapsing dairy product prices. ‘Dairy’ happens to be New Zealand’s top export in the region. Data from OEC There’s one other little known fact about New Zealand’s commodities industry. New Zealand has recently discovered potentially large, very high quality oil reserves. These reserves (a major export to Australia at 16% of total, by the way) earned US$270 million in revenue for the government . Unfortunately, the very last thing global oil markets needed in 2015 was a brand new major oil field discovery. Data from OEC So is this a good time to have a stake in New Zealand’s economy? If so, there’s only one port of entry, found in BlackRock’s (NYSE: BLK ) portfolio of single focus country ETFs. It’s the iShares MSCI New Zealand Capped ETF (NYSEARCA: ENZL ) . The fund first listed on September 1, 2010; just three days before a devastating earthquake struck New Zealand’s South Island. The fund is not large, with approximately US$72.00 million of net assets. The expense ratio is 0.48%, reasonably in line with the industry average of 0.44%. The three-month average volume is adequate at approximately 25,000 per day; more than enough for a small position. The fund’s P/E ratio is 16.85 and the price to book multiple is 1.81 times. The volatility is a bit high at 1.37 times the S&P 500. The yield is a very attractive 5.44%; the trailing 12-month yield is 5.61% and the 30-day SEC yield is 3.62%, which is most likely why the fund is selling at a surprisingly high premium to NAV of 1.13%. If the companies in the fund are stable and profitable, this looks worth holding even just for the distributions. The best way to tell is to take a closer look, starting with the sector allocation. Data From iShares The fund leads off with a very defensive sector, Utilities at 18.58% of the fund. Equally surprising were the payout ratios: each well over 100%. This is significant since by Investopedia ‘s definition, “. ..payout ratio is the proportion of earnings paid out as dividends to shareholders… ” There’s a likely reason for this and it’s worth noting here before examining the entire fund. Over the past two years, the New Zealand Dollar has lost a great deal of value relative to the US Dollar. The high payout ratios may be, in part, due to the devaluation of the NZ Dollar vs. the US Dollar; note, too, the negative 5-year earnings growth. To give a simple example of how the currency exchange factors in, the market cap of Contact Energy Ltd. ( OTC:COENF ) in New Zealand Dollars is $34.01 billion; in US Dollars it’s $23.03 billion. Both currencies use the same symbol ” $ ” and this may be causing confusing on some widely used financial media sites; the market cap is listed as $34.01 billion in both US Dollars and New Zealand Dollars , which is impossible. Hence, it isn’t as much the underlying metrics as it might be the currency exchange, or lack of it. (click to enlarge) On the other hand, the total debt to equity measures is a little more in line with Utility companies. There’s one exception: Infratil (IFT) ( OTC:IFUUF ) at over 100%. This is a diversified utility with energy, transportation and social infrastructure holdings. Recently, Infratil and the nation’s sovereign wealth fund, New Zealand Superannuation , sold their combined holdings in Z Energy ( OTC:ZNRGF ) . The high total debt to equity as well as the high P/E may be a temporary reflection of the sale of that large portion of that equity holding. So although the numbers look a bit alarming, they may be reflecting a currency translation. Utilities 18.5839% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Contact Energy Ltd. OTC: COENF 5.6117% $2.318 5.51% 13.18% 143.34% 26.00 -6.63% 55.19% Meridian Energy Ltd. NZ: MEL 4.5252% $4.026 5.54% NA 133.60% 24.05 -3.56% 23.76% Mighty River Power Ltd. OTC:MGHTF 3.4734% $2.531 5.15% NA 417.02% 79.35 -31.34% 35.27% Infratil Ltd. IFUUF 3.1813% $1.170 4.29% 14.87% 261.34% 100.82 -12.45% 140.25% Genesis Energy Ltd. NZ: GNE 1.7923% $1.297 8.33% 17.22% 152.58% 18.31 -3.95% 52.49% Averages 3.27% $2.27 5.76% 15.09 excluding MEL and MGHTF 221.58% 49.706 -11.59% 61.39% Data from