Print this page

Taking Stock 31 March 2011

The thousands, tens of thousands, of investors in those finance companies which cheated should not yet give up on compensation.

With the help of litigation funding Australian and Auckland lawyers are investigating a class action against at least two trustee companies who are suspected of having applied inappropriate skills and inadequate attention to their task of representing investors.

Any investor is free to approach lawyers Turner Hopkins to join in the possible action. The contact point is either 09/486 2169 or 400 Lake Road, Auckland 0622.

The proposal is that if action is taken and liability established, then investors could take individual action, perhaps with the help of the litigation funder, who might take up to 40% of any spoils.

What must first be established is that a court rules that trustees failed in their duties to investors.

Frankly, I cannot see how a court could find anything else.

Trustees failed in condoning dreadful trust deeds (i.e. Lombard), in condoning nonsensical claims to investors (i.e. Bridgecorp, Capital & Merchant Finance – “all loans are fully insured by Lloyds” – ), in allowing loans that breached covenants (i.e. Dominion/North South Finance, Lombard), in allowing lies to be told (i.e. Nathans Finance), in allowing loans to be miscoded and related party loans to be disguised (i.e. South Canterbury Finance), in allowing bad debt to be understated (just about every company) and in allowing companies to operate on a Ponzi basis (i.e. Nathans, CMF, Bridgecorp, Lombard).

I could continue for another ream or two.

Also in the spotlight should be auditors, who stated that various companies were presenting truly and fairly their affairs when very clearly they were in fact wilfully misleading investors, analysts and credit raters.

Then maybe valuers should appear in the spotlight, especially those offering valuations in the property development area.

Another in the spotlight should be the regulators, especially Jane Diplock’s regime at the Securities Commission, which stepped over and around rotting corpses while piously claiming that there was no evidence of dead bodies.

The Crown has previously had to front up to mistreated investors, with Equiticorp being an example, the Crown having finally accepted that it acted illegally in allowing Equiticorp to use investors’ money to buy back from the Crown the Equiticorp shares the Crown had stupidly accepted as temporary payment for NZ Steel, which Equiticorp had bought from the Crown.

Memories of all of the crimes committed between 2000 and 2010 will be starting to fade, though the current Serious Fraud Office investigations are helping to keep memories warm.

If the litigation funder acted quickly to pursue the trustees, at least some, maybe most, investors will be alive when the issues are resolved.

I accept the Crown has its problems, excessive debt caused by years of imbalanced budgeting being an obvious problem, another being the outcome of the global financial crisis, another being the earthquake.

It will be doing its damnedest to avoid a payout to those let down by the Crown’s employees who failed to apply adequate scrutiny to the finance company cheats.

In any normal justice system, an investor buying securities that resulted from an approved prospectus and investment statement would be entitled to assume the approved documents were diligently scrutinised before being approved.

Certainly in the case of Lombard, Bridgecorp, Capital & Merchant Finance, Nathans and Credit Sails, a cadet in the office ought to have identified giant anomalies, given the information supplied to the regulators (but no-one else).

CMF, for goodness sake, was geared at 40 to one! Bridgecorp’s survival depended entirely on new cash arriving, its loans being ridiculous and almost never repayable, and Lombard was the highest geared of all and lent almost a third of its money “secured” by a second mortgage on one hopeless project run by a property developer who was cheating the IRD.

Nathans used money raised as equity for its own improbable vending machine business in the USA. Surely a cadet might have asked about the efficacy of these deals, let alone a trustee, an auditor, a credit rater or a regulator.

Sadly, these issues are only now surfacing after years of unpublished investigations. Many of the issues were debated on this website five or more years ago.

One hopes the new energy Turner Hopkins will generate will lead to a chain reaction.

-------------

Imagine how this deal could be explained.

The owner of a finance company organised for himself a land (section) development, funding it with a bank loan and a large loan using his investors’ money.

The finance company fails. The development sales are slow.

After failing, the finance company’s chief seeks to sell-down the sections at $185,000, sells a few, but wants to speed up the action so he commissions a report on how low the price would have to drop to sell the rest in one transaction.

The quick sale price is defined as $138,000.

So the finance company chief authorises the sale of all the sections for $80,000 each to friends of the finance company, generating no repayment at all for the finance company, the proceeds going to the first mortgage lender, the bank.

The “friends” all make a nice shilling, selling the sections at realistic prices.

The Crown, which has guaranteed to repay investors, bears the cost of a sale not explicable by any commercial definition, as the finance company gained no cash but simply handed over the profit to more patient investors.

Are there so many of those strange deals around that no-one has the time to investigate them?

What about a similar oddity, where a Crown guaranteed finance company writes down its assets to fire sale price, and then agrees to a 50/50 profit share with a paid employee on any write-back achieved by selling at a price above the written-down price?

Again, the Crown is the loser.

Still too hard to investigate?

Perhaps these transactions were kosher for reasons that elude me and do not justify investigation.

They do justify explanation, however.

When will we get it? Are our receivers earning their huge fees by ensuring all issues of fairness and morality are being referred to the appropriate authorities?

---------------

Blue Star Print investors may wonder what logic has allowed the company to lend money to its shareholders not permitted to receive a dividend until bondholders are paid.

The latest report at least discusses loans to the shareholders to service bank obligations.

I am told this does not imply a dilution of assets to the disadvantage of bondholders, a situation which would have been clearly in conflict with the superior rights of bondholders (over shareholders).

Blue Star Group would do well to explain this rather more fully than it has.

For a company in the communication business its skill in communicating satisfactorily with investors is still inadequate.

----------------

Rabobank’s Capital PIE holders (8.78% till 2014) had a strange bonus this week, receiving a little extra, with their quarterly payment.

The “extra” relates to a slight tax benefit from an IRD ruling, relating to the timing of the drop in corporate tax rates from 30 to 28 per cent.

Every little bit helps!

----------------

Credit Sails investors who were told that their investments were “capital protected” will be pleased to hear that compensation is still a real possibility.

This week, I am told, the Commerce Commission received a letter written by a long-serving adviser to a client, apologising for the incorrect use of the words “capital protected” and enclosing a cheque to reimburse the client.

The adviser was behaving wisely, putting an end to a terrible error. His employer can hardly reimburse one investor and not all of them.

The Credit Sails bonds were “capital protected” in the sense that a portfolio of bonds were available to “protect” the capital,  just as a portfolio of loans “protect” finance company debenture investors.

But capital “protected” would mean capital “guaranteed” to 99.9% of investors and “guaranteed” means you cannot lose your capital.

For example various funds issued by the Man Group (OMIP) are capital protected, by a bank deposit in a AA bank, which will be the source of repayment of capital.

This provides investors with assurance.

Capital “protected” was in my opinion either a cynical or careless, but certainly misleading, term for Credit Sails investors and, if widely used, is likely to cost the user and/or his insurers one very large sum of money, possibly large enough to be beyond the cash resources of most people.

There has recently been one other Credit Sails claim, by an investor who asked his broker to sell his Credit Sails investment when it was worth $3,200.

The broker unilaterally decided not to sell and the $3,200 was lost, when Credit Sails collapsed.

Virtually every broker in the world would have accepted that this was a simple, if dopey, broker error and would have paid the investor his $3,200, honour restored.

How that claim was allowed to escalate to a formal claim, a formal NZX hearing, a fine, and then, one would hope, an apology and a compensatory cheque, is beyond the imagination of me or any industry peer I know.

I am absolutely certain that no honest broker would deny the victim a cheque once it was established that the broker was in error, and would pay up with no need for an NZX complaint.

One hopes this was a matter that escalated by inattention due to more pressing matters, rather than by dreadful judgement from well-healed brokers.

Credit Sails has by no means disappeared from the radar.

