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TAKING STOCK 25 May 2017
 
IN COMMERCE, most companies assess their success on varied criteria, perhaps including market share, client satisfaction, nett profit, share price (in the case of listed companies) and, hopefully, on their achievement of social objectives.
 
In the narrow area of financial markets many different organisations have sought to offer ‘’awards’’ of ‘’excellence’’ by allowing companies to apply to a panel of judges.
 
Sadly these judges are often of doubtful acumen, often being the sort of people who seek this role as the pinnacle of their career, or to paper over their career failures.
 
The one type of award that does mean something is that assessed by clients, rather than some appointed panel, or worse, some foreign magazine, requiring an entry fee and advertising support.
 
Indeed our business is regularly approached by Asian magazines and organisations wanting to award our firm ‘’Financial Analyst of the Year’’, or ‘’Broking Firm’’ or in one absurd case ‘’law firm’’ of the year.
 
But an award voted on by clients means something.
 
For that reason the annual INFINZ awards are treated with respect, by those who work in capital markets.
 
To win the Fund Manager of the Year is a genuine compliment.  I do wonder about awards such as the ‘’debt issue of the year’’ but I do respect the categories that are meaningful.
 
The sharebroker of the year is awarded after institutional clients assess 20 categories of service, selecting the best in each sector, second best and third best.
 
The overall winner is decided mathematically, presumably awarding 3 for the best in each section, 2 for second and 1 for third.
 
Over the last 15 years, the stand-out performer has been First NZ Capital, which has won the award in 10 of these years, including this year, and in most years it has won the key category of best in research and analysis, its head of research Arie Dekker clearly heading an excellent team of, I think, 13 committed, skilled performers.
 
To win 10 times in 15 years cannot be a random result.  It must mean something.
 
This year the points awarded, on the 3, 2, 1 basis, left FNZC more than 50% ahead of any opposition.
 
I am unsure why, but neither JBWere nor Goldman Sachs were awarded first, second or third in any category.
 
FNZC’s long-term chairman Bill Trotter and his fellow directors deserve an accolade for having won such respect for so long.
 
I suspect their dominance comes down to a client first mentality, advice based on research, a constant pursuit of excellence, and a willingness to spend money developing global markets.
 
FNZC executes nearly 50 percent of all NZX trades, it is easily the prime marketer of our capital market in the large global cities, and it has no tolerance for the sort of big swinging hicks that overcharge and under-deliver.
 
Vigour, rigour and candour, as well as intellectual grunt make up the formula that all market leaders should exhibit.
 
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DESPITE FNZC’s dominance it is not represented on the NZX Board, where the sharebroker representation is from the retail firms Forsyth Barr and Craigs, whose CEO, Frank Aldridge, has recently joined the NZX board.
 
I suspect the market regulators and the bureaucrats get their input from FNZC from private meetings rather than NZX representation.
 
It is not a coincidence that FNZC is focussed on research and their relationships in places like Beijing, Hong Kong, Singapore, London, Frankfurt and New York.
 
The information flow between NZ and these important capital markets is essential if NZ is to win its share of their savings, enabling NZ to develop its infrastructure and fuel its business and social development.
 
Nor is it a coincidence that many of our leading fund managers gained their career impetus from FNZC, the likes of Matt Whineray (NZ Super Fund), Brian Gaynor (Milford), Murray Brown (Fisher), David Copley (Trafalgar) and Matt Goodson (Salt), all having had senior roles with FNZC.
 
Perhaps the NZX has a clear line of communication with the market regulator through its new CEO, Mark Peterson, who is another with FNZC exposure, at an earlier time in his career..
 
Of course the best known FNZC ex-manager is Chris Liddell, who has had a series of very senior jobs in global organisations like Microsoft and General Motors and is now doing his best to run what some see as the baby-sitting service for one Donald Trump.
 
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THE SALE of the Perpetual Guardian Trust Company to an Australian trust company may not mean much to New Zealand investors, given the fading relevance of trust companies.
 
