NEW ZEALAND GAZETTE

No. 100

Registered Office:
Second Floor, Community Trust House, corner of Filleul Street and Moray Place, Dunedin.

Auditor:
Taylor McLachlan, Dunedin

Solicitor:
Anderson Lloyd, Dunedin.

Investment Advisors:
Frank Russell Limited, Auckland.

Bankers:
Westpac Trust, Dunedin.

Custodian:
Chase Manhattan Bank, Sydney.

Chairperson’s Report for the Year Ended 31 March 1998

It is a pleasure to present the tenth annual report of The Community Trust of Otago. The year past has seen significant milestones reached. The years ahead contain wonderful opportunities for us to really make a difference in the community of Otago. We are in the midst of a most exciting time.

Highlights of the year included:

• achieving a gross income from investments of over $25 million, representing an 18.8 percent return,
• committing over $10 million in donations, compared with last year’s $4.3 million,
• installing new fund managers,
• seeing some of our previously committed donations coming to effect,
• moving into our new building,
• thinking hard about the future, and
• seeing continued excellent working relationships within the trust.

Trustees view themselves as accountable to the public for the wise exercise of their duties. This includes making effective donations, obviously, but first it requires the execution of a sound investment strategy. I would like to explain what lies behind our donations and investment policies so that people can more easily understand what we do.

Investments

The trust’s investment objective is to obtain the maximum return for an acceptable degree of risk. All “risk” means is that we expect our income to be volatile, to vary from year to year. We don’t want our donations budget to be unpredictable, so we must manage this risk. The strategy we have adopted is to set aside reserves to cope with a degree of risk that allows also a higher average income.

Our asset allocations are still reasonably conservative for a long-term investor, our benchmark portfolio containing 35 percent in equity investments. Nevertheless, it is important to realise that we expect investment performance fluctuations perhaps twice as large as our donations budget.

In practice, our reserving policy is quite sophisticated. The graph below shows the band within which our funds must stay unless we are to take corrective action of some sort. The boundaries represent overall fund levels where the statistical probability of either losing capital or retaining excessive reserves have reached a certain (still rather low) level of significance.

Although trustees take full responsibility for choosing the overall strategy and the asset allocation and the fund managers, they do so only after obtaining advice from our investment advisors Frank Russell Limited. Russells also provide regular performance reports.

As I reported last year, trustees selected new managers for both our overseas equities and overseas fixed interest portfolios. We became fully invested with both Lazard Freres and Fischer Francis Trees and Watts by August 1997. At the same time we engaged Chase Manhattan Bank to provide custodial services for our overseas securities. AMP manages our New Zealand balanced portfolio.

The above discussion puts this year’s performance in perspective. On the basis of our assets allocation, history, and average manager performance we are advised to expect an average gross nominal return of 8.3 percent. In fact we got 18.8 percent. We are delighted to report a very good year, but we expect both good and bad.

Although the trust will continue to keep all aspects of its operations under constant review, we are satisfied for the present that we have in place a sound policy on investments.

Donations

The single most significant feature of the year for the trust was that we committed $10.2 million in donations. This eclipsed last year’s total of $4.3 million, itself a record. Details of the donations, both large and small, are contained elsewhere in this report.

We expect to continue donations at roughly the same level in the current year. As I have indicated, our average expected income is 8.3 percent of our capital. An estimated 2 percent must be added to our capital to maintain its real value, leaving 6.3 percent to spend. After deducting expenses, this leaves approximately $9.5 million for distribution. Our healthy reserves position has allowed trustees to set a budget for the coming year of $10 million.