Chris Lee & Partners Ltd

TAKING STOCK 25 AUGUST 2016

THOSE investors who trusted the forecasts of analysts in Germany, first discussed here six years ago, will now be facing some important decisions.

The analysts in Europe told us six years ago that interest rates, already low then, would keep falling and that inevitably New Zealand would have to follow that trend.

To do otherwise would lead to a gross, and highly damaging, rise in our currency.  To do otherwise would lead to the world loading up on our interest rates, forcing up the value of our currency, damaging our export sector, jobs and ultimately damaging our tax base.

Globally, rates would not, and could not, rise without destroying British, Japanese, German and American banks and government balance sheets.  If the Federal Reserve in New York had to mark-to-market its multi trillion dollar bond portfolio, the Fed would have negative capital, were rates to rise by just two per cent.

I recall in particular the words of one German business leader -

‘’Do not believe any banker, any economist, or any central banker, who forecasts rising interest rates.  There is virtually no chance.’’

We go to Europe to listen to what private sector leaders believe.  We listen.  We understand.

The result has been that for many years those who have taken their advice from us have loaded up on long bonds, and on shares with sustainable dividends, and on perpetual bonds where the default risk seemed low and the discounted market price seemed excessive.

For many years there has been no need to change this.

But, sadly, the bonds are now maturing.

The problem is selecting where to reinvest.

New bond offers are plentiful but are not at 7%, or 6% or even 5%.

And new bonds are harder to access, and may sometimes in future be done by placements, rather than by distribution via retail brokers.

I expect there will always be some allocated to retail brokers but the logical move is for most issues to be captured by fund managers, pension funds, Exchange Trade Funds and by institutions such as insurance companies.

In particular ETFs are now buying corporate bonds, and also bonds in emerging markets, such as Argentina, Brazil, India and China.  They are chasing return at the apparent acceptance of risk.

Last week a US fund manager disclosed that his developed market bond fund yielded 0.56%.  His emerging market bond fund yielded 4.44%.

His clients, obviously unmoved by risk, were shifting to the EM fund.

Corporate bond issuers were lining up, to fill up on low rates.

The volume of corporate bond issues in the US in the past six years is telling:

2010-US$6 billion

2011-$7 billion

2012-$9 billion

2013-$21 billion

2014-$23 billion

2015-$60 billion

2016-YTD 50 billion (26B in July/August)

Bonds are being issued for longer terms.

Britain is discussing issues of sovereign bonds of 30, 40, 50 and 100 years.  So, too, is the USA.

Brazil already has a 100-year bond, as does Mexico.

Vodafone recently issued a 40-year bond, whose issue value was a pound, current value weeks later, nearer 1 pound 30p, thirty percent more, as rates keep falling.

Our European contacts react silently.  All of this, they say, was inevitable.

If bond funds are allocating huge sums to new issues, how will retail investors avoid being left out?  Recall also that many of the world’s most influential central banks are also buying bonds from markets.

We suggest when any new issue is announced, communicate firmly with whoever is your broker.

Will it be wise to keep investing in long bonds at 4%, or even 3%?

The continuing trend to negative rates, in so many countries, suggest that zero or negative rates are here to stay.

One US broker noted: ‘’The only reason to buy a negative coupon bond today, is because you think that tomorrow the returns will be even more negative.’’

Every experienced capital market participant will now accept that we have low, or negative, interest rates ahead of us for a long, but undefined time.

Only an oaf, with no market connection, would comment, as one Dominion Post columnist did recently, that we are simply at the low end of an interest rate cycle.  This is not a cyclical event.  It is a structural event.

Expert commentators will admit that no-one knows all of the unintended consequences of negative or zero rates.

The obvious consequence is that those with money will either attract no return on their savings, or will accept the risk of buying assets (or shares) at ever greater prices, in quest of yield.

Is this really a modern version of the bigger fool theory?  You buy expecting a bigger fool to buy later, at ever greater prices?

But is it foolish to buy a sustainable income stream at a level much higher than bank rates?

Who would you rather be – the person who lends to Fletcher Building at 3%, or the person who owns part of Fletcher Building which can borrow at 3%?

What do you do with your bank deposits when interest rates are negative? You pay for the privilege of their holding your money.  Will these concepts hasten the day when money is digitalised and cash is obsolete?

One of the world’s biggest reinsurers, Munich Re, has recently conceded, and has bought a secure vault in which it will stack the money which previously was held in bank accounts.

Is this the sort of unintended consequence we should expect?

Insurance companies, pension funds, and annuity providers are now finding investment returns do not sustain their ability to meet their obligations.

Some will go broke. (Does our media understand? See final Taking Stock item).

In Britain only a fool would now buy an annuity.  I suspect this is just as true in New Zealand. (Does our media understand!)

In the UK a 100,000 pound lump sum, nine years ago, bought a 65-year-old an annual pension of 7,500 pounds until death.

Today the figure is around 4,000 pounds, or 2000 each for a couple.

If you assume a 65-year-old will live for 20 years, what are you doing buying such a dreadful proposition?  You would be very lucky to even have your money back.

Negative interest rates have killed the concept.  Buy a vault!

AXA in 2014 worldwide earned 4% on its total portfolio.

Last year it was nearer 3.4%.  Take off fees and taxes, work out the nett return for risk, and ask yourself the obvious.

You can try to solve the problem as China has done, creating shadow banks that sell wealth fund management, and in current times will target up to 14% p.a return.

How do they seek to achieve this for their followers?  They lend to property developers and accept high risk.

Hanover?  Bridgecorp?  Money Managers?  Strategic Finance?

The IMF now says that China has USD 6 trillion invested through such high-risk funds and that 50% of the loans are facing peril – that is 3 trillion.

Three trillion is 30% of China’s GDP!  New Zealand’s finance company/ mortgage trust collapse cost us 2% of GDP.

(China’s total debt is 240% of its GDP, similar to the levels of Greece and Japan.  Corporate debt is 145% of GDP.)

For New Zealanders the outlook at the moment is less bleak, as our interest rates and equity market yields still deliver a positive real return, for as long as inflation is virtually nil.

Those who bought long bonds, discounted perpetuals, listed property trusts, or shares in companies with sustainable margins have done extraordinarily well since 2010.

And of course for those who speculated in investment properties, the capital gains have been extreme, as the world’s wealthy people seek to migrate to what they perceive are the best cities of the world, or at least visit them. (Auckland and Wellington are rated in the top dozen cities in the world.)

When Sterling fell after Britain signalled it would exit the EU, the number of Americans travelling to the UK rose 13% in one month (over last year’s figure).

(And the number of Brits wanting to immigrate to NZ doubled.)