These are the parties who should be budgeting for claims of full compensation, in my opinion.

1. Any broker who misled investors with the words “capital protected”.

2. The trustee, NZ Permanent Trustees, which had seen and sent to the regulators and the Companies Office, a legal opinion that clearly indicated Credit Sails was not suited for retail investors.

The same trustee which accepted responsibility for overseeing any changes in the bonds that were chosen as security for the fund yet allowed bonds issued by the Icelandic banks to be a disproportionate part of the portfolio of bonds.

3 The issuer, Calyon, a division of Credit Agricole, that acted with either great fortune or some cynicism by switching into the portfolio the Icelandic bonds. At issue will be the source which gave up the bonds to Credit Sails, removing the risk from the source of the bonds.

4. The Companies Office (the Crown) which authorised the issue of the prospectus aimed at retail investors despite a very specific legal opinion that Credit Sails was inappropriate for retail investors, an opinion never published to investors.

5. The credit raters, who rated Credit Sails “AA”, the same rating held by our major trading banks.

Credit Sails investors most likely to get compensation from the current Commerce Commission enquiry are those who were sold the “capital protected” line.

But there are other lifelines of hope as described above.

--------------

One NZX firm was fined this week $5,000 for failing to sell Credit Sails though the NZX did not name Credit Sails as the security left unsold, a peculiar situation and one I am sure the erring broker would not welcome, as that firm would most certainly want to see everything fully disclosed.

Simple errors do not breed suspicion and are made by every fallible human being.

The odd decision of the NZX not to mention Credit Sails was made even odder in that another broker, who made the exact same error, was fined $30,000 and the unsold security, Babcock & Brown, was named.

One imagines the broker who made the Credit Sails error must be quite pleased its fine was smaller, but surely there should be transparency about the error.

-------------

Details of the Genesis offer should reach the public and us within a day or two.

I speculate that it will be an instrument similar to the NZ Post issue of 2009 (another SOE), which proved well suited to most investors seeking a reasonable rate of interest from a Crown-owned entity.

If the issue is at 8% or thereabouts, pays interest at that rate for several years, and appears to have a natural life of say 10 years (whatever the legalese says), it will be used by many who have been trapped in falling short term bank rates.

One hopes that this issue is available within the next week or so.

--------------

Today marks the end of a 26 year era for us. Projects Resources Ltd, owned by my family, will no longer own our broking and investment advisory business.

Chris Lee & Partners Ltd will own the business, with Mike Warrington sharing ownership. For the meantime, my family will have the largest interest.

Clients will not notice any change yet and from July 1 there will be no significant changes in our “broking” or “class service”, which account for nearly all of our business.

But specific “personal investment advice” will be more formal, and not available from anyone who is not an authorised adviser, from July 1, 2011.

Projects Resources Ltd will continue to operate, simply as a family investment company.

Chris Lee & Partners Ltd will continue to offer free information, free research and free allocation to new products, but after July 1, will charge in the rare events of providing personal investment advice.

Chris Lee

Managing Director

Projects Resources Limited 

Footnote: We have access to a line of Fletcher Building 15 March 2017 capital notes with a 7.50% interest rate. The purchase price for settlement next week is approximately $10,170 per $10,000.

If you would like to purchase some of these securities please contact us with an amount and your CSN, then we will forward a contract note to you for settlement.


Taking Stock – Thursday 24 March 2011

The unexplained decision by South Canterbury Finance receiver Kerryn Downey, of McGrathNicol, to retain nearly 100 of the last-to-leave SCF branch staff for a full year, may soon mean little more than just another sad use of taxpayer money.

It now seems SCF is on the cusp of selling off its investment subsidiaries, Scales, Helicopters NZ Ltd and Dairy Holdings Ltd.

SCF’s commercial lending has now ceased, implying that someone like Kiwibank’s new finance company will take over Face Finance and any of the SCF commercial and business loan book that is not in disarray.

Personal lending is now done at dribble levels, raising the questions of the imminence of the sale of this ledger, and the wisdom of the retention of branch staff.

All of these parts of SCF may be gone within the next few months. The government’s cash might be put to better use further north.

These sales would leave remaining the controversial asset management team in Christchurch, headed by property developer Ian Thompson, who is seeking to deal with the property development loans.

There is controversy around this division as its processes have not been transparent to the public and have been strongly criticised by some who, in default, have had assets reclaimed and sold off. There has been widespread usage of extremely expensive third parties, described as “consultants”, an expense perhaps a legacy of 2010 when money was spent freely at the tax-payers’ expense.

Thompson, interestingly, has also had a banking background, joining the ex-Westpac clique who were partly, perhaps largely, responsible for the lending transactions that Thompson now strives to cleanse.

Sacked CEO, Lachie MacLeod, sacked COO Peter Bosworth and several regional lenders had careers in Westpac before becoming undistinguished lenders in SCF.

Thompson, of course, had no part in the disastrous loans that helped destroy SCF – his appointment came long after the loans had been made.

The Westpac connection is perhaps a strange coincidence and is unlikely to be linked to New Zealand’s arguably biggest-ever banking error, the Westpac loans to the Albany City project, which cost Westpac more than $100 million in write-offs, cost some Westpac staff their jobs, and led to a knock-on effect that hurt thousands of investors.

Of course none of the SCF lenders, or Thompson, were still at Westpac when Westpac made its ill-fated loan to Albany.

Whatever the cause of SCF’s cancer, it is now obvious to everyone that the company disguised the idiotic lending to some of New Zealand’s most notorious serial defaulters, it disguised its related party loans, even using the brother-in-law of a director as a nominee, and it blundered terribly when it put its recovery into the hands of sharebrokers Forsyth Barr and Samford (Sandy) Maier Junior.

One hopes that at some stage the public will learn of the content of the meeting in an Air N.Z. lounge, when a workable plan that might have saved hundreds of millions was ditched on the basis of very poor advice.

One would also hope that the report that Maier wrote leading to his appointment as CEO, will also be shown to the public.

Maier, the only CEO I have come across who was paid on a daily basis, visited the Timaru hub of SCF three times in nine months, providing a definition of leadership that John Cleese might one day explain.

I am not sure that Downey has achieved his leadership goals, either.

SCF, it now seems, has cost tax-payers in a true sense the thick end of a billion dollars and has cost many people their reputations. Many will feature on “never-again” lists; some, unfairly.

It might just be speculation, but any orthodox analysis might conclude that in its last nine months, SCF was propped up by credit rating agency collaboration, by Treasury optimism, by investors who were wilfully misled about the real state of the progress being made, and by Allan Hubbard’s now cruelly exposed blindness to sane practices.

All that nonsense, an orthodox analyst would calculate, combined to cost the tax-payer close to a billion and denied SCF’s duped preference shareholders of any truthful basis on which to make sale or purchase decisions last year.

The SCF crash produced a gravy train for a wide range of performers, some of whom I judge to be mediocre, or worse.

One hopes the McGrathNicol receiver, Kerryn Downey, wraps up the mess soon, putting an end to the bills tax payers are paying, and allows this disaster to pass into folk lore as an example of what happens when a sequence of bad decisions never gets broken.

-------------

SCF’s receiver, Downey, astonished many by contracting SCF’s leftover staff, many of whom had been unable to find another job, with attractive bonuses for those who would sign up for a year. Some have been paid six figure salaries to keep seats warm, while the sale process was undertaken.

Many of these people have had little to do; some have forgotten the bonus and moved on, bored witless by the absence of ongoing business, a situation exacerbated by the Christchurch earthquake.

With SCF’s break-up imminent, it made no sense to keep on lending. One imagines that the loan books will be discounted, so every good new loan written might be included in the discount.

Why lend tax-payers’ money and then sell off the loan to a new buyer at a discount?