But it does bring to an end an adventure whose origins were with the troubled PGC group and its eccentric owner George Kerr, and with a British visitor Andrew Barnes, who arrived here after an unsuccessful foray into wealth management with the Australian company AWM.  I am unsure why Barnes moved from Australia to New Zealand.
 
Kerr sold the PGC subsidiary Perpetual Trust to Barnes, with a plan not detailed to PGC investors, but arranged with Barnes, a fellow with whom I once locked horns.
 
The plan was based on growing Perpetual by borrowing money, some of it mezzanine finance, to acquire other trust companies and then list the larger entity, with Kerr/PGC to share the intended premium achieved by selling off the new entity, after achieving some synergies from mergers.
 
The first part of the plan proceeded.
 
Barnes, through his company Complectus, bought Perpetual, then the troubled trust company NZ Guardian Trust and later bought at least two minnows including Covenant Trust and renamed the group Perpetual Guardian Trust.,
 
With borrowings from banks, some with expensive short-term conditions, Complectus sought to list PGT in Australia and New Zealand and at one stage thought Goldman Sachs would achieve a listing. Not all, including the writer, saw value in this listing.  The plan has taken much longer to hatch perhaps because many share my view that the future of PGT is not certain.
 
New Zealand’s other large investment bank, First NZ Capital, perhaps did not see the same value in PGT.  The chance of selling the group to the public, always a prospect I opposed, fell away.
 
Barnes said that the broking world was keen on a float but those I know in that world did not share this enthusiasm, so a trade sale became the most probable outcome.
 
It was clear to me that this transaction had always been an arbitrage play, rather than a plan to build and own a trust company with long-term ownership stability.
 
I did share the view that the best possible outcome for Barnes was to find a trade buyer enabling all debt to be resolved and if a tail wind prevailed, left the Englishman with a shilling for his ambition and the risk he took in borrowing to build the group and for his time in merging the companies and cutting costs.
 
While he was working towards his exit, Barnes was rattled by a public claim from PGC that Barnes/Complectus ‘’owed’’ PGC $22m as its share of the gain that might (or might not) occur when the original plan (buy Perpetual, grow it, list it) was achieved.
 
Barnes denied there was any obligation to pay PGC $22m and at one stage counter-sued PGC/Kerr.
 
That argument was resolved, perhaps with a promissory note payable when an exit occurred.
 
If there were such a note, it must soon be settled, presumably after Complectus has repaid the banks, and the mezzanine debt.
 
Such an outcome might imply the group has sold for enough to repay debt, any capitalised interest, and PGC, implying an obligation of at least $100 million.
 
If the Australian buyer has paid out this amount, its view of its ability to succeed in NZ wealth management is massively more optimistic than mine.
 
I believe trust companies should exit wealth management, conceding that they have no competitive advantage and are unable to attract the sort of staffing skill levels that usually home in on niche managers like Salt, Devon, Harbour, Mint, Aspiring and Milford.
 
Trust companies, as I see it, should sell wills and should administer trusts and estates, when there is no other option, for example for an orphan or immigrant bachelor with no family or friends.  They should exit wealth management.  They are not needed.
 
If Barnes has sold for more than $100 million he has succeeded spectacularly, in my opinion.  Some guess he has made a huge profit!
 
I have seen precious little reason to believe that PGT will become an increasingly significant wealth manager. Indeed I foresee the reverse.
 
There is very little margin in selling wills, designing trusts and being the wealth manager of last resort.  Administration in these days is a low-value product.
 
There has been no disclosure of the sale price so what others guess is simply speculation.  Presumably the IRD will eventually know the outcome of this transaction.
 
PGC shareholders, no doubt, would be curious if this plan had achieved its lofty goals and might have wondered why their asset, Perpetual Trust, would have been the catalyst for a planned asset arbitrage.
 