Fortnum & Mason say their July sales were up by 20% (over last year) and in the first 10 days of August were up 16%.  Tourists like the cheaper currency.

Zero interest rates, vigorous changes in currencies, game-changing break-ups of trading groups and central bank determination to bring back inflation have led to unprecedented changes, which will have unintended consequences.

Does a NZ retail investor continue to do what has been the right strategy for the past decade – that is, invest only in NZ in a range of income-producing securities?

That is the question that few will answer categorically!

I guess those who are not trying to buy annuities or managed funds in Brazil and China, will talk to competent advisers.

 _ _ _ _ _ _ _ _ _ _ _ _

THE Royal Bank of Scotland, under pressure as explained previously, has recently topped up its capital needs by issuing 2.65 billion pounds of subordinated bonds, with coupons between 7 and 8 per cent.

A week later the Standard Charter Bank issued 2 billion pounds.

Both bonds now sell at premiums.

The ETFs and the pension funds are said to be the big buyers.

 _ _ _ _ _ _ _ _ _ _ _

EVIDENCE of a changing world is omnipresent.

In New Zealand in the 1970s, the chief executives of our largest companies were paid on average around five times the average wage.

Today the ratio is nearer 20 times.

But in Britain the FTSE Top 100 chief executives are paid 147 times the average wage in Britain.

(How long before the pitchfork rallies begin?)

 _ _ _ _ _ _ _ _ _ _ _ _

IN the USA 11 million people pay more than 50% of their nett pay in rent.

Manufacturers 30 years ago employed 30% of the workforce (today they employ 10%).

In 1946 one worker in three belonged to a trade union.

Today one in 10 belong to a union, and a high number of those in a union are school teachers.

The life expectancy of a white American without a university degree has FALLEN since 2000, the only demographic with falling life expectancy.

The analysts blame drug abuse and suicide, misery brought about by the decline of the middle class.

Over the past 10 years in almost all areas of the USA wages have fallen.

 _ _ _ _ _ _ _ _ _ _ _ _

NEW Zealand investors will recall with disgust the performance of directors, trustee companies (Perpetual, Covenant, NZ Guardian Trust, Trustees Executors, the Public Trust) and auditors in the lead up to the collapse of finance companies and mortgage trusts.

They might even have the same feeling of nausea when they recall the performance of corporate advisers, market regulators, the credit rating agencies and the financial advisory industry.

In the USA the sixth biggest bank collapse ever was of Colonial Bank, which for seven straight years before its collapse, was given a clean audit by PricewaterhouseCoopers (PWC).  Colonial collapsed in 2008/9.

Well, in the USA sometimes you get a response.

PWC is being sued for US $5.5 billion for an alleged audit failure.

The allegation is that its audit failed to note that more than a billion of balance sheet assets did not exist, or were worthless.

Perhaps one can explain why this sort of action has been rare in New Zealand by observing that, over here, most of the dreadful trustee companies appointed a major accounting company as the receiver of most failed finance companies.

Major accounting companies often had been the auditors of the failed finance companies.

Far be it from me to observe that Old Boy Networks are not unknown to exist in New Zealand.

Note: There is still some hope here.  The receivers of Capital + Merchant Finance are in court in December, suing CMF’s trustee, the appalling Perpetual Trust Company.

 _ _ _ _ _ _ _ _ _ _ _ _

OUR recent focus on performance fees, specifically those of the Pie fund, were generally welcomed by investors, though one investor, who has had a good run of nett, after-fee returns, wrote to me, believing it was unfair to focus on fees.

We now are assured by various fund managers, including Dunedin-based Forsyth Barr, that fees are being reduced, and performance fees are being slashed or abolished.

FB had two Australian equity funds which fed them performance fees if the fund achieved a stated return, in this case 10%.

If the ASX market rose 20% in one year and a poor-performing Australian equity fund rose only 12%, then a performance fee would be claimed for under-performing an index.

Great!

Given what I learned in Europe, I expect active managed funds will soon be priced at low fees, with no bonus fee potential, restoring all the return to those whose money is at risk.

Low returns generate a new focus on unfair charges.

It is in the interests of fund managers to address this.

Surely they do not want regulation of fees!

 _ _ _ _ _ _ _ _ _ _ _ _

WHEN investor protection law was being designed in New Zealand after the 2008 financial market collapse, primary focus was placed on directors, trustees, auditors, financial advisers and offer documents.

Surprisingly little notice was taken of the research that showed a high percentage of those who lost money took their information and ‘’advice’’ from advertisements and articles in the media, particularly the daily papers.

More than half of the money lost in mortgage trusts, finance companies and contributory mortgage funds seems to have been invested as a response to advertising and media items.

Yet nothing has been done to ensure the accountability of the media for the published information and opinion/advice that a large percentage of the investing public apparently trusted.

What you have, as a result, is arguably less dangerous than crooked business leaders or self-focussed financial salesmen, as the journalists achieve no visible benefit from offering slanted, or idiotic advice, so there is no evidence of specific monetary gain for the inept copywriters and journalists.

Perhaps that is not true of the generally dreadful columnists in New Zealand who conclude their offerings with the unread, and often insincere standard paragraph saying that all their offerings are not to be taken as specific advice.

Currently the only realistic sanction on our salespeople writing inept newspaper columns is that they inevitably lose any mana in the professional markets as soon as they propagate drivel.

It is the issue of poor journalism that is easiest to fix.

As an example the quite unimpressive British ‘’journalist’’ (I would say advertising copywriter), Jayne Atherton, recently wrote one of the worst articles seen in recent years, on the Stuff business website.

Mercifully it was culled by someone with common sense within a few hours.

Atherton, who I have not met, has been writing uninquisitive trivia for Fairfax for a year or two, having gained entry to New Zealand presumably because we have a shortage of advertising copy writers.

Fair enough.  There is nothing wrong with copy writing, done accurately.

Her Stuff guff was a thinly disguised promotion of a tiny inappropriate product which has been disproportionately promoted by journalists and columnists in Fairfax.

A cynic might ponder why.  Her article was an advertisement, not a news item, in my opinion.

Worldwide annuities are becoming an anachronism, their model destroyed by zero interest rates and a new focus on zero fees. (See earlier item in Taking Stock)

The annuity Atherton inexplicably sought to promote is a tiny aspirational product built on crowd funded capital, promoted by 100 financial advisers willing to gamble on a product with a B minus credit rating.  Those advisers are unwise.  B minus is a seriously deficient credit rating.

I have rarely met a competent journalist who would make Atherton’s error, even if in doing so, the journalist’s promotional guff led to advertising revenue.

It is well past time for the law to intervene.