Perhaps it would be a neutral decision if Kiwibank Finance Co Ltd becomes the buyer.

That might mean the tax-payer giveth, and the tax-payer taketh.

Kiwibank Finance, now formed, wants to do plant and equipment lending, (sure to be a busy market around Christchurch) and probably should do consumer lending, where there is now very little competition, and margins will be wide.

If Kiwibank bought SCF’s Face Finance, a business lender that made few errors, and SCF’s consumer finance book, then the discount it negotiated with SCF’s receiver would be irrelevant, Kiwibank being tax-payer owned.

Perhaps Kiwibank Finance will find the rare gems still in SCF who bravely soldier on in a company that has been leaderless for years, if by leadership you mean visible and inspirational.

Kiwibank, basically entrenched in low-margin home mortgages, might convert to a bank that is focussed on growing the economy, if it quickly builds its finance company arm.

----------

Regrettably, it is probably too late to prevent Geneva Finance investors from making yet another terrible decision that must surely produce a huge win for shareholders at the expense of debt investors.

Where, I asked last week, is Geneva’s trustee, Graeme Miller of Convenant? Why has he not intervened in the latest Geneva plan to switch investors into shareholders?

The moratorium was his idea! It has failed miserably.

At one stage shareholder activist Bruce Shephard was going to intervene to prevent the Geneva board from continuing to act for its shareholders, at the expense of debt holders.

Shephard, for reasons I do not know, changed his mind on the eve of the crucial moratorium meeting, and sold to the audience the directors’ proposal.

Geneva is again seeking concessions for its shareholders.

The answer should be a loud Gallic “Non”!

The Geneva problem always was some dreadful property lending, tucked into Stellar, a subsidiary, very wrongly assessed as having significant value.

There were also some other strange loans, still unexplained. They need some serious external examination.

Now Geneva has written down a wide range of consumer loans, though it may hope later to recover those. Its Christchurch consumer loans may be the focus of its provisioning.

Its call for a debt to equity swap simply diminishes the rights of debt holders if Geneva falls into receivership.

Even if Geneva survives, demand for its shares would logically soon plummet, if it is possible to plummet from a very low-lying start point.

One imagines the regulators will be watching closely to observe the identity of any party that later takes over the shares at the virtually zero prices that inevitably will follow the action proposed.

Frankly any investor agreeing to this new plan is not thinking.

The investors should let Geneva fail, appoint a receiver and look to other remedies should the debenture-holders not be fully repaid by the collection of the consumer loans, and the sale of assets. At very least the company needs some more weighting in independent directors, while it seeks to meet its debt obligations.

Geneva, Lombard, Hanover, Nathans, Dominion… What fine names were chosen for such detritus.

------------

Any time soon the High Court will be judging the directors of another failed finance company, the cynically-named Nathans Finance Ltd.

Nathans was not a finance company, in that it used investor money almost exclusively to fund its own jumble of assets, rather than use the money to lend to third parties. We discussed this repeatedly several years ago when we identified Nathans as a Ponzi lookalike.

Its chairman of directors was Roger Moses, a life member of the Institute of Financial Advisers, the IFA’s founding President, the founder of Reeves Moses Hudig, and the founder of Reeves Moses Investorcare, the contributory mortgage fund that collapsed well before the global financial crisis.

Moses was a financial adviser who, like Douglas Lloyd Somer Edgar, and Kelvin Syms, created a brand of products to sell to investors, rather than stick to selling conventional products.

Moses and fellow Nathans directors Donald Young and Mervyn Doolan now face criminal and civil charges alleging that these directors signed prospectuses that were untrue, while in their role with Nathans.

The Securities Commission seek declarations of civil liability of up to $500,000 from each director.

The criminal charges have sanctions including up to five years in jail and fines of a further $300,000.

Moses was found not guilty of somewhat similar charges after Reeves Investorcare failed, costing ASB/Sovereign nearly $20 million after it had bought the company before the collapse.

Nathans CEO John Hotchin, younger brother of Hanover’s Mark Hotchin, has pleaded guilty to charges and received 11 months of home detention, a penalty that took into account his guilty plea, and his offer of help to prosecutors of the remaining Nathan directors.

Moses, Young and Doolan have pleaded not guilty to all charges.

This case will be watched with intense interest by the directors of a large number of other failed companies beginning with Bridgecorp, Capital Merchant Finance, Lombard, Dominion and quite possibly many others.

All investors and all analysts, brokers and advisors will be pleased if, as a result of this new scrutiny, prospectuses and investment statements can be regarded in the future as being readable, accurate and complete.

It is a great pity that such action as we now witness was not initiated many, many years ago.

-------------

US investor Warren Buffet, whose homely ways and little homilies have captivated investors for decades, has just been repaid the US$5 billion he invested in Goldman Sachs during the global crisis in 2008, at an interest rate of 10%.

Buffet received interest and free options for shares.

Goldman Sachs has had the right to repay him early, subject to a $500 million penalty fee, putting an end to a deal that rewarded Buffet for backing the Wall Street giant when many would have wondered if Goldman Sachs could overcome the ridicule it faced for its involvement in the excesses that led to the global financial crisis.

Buffet backed GS when others were demanding extreme lending margins to lend overnight money to the severely criticised Wall Street monster.

His reward now is extreme. In return for his courage, Buffet, in total, has been repaid $8.7 billion for his $5 billion, a nice gain in two years.

Anyone who watched The Inside Job, in which Goldman Sachs former staff were fairly visible, might have wondered whether Buffet was wise, but the wily old bloke must have known something to justify his brave stand.

Former Goldman Sachs people remain a large influence in Washington. Perhaps Buffet banked on that.

----------

Two weeks ago I wrote of the issues raised by a professional fundraiser for small charities.

He had written to me, questioning the role of some international charities whose organisational costs eat up large amounts of donations, and whose bureaucracy can make the allocation of grants a slow and frustrating process.

To his credit a Red Cross’s executive responded, writing to me with a pledge that all money received would go to the needy, not to the Red Cross bureaucracy.

He admitted that the logistics of bringing in competent people to handle Christchurch grants had been a problem, and caused delays, but discussed the solution, which, by now, should be evident to all.

I applaud his willingness to enter this debate and was pleased to include Red Cross on the list of organisations we supported.

Another, quite different, avenue for giving came up unexpectedly through a retired client, who was helping others via her church.

Her account of her personal losses in the quake was couched so selflessly that one could not but be moved by her urge to ignore her ruined home and help others with greater problems.

Christchurch has shown all of us just how many unselfish, fine people it has, very few of whom would consent to being identified for their goodness, let alone want that to happen.

These people are the ones to whom we should offer our badges, medals and community or national awards.

Let us hope that the day of the knighthoods for cash, have long gone – knighthoods should be for real people who get stuck in to helping others, not for those already privileged by financial reward who simply dish out what is often other people’s money.

There should be a few knighthoods (or equivalents) being aimed now at Christchurch.

Chris Lee

Managing Director

Projects Resources Limited

 

Footnote: The Chateau On The Park in Christchurch has been in great demand after the earthquake but it has hired me its boardroom on May 3 (p.m.) and May 4 (a.m.).

Any Christchurch clients or investors are welcome to contact me to arrange a meeting. There is not, nor will be, any cost for these meetings. At this stage I have 10 unallocated times.


Taking Stock 17 March 2011

 

With the NZ interest rates now well below Australian rates, and with Australian growth rates well above New Zealand’s, it is now perfectly understandable why New Zealand retail fixed interest investors would prefer to invest in Australian bonds.

In theory, N.Z. investors would get better rates, better security and be in a stronger currency – a three-way win.

Oh, if the world was so easy!