Reuters and Yahoo! and others The second largest weighting is Health Care at 15.65%. If one of the companies’ name sound familiar, it’s because it is. Fisher & Paykel Healthcare ( OTCPK:FSPKF ) was spun off from the famous appliance manufacturer of the same name. The health care spinoff is a global provider, specializing in respiratory devices. Health Care 15.65% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Fisher & Paykel Healthcare Ltd. OTC: FSPKF 7.8125% $3.158 1.77% 2.16% 65.11% 41.83 8.00% 24.44% Ryman Healthcare Ltd. OTC:RHCGF 4.7019% $2.783 1.77% 17.39% 13.69% 15.47 25.15% 41.65% Summerset Group Holdings Ltd. NZ: SUM 1.7655% $0.588 0.99% NA 11.57% 11.61 151.06% 44.24% Metlifecare Ltd. NZ: MET 1.0516% $0.628 1.03% NA 7.79% 7.55 0.99% 123.56% Orion Health Group Ltd. NZ: OHE 0.3233% $0.342 0.00% 0.00% 0.00% NA NA 0.00% Averages 3.13% $1.50 1.11% 9.78% excluding SUM, MET 24.54% 19.12 excluding OHE 46.30% excluding OHE 46.78% Data from Reuters and YaHoo! and others The more cyclical industrial sector contains three companies which all tie in together: Air transportation, airport management, and mail, parcel and freight transportation. The yields, payout ratio, P/E and debt to equity are well in line for this sector. Industrials 13.3491% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Auckland International Airport Ltd. OTCPK:AUKNY 8.5518% $4.301 2.73% 9.89% 77.76% 28.46 48.24% 56.61% Air New Zealand Ltd. OTC:ANZFF 2.9468% $2.160 5.61% 17.98% 55.05% 9.81 30.72% 118.17% Freightways Ltd. OTC:FTWYF 1.8505% $0.653 3.92% 11.84% 87.33% 22.33 13.02% 85.20% Averages 4.45% $2.37 4.09% 13.24% 73.38% 20.20 30.66% 86.66% Data from Reuters and Yahoo! and others New Zealand has a small consumer population and this is reflected in the fund’s telecom services holdings. Spark New Zealand ( OTCPK:NZTCF ) is the fund’s largest holding. Spark offers all telecom services, nationwide 3G and 4G Wi-Fi, fiber broadband, content, data and more. Chorus Ltd. ( OTC:CRRLF ) focuses on telecom infrastructure and provides 90% of all New Zealand’s fixed network connections to service providers. In short, both companies complement each other. Again, the data is scarce, but might indicate the two companies are still in a growth/buildout phase. Telecom Services 12.2952% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Spark New Zealand Ltd OTC: NZTCF 9.7968% $3.937 6.28% 3.86% 98.12% 15.67 149.11% 38.92% Chorus Ltd OTC: CRRLF 2.4984% $0.830 0.00% 0.00% 0.00% 15.80 NA 295.85% Averages 6.15% $2.38 3.14% 1.93% 49.06% 15.74 74.55% (excluding CRRLF) 167.39% Data from Reuters and Yahoo! and others ” SkyCity Auckland ” is the nation’s premier entertainment and convention center. Sky City Entertainment Group ( OTCPK:SKYZF ) manages property assets in SkyCity, Auckland . However, the interesting holding in the consumer discretionary sector is Trade Me Group ( OTC:TRMEF ) , an online marketplace which, except in size, is not too unlike eBay (NASDAQ: EBAY ). The sector yields are good, average payout ratio high but still well below 100%, as well as average debt to equity. Consumer Discretionary 11.1946% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Sky City Entertainment Group Ltd. OTC: SKYZF 4.3633% $1.703 4.71% 3.00% 90.71% 19.34 8.37% 85.58% Trade Me Group Ltd. OTC: TRMEF 3.1684% $1.562 3.73% NA 80.20% 21.08 4.69% 24.01% Sky Network Television Ltd. OTC:SKKTY , OTC:SYKWF 2.9325% $1.135 6.94% 16.47% 34.09% (of EPS) 9.80 10.77% 26.26% Warehouse Group OTC:WHGPF 0.7304% $0.609 6.15% -7.79% 105.84% 17.28 -4.93% 61.23% Averages 2.80% $1.25 5.38% 3.89% 77.71% 16.88 4.73% 49.27% Data from Reuters and Yahoo! and others The financials are dominated completely by REITS or property investment groups. The yields look really good and are well sustainable. Financials 10.0932% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Kiwi Property Group Ltd OTC: KWIPF 3.1954% $1.172 4.66% -3.84% 58.32% 12.65 NA 47.78% Goodman Property Trust REIT NZ: GMT 2.5863% $1.060 5.16% -1.05% 23.59% 9.62 112.29% 57.00% Precinct Properties New Zealand OTC:AOTUF 2.5743% $1.022 4.32% -2.34% 13.36% 11.43 NA 