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Market News 20 September 2021

This report from the Buy Now Pay Later sector rather sums up the evolving attitude to debt:

Baby Boomers – 10% acknowledged they had made a late payment;

Generation X – 22%; and

Generation Z (Millennials) – 50%!

It doesn't sound like they're all that interested in repaying all that new debt we are layering up for them.

INVESTMENT OPINION

Funding – Continuing on from the opening information above.

You may not agree with the ocean of 'borrow and spend' strategies launched by governments around the world, including ours, but globally investors continue to confirm that they do not mind funding such extravagance.

The NZ government announced the launch of its first ever 30-year bond last week, catching up with the rest of the developed world (nice timing though, at the lows for interest rates) and demand for the bond was immediately a very impressive $12 billion.

The NZ Debt Management Office only wanted to issue a maximum of $3 billion, which they have done. The bonds were issued with a 30-year yield of 2.8575%.

81% of the bonds went to offshore investors, which is great news on two fronts:

Respect from international investors for the governance and monetary regulation in New Zealand; and

We didn't need our own central bank to buy them!

For the curious, here is the geographic split of our supporters:

Asia - 18.7%

Australia - 6.2%

Europe/UK - 30.0%

New Zealand - 19.0%

North America - 26.1%

And the split of investor type:

Asset Manager/Central Bank - 75.6%

Bank - Balance Sheet - 6.4%

Hedge Fund - 11.0%

Bank - Trading Book - 7.0%

It would have been more useful if the Central Bank line above was split out on its own to know how much support comes from their placing of foreign reserves.

The mathematically minded will have quickly calculated that this issue resulted in 75% scaling for bidders, a much tougher result than the recent corporate bonds from Oceania, ANZ and Wellington Airport.

An excess of demand is better than the opposite.

Investors of the world still love NZ and are happy to fund our liberal spending behaviours, regardless of the long-term integrity of such policies.

Dear children of the world, you should be watching these developments a little more closely.

Name and Shame? – It's a little less fun being a fund manager in Australia now than it used to be (see below), and new disclosure pressures are coming for NZ fund managers too.

Whilst increased disclosure obligations should benefit net return outcomes for investors, expectation setting is not as black and white as the regulators might hope.

The Financial Markets Authority (FMA) is described as 'road testing' a review process for fund managers fees and performance. I hope they develop a better mechanism than that which has emerged in Australia.

My opening reference to fund management being 'a little less fun' relates to a very aggressive name and shame stance being taken by the Australian regulator, APRA.

APRA is monitoring performance relative to certain targets and those who fall outside quite tight tolerances (0.50% p.a.) suffer from these steps:

Publicly named as Pass or Fail based on fees versus performance over the past 7 years;

Told they must write to their investors to describe the 'fail' status;

If they appear on the fail list two years in succession they must stop accepting new clients until performance improves; and

If they continue to 'fail' they must offer clients the ability to switch to another 'better' fund manager;

The concept of reducing the impost of fees on savers and investors is unquestionably commendable, however, the measurement filter is fraught and likely to result in a mix of unintended consequences.

I agree with some who are already pushing back, and justifiably highlighting the following:

Our returns have outperformed many other investment opportunities presented to investors by financial advisors both on a risk adjusted basis and long-term reward basis;

Investors are demanding a migration of assets toward environmental and social objectives (ESG) which currently deliver lower risk adjusted returns.

I also quite like the fund manager who pointed out that Warren Buffett fails the APRA test, and thus he would be obliged to contact his investors and encourage them to exit their investment in Berkshire Hathaway.

As we have mentioned occasionally in Market News, the world of finance is moving quickly toward measuring impact on the environment (cost or benefit) as sought by leaders endorsing the Recommendations of the Task Force on Climate-related Financial Disclosures.

So, is APRA guilty of endorsing the commercial imperative ahead of the needs of the planet, and the freedom of choice for investors? Neither stance is appropriate from a regulator.

In theory Emissions Trading Schemes (oops Australia doesn't have one yet) and the pricing of carbon should draw risk, reward and ESG closer together.

As I say, using a simple investment index performance parade to press for lower management fees is not as simple as APRA currently hopes.

Here's another thought:

If is it OK to press for lower fees based on underperformance by a fund manager, why is it not OK for a fund manager to ask for higher fees following outperformance?

My stance – I am OK with outperformance fees so a fund manager can afford the most talented staff in the market. However, the performance benchmarks need to be far more challenging than they are for most funds at present.

Some funds 'only' promise to outperform the 90-day deposit interest rate, which my children could do blindfolded, whilst holding down day jobs.

At the other end of the performance spectrum Morrison & Co (managing Infratil) receives outperformance fees after delivering returns in excess of 12% per annum (Hurdle Rate).

Yes, Morrison & Co stands to earn some additional reward by putting my capital at risk, but this is what I asked them to do, expecting that they will be better at the task than me.

They collect a base fee on the basis that I have contracted them to manage some of my money and if they can exceed a 12% hurdle rate I should applaud the announcement that I need to pay them more.