The truth is that Australian bond issuers usually focus on the wholesale market only, the directors of issuing companies refusing to accept the compliance and litigation risks involved in signing off retail offer documents. So there are very few bonds available at retail level, to Australians or New Zealanders.

N.Z. investors by contrast have literally dozens of retails offers available via the secondary market.

There have been some wholesale offers in Australia that later were offered in retail amounts but when that has happened, the parties who broke up the wholesale amounts into retail parcels have been vulnerable on compliance criteria.

At least one N.Z. bank and one American-based N.Z. broker has been fined for doing this.

The fact is that very few Australian issues have been available to N.Z. investors, Brookfield (a property owner offering mortgage-backed securities) and Healthscope being rare exceptions.

Brookfield, paying around 8.5%, has traded at a small premium in recent weeks and Healthscope, which pays 11.25%, has mostly traded at a premium, on the Australian exchange.

Another available offer was from Nufarm, formerly a N.Z. based company, whose shares sell at around A$5.00, though they were nearer A$15 when the Japanese giant Sumitomo bid for a 20% stake two years ago.

Nufarm produces sprays and chemicals aimed at pasture growth and crop protection, its focus being on helping the world meet its food needs.

It had a note issue five years ago, paying investors half yearly at 1.9% above the bank rate, resetting its rates six monthly.

It promised after five years to go through a unique process of re-assessment, potentially repaying investors.

After five years (November 2011) it will offer retail investors the chance to reset, by majority demand, the margin at which Nufarm can re-calculate its interest rate for the next five years.

Investors can demand to be paid up to 3.9% above the six month bank swap rate. My guess is that every investor will demand that margin.

Nufarm can then either pay the demanded rate or it can remarket its bonds at a lower margin, and, if successful, repay those investors who demanded a high rate and do not want to stay invested.

Nufarm has other options.

It can also offer investors new Nufarm shares, priced at relevant levels, i.e. if the share price in November is $5.00 then an investor owed $10,000 would get about 2,000 shares.

Another option is to default – that seems improbable for a profitable company.

There are other possibilities.

Nufarm could be taken over by Sumitomo, which would probably raise money in yen at cheaper prices and choose to repay debt.

Currently Nufarm securities sell at 72c (AUD) and pay around 7%. The current price includes some accrued interest (nearly three cents).

The market is pricing these securities as though it disbelieves that Nufarm will either pay a 3.9% margin or remarket the securities and repay in cash.

The market price implies Nufarm will issue shares.

If that occurs, as a Nufarm investor I would welcome the outcome, expecting that the shares will prove to be good value, but most investors are suspicious.

While all of these uncertainties are of some concern there is another key issue.

Nufarm, which has performed poorly (though profitably), is currently undergoing a strategic review, its strategies and its long-time chief executive Doug Rathbone, under the microscope.

If the review were to require Nufarm to sell surplus assets and maybe seek a replacement for Rathbone, the market, I suspect, would re-rate Nufarm positively.

Perhaps bankers might also regard change as desirable.

I conclude that Nufarm’s prospects are still okay and regard the current price of the securities as good value.

If one can buy Nufarm at 72c (AUD) and ultimately receive interest at a price of AUD six month swap plus 3.9%, then I would be delighted to collect the interest.

If one can buy at 72c and get either A$1.00 in November, or A$1.00 value of shares, that too would seem okay.

Obviously I discount the fear that there will be a default, and clearly there is risk. Also it is clear the overall market does not hold my view.

Note:   This is not specific advice to buy. These website newsletters are never to be regarded as personal advice.

Other options for those wanting AUD fixed interest include bank term deposits.

--------------

Of course N.Z. investors, fearful of asset price falls worldwide, need to find solutions, as many of the traditional options have gone.

Some years ago, investors trusted some finance companies to deliver better returns, putting their faith in their previous successes. Their apparently strong, audited balance sheets, their continued profit announcements, their credit ratings and the affirmation of regulators, trustees, auditors and brokers, encouraged investors.

Of those still in the game only Marac, PGG Wrightson Finance, UDC, Fisher & Paykel Finance and, quite unexpectedly, the lowly Broadlands company, are still supported, to any real extent.

Oxford Finance was also on that list but as discussed later in this email, is no longer wanting retail money.

The range of corporate/SOE/council bonds available in the last three years has replaced the finance company offerings, and some investors have sought out listed shares with higher dividends, like The Warehouse, listed property trusts, and others that appear able to pay out most or all of their profits in dividends.

The result of the investor demand, and low range of current choices, is that today the secondary market bond prices reflect excessive demand and inadequate supply. Prices are high, too high, in many cases.

There seems little value to me in buying at yields of 6.5% the securities offered by companies with BBB credit ratings, when AA-rated banks are offering similar long term rates.

Obviously if Genesis has a reasonable offer (in terms of covenants – that is security) then it will be popular.

When non-investors mock those who bought finance company debentures in the pre-GFC years, critics themselves risk being ridiculed.

All asset values have fallen. Investors who bought in listed property trusts have had huge capital losses. Those who bought high-yielding shares (like Telecom, The Warehouse) have had huge losses, and those who bought rental properties have hardly had a charmed run. Shares like Macquaries have fallen by a half, Lloyds Bank by 90%. Provincial Finance investors lost 8%.

After the recent fall in the overnight cash rate to 2.5%, it seems likely that bank short- term rates will be low for a long time.

Many investors will find short-term rates, being paid on their capital diminished by the GFC, will not produce desired income levels.

We are in tough times, with no risk free or easy options.

-------------

Last week The Dominion newspaper discussed with me the proposed Genesis offer, correctly quoting me as guessing that in a falling interest rate era, the Genesis offer may be at rates in the 7% - 8% range, rather than at higher levels.

The Dominion also said that I had discussed an “inferrable” bond which, at 8.5% for six years, was a standout in the market.

Of course I had said an “Infratil” bond was the standout. There is no such security as an “inferrable” bond.

I am relieved to learn that I am not the only person on earth whose aural organs do not improve with age!

----------------

When Epic, a PGC controlled fund manager, offered the public a chance to invest in an income fund which it would list within five years on the NZX, thousands of N.Z. investors supported it.

Epic bought a tiny holding in the giant Thames Water company in the UK and later bought a 19% holding in Moto, the UK company with a monopoly-like hold on motorway food/retail shops on the major motorways.

Both companies have produced good income and grown in value but both are now using profits to repay debt, and both have cancelled dividends.

Epic’s choices have thus changed. Epic can borrow to pay dividends – the banks might say “no” – it can cancel dividends, or sell up and repay the investors lured into an income story that is now a growth story.

A fourth option would be for the fund manager to borrow to buy out investors at par.

If the fund really is worth more than cost, as it implies, then the buy-out at par would be the honourable strategy and beneficial to remaining unit holders.

Epic’s chairman is Margaret Devlin, who has been a poor communicator, stiff, pompous and detached, in her written communication.

She has written to investors (I have a significant investment) saying Epic would consider selling Thames Water, then making a capital payment, and might consider using funds to buy out those investors who want to quit.

They have finally conceded that it is the scale of their debts and pressure from the banks that resulted in the cancellation of dividends.

My message: offer $1.00 per share to those who want to exit, because they need income investments.

Honour would be restored.

Macquaries and PGC, the key parties in these transactions, would make a giant leap in investor estimations by displaying such honour. Both parties rely on such reputation to meet their own growth expectations and their desire for more institutional support.

-------------

The unbelievable Japanese earthquake (1,000 times the intensity of the February 22 quake in Christchurch!) has terrifying implications for world trade, growth and confidence.

It may make redundant our decision to ask NZX’s soon-to-retire chief executive Mark Weldon, to lead a plea for world support.

Japan’s disaster may overshadow our request, but if we are to pursue this appeal to our trading partners then Weldon is a good choice to lead it.