Anyone losing money as a result of such braindead promotion should have a direct path to compensation.

Fairfax would very soon react to that possibility.

The Sunday papers in New Zealand are quite dreadful, as their sales figures suggest, in part because they have not the revenue to employ a range of competent, experienced journalists, certainly not in the area of business or finance.

Perhaps their lack of revenue explains their willingness to present misleading drivel, in the hope of attracting advertising revenue.

Investors, sadly, would be the victim, if the problem remains unaddressed.

 _ _ _ _ _ _ _ _ _ _ _ _

Correction/Apology

In Taking Stock published on August 18, I wrote that Norman Miller, a previous member of the Securities Commission, had regular long lunches with David Ross, on Fridays.

Miller has advised that this was not correct.

I wish to apologise to Miller for any distress that I may have caused by publishing this information which I accept was not correct, and I further accept his advice that he did not have a close relationship with Ross.

TRAVEL

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 - by appointment please.

Investors wishing to make an appointment are welcome to contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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TAKING STOCK 18 AUGUST 2016

 

THE world’s third biggest insurer, the US company Metropolitan Life, has put me right.

Under-funded pension funds are not the largest victim of zero-interest rate strategies and quantitative easing (printing money).

The pension funds are the second largest victim.

Ahead of them are the insurance companies like Metropolitan Life, which collectively will soon manage around US$35 trillion of assets, a high percentage of which is investments in sovereign bonds, and some of which is invested in corporate bonds, at low or nil interest rates.

The US insurer advises that the pitifully low returns from its fixed-interest investors are having several consequences, threatening the industry worldwide.

1.  Overall returns are far below historical levels and are destroying the ability of insurers to match claims with income.

2.  Insurers are responding by taking on risk that they cannot adequately quantify, such as becoming moneylenders, buying illiquid alternative assets, and increasing allocations to hedge funds, where fees are high and returns vary wildly.

3.  Low returns must mean much higher premiums and may force mergers between insurance companies, aiming to cut costs (and jobs).  (Witness the partnership with IAG & Warren Buffet.)

Of course the principal activity of insurers is forecasting the risks of events that result in claims.

Historical data, processed by mathematical minds (actuaries), provide a reasonably reliable guide on things like car accidents, medical problems and household robberies.

But claims arising from new phenomena, such as what many would call climate change, are harder to model and the speed at which modern medicine is stretching out the ‘’three score plus ten’’ forecast must be daunting for insurers.

Until recent years insurers like Metropolitan Life could assume that the money it managed would be invested to return an average of around eight percent.

With 60 percent now invested at 1.0%, or less, that means the remaining 40 percent would need to be invested at 20%, to get the average to a little above 8%.

Call in David Ross?

 _ _ _ _ _ _ _ _ _ _ _ _

THE insurance companies naturally concern all of us, and their falling profits and threats of raising premiums will draw even more attention to the underlying unprecedented market condition.

But it is the banking sector that must be restored, whatever the cost.

New Zealand investors are unlikely to have exposure to Italian banks, which need to raise tens of billions of euros to be restored.

Just a 1% fall in asset prices would wipe out banking equity in Italy, so parlous is their position.

The Italian bank shares in the past six months have fallen on average by 50 percent, its worst bank (Banca Monti dei Paschi) falling in value by 75 percent.  (Imagine Westpac shares at $7.)

Collectively the banks in Italy have funded themselves with retail deposits and bank bonds.

They have raised 200 billion euros from senior retail bonds, 100 billion from covered bonds, 300 billion from uncovered non-retail bonds, 36 billion of subordinated non-retail bonds and 31 billion from subordinated retail bonds.

The restoration of the BMdP bank seems to have been designed to save the subordinated retail bonds, the tail wagging the dog, fairly vigorously.

But it is in England and Germany that NZ investors will have their eyes riveted.

The Royal Bank of Scotland (RBS) has notched up 16 quarterly losses, aggregated to GBP 30 billion, out of the last 22 quarters.

The positive quarters tally up to about GBP 10 billion.

No dividends are on the horizon and survival is the strategy.  This year RBS expects to lose at least another billion pounds.

Barclays Bank is in similar disarray.

Lloyds is shedding 3000 staff and looking to close hundreds of branches.

Of course the 300-year-old Halifax Bank of Scotland is now a part of Lloyds.

New Zealanders will recall that it was HBOS, through its international arm Bank of Scotland International (BOSI), that deceived 20,000 New Zealanders in 2006-2008, who had invested in the grossly mis-governed Strategic Finance.

BOSI, and Strategic’s chief executive Kerry Finnigan, duped investors, claiming that BOSI had agreed to buy into Strategic and provide it with a $150 million evergreen facility to underwrite Strategic’s liquidity needs.

Finnigan, on behalf of Strategic’s directors, wrote to investors giving them this great news.

Of course BOSI had not committed to do any such thing.

Finnigan’s letter was a lie.  BOSI had made no irrevocable commitment to buy into SFL.  It did not.  Investors lost $300 million.

(It amazes me that neither the Securities Commission, nor Strategic’s receiver John Fisk at PWC, investigated the liability – potential for compensation – of this blatantly incorrect information.)

While RBS, Barclays and Lloyds are all in survival mode, the situation is at least as delicate for the large German bank Deutsche Bank, which is very well known in NZ.

Deutsche Bank (DB) came to NZ to share in the fees to be generated by the Government’s assets sales programme, signalled six years ago.

It tried but failed to attract New Zealand’s best investment bankers, eventually buying 50% of the retail broker Craig & Co, and arriving here as a separate investment bank, reporting to Sydney.

The Crown asset sales programme was to generate more than a hundred million of fees, and DB and Craigs set out to get their share, DB being used by Treasury to scope the programme, Craigs to distribute the shares of the companies, Mighty River Power, Meridian and Genesis.

The German bank’s implicit underwriting of Craigs’ needs gave the Tauranga sharebroker the grunt to compete with the market leader.

Deutsche Bank, of course, is not a bank, as we would define one.

It has, worldwide, only a limited retail operation, no real presence in credit card lending and very little repeat income.

In Germany it owns Postbank, which is a retail bank, but it now proposes to sell that for around 5 billion euro.

It proposes to lay off 9,000 of its 100,000 worldwide staff as it faces up to a mere 7,000 different law suits, many relating to mis-selling of sub-prime loans many years ago.

It has incurred huge derivative trading losses, and now is barely reaching the minimum level of capital required.

Its share price is around 12 euros after many years of trading at nearer 40 euros.

Last year it lost 6.8 billion euros.

It probably will survive, but without dignity.

No doubt it likes its investment in Craig & Co, a shareholding that may have cost it around $40 million, but now likely to be returning double-figure dividends, as Craigs has distanced its only retail broking competitor, Forsyth Barr.