I think this results in me making a 'President for the Day' determination for the Financial Markets Authority:

Don't set out to suppress the potential for fund managers to perform strongly and earn well.

Focus your energy on defining appropriate performance indices from which fund managers are entitled to secure a range of fees.

Fixed Interest assets: Recorded inflation plus a percentage +/- certain standard deviations;

Property assets: Indices +/- certain standard deviations;

Shares: Global Indices +/- certain standard deviations;

Commodities: Global Commodity Index +/- certain standard deviations.

Outperformance Fees: High nominal performance relative to recorded inflation, and a rising low tide mark to measure from.

Fees must be discounted the following year if performance is below 1 Standard Deviation of average performance targets.

Fees payable can expand once performance exceed 1 Standard Deviation of average performance targets.

The Regulator can evolve the performance indices over time.

Public disclosure of normal and abnormal performance would increase.

Consequence – slightly higher investment performance, or slightly lower fees, but not both.

The other alternative, of course, is to self-manage your investments (excludes Kiwisaver) with the help of a financial adviser!

EVER THE OPTIMIST

NZ Super Fund continues to add billions (+$15bn last year) to the value of the fund and to outperform its performance benchmarks (+$757m or about 5.0% of annual result).

The NZSF has outperformed its reference portfolio by 1.24% which is very impressive over a long period.

I repeat my invitation to Matt Whineray (CEO) to open a Kiwisaver doorway and I am certain that he would attract a large following and contribute to downward pressure to fees charged across the sector.

ETO II

Travel providers are surveying their customers trying to understand their wants so they can plan ahead.

Global platform Agoda says interest in NZ is strong and wants us to be ready to serve from 2022 onwards.

This 'demand building' message is consistent with the confidence of airline owners, one of which tried to takeover EasyJet before Covid19 was resolved in Europe, and of the current takeover attempts being made for Sydney Airport.

Qantas is itching to get moving and Greg Foran has Air NZ well positioned so it seems to me that we are ready to deliver people down-under; are we ready to receive them?

While I am talking about the airlines, it looks like our regulators aren't yet ready for overseeing post Covid business, still resting on their 2019 thinking.

The Australian competition watchdog is concerned that a sharing proposal between Qantas and Japan Airlines will initially have a dominant position on the route and make it difficult for competition.

For goodness sake, surely we should be urging all businesses to take risks again and to move forward into the unknown, giving them a chance to profit. It wouldn't be hard to review such permissions annually as new data emerges.

Our fastest move forward, out of Covid economic complications, is to provide better business opportunities than we would otherwise tolerate from a regulatory perspective. It would be a much better release of value than some of the unproductive billions 'we' have been spending on artificial support mechanisms that have no future in a well-functioning economy.

ETO III – Vaccinations

Great news, we finally have our own focal point – 90%+ vaccination of those aged over 12 years of age (4.2 million people), which is approximately 78% of our total population (4.869 million).

It is a stretch goal, but there's no point in issuing an easy one. I'd prefer that the government also applied a time based goal to ensure two forms of tension are applied to vaccination progress (carrot and stick).

We are about to discover just how collegial our small population can be. The only countries to exceed 90% of total population are small island nations. However, Singapore with a population of 5 million and Spain with near 50 million have reached 82% of total population and are still climbing.

A lot of large nations, including China, have passed above 75% of total population.

Now would be an appropriate time for the Prime Minister to declare 'we've got this' but then take effective action to make it happen. Less talk, more do.

So, I'll record our progress here for a while because it is very important for our local opportunity.

NZ 1st Jab: 60.5% (total population) 69.8% (>12 years of age)

NZ 2nd Jab: 31.1% (total population) 35.80% (>12 years of age)

https://www.bloomberg.com/graphics/covid-vaccine-tracker-global-distribution/

https://www.health.govt.nz/our-work/diseases-and-conditions/covid-19-novel-coronavirus/covid-19-data-and-statistics/covid-19-vaccine-data#age

Global Data

Vaccination doses delivered – 5.90 billion jabs (42% Jab 1)

Total (recorded) Corona Virus cases – 227 million

Active Cases – 18.6 million (decrease)

Daily rate of new cases – 450,000 (decrease)

People in serious condition – 102,000 (decrease)

Daily Deaths (Covid related) – 7,000 (decrease)

Investment Opportunities

Wellington International Airport – issued its new 10-year bond last week, with two periods of 5 years (2026, then on to 2031).

The interest rate for the period to 2026 was set at 3.32%.

Thank you to all clients who participated in this bond offer through Chris Lee & Partners.

2 Degrees IPO – The company has confirmed that it intends to float on the NZX before the end of this year.

TRAVEL 

It is becoming possible to start making plans again.

Edward will be in Napier on 7 October & 8 October, Blenheim on 13 October, Nelson on 14 October and Wellington on 15 October.

Kevin will be in Timaru on 30 September (afternoon) and 1 October 2021.

Michael Warrington 

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