He is a persuasive fellow, now well-connected in moneyed circles and will be seen as close to our political leadership, thus speaking with government authority.

We will all wish him luck.

Many of us will see this as his farewell from the NZX, where man management leadership has been unsatisfactory (leading to appalling staff retention rates) but where strategic decisions have been largely profitable.

Weldon, it is said, may have made enough wealth to want his next challenge to be in politics.

Politely, I would suggest that if that were to be the case, his best hope might be via the list, not via the common vote. He does not have the common touch.

The next NZX leader ought to have people skills and be focussed on proving to the public that its rules enforcement are aimed at improving public participation in share investing, and at making compliance for its members practical and effective.

New Zealand investors need a charm offensive at many levels.

-------------

Horowhenua investors will be sad to read that the well-performed local finance company Oxford Finance is to cancel its debenture issues.

Oxford, owned by a consumer electricity trust (Electra), lends on cars, motorbikes and similar items, with rare (and regretted) forays into property.

It has never failed to meet its promises and is exactly the sort of small, micro-managed finance company that should succeed.

But three major events have slowed it down, surprisingly the willingness of local investors to support it, not being one of those factors.

Firstly, the new regulations and the compliance cost have caused Oxford grief.

It would need henceforth to keep millions in cash, each million probably costing it $40,000 per annum, in a margin between cost of funds, and deposit returns.

Its required external “guards”, like auditors and especially trustees, are likely to double or treble their charges, given the new era of litigiousness.

Secondly, it has lost its BBB minus credit rating, as ratings agencies pare back their optimism, probably aware that they, too, face litigious futures.

And thirdly, the banks are now seeing small, well-managed finance companies as good homes for bank finance, at rates much cheaper than the total cost of retail funding.

Oxford has been offered a truckload of bank money at rates less than the headline retail rates it would have to pay investors.

The banks will take security, police the covenants, and monitor performance and will do all of this far more competently and efficiently than underpaid, under-skilled and under-motivated trustees have done in previous years.

[This is not a comment on Oxford’s trustee’s performance, whose efforts I do not judge.]

Oxford will repay existing investors on maturity or on demand if investors want early repayment.

I guess investors will be disappointed that yet another way of getting extra income has ended.

Sadly, there are not too many ways of achieving extra income at the moment, with few bond issues available, Genesis and Infratil being on the current agenda, with only one other known to be in the pipeline.

-------------

Geneva Finance collapsed four years ago, well before the global crisis, and succeeded in getting investors to sign up to a plan that protected the shareholders at the expense of the debenture-holders.

This never made sense and so it is no surprise that Geneva, has again found itself unable to meet its obligations, for the third time!

It now wants its debenture-holders and note-holders to agree to swap their preferred position for an equal position with shareholders. It will target its bigger investors seeking to herd them into a group that will enable the management to maintain their highly-paid jobs.

For heavens sake, the CEO David O’Connell is now paid $500,000 per year!

To me it is absurd that Geneva might ask those who are first in the queue (debenture-holders) to agree to write off their prior rights, so those last in the queue can survive.

Each and every Geneva debenture-holder should vote to call in a receiver and put an end to a company that has never shown respect for those at the front of the queue.

The whole process to date has been costly, lacking transparency, and poorly managed. Wealthy investors should stop the clock now.

Where is the trustee?

----------------

The predictable stream of scam offers to the public continues. The latest is an offer from ‘Energy Securities LP’ (sourced to Bernard Whimp again) to buy DNZ shares with payments over 10 years.

It tries to disguise its appalling value amongst the smoke and mirrors of comparing present values to future values.

The offer amounts to you lending them money to buy your shares.

I wouldn’t lend money to these people at all, nor drink with them, but if we apply a loan interest rate (discount rate) of say 20% then the present value of the offer is only $0.83 per share and you’ll note that the dividends go to the new owner.

If DNZ can continue to pay you 8 cent dividends for next 10 years the present (today) value of your shares is about $1.54.

Maybe they are testing Financial Advisers to see if they have successfully completed their exams, but you do not need such competence tests to judge this offer. It is rubbish.

The standard rule applies – unsolicited mail usually belongs in the rubbish and always requires advice.

If you have the energy, refer all such offensive offers to your local MP.

----------------

Yet another scam.... we hope the Securities Commission is watching this predictable escalation...

Holders of Dorchester property units have been offered 32 cents for their $1 units. Again this is a disgracefully low offer.

Unit holders are about to receive 7 cents back following the company sale of the Remarkables apartments and will shortly receive a report that describes the promising situation for the rest of the properties being managed (toward a sale).

Unsolicited mail, into the rubbish.

------------------

To our clients in Japan, and our friends there, we extend our thoughts, sympathy and care.

I hope New Zealand opens its doors, and homes, to those who cannot rebuild their lives in Japan.

Chris Lee

Managing Director

Projects Resources Limited


Taking Stock 10 March 2011

 

The re-creating of Christchurch will clearly be New Zealand’s priority over the next several years, the availability of money being the least of the problems.

Much bigger issues will be the need to measure and then meet the aspirations of the Christchurch people, the need to minimise human cost in any such catastrophes in the future, and the availability of skill and equipment to minimise delays in the rebuilding.

Money must not be the issue.

New Zealanders have and are approaching the rebuilding of lives with generosity, stories abounding of wonderful people giving time, money, or both. We are digging deeply, as a nation.

What has been especially interesting to me is the divergence of views on how best to get money to the people who most need it.

The Adopt-a-family idea, available through a website, seems a practical way of helping individuals.

The Prime Minister’s fund, promising direct routes between money given and money received, also is likely to be popular.

Last week I heard from the 69 year-old managing director of a fundraising broker, who has served for decades in different countries, raising money for small and large organisations.

He pleaded the case for using the on-the-ground charities who work long after the television cameras are gone, and do not divert funds to their own projects, such as rebuilding their own premises.

My initial reaction to his first letter was slightly sceptical, so I asked him to declare his interests. He responded. 

His point was valid, and is generally well known. A large number of worldwide charities eat up half or more of all donations on bureaucracy, promotion and politics.

Of course, professional helpers need to be paid.

But many donors resent any budgeting applied to political behaviour.

Having said all of that, I am very sure even the cost-heavy charities will be doing their damnedest to get every possible penny through, with absolutely minimal form-filling or money diversion.

So money will be donated, in enormous quantities.

The Crown will introduce higher earthquake levies, perhaps bring in a special high-income tax levy, and offer a low-interest earthquake 10-year bond, if it is paying attention.

We might also use this event as the reason to have a multi-party agreement on such political issues as the N.Z. pension, any rorting of social welfare, and prioritising capital projects. Money saved will be a help.

Paying a universal standard pension might seem like extravagance. Asset and income testing makes sense to me, as a 60 year-old, providing the cut-off level is high enough to put value on carefully saved nest eggs.

A Minister of Christchurch might head a multi-party committee whose only goal might be action.

Money aside, the biggest issue will be access to skills and equipment.

New Zealand does not have the skilled labour force surplus to take up the demand we will face when rebuilding Christchurch.

If we are to repair or rebuild thirty thousand homes, a thousand commercial buildings, and repair hundreds of kilometres of destroyed pipes, and then rebuild the roads above the pipes, we would need far more skilled people and machines than the whole of the South Island could provide.

This shortfall explains why one of the South Island’s longest-serving and most versatile drainage, piling, demolition, and subdivision development companies, March Construction, has formed an immediate joint venture with one of the world’s biggest construction companies.

Fletchers will be doing the same; Downers, McConnell Dow, and Fulton Hogan will also be signing up international partners, I expect.

The unskilled labour requirement surely will not be a problem.

We ought to have thousands of able-bodied people keen to provide the sweat, in return for a better income than the dole provides.