The International Monetary Fund says of Deutsche Bank that it appears to be the ‘’most important contributor to systemic risks’’.

DB itself has left New Zealand, having come for the fees from the Crown asset sales, and found no other low hanging fruit, though it has kept its Craigs shareholding, at least for the meanwhile.

To put in perspective its problems, I list below the return on equities of nine large European banks, for the 2015 calendar year:

Banco Santander – plus 7% (Spain)

Credit Suisse - (minus) 6% (Switzerland)

Commerzbank – plus 2% (Germany)

UBS – plus 11% (Switzerland)

Credit Agricole – plus 6% (France)

BNP Paribas – plus 6% (France)

Societe Generale – plus 6% (France)

Barclays – plus 1% (UK)

Deutsche Bank - (minus) 10% (Germany)

DB forecasts its 2016 year will return minus 860 million euros, a big improvement.

 _ _ _ _ _ _ _ _ _ _ _ _

THE conclusion of New Zealand’s Crown asset sales programme also preceded the unlamented exit from New Zealand of Goldman Sachs’ broking business, leaving behind a tiny team, toothless without distribution capacity.

Goldman Sachs had tried and failed to acquire New Zealand’s best leaders in broking, and now has a silent presence only through its part ownership of JB Were, also owned by National Australia Bank (owners of BNZ).

Its role in the asset sale programme was awful.

GS was tasked with co-managing the first sale, that of Mighty River Power.

It sold tens of millions of shares to offshore investors during the issue at the $2.50 listing price, but in the days after the listing, most of those shares were sold on the market, at a small profit, swamping the market’s liquidity and undermining the share price.

Of course certain goofs in Parliament were also guilty of destroying the share price.  It was the clowns in the Beehive who led to the discounted prices that were required to sell Meridian and Genesis.

The politically treacherous tomfoolery undoubtedly cost the tax-payers billions of dollars, Meridian and Genesis both being sold at cut prices because of the stupid threats to undermine the companies.

Meridian shares were sold by instalments at a total of around 60% of their value, and Genesis shares were sold at a price of around 70 percent of their value today.

The missing billions ended up in the hands of gleeful fund managers and those investors who were not put off buying by the amateurish advice offered in newspaper columns or by the amateurish behaviour of various politicians.

One could hardly blame Treasury.

Tasked with implementing the sale after the government interpreted its election success as a mandate to sell, Treasury wisely scrutinised those who wanted to advise on the sale.

Forsyth Barr was excluded from advice roles, following its disastrous role in ‘’advising’’ on the South Canterbury Finance recovery, and Treasury tidied up some of the boards of the power companies, or appeared to do so.

For example Sanford Maier Junior, who was CEO of SCF, retired from the Mighty River Power board to pursue other interests.

Goldman Sachs, First NZ Capital and Macquarie all played roles in selling the assets, with all brokers, including Forsyth Barr and our own company, distributing the shares.

Many of those interested in buying the shares were heavily scaled by Treasury, in favour of overseas shareholders, most of whom sold out for a quick shilling after the listing.

Presumably Treasury felt there was a need to accommodate the foreign investors, either to ensure there would be ample sellers after the listing, or to ensure the issue would be fully subscribed.

Goldman Sachs and Deutsche Bank have come and gone.

All those who were scaled but still bought some shares have benefitted from dividends and from the extreme discount necessitated by the political skulduggery.

The Crown, in effect, gave away a couple of billions to add some spine to our sharemarket, and to generate some cash that might otherwise have come from borrowing.

I doubt any will lament the exit of the investment banks that targeted the process.

 _ _ _ _ _ _ _ _ _ _ _

HERE in Berlin, Deutsche Bank’s woes are the subject of the day.

Its share price suggests the bank’s assets are worth just one quarter of book value.

I guess the biggest unknown is the quantum of the fines that DB will attract.

As well as the derivative losses, and the 7,000 lawsuits, it faces an investigation into an alleged 10 billion euro of suspicious trades with Russia, with whom banking is now barred.

If interest rates rose, and led to falls (or wipeouts) of sovereign bonds (e.g. Greece, Italy etc.), then DB would have no future.

I am told that, for that very reason, interest rates will enjoy no significant rise for a great number of years.

(If a bond issuer pays no interest and does not have to repay for tens of years, there is no reason to write off any holdings).

I observe that Vodafone is now raising money for 40 years (FORTY!!) at less than 4%.

Lower for longer seems to be the mantra on interest rates.

 _ _ _ _ _ _ _ _ _ _ _ _

EVERY fair person will feel some sympathy for the victims of fraudster David Ross but Justice Clifford’s decision to favour a retired broker, Duncan Priest, looks to be sound.

Clifford took about nine months to make his decision to award to Priest about $2million, concluding that Priest had invested his wife’s money in a separate fund, not related to the Ross pooled funds that defrauded investors.

The only surprise in Clifford’s decision was the extreme time it took him to reach his decision – nine months!

Either he is over-worked, found the issues involved extremely challenging, or he is a one-finger typist, and a lazy one at that.

I guess he is over-worked and that in the scheme of things he saw this as a low priority.

Priest had been a gypsy broker, in the 1980s a partner of the disastrous Renouf Partners/Natpac broking firm that cost its clients multi-millions, because of the administrative incompetence of the partners, and their lack of wealth to reinstate their losses.

He then worked for Eoin Edgar at Forsyth Barr, establishing their Wellington branch on a car yard in Cable Street, and then moved to McDouall Stuart, where his interest in the Toronto Exchange and its mining shares drew him a small following of investors seeking miraculous returns.

At MS he also worked with penny dreadfuls like Glass Earth, Mowbrays and ultimately Diligent.

At some stage he put his wife’s money into Diligent shares that had fallen in price to just a few cents.

Diligent was later saved by the invention of the iPad which converted the Diligent electronic board paper concept into a useable product.

Its shares soared to at least seven dollars, so the $100,000 Priest invested through Ross rose in value to ‘some millions’.

Priest was a friend of Ross.

He and Falcon Clouston, the latter a previous member of the poor-performing Securities Commission, had regular long lunches with Ross. 

Perhaps they were mining enthusiasts and wine drinkers.

Nobody has explained why Priest needed a nominee company under Ross' management, indeed why he needed a nominee company at all, in which to place his wife's shares.

Diligent shares were NZX- listed, not Toronto- listed.

Whatever the reason, Priest's wife's shares became caught up in the Ross fraud.

I doubt that, like Queen Victoria, she was amused.