Surely they would have wondered why the Englishman should have been involved, given he was by his own strong words, no friend of Kerr’s, and had no relevant history in New Zealand.
 
But the matter is now concluded.
 
I would hope the new Australian owner paid such a carefully calculated sum that any returns in the future will be satisfactory.
 
I guess the alternative – that the Australians paid anything like $200 million – might mean, by my guesswork, that the Aussies have a much higher level of optimism about trust companies as wealth managers than I imagine.
 
Either way, all will be applauding Barnes for his exit.
 
If he has had a windfall, it is probably best that the PGC shareholders never have to confront this news.
 
Arbitrage is not really a subject that brings joy to retail investors.
 
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IF IT transpires that the Australian buyer of PGT has paid far too much, our sympathy will be minimal.
 
PGT is spinning its greater value as being related to the use of the cloud to store wills and documents.
 
In this age this is hardly a unique long-term advantage, and very far from being a money-spinner.
 
PGT earns very little from drafting or administering estates and trusts, nor should it, as there is minimal value-add.
 
If it makes an extravagant profit it would be by persuading the public to allow PGT to manage the investments of wills and estates.  Managing money does provide large margins.
 
One of New Zealand’s best-ever trust company’s CEO last year told me that it was impossible for a trust company to attract top tier fund managers.
 
The best result for trust company clients is that PGT appoints the best external managers to look after PGT’s client money, and does not charge for identifying the best of these managers.
 
More likely, there would be double intermediation costs leaving hanging the question of what value, if any, is there in paying anything other than a token sum to a double intermediator.
 
My view is that if there is any value it is calculable in a flat amount, say $100- $200, not as a percentage of the assets of any trust or estate.
 
If the Aussies believe that PGT will grow its revenue from double intermediation, New Zealanders should address this by voting with their feet.  We have banks and some good fund managers with skills in managing wealth.
 
Perhaps it would be revenge on the Aussies, if it transpires that PGT has been mis-valued.
 
Who will forget the behaviour of Australian companies of past eras, when they arrived here and simply rorted New Zealanders?
 
For example the Australian property rogues Girvan Corporation bought the almost debt-free NZ property company St Martins Properties in the mid 1980s, used its cash and borrowing ability to sell to it various poor quality assets, stripped it of value and left the renamed ‘’Girvan Corp’’ as a corpse on the NZX.
 
Thanks for coming.
 
If PGT has been sold for a premium price that does not deliver on the optimistic hopes of its buyers, tears will not be shed in my office!
 
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POWERHOUSE has sold its tiny holding in the Ruth Richardson led Syft Company, realising around a million dollars.
 
I applaud this exit.
 
Powerhouse, an incubator for companies hoping to commercialise modern technology, is underpowered, lacking the capital it should be providing to the excessive number of companies it wants to support.
 
The million dollars from the sale of Syft will help.
 
What is not so encouraging is to note that Powerhouse, which employs valuers to guess what each of its holdings are worth, has sold Syft for around two thirds of what its valuers had guessed that Syft was worth.
 
In other words the Powerhouse model was not validated by the Syft sale.
 
One hopes Powerhouse advises its shareholders on the reasons for this negative margin between valuation and sale price.
 
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THOSE who have become agitated by the warnings of Goldman Sachs about a housing market collapse should relax.  Perhaps take an afternoon nap.
 
The suggestion that a 5 percent fall in prices is worthy of anyone’s attention is risible.  Prices of any asset, be it a house, a car, a share of a company, or a lump of gold, vary and almost never move only upwards.  Five percent movements can occur in any month. Ten percent swings are not too rare.
 
Goldman Sachs is the world’s highest profile investment bank.
 
It is akin to a money machine, an icon for those wealthy Americans, whose mantra seems to be that the acquisition of money is the reason we were put on Planet Earth.  Its social contributions are not obvious.
 