Housing quarters for the required work force of skilled and unskilled people should be at the planning stage now. We will need a suburb of temporary housing, fully serviced, to attract the required labour force.

The army might also become a civil recovery force. (Civil defence has always seemed to me to be a great use of these well-trained people.)

Of course no-one knows how many Cantabrians will collect their insurance and build in apparently safer territory.

Insurers in Switzerland and Germany are not going to like the bill.

I have no doubt that there will be scores of buildings which prior to the earthquake had no future, but were adequately insured to meet the requirements of the lenders.

From this narrow perspective, the outcome might be favourable.

We all know the names of the ugly Christchurch “entrepreneurs” who oversold their property dreams, leaving the lenders with the nightmare of repossessing poor buildings, housing poor businesses, or taking over cynical projects.

The demolition of any such buildings, provided they are insured well, may well help the likes of The Canterbury Mortgage Trust, the receivers of Mascot and South Canterbury Finance, and the manager of Marac/PGC’s real estate fund, despite any predictable propensity to blame the earthquake for delays or shortfalls. I guess we will all be cynical about those whose previously undeclared problems suddenly are put down solely to the February 22 quake.

Those “entrepreneurs” who were undermining Christchurch with their self-focussed projects surely will never be funded again, so will not be involved in the recovery.

If the banks and non bank lenders ever again lend to the mix of nutters, bullies and liars that so exploited the lending industry in the last decade, then there should be no lending sector.

The public would not trust again any lender that accepts as security, “pre-sales” to real estate agents, friends and families of developers, or gormless speculators.

The days of an “entrepreneur” bribing a valuer to add a nought to his “valuation” or bribing a mate to “warehouse” a property in exchange for a suitcase of $100 bills, should never recur, least of all in Christchurch, where such practices were rife, and were supported by some lawyers, at least one valuer, some finance brokers, and, unbelievably, some moneylenders.

Christchurch rebuilt should be rid of all this sort of skulduggery. Those “entrepreneurs” should be driven out of society, anywhere.

My vision of the rebuilt Christchurch is a city united by its stoicism, redesigned to incorporate current scientific knowledge, user-friendly and rid of its underworld of those grubby, exploitative, greedy “entrepreneurs” whose failures never seem to lead to detention or poverty.

The Christchurch rebirth can be a triumph.

---------------

One of the reasons we can afford to rebuild Christchurch is our nation’s relatively low level of government debt. Our national debt is high because it includes household (bank) debt but our government debt is low.

Our terms of trade are fortunately high, with world demand for food growing faster than anyone forecast.

Not every country is in this position.

Consider the United States balance sheet.

The US sovereign debt level is $14.2 trillion, 220 times higher than ours, yet their population is not quite 80 times ours.

If US interest rates rose 1% from their almost zero level now, the US would use an extra $142 billion of tax just to pay that extra 1%.

If inflation became rampant through printing of money (quantitative easing), and US interest rates rose by 7%, the extra interest service cost would be a trillion, a sum that would decimate any budget, far exceeding what the US spends on social security, as an example.

Japan also has enormous government debt, largely funded by national savings, prepared to invest in Japanese sovereign debt for 10 years at 1.5%.

The bond investors will do this because they see Japan enduring deflation, so real purchasing power increases by the deflationary rate plus the 1.5%.

Japan spends a mind-boggling (more than 20%) of its tax revenues on servicing its debt, just at current costs.

But if Japan had to borrow at the cost of the AAA-rated French government, the interest burden to Japan would exceed their entire tax revenues.

This subject may be “grey” and may not warrant the attention of mainstream media seeking readership but it is hugely relevant.

It explains why we believe short-term rates, worldwide, will remain low for as long as confidence (and demand) is low – many years, we suspect.

It also explains my personal belief that it is simple sorcery to persuade people to subscribe to an investment strategy that assumes economies and thus equity markets can be regarded as normalised over any 10-year period, whatever the surrounding circumstances.

The world has never had to devise strategies to cope with the distortions extant today.

It is simply dishonest to preach that central governments know how to cope, and will solve the distortions in a forecastable time frame.

The world might need to modernise some of its portfolio theories that base themselves on an irrelevant paradigm.

------------

Confirmation that investors are preparing individual and group litigation against the trustees paid to oversee finance companies is of no surprise.

Research and investigation into trustee behaviour has been bubbling for two years.

Christchurch ex policeman, recent abseiler, now lawyer, Grant Cameron is seeking litigation funding, which, if available, would fund all the litigation costs in return for a share of any gain, in any class action he takes against trustees.

Cameron has said he is seeking funds out of London for his clients.

In itself this is curious as we have at least one financially robust litigation funder, based in Auckland.

One must assume the N.Z. funder does not see enough potential in these cases to be worth the risk.

There has also been an individual action planned by a Wellington lawyer on behalf of an ex-pat New Zealander who put $1.3m into Capital Merchant Finance, and is alleging that the trustee of CMF (Perpetual) failed to perform its task properly, perhaps basing his claim on the visibly inaccurate statements of CMF with respect to related party lending and prior charge funding, and the inaccuracy of claims about loan insurance, with Lloyds of London, whose policies CMF appears not to have understood.

In the case of CMF the trustee, Perpetual, has stated it would vigorously defend the charges and notes, sadly, that its current focus is elsewhere (Perpetual had large numbers of staff housed in the collapsed PGC building in Christchurch).

Without having specific knowledge of these cases, I restrict my comment to noting that trustees, like auditors, directors and regulators, had direct access to the truth in the finance companies and were paid to perform duties. Indeed all those parties could demand files, something no financial adviser or sharebroker could do.

It seems entirely logical that all of these parties, being paid for their work, should be tested to see if they failed in their paid duties.

Perhaps even the paid credit rating agencies might be included in the group that is scrutinised.

Cases have also started to appear against financial advisers.

The focus of these cases will be the duty of care owed by advisers to perform their role faithfully, using the best available information to them.

The range of these claims will be wide.

In theory anyone who took advice and lost money is a potential litigant. There is no constraint on who can bring a legal action.

Advisers who charged fees, and accepted brokerage or worse double brokerage, may be vulnerable to the claim that they charged for a personal skill level and failed but even those, like us, who charged no fees, might be potential targets.

Investors might claim that their risk profiles were misinterpreted and that advisers mis-assessed risk, even if directors, trustees, auditors, credit raters and regulators (by implication) were not identifying risk.

Some cases will be problematical, as it might prove difficult to re-establish the investment environment of 2004, 2005, 2006 and 2007, far removed from the environment today, and five-year old conversations are not always recalled with word-for-word precision. It is for that reason that many advisers will henceforth get signed minutes of conversations, before providing personal advice and will charge for such advice, at a rate that reflects the potential cost of litigation.

Interpretation of attitudes to risk is an art, not a science, and memories are not always photographic, indeed can be varied by emotion, or can be selective.

One recent case, already heard, awaits a judge’s finding and seems likely to be determined by the effort the adviser made to examine companies before recommending them.

Very clearly anyone freely recommending Bridgecorp, Capital & Merchant Finance or MFS would want to show why their research found no negatives in these companies or at very least that they conducted sensible enquiry.

Many advisers relied on the investment statements and the information given by company salesmen, and did no research beyond that. It is not clear how this justified a fee.

A judge may need to determine whether this constituted fair effort to equate with fees charged.

Advisers who did visit companies they used, did attend briefings, did perform analysis, and did perform regular reviews with company chief executives/directors may not necessarily avoid scrutiny.

I expect there will also be a focus on all brokers and advisers that sold the idea of growth funds, foreign shares, or any asset that has caused a loss, to investors who believe that when they invested, they did not accept there to be any risk of loss.