If the liquidator of Ross' fund, John Fisk of PricewaterhouseCoopers, sold the shares believing they belonged to investors in Ross, Priest would now be entitled to those proceeds, based on Clifford's ruling.

Two million dollars is a lifetime fortune and should surely provide for an ample retirement.

The Ross victims will be sad that two million has gone from the pool but will be hopeful that Fisk claws back large sum from those previously paid out by Ross, using other people's money rather than the fictitious profits that pathetic Ponzi scheme thieves always claim.

Ross and Priest were also connected to the South Canterbury Finance founder, the late Allan Hubbard, who frequently was invited to join them in sub-underwriting placements of penny dreadful stocks, based in Toronto and New Zealand.

Hubbard was also a believer in miracles, a soft touch for penny dreadfuls.

Curiously, Hubbard's investors benefitted from Diligent's meteoric recovery, but that victory was rare.  Most such dreams turn into nightmares.

One hopes that never again, will the process Ross was able to shield, be repeated.

The Securities Commission judged Ross to be kosher.

During its formative days the Financial Markets Authority was alerted to Ross' shenanigans but it took some years to nail the fraudster.

Today a Ross-like character would find it very difficult to obtain a practising licence.

Similarly the likes of Money Managers would never again be permitted to buy time on a ghastly Radio Pacific programme and con tens of thousands of listeners into believing in their fairy tales.

And one would hope that all investors are aware of the improbability of mining stock miracles, managed furtively without supervision.

TRAVEL

Kevin will be in Dunedin on Friday 26 August.

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 - by appointment please.

Investors wishing to make an appointment are welcome to contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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TAKING STOCK 11 AUGUST 2016

WHEN the new British Prime Minister, Theresa May, in her first remarks upon being promoted, warned that capital market practices must change, she was probably doing what all clever centre-right politicians do.

She was leaning over to appease the centre-left voters, demonstrating flexibility in her thinking.

Perhaps she was also reacting to a newspaper article that has sat many capital market leaders on their backsides.

Imagine the response if a vegetarian lobby group put out a media release that claimed beef and lamb produced better and healthier lives.

Imagine if a Greenpeace magazine advocated nuclear testing in the Antarctic.

Would either be more surprising than the Wall Street Journal, a daily paper dedicated to capital markets, producing an article proving that investors get far better rewards from companies that do not pay the highest executive wages!

The WSJ had analysed results, linked them to the declared levels of executive pay, and discovered that investors get at least 50 per cent better overall returns from companies whose executives are not in the top fifty per cent for executive pay.

Remember, this is The Wall Street Journal, the preferred source of business opinion for the likes of Goldman Sachs!

The WSJ research shows that the lower paid CEOs over the past 10 years, led companies whose overall shareholder returns (dividends plus share price gain) averaged around 220%, whereas the companies whose CEOs were in the top fifty percent averaged returns of around 130%.

Perhaps Britain’s Theresa May might send out copies of the research to those UK companies that still believe that ridiculously high pay is offset by superior performance.

Note:  It is possible that the past 10-year returns were influenced by the fall in oil prices, bank share prices, and that those companies, like Berkshire Hathaway, where CEO pay is more measured, have had stellar performances.

The WSJ research must still be a catalyst for a capital market review of a whole lot of self-serving practices that are seen by ordinary investors as simply stealing.

My guess is that it will soon be standard practice to have a shareholder structure that determines executive pay, and also corporate ‘’sponsorship’’.

I do not imply that the structure would be a subset of the appointed board of directors, as it often is now.

It may be a group of shareholders, appointed by a show of hands at an annual meeting that interacts with the board, but has the power of veto.

Surely no such group of shareholders would ever allow the sort of abuse that has become commonplace in Britain and the USA.

(With thanks to the NZ public company chairman who sent me the WSJ research)

 _ _ _ _ _ _ _ _ _ _ _ _ _

MY comment on British pension problems was sent off the day before I learned that Britain is to conduct an enquiry into pension performance, focussing on a company with a NZ connection.

The inquiry will look at the appalling performance of Coats, noting its success in selling assets, repaying shareholders but not solving the 360 million pound deficit in the company’s pension fund (according to The Financial Times).

It seems highly likely to me that the British parliament or the courts will soon be changing the way companies can determine whether to prefer shareholders or pension fund dependants, when the companies allocate surpluses.

Given the growing number of under-funded pension plans, it seems very likely to me that there will soon be dividend pool reductions, and pension plan top-ups.

For highly profitable companies, this may be achieved without excessive pain.

For companies battling to make a profit, this may entail asset sales, with funds being applied to debt and then pension funds, resulting in sharp re-rating of the company’s value.

Lloyds Bank, announcing a massive 3000 staff reduction, is essentially downsizing its assets, presumably happy to reduce its market share, accept lower revenues, lower profits and lower dividends.

If it is actually alleging that those staff were not contributing to size, revenue and profits, then how good was the management that ever appointed the 3000 people to jobs?

 _ _ _ _ _ _ _ _ _ _ _ _ _

BRITAIN may delegate to its pensions watchdog the authority to intervene in the sale of companies where there is any negative impact on its pension fund.

Responding to the growing number of pension funds that are not earning enough to meet their pensions obligations, Tory politicians are contemplating law changes that require any proposed takeover to be preceded by a solution for pension funding.

Of course the core problem is that every pension fund must, by its own rules, hold British Treasury bonds, now yielding somewhat less than 1%, for a 10-year term.

No fund can average the 7.5% to 9.0% needed to meet pension commitments if something like a quarter to a half of the fund is invested at 1%.

One strategy being used is to offer pensioners a lump sum now, instead of an annual pension.

Another strategy is to top up the fund from company resources and then transfer the pension fund to a third party, usually an insurance company.

Sadly, neither of these strategies result in the meeting of the undertaking made to pensioners.

It seems likely that pressure will mount on governments (tax payers) to top up the shortfalls, effectively underwriting the fund’s failure.

Investors in branded managed funds, or retail pension funds, might wonder why some pensioners might get government subsidies while others do not.

The pure solution is to let the pension funds deliver what they can, and let the shortfalls occur, or be subsidised by the owners of the company.

Pure solutions rarely coincide with political pragmatism.

 _ _ _ _ _ _ _ _ _ _ _ _

MEANWHILE, to minimise fund losses, many pension funds are dropping their fees to historically low levels, barely above 0%.

Indeed those ‘’average-chasing’’ exchange traded funds, likely to deliver nil or negative returns, are in some cases being offered in Europe at nil fees.

Financial advisors, recognising their inability to add value by selecting this form of investment, are now pondering how they can charge any fee at all to buy nil-return investments.

In this respect, New Zealand might be ahead of the world, as many of our financial planners no longer charge any percentage fee, but instead charge for appointments.