To be fair, Goldman Sachs spends much on research, it does facilitate deals, it is undoubtedly smart at finding solutions that can be defended in Court, and it manipulates American politics with breathtaking impunity, and astonishing regularity.
 
It seems half of the unelected people who advise Presidents are Goldman Sachs disciples.
 
Sorry to spoil the myth, but Goldman Sachs is not even smart at forecasting the future, let alone omniscient, unless the future can be manipulated.
 
Recall that just six years ago Goldman Sachs forecast peak oil production had been reached and that a barrel of oil would not be cheaper than US$200 per barrel, ever again.
 
It is US$50 and has been pretty well ever since.
 
Thanks to often highly risky technology, production and discoveries are increasing, while usage is falling.
 
Goldman Sachs three years ago forecast a slump in gold prices, putting the future price at US$1100.
 
It has been above that price by a significant margin ever since.
 
To those who seek to compare NZ housing prices with overseas markets, I suggest they have a kip, wake up refreshed, and consider these facts.
 
1.  We are unable to build even a half of the new houses that our growing population require.  Demand is obvious.  Supply is a problem.
 
2.  We are reluctant to rezone productive land for housing usage.
 
3.  We encourage wealthy people to come to live in New Zealand.
 
4.  Technology provides high-paying jobs in our big cities, resulting in a concentration of population in urban areas.
 
5.  Our public transport is poor, adding to the concentration problem, which itself is burdened by inadequate roading solutions.
 
6.  Younger people, new to the housing market, aspire to much better and bigger houses than the dwellings that were good enough for their parents 30 years ago.
 
7.  Officialdom imposes minimum standards that add to cost.
 
8.  Never before has the world so clearly signalled a long future of very low inflation and very low interest rates (An official global strategy).  Low rates enable the servicing of ever bigger mortgages.
 
9.  Many young women prefer careers to marriage and family-rearing, in effect adding to housing demand as individual ownership increases.
 
The likes of Goldman Sachs focus on the price of a house, relative to the buyer’s income, and note that the house is now 10 or even 15 times the average salary, whereas in the 1970s that ratio may have been four times.
 
One wonders why not much public discussion focusses on the income, rather than the asset.
 
New Zealand’s productivity remains moribund.
 
We are a nation that does not regard productivity as the definition of a good person, quite unlike, say, Czechoslovakia under Russian rule from 1948-1989, where ‘’unproductive’’ people like sportsmen, musicians, artists and poets were beaten with baseball bats, by thugs whose attacks were sanctioned by the Communist leaders right up till late 1989.
 
If we ever want to make our large city houses affordable maybe we need to increase our average incomes, through greater productivity.
 
(I often observe, covered in scrub or gorse, perfectly good land, easily capable of producing crops.)
 
Should we be recognising that we live in a highly desirable country, blessed with rain, topsoil and a liveable climate, now in reach of wealthy people who observe our tiny population and want to immigrate here?
 
Is our distance from North Korea, or even Trump, now a benefit rather than a handicap?
 
If you were selling out of London, or Chicago, or China or Johannesburg might you not consider as good value for money, a nice house in Auckland or Tauranga, or Napier or Wellington, or Nelson or pretty well anywhere in New Zealand?
 
Is not our housing market simply a reflection of too many people able to buy a house, and too few houses to sell?
 
Are we not just another option, behind Vancouver and Sydney perhaps, but way ahead of most English-speaking nations?
 
Why do we not focus on productivity, and set about lifting our incomes, so that the house/income ratio improves.  Perhaps that is a discussion for another day?
 
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TRAVEL
 
I will be in Whangarei on June 12 and Auckland on June 13 and Christchurch on June 20 and 21.
 
Kevin will be in Christchurch on 22 June.
 
Edward will be in Auckland on 26 May.
 
Edward will be in Hamilton on 7 June.
 
Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.
 
Anyone wanting to make an appointment should contact us.
 
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
 
Chris Lee
Managing Director
Chris Lee & Partners Limited

 
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