It is hardly logical to claim for losses in any one asset class but not in others. Worldwide, losses are in the trillions of dollars. Most investors understand this but there will inevitably be many who believe that higher returns are achievable without any concession to risk.

Of course it is absurd to expect an adviser or broker to underwrite every security they recommended. The fees for such an underwriter would be prohibitive. Advisers are neither prescient, nor omniscient. Instead some are not scient, at all!

It is reasonable to expect an adviser to perform research, to make a proper effort, to use proper processes (i.e. provide documents that properly discloses relevant information), and to earn his fees by providing reasonable care.

The judge’s findings in the recent case will be relevant, and the cases against the trustees, sometime in the future, will also be watched with great interest.

There will be many cases, against all the parties involved.

As for those company directors or executives who told lies, their fate will attract no sympathy.

When Nathan Finance’s director John Hotchin was last week sentenced to nearly a year of home detention some errant directors may have expressed relief, knowing that jail is much worse than home detention.

They should not celebrate too soon.

Hotchin was not charged with lying so his punishment should not be regarded as a relevant benchmark.

Of course if you re-read all of this item you would notice no mention of the real culprits in the finance sector meltdown – those conniving, cynical cheats who promised to repay, did not, and have fled the crime scene.

If they had all repaid their loans, as they promised to do, there would have been no losses, even in sub-prime loans. What made people believe their loans were of a non-recourse nature? (In the USA, non-recourse was the law, in most states, but such nonsensical law is not prevalent, elsewhere.)

It is a crime – fraud – to promise to guarantee an amount of money that you have no ability to repay. How often did this happen?

So when will these borrowers appear before the prosecutors?

------------

Last week the Taking Stock was emailed to the several thousand who request such a service but it was emailed as gobbledegook.

The technicians in Wellington who circulate it on our instruction, made a technical error which was not immediately detected, leading to a good deal of email traffic to us, and eventually a re-sending of the email, in a readable form.

We apologise for the error.

 

Chris Lee

Managing Director Projects Resources Limited


Taking Stock 3 March 2011

The global financial crisis, and particularly the failings of the NZX as a regulator, and the collapse of NZX–listed and other finance companies, has prompted a practical response from the regulators.

Financial advisers now must all be regulated, we must pass some exams and we are subject to new scrutiny.

The response is not perfect, but it has improved at each review and will soon be fully implemented.

Some sitting the adviser exams might want to debate some of the doctrine, and may regard some of the dogma as outdated or discredited, but most would accept that as a first response, the regulatory repair work is mostly sane, and far improved from the initial drafts.

In effect the Crown takes over from the poor work of the NZX and the Institute of Financial Advisers, both of which had behaved like lobby groups, rather than neutral upholders of fine standards.

The IFA, in particular, had lost its way, confused as to whether it should represent its members, protect investors, or try to regulate its members, somewhat feebly.

The new regulatory broom has swept the IFA into the cupboard of lobby group for its members, an outcome which at least removed doubt about its future role.

The IFA itself has clearly accepted this and is illustrating its commercialism with its recent decision to allow the Money Managers/NZ Funds Management group to run sessions at the IFA annual conference soon.

I doubt that any readers of this website need reminding of the pre-2008 behaviour of Money Managers or NZ Funds Management.

They were closely linked for many years and were jointly or independently involved in such rotten offers as First Step, Orange Finance, NZ Super Yield, various property syndicates or junk bonds (Metropolis) and were renowned prior to 2008 for their unwillingness to engage with analysts of their portfolios and results.

Indeed their secrecy was read by some as furtiveness.

The IFA organises conferences which allow its members to have fun, swap stories, and gain “educational points” to demonstrate commitment to their search for knowledge. They seek to reduce the cost of attendance for their members by getting sponsorship, inviting sponsors to talk to the IFA advisers.

The NZFM CEO Richard James has rubbed shoulders with his owners and Money Managers for 17 years and has written to me, about the new NZFM, which he says discloses everything.

To add momentum to his new strategy and to get access to IFA’s people, he has agreed to sponsor IFA conference sessions, presumably showing IFA members the “new” NZFM, rid of words like Money Managers and First Step, fighting for a share of a market that is dominated by players with no such history and, in my opinion, more impressive pedigree.

Today the market dominators are the big guys,  the banks, AMP, AXA, One Path (ex ING) and Tower and those smaller operators who put their name and reputation on the line like Carmel Fisher (Fisher Funds), Brian Gaynor (Milford), Gareth Morgan and the highly regarded South Island team led by Stephen Montgomery, at Aspiring.

The likes of Money Managers (Generation Wealth Management) and NZ Funds Management are unlikely ever to have pole position, or even be near the front line, given the enormous losses of First Step, jointly owned by people who have also owned NZ Funds Management, Gerald Siddell and Russell Tills.

The IFA whose new manager has declared a long friendship with at least one NZFM manager, has urged NZFM to sponsor IFA and to run sessions at the conference.

I believe IFA has made a poor decision, however well meaning NZFM may be.

The IFA conference attendees should pay their own way, accept no sponsorship, and prove they accept the need for educating whatever the cost. If a conference has any value the attendants should bear the cost of gaining that value. Surely if the IFA now believe investors should pay for advice to avoid accusations of conflicts of interest advisers should also pay for education.

NZFM, for its part, is entitled to seek out (or hire) salesmen and push its own product range, advertising and battling with other small competitors for a share of a market that is certain to be more discerning and avoid those who deliver poor results and charge ridiculous fees.

Lower yields for investors should mean lower fees; a new focus on cash and bonds must put an end to fees, based on portfolio size, of 1% per annum or anywhere near that figure.

Fees of 1% per annum are approximately four times higher than the annualised fees that enable broking firms like ours to exist.

Indeed if any advisory firm is charging 1%, or near it, to oversee cash or fixed interest, the firm is doomed, or it should be. One per cent fees would imply Olympic medal standards in asset selection, not selling of discredited or doubtful doctrine.

The adviser with a future will be knowledge-based, untied to any supplier, highly focussed on preserving or building capital in a way that matches risk to investor taste, delivering reliable returns. And his fees will be a tiny percentage of an investor’s capital, nearer zero than one per cent.

Such advisers will learn that an investor fears loss more than he celebrates victory, and will learn that there are investors who have access to hindsight and so expect advisers to have access only to prescience, and preferably omniscience, if they are to charge fees at 1% p.a.

Salesmen of a branded range of products will know they must restrict their selling to just that brand, and thus will be totally reliant on their head office to arrange their brands wisely. The old insurance salesman model will still work if the salesmen stick to a brand that Head Office underwrites with good practices and transparency.

The IFA conference organiser should contemplate these matters.

How does a brand “educate” a neutral adviser, let alone a roomful of them?

Judging by our email traffic, many in the industry believe the IFA has got this decision wrong. If the IFA is to provide any useful purpose for investors it must forget commercial sponsorship and seek to educate only those advisers who will pay their own way.

---------------

The Securities Commission and Nuplex have agreed to end their argument over the failure of Nuplex’s directors to advise the market that in December 2008 it might have breached its banking covenants.

The SC claimed this breached Nuplex’s obligations under continuous disclosure.

Nuplex has agreed so its shareholders will pay for the costs of the investigation and will create a pool of money so that some affected shareholders will be paid by all shareholders, if they can demonstrate loss.

The directors and chief executive will consider themselves told off.

If Nuplex failed under continuous disclosure obligations by not declaring something it might have declared, and is fined $3 million, what would be the fine for a company whose chief executive lied to the market, making claims he knew were untrue, and not alerting the market to information that was of monumental importance?

Would the company pay a fine, leaving its directors “told off” for not correcting the crass behaviour of the chief executive? This continuous disclosure obligation needs sorting out, and so do the penalties.