Hopefully the hourly rates charged reflect their genuine knowledge of securities and investing, their own experience working in capital markets, and their own access to new issues of securities.

The days when advisors could charge 1% or more, to refer investors to fund managers are numbered, if not already gone, from the offices of client-focussed intermediaries.

A fee implying value-add of more than a fraction of one per cent would imply a long successful history in the engine rooms of capital markets, and would be risible if the advisor had never had any such experience.

Britain, Europe and the USA now acknowledge this.

How far behind will NZ be?

Is this reality what has motivated the former Tower Sales Manager and former, for a brief time, Hanover Finance Group CEO, Sam Stubbs, to come out with a very low-cost Kiwisaver fund?

Stubbs, a pleasant young man, who cannot be blamed for Hanover’s disgraceful governance or Tower’s various failures, wants to steer Kiwisaver NZ into the giant US fund manager, Vanguard, which itself is cutting fees, and controversially, is intending to offer retail advice at a very low cost.

Kiwisaver fees will inevitably fall, as the sums invested rise, and as returns fall, reflecting the decade or more of low returns that are almost inevitable for passive fund strategies.

Stubbs is to be commended for speaking out on this matter.

 _ _ _ _ _ _ _ _ _ _ _  _

ONE new investment option I will NOT be accepting is the proposed offer of Perpetual Guardian Trust, announced by the British visitor Andrew Barnes to an uninquisitive media group last week.

Barnes borrowed the thick end of $80 million from the BNZ to buy Perpetual Trust from George Kerr, and then buy the other dreadful performer, NZGT.

The announcement of a public offer of around $150 million suggests that he has been unable to sell PGT to an industry buyer, such as one of the Australian trust companies.

That Barnes put these companies together, instead of Kerr, may be because Kerr was unable to retain the ‘’fit and proper person’’ criterion demanded by the Financial Markets Authority, as a requirement of a trust company owner.

Barnes succeeded and put this deal together, Kerr demanding a slice of the profit if Barnes succeeded in listing the group.  (Kerr controlled PGC, which owned the Perpetual Trust estate business).

Barnes is quoted as saying that PGT’s growth is linked to the writing of wills, for the growing number of elderly people.

Writing wills makes virtually no money at all.  A skilled lawyer, most unlikely to work in a trust office, would charge a few hundred dollars to write a will.

What Barnes may have meant is that the goal of PGT is to write wills and trust deeds AND convince the settlors and testators to allow PGT to manage the money for an annual fee.  The fees are where PGT will hope to make substantial profits.

My view is that this model is shattered.  Value-add does not equate with the fees.  The world is slashing fees.

When the offer is formalised I will provide in-depth information and opinion on the proposal.

My view is that it should be sold at whatever price is achievable, to an institution with demonstrable ability to underwrite its future in a very different world.

 _ _ _ _ _ _ _ _ _ _ _ _ _ _

A TARANAKI life insurance salesman has been kind enough to point out an error in my comments some weeks ago about the selling and churning of insurance policies.

I noted that anyone buying term insurance should insist that they have the option to convert this to whole of life, without any right of the insurer rejecting the change, such as might happen if the insured person developed a serious illness.

The Taranaki man advises that I am out of date (no surprise, here).

ALL term policies are now renewable without intervention, unless the premiums have lapsed, he tells me.

There is no longer an option to buy cheaper term insurance that can be cancelled because of illness.

He also advises that very, very few whole of life or endowment policies are sold today, perhaps less than 10, nationally a year.

Only the old dinosaur, AMP, still offers the product.

His view was that churning – the subject of my article – is a real problem, but that all insurers accept churned new clients.

My view remains that a churned new client represents a poor prospect and that the process of churning will cease when the insurance companies require an affidavit that the client’s best interest is the sole motivation for a change in insurer.

Perhaps commission on churned clients should be withheld for five years.

Thanks to the insurance man for bothering to update me.

 _ _ _ _ _ _ _ _ _ _ _ _

BECAUSE Malta is so small – 450,000 people in two islands, neither of which is much bigger than Waiheke Island – it is possible for visitors to connect with the island’s decision-makers.

Business leaders all have good access to the politicians.

Malta has made extraordinary progress in the last decade, creating a lifestyle that would satisfy most New Zealanders, based as it is on free hospital care, free education, generous pensions, excellent food, and co-operative living, in a very benign climate.

But the island has no natural resources – no water, no oil, very little arable land and no mineral wealth.

Its success is built on intellectual property.

It educates tens of thousands of European students, who want to gain their education in English.

It now maintains the air fleet for EasyJet as well as Lufthansa, because of its educational focus on engineering and mechanics.

It services a nice share of Europe’s financial markets and it is a world centre for internet gambling, a large and high-paying employer of software writers and software developers.

It has lured some of these big employers with a tax regime that is extremely tempting.

All companies pay a 35% tax rate but foreign companies meeting certain criteria involving the use of Maltese staff receive tax rebates of most of the tax paid.

As one software company owner said to me, what is a lake to Malta, might only be a puddle to Italy, so every industry attracted to Malta, by the skilled staff and the benign tax arrangements, is important.

Of course tourism is the key sector.

Malta’s 450,000 people host 4 million tourists a year.

During summer the infrastructure must cope with 1.5 million people each day.

New Zealand’s nearly four and a half million people host nearly three and a half million tourists per year.

To be as flexible as Malta is, New Zealand’s infrastructure would need to cope with 40 million tourists, an unthinkable proposition.

I asked a business leader how concerned he was about the exposure of a politician and a government department head to the Panama secret trusts, that were linked to New Zealand.

Wearing Panama hats was briefly a form of protest in Malta, and for a short period there was grave fear that secret ‘wealth’ had been gained by accepting ‘’commissions’’ from overseas companies that won large government contracts.

However, over time, the Maltese MP and departmental head have disclosed how they had acquired wealth, and the public satisfied itself that the Panama structures were probably used for tax avoidance, or for secrecy, rather than to hide criminal abuse of their public positions.

The current government has reduced unemployment from 8% to 4%, public debt is falling, average incomes are rising, inequality is not an issue, and crime is extremely low.

The business owner summed up by arguing that the government’s large majority, say 145,000 voters in favour to 108,000 voters against, would probably fall because of the Panama disclosures but the people of Malta have never faced such a favourable economic future.

(I am not sure that the Roman Catholic Church leaders would be as casual about the morality issues that were raised by the Panama disclosures!)

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

Kevin will be in Dunedin on 26 August.

David Colman will be in Palmerston North on 17 August.

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 - by appointment please.

Edward will be in Christchurch on 23 August and has one last appointment available at 3:15pm.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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TAKING STOCK 4 AUGUST 2016

 

IF you want to know why Britain and Europe now wallow in a deteriorating lifestyle, and rising misery, look no further than the arrogant prats ‘’Sir’’ Philip Green, and ghastly wife Tina.

Vilified now as the ‘’unacceptable face of capitalism’’ by Tory MPs and the media, these two are currently moored in their silly super yacht, equipped with a hairdressing salon, somewhere off the Greek Islands, having days before passed through Malta, where observers gestured with two fingers.

Their greed and corporate behaviour, their ‘’structuring’’ to avoid tax, and their complete indifference to investors, staff and previous staff, earns them the contempt they have attracted.

Green was awarded a plastic knighthood in 2006 by then PM Tony Blair, ostensibly for ‘’services to the retail sector’’ but more likely for large political donations.

He chaired and controlled the retail giant British Home Stores (BHS).

As its profits waned he stripped what was there, in a move not unlike what the Hanover directors allowed Watson and Hotchin to do in 2007.

Green extracted a billion or so pounds leaving the company entirely dependent on bank debt facilities (shades of Dick Smith?).

He also so under-funded the BHS pension fund that 20,000 people entitled to pensions are now dependent on his ‘’charity’’, his willingness to refloat the scheme!  It is in deficit by £570 million.  Lovely chap.

With the advice of Goldman Sachs, Green then sold BHS for what value it had left – exactly £1 and no pence.

He sold it to a former bankrupt, with no known skills in retail, at the suggestion of a fellow who himself was a convicted fraudster.

He left behind a sabotaged empire which duly collapsed, at the cost of thousands of jobs, leaving behind those whose livelihoods depended on the pensions they had earned.

Green and his wife structured their deals via a tax haven, so that what they had stripped created no tax liability for them.

His greed sums up all that is lousy about Britain and Europe.  He allegedly has a fortune of 3 billion pounds.  He is a psychopath.

Financial markets in Britain and Europe have hundreds of psychopaths sheltering behind corporate facades.

Those countries which defer to those with wealth, irrespective of how it is earned, are on a slippery track.

Those that ‘’honour’’ such crooks, because they hand over to politicians vast sums (that might otherwise have been paid in tax), destroy their relationship with normal, decent, moral citizens.

Those that do not prosecute such behaviour, encourage others.

The British are now contemplating reversing the plastic knighthood.

Green is saying he might look at topping up the pension fund for those who have retired but do nothing for those who are still available to earn. This decision should be made by a court.

If this is the ‘’class’’ system, or the ‘’political’’ system of Europe, small wonder that like the Roman Empire, it might be the architect of its own demise.

Small wonder angry, sick or religiously-dominated people are making their violent protests, perhaps under the guise of terrorism.

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

THE Tory MPs who branded Green the ‘’unacceptable face of capitalism’’ are plagiarists.

This phrase was created by the somewhat odd Tory leader, Edward Heath, in the 1970s and was used to describe the controversial public company Lonrho.

Lonrho, through its chief executive Tiny Rowland, supported by his royal director Angus Ogilvy and the former War Cabinet Minister ‘’Lord’’ Duncan Sandys, notified the tax authorities that it was seeking to create future revenue by bribing many Rhodesian black politicians, and thus was entitled to deduct the bribes from its taxable revenue.

The courts supported Lonrho’s plan. The City hated Lonrho.

Heath attacked Rowland and Lonrho, calling them the unacceptable face of capitalism.

The great story-teller Frederick Forsyth used Lonrho’s African interference as the basis of his best seller ‘’The Dogs of War’’.  Rowland sought to sue the novelist, alleging the book was rather too close to fact to be granted the shelter of fiction.

I had a fairly close view of all of this.

Rowland, at the time, worked on the 11th floor, Mahogany Row, of Cheapside House in the City.  I was one of his accounting people, on the 8th floor.

Rowland was ten times the man that Green will ever be but still would feature in any ‘’Scoundrels I have met’’ story that I would tell.

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

THE demise of BHS’ pension fund has much to do with Green’s theft of the BHS available cash flow but also much to do with a problem with pension funds that threaten social and political stability, particularly in Britain, Europe and the USA.

Indeed, if I were a salaried worker in these countries, I would be demanding my pension subsidy in a cash payment now, and would have nothing to do with the concept of allowing others to manage my future payments.

The defined benefit corporate pension concept is being destroyed by low, zero or negative returns in many large economies, and is most unlikely ever to recover.

In a sense it is why no-one respecting my analysis or advice would consider using a private annuity scheme in New Zealand, let alone such a scheme with impotent shareholders and a forlorn credit rating.

In Britain and the USA, pension funds always promised far more than was funded, and expected 7.5% to 9.5% annual investment returns to make up the difference.  The tooth fairy would deliver.

This naïve, some would say moronic, faith in the skills of grossly over-paid investment ‘’managers’’ is now shown up, in the harsh light created by zero interest rate policies.

The American analysts at the equivalent of our Treasury, and their private sector analysts, both now accept that investment returns for many years, at least a decade, will range from negative to plus 2%.

In Britain and Europe the analysis is the same, or worse.

The concept of getting superior returns by using low-cost Exchange Traded Funds (ETFs) looks like capitulation to the inevitability of zero returns. Why would you want the average, zero return?

Without returns private sector pensions are toast.

The public sector pensioners have one hope, as illustrated by Chicago, Illinois, where teachers , firemen and policemen are virtually ‘entirely’ dependent on a public pension scheme that is now unable to meet its promises.

Chicago could either declare itself bankrupt, and leave the pensioners to starve, or it could do what it just has done – use its ability to raise rates (property taxes) to drag in the shortfall, and keep paying the promised pensions for the next year.

It chose to increase property taxes.  Many houses have had their rates increased by thousands of dollars.

You can imagine the effect on home-owners.

If people rush to sell and move elsewhere, they sell in a fast-falling market, and risk negative equity in their home.

If they choose to borrow to pay the rates, interest on the loan may be low but borrowing to pay debts is a leap into a vortex.

Declaring bankruptcy would put politicians and bureaucrats out on their ear.

Nice problem not to have, would you not say!

Those reliant on private pensions have no such wonky-old lifelines.

There are 6000 private corporate schemes in Britain, of which 4000 are under water, to a combined level of a mere trillion pounds - that is 1000 billion pounds.

BT, the country’s huge Telecom provider, last year saw its fund deficit rise from 7 billion pounds to 10 billion pounds.

BT had diverted 3 billion pounds from dividends or capital expenditure plans to keep the deficit to 10 billion.

British Steel’s fund is 700 million short.

British Airways, now owned by International Airlines Group, has a total market value less than its pension fund deficit, as does the Dutch Postal company and the Royal Bank of Scotland.

Lufthansa has acknowledged an inability to solve the problem.

One wonders from where Volkswagen might find its billions to top up its pension fund if the various global parties offended by its emission-fraud keep dishing out multi-billion dollar fines.

Barclays Bank now pays more in top-ups than it does on dividends (as it should), raising the question of the value of its shares to those who want reliable dividends.

The Adam Smith Institute in Britain sums it all up nicely.

‘’Employees have been over-promised. A gold standard pension is not sustainable.’’

I spoke with the CEOs of two large British companies, who I met when I was in Austria.

Their view was that in future a new pension scheme will begin by getting shareholders to vote on the quantum of any company contribution, or a formula to establish that quantum.

The employees will then be invited to contribute or not, losing the value of the company contribution from their salary.

No-one will promise any investment return.

No-one will forecast future payouts from pension schemes.

Their fund managers might be robots, paid nothing, simply using algorithms to invest as programmed.

As for annuities, the two CEOs laughed.  Not bleeding likely!

One joked that it would not be long before a UK bank announced it would charge its clients for money deposits held by the bank.

On the day I write this, the NatWest Bank has written to its depositors advising that charges will apply to deposits held if the Bank of England lowers its Overnight Cash Rate from 0.5% to 0.0%.

_ _ _ _ _ _ _ _ _ _

THE British MPs aimed their fury not just at the despicable Greens, when their investigation into British Home Stores uncovered Green’s rampage.

At long last they spoke out strongly also about the behaviour of a corporate advisor, in this case the far from admired Goldman Sachs company (GS).

GS, you see, is the highly paid ‘’wealth manager’’ of Green, his wife and his companies.

It was keen to see Green exit BHS as was evident by scores of emails and phone calls between GS and Green, tracked down by the investigators.

GS denies it was an advisor to the contract but the British MPs lashed at GS, accusing it of cynicism, and giving the transaction the benefit of Goldman Sachs’ ‘’blessing’’.

We in New Zealand should not look down our noses for long when we consider this contemptible behaviour.

Indeed if we think back to the 1980s, we might recall how Chase Corporation (Reynolds, Francis, etc.)  bought out Farmers and soon raided its pension fund, using it to pump up Chase share prices. Chase and the pension fund soon became worthless.

Nor would we want to be too pious about dishing out plastic knighthoods to scumbags purely on the basis of their political donations, probably made with money diverted from what otherwise might have been tax liabilities.  We have done that too.

And who spoke up in New Zealand, from Government benches, when various corporate advisers raided the cupboards of struggling finance companies and, in one case documented in court, advised a corporate client to lie to the Securities Commission, in the interest of survival for a few more months?

Piety might be most unwise. We also have endured spineless politicians.

Tax-paying decent citizens and genuine investors are entitled to be protected, and part of that protection should come from Parliament, which is free to discuss all suspicions of despicable behaviour.

My view is that our High Court has been noble in reaching transparent decisions when corporate skulduggery is referred to the judiciary, and I also respect the work of the Commerce Commission, lately, the FMA.

But our media and our politicians have been pitifully weak.

Watching the British and Europeans bare their gnashers in recent days might be the catalyst for a new level of energy for all those who care.

Just four years ago, when our asset sale programme was being assessed, political donors believed they could ring Cabinet Ministers to demand favours for their companies

Surely no such gnome would try out such tactics again.

Indeed perhaps Cabinet should introduce a requirement to disclose and publish such calls, should they ever recur.

Perhaps that is what John Key means with his programme to get rid of rats.

_ _ _ _ _ _ _ _ _

WHEN wee Malta, just 450,000 people, the smallest of the EU members, managed to reduce its sovereign debt last year, I was an admirer.

Its debt, 63% of GDP, fell by $3 billion last year.

(By comparison, Britain, Italy, France, Germany and most others have debt levels that are more than 100% of GDP and rising).

The obvious response to Malta’s debt reduction was to applaud good housekeeping.

It might not be the right response.

Malta has generated some billions of euros, not by cutting costs or increasing its trading, but by selling its citizenship.

To attract wealthy immigrants, it is offering full access to its free education, its generous pension scheme, its excellent health system AND to a permanent low tax rate of just 15% on all foreign-sourced income.

In return the newcomers pay 650,000 Euros to the government, invest 350,000 Euros in Maltese government stock, build a house for not less than 350,000 Euros or sign an annual rental agreement for 16,000 Euros a year.

Money launderers, plastic knights and terrorists need not apply, nor should commercial dropouts from other countries.

So far some 6000 people have sought this deal, bringing in, I figure, some 3.9 billion Euro. How much did Malta repay in debt last year?

As well as the financial benefits the new citizens get to share 3100 hours of sunshine per year (I think Nelson gets about 2200 hours), and will live in an environment where cars are rarely locked, good food is cheap, history unfolds around you, and the sea is warm, clean and of no interest to sharks.

Indeed Malta’s history is constantly displayed.

This weekend they celebrate with a classical music programme, the defeat of the Ottoman Empire, which raided Gozo 500 years ago, but was defeated by those fighting behind the wonderful citadel, that still sparkles today in Rabat, the capital of Gozo.

They also celebrated the 75th year since the Italian Navy was beaten off, as it sought in 1941 to enter the Grand Harbour at Valletta, and scuttle the various merchant ships and submarines sheltering in the fantastic multi-winged harbour.

The Maltese gunners, aided by British radar, spotted the attackers in the night and butchered the fleet, with the help of British aircraft, energising the locals and giving them the faith that they could fend off the Italian and German attackers, who sought to neutralise the bunkering capacity of the post.

All of this history comes alive in this tiny country.

Yet its adoption of technology, its focus on engineering, medicine and education makes it a leader in many areas.

I can buy the international newspapers here within hours of their printing, Malta has the right to print them here, simultaneously with their printing at the place of origin.

Sadly, watching the Hurricanes live is more of a challenge!

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Travel

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 - by appointment please.

Kevin will be in Christchurch on 11 August and Dunedin on 26 August.

David Colman will be in Palmerston North on 17 August.

Edward will be in Christchurch on 23 August.

Investors wishing to make an appointment are welcome to contact us.

I return from Europe on August 17 and intend to visit Invercargill, Dunedin, Timaru, Christchurch, Nelson, Wellington, Kapiti, Auckland and North Shore to discuss the SCF progress at one meeting, and investment strategies at a second meeting.  Dates will be published and advertised in various newspapers when they are confirmed.  (I may include other cities if demand is sufficient.)

Chris Lee

Managing Director

Chris Lee & Partners Ltd

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