25.41% Argosy Property Ltd OTC:IGPYF 1.7381% $0.632 5.17% NA 66.30% 12.77 NA 68.66 Averages 2.52% $0.97 4.83% -2.41% (excluding IGPYF) 40.39% 11.62 ———- 49.71% Data from Reuters and Yahoo! and others It seems that, for any fund these days, the two weakest sectors in the entire Asia-Pacific region would be Materials and Energy. It’s a simply a matter of too much supply and too little demand. One of the problems of a smaller economy fund is that one or two companies may dominate the fund. Hence, when the domestic sector weakens, there are few ways for the fund to be diversified enough to offset it. Nuplex Industries ( OTC:NPXIY ) , although in the weak materials sector, is a company with good global reach; it produces polyester, vinyl-esters and coating resins. Operations are located in Germany, Russia, Netherlands, the UK and the Americas as well as the Asia-Pacific. Materials 9.9369% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Fletcher Building Ltd. OTC:FRCEF 8.0959% $2.205 6.15% 25.15% 209.57% 18.13 -2.50% 53.05% Nuplex Industries Ltd. NPXIY 1.841% $0.567 6.07% 12.47% 89.71% 15.16 -2.02% 40.68% Averages 4.97% $1.39 6.11% 18.81% 149.64% 16.65 -2.26% 46.87% Data from Reuters and Yahoo! and others In the energy holdings, Z Energy ( OTC:ZNRGF ) distributes a full range of fuels; NZ Refining ( OTC:NZRFF ) is a refiner of raw petroleum and ‘pipeline’ distributer. The investor should make careful note again that New Zealand may have some of the largest, untapped high quality oil reserves on the planet. Light Sweet Crude is the easiest grade to refine and has the most desirable qualities of all extracted oils. Right now, supplies of oil are so abundant that it simply wouldn’t be worth a major extraction investment. However, the potential cannot be ignored, especially as new technologies come to market which greatly reduce emissions from fossil fuels. Energy 5.2033% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Z Energy Ltd OTC: ZNRGF 4.2524% $1.835 3.68% NA 192.31% 50.16 NA 86.93% New Zealand Refining Ltd OTC: NZRFF 0.9509% $0.777 1.36% NA 19.02% 13.87 -17.36% 37.77% Averages 2.60% $1.31 2.52% ——— 105.67% 32.02 ———- 62.35% The IT holdings are pretty much standard, offering accounting and business services, mobile tablet device software particular for ‘B2B’. Information Technology 3.172% Exchange: Ticker Fund Weighting Market Cap (USD Billions) Yield 5-Year Dividend Growth Payout Ratio P/E 5-Year EPS Growth Total Debt to Equity Xero Ltd. OTCPK:XROLF 2.2816% $1.661 NA NA NA NA NA 0.00% Dilligent Corp. NZ: DIL 0.8904% $0.353 NA NA 0.00 61.21 NA 0.36% Data from Reuters and Yahoo! and others To sum up, much of the data may be distorted by currency translation. Further, the data gathered when going from sector to sector was inconsistent. This, again, may be due to currency adjusted data vs. unadjusted data. The New Zealand economy is in fact experiencing a slowdown, much in part due to the economic contraction of the two major ‘import economies’: Japan and China. However, New Zealand maintains a triple top credit rating: S&P, AA stable; Moody’s, Aaa stable; and Fitch, AAA stable. Lastly, is the interest in the fund itself. The full chart clearly demonstrates continued interest even as the relative value of the currency declined. Compare the chart below with the currency chart above. (click to enlarge) Some metrics of some of the fund’s holdings may give the impression that they are far more risky than they actually are. If the fund was currency hedged and the data more consistent, it would look far better. Over a long period of time, say in a retirement account, it might be well worth the risk to dollar cost average over time, reinvest dividends and use any market corrections as buying opportunities. The end result, especially in a tax deferred retirement fund, just might end up being a top performing portfolio asset. As always, the investor must weigh the risk to the region in general which is heavily dependent on the Chinese and Japanese economies and the demand for Australian raw commodities. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.