If the disadvantaged shareholders are going to accept the punishment while the directors and CEO are simply “told off” how will that incentivise better behaviour from people who lack the integrity to behave fairly, irrespective of incentives?

For many years the NZX has sought to put its listed companies on the high moral ground, alleging that continuous disclosure obligations ensured transparency and instant collection (and display) of relevant data.

The sizzle sounds inviting. The sausage was offal.

Surely the new market regulator will seize the moment and ensure any offenders, are, at very least, sidelined for some years, when the offence is wilful and cynical.

If we all want investor confidence to return, we must put in place processes that punish the cynical, the greedy and the cheats.

------------

When Simon Power resumes life, out of the goldfish bowl of politics, he will leave behind many people who are grateful for his energy, determination and intellect.

Investors should be especially grateful.

The new regulation of those who seek money from the public (issuers of shares or debt) or those who study investment offers and sell knowledge, and the regulation of those who sell product, would be farcical regulations were it not for Power and a small handful he assembled.

The original crew who tried to capture the process were in some cases poorly-performed, unknowledgeable, self-focussed or plainly daft.

There were some who saw the NZ Stock Exchange, or other lobby groups, as being the people who should reassemble the rubble.

They had created the rubble and benefitted at investors’ expense!

Power saw through this, listened well, and gradually those self-serving people were isolated from the process, prevented from hijacking the cleansing process.

Power has ensured that the Crown will be the regulator; the lobby groups will simply lobby; the misleading products and “solutions” (professional indemnity insurances, is an example) will not be misdescribed in future.

Power gets the majority of the credit for this.

He has done much in other areas; law reform an obvious example.

I met his father Ross Power some years ago. He referred to his son as a potential Prime Minister. This was no paternal skiting. It was a proud, but considered, view.

Simon Power could have been a Prime Minister, because he is bright, listens, is energetic, determined and task-oriented, rather than grasping, egotistical, bureaucratic and self-protective, as so many career politicians become.

Whatever he tackles next – Fonterra, the NZX, who knows? – will not lessen the impact he has had as a Crown Minister.

------------------

Many thanks to our Christchurch clients, from whom we have had more than 200 emails, describing their experiences since the devastating earthquake on February 22.

Clearly, our best response is via donations to Red Cross, the Salvation Army and the Prime Minister’s fund.

We are confident that the money will find the needy.

The staunchness and spirit of Cantabrians surprises none of us. Many of our clients offer hot water, laundry facilities etc to others. Those in need can contact us. We will be a conduit between the offerors and those in need.

What a great city Christchurch is, will always be.

What people!

Chris Lee

----------------

Kevin Gloag writes from Timaru

In last week’s Market News Mike reported on a recent survey by Barclays Capital which revealed that over the last decade cash and fixed interest have out-performed shares on a real return basis (after allowing for inflation).

These same performance trends will be evident in most KiwiSaver schemes, although these performances are measured over a much shorter period, with KiwiSaver only in its fourth year. The performance of shares follows the economic cycle so it is hardly surprising that investment funds that have a high weighting in equities have performed poorly in recent years given the major economic downturn between 2007 and 2009. Typically balanced growth and high growth funds have an allocation of around 50% and 70% respectively, in Australasian and International shares.

Mike’s article prompted me to check the fund performances of my own KiwiSaver provider. Their website records the annualised returns on the five investment funds they offer to Kiwisaver investors.

Their NZ Bank Term Deposit Fund (100% short term cash deposits and securities) has been their top performing fund over the last three years returning 4.92% followed by their Conservative Fund (25% cash, 25% fixed interest and 30% world fixed interest, 20% - other) returning 4.50%.

Their Balanced Fund (50% Australasian and Global equities) and Growth Fund (70% Australasian and Global equities) have returned 0.02% and – 2.38% respectively.

The returns are before tax and after fees and should surprise none of our website users, the results forecasted and inevitable.

Note: These KiwiSaver investment funds are index tracking funds (or passive funds) and some fund managers will outperform this management style, most of the time. Although numbers are growing it is difficult to understand why.

Many eligible New Zealanders are still not members of a KiwiSaver scheme.  I attribute this to a lack of information, understanding or guidance on the benefits that KiwiSaver offers.

Benefits include:

·        $1,000 government kick start

·        Up to $1,040 per year ($20 per week) dollar for dollar matching government contribution

·        Employer contribution of 2% of the employee’s gross annual salary

·        Some Kiwisavers will also be able to take advantage of a first home subsidy

This is not an advertisement for business.  KiwiSaver is a work based scheme and we do not get involved in KiwiSaver but if you haven’t joined a scheme I suggest you do so and contribute enough (either 2% or 4% of your gross salary) in order to maximise the dollar for dollar government matching contribution.

Note: Minors (under 18) do not qualify for the government contributions after the kickstart and employers are not required to make employer contributions to a minor’s account, although they may choose to.

Many employees have other work place employer subsidised superannuation schemes which adequately meet their retirement needs and may have decided not to join KiwiSaver. Some employers who offer complying superannuation schemes are not required to contribute to their employee’s KiwiSaver accounts.

My only criticism of KiwiSaver and other subsidised work place superannuation schemes is that in many cases there is insufficient guidance and education available to employees. Employers have a responsibility to provide work place support so that their employees have a reasonable understanding of their retirement savings scheme. I am sure this is why so many eligible New Zealanders have yet to join a KiwiSaver scheme and why many others don’t understand the characteristics of the fund that they are contributing to.

I know many cases of people approaching retirement who were caught out by the world-wide economic downturn which arrived in 2007. Many were members of very good work place superannuation schemes but had stayed in growth or high growth schemes right up to their date of retirement. As growth funds were the worst affected by the downturn they saw their life time work place retirement savings seriously reduced. Many didn’t realise there were different risk profile funds available and other didn’t even know what fund they were in.

We encourage all superannuation investors to understand the fund they are contributing to and in the lead-in to their retirement (last 5 years) reduce their exposure to the volatility associated with growth assets (shares and property) in order to protect their accumulated capital. Cash and fixed interest funds may offer lower potential returns at this time but they should protect you from major erosion of your capital.

I have much less enthusiasm for non-subsidised managed funds or superannuation funds. We think the evidence is that many such funds are slanted to the advantage of the managers, are badly sold, and in N.Z. have no economy of scale.

Management fees and poor performance can’t be offset against employer or government contributions. Losses are passed directly to investors while gains are often shared with the fund manager courtesy of performance fees.

We urge anyone using a non-subsidised scheme to cancel all future contributions, to exit the scheme at the first opportunity, and to save in a smarter way.

In particular, fund managers offer little value when investing in fixed interest and cash. I have a 13 year old experience in a non-subsidised managed fund taken out unwisely, but of my own volition, when I was contracting to the NZRFU. It wasn’t until I stopped paying into it (10 years ago) that I realised how poorly it was doing. We have been through high/low interest rate cycles twice in the past decade so it has had enough time to demonstrate its true performance.

The fund balance has grown much less than could have been achieved by having the money in the bank for 10 years earning 2% per annum after tax with interest compounded annually.

Some others, but not me, have done well from my contributions.

For me it serves as a good reminder that in the case of fixed interest and cash investments you don’t need a fund manager. Investing prudently in short term cash deposits, bank term deposits, government and local government bonds and corporate bonds can be easily achieved by most investors at minimal or no cost. – Kevin Gloag


This emailed client newsletter is confidential and is sent only to those clients who have requested it. In requesting it, you have accepted that it will not be reproduced in part, or in total, without the expressed permission of Chris Lee & Partners Ltd. The email, as a client newsletter, has some legal privileges because it is a client newsletter.

Any member of the media receiving this newsletter is agreeing to the specific terms of it, that is not to copy, publish or distribute these pages or the content of it, without permission from the copyright owner. This work is Copyright © 2024 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz