Taking Stock 24 February 2022

LET us be hypothetical. Imagine you are chairman of a nationally important organisation. Let us name it Fonterra.

A few days ago you have announced that after careful prolonged discussions, you will be delisting Fonterra, returning it to its previous cooperative structure and paying out the non-farmer shareholders at a premium price to regain your authenticity as a dairy farmers' organisation.

You will offer non-farmers bonds at a rate of 4.5 $1.00 bonds per share held, pay them 5.5% quarterly for ten years, and will then pay them out in cash.

You observe that you have the legal authority to take this action without consultation, though you soften this by saying that you have spoken to many advisers, and you are confident your decision will be well received by the masses.

Now, the situation changes. Suddenly there is a challenge requiring a different leadership skill.

A group of 50 non-farmer shareholders turn up outside your Auckland head office. They park their cars in the parks designated for directors and management.

They install barricades around the car park. They demand to talk to you, stating they will not leave until you talk to them and hear their views.

One shareholder carries an empty sack clearly marked 'melamine' and uses it as a rather thin mattress. (Melamine, of course, was a poisonous milk product additive, used in China years ago.)

Another has a bullhorn and repeatedly shouts that the Fonterra directors are behaving like little Hitlers.

The media surrounds them. One reporter breaks through your security and finds you, demanding an interview, prefacing her comments that the protesters will be camping outside the marble office indefinitely, until you meet with them and listen to their call, for you to reverse your decision to delist and escape from non-farmer shareholders.

Here is your problem. You have two choices. You have to decide how you will lead.

You can come down to the foyer and address the crowd, agreeing to meet with someone if the crowd elects a single spokesman.

You can empathise with the grumpiness but carefully and politely explain to the crowd your need to make a board decision, and the thorough process you have followed.

You can offer the crowd the promise that you will study any alternative ideas put to you in writing, providing they address the various problems that have to be resolved.

You can tell them that you respect them and their views and that you were wrong not to have had a wider group with which to consult. You commit to consult. You do not promise any particular outcome.

You then ask them to leave the car park in return for your promise to address their complaint, and to behave respectfully and legally, so that there need be no arrests, no need for anyone to face any criminal charges.

Your second choice is to issue a press statement, declining to meet with the crowd. You begin this by noting the threat of the melamine sack, observing that this is clearly a threat to poison children with melamine if you do not succumb to the crowd's demands. Such a threat, you denounce as an intent to commit a crime.

You observe the sign referring to a little Hitler and decry this as a clear display of Nazi name-calling and potentially a threat to your life.

From these ugly signals you deduce that the crowd as an unruly, ugly, rabble.

You tell them that you know their view represents the tiniest minority.

''I know this,'' you declare. ''My staff have analysed the social media which proves you are a tiny minority. To be precise social media records 9,000 responses condemning my decision and supporting you protest. These 9000 responses attract exactly 90,000 likes. That is 10 likes per response.

''But there are 100 responses applauding my decision, and they attract 1,500 likes, or 15 likes per person. Obviously the support for my decision comments out-numbers by 50% the anti-mob.

''And I know you are rabble and non-representative. For example, I have arranged for – pardon me, I am aware of – the content of the front pages of the NZ Herald and The Dominion Post for tomorrow and they will feature photographs of the melamine sack and the Nazi supporter.  Those photos are signalling to me that this protest is rabble which represents no credible opinion.

''So, go away. I will not discuss anything with you. I will turn the hoses on you and blast you with dirges.''

Hmmm.

Which approach sounds like that of an effective leader who has the experience and wisdom to deal with a problem and resolve it before it gets out of hand?

I am fairly sure which would be the response of someone with real leadership qualities.

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IN the case of our Wellington protest, a leader might tell the crowd that all in the public sector would be offered a resumption of their job as soon as the health issues are stabilised.

A leader might have told then when standing them down that if they resume unemployment when the crisis has gone, they will be back paid for the stand down period, at half rates.

Such a leader would be trying to avoid the diminishing of our health workers, our police, our teachers, our frontline people at a time when none of these organisations could afford to lose anyone.

A real leader might announce that the Government was abandoning the clumsily designed Redundancy Insurance and simultaneously would introduce an equivalent one-year health surtax, to help fund the health crisis.

Such leadership would be recognising that the Wellington protesters are by majority much-needed citizens. The protesters should go home as soon as they observe leadership. Those who remain and behave illegally should be arrested.

Leadership is judged not by presentation skills or media idolatry but by substance.

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THE Financial Markets Authority now has its first female leader after many years of failed manoeuvering by other female FMA executives who battled to gain the position.

The new leader is an ex-pat, Samantha Barrass, brought up in NZ but gaining relevant experience in Britain.

The first FMA CEO was Sean Hughes, a gutsy ANZ corporate banker who was tasked with the dual problems of pursuing the various crooks who destroyed the finance company sector, and simultaneously managing a coterie of female executives, several of whom wanted Sean's job. He also had to bed down the much-needed Financial Advisor regulations, and detach himself from the dreadful overhang of the FMA's predecessor, the gormlessly-managed Securities Commission.

I greatly admired Hughes' energy, his tenacity, and his endeavour.

When he left after five years, exhausted, he was replaced by Rob Everett, a Brit, a lawyer, a man then in his 40s, with experience as a market participant and as an adviser to regulators. Everett was married to a New Zealander and wanted to live here.

He grew into being much admired, wise enough to identify the most helpful market participants, astute enough to stay below the radar, tolerating one or two utterly hopeless directors, appointed by the Crown for all the wrong reasons. He probably regretted the short stays of some others who found the role frustrating, politicians and the public service playing games that were typically unhelpful, some appointments simply cosmetic.

Everett grew the organisation, achieved some victories in public, others behind closed doors, and lasted seven years, making considerable progress.

His excellent leadership skills, visibly conducted with gentle humour, kindness and wisdom, are now being used to restore the toxic culture that evolved at what was the NZ Venture Capital Fund, now known as NZ Growth Capital Partners.

Thanks for Hughes and Everett, Barrass has an easier task.

My opinion is that a prime task on which to concentrate will be the protection of the often green, and often naïve, new investors who have plunged money into crowd-funding proposals, and more recently, plunged money into the sharemarket, with no access to useful advice and too little regulatory protection.

Crowd funding is currently lightly controlled and has often been abused, investors losing money in glossed-up offers, the financial projections often being the only figures available for analysis. Projections can say what they like.

I accept that those who support these funds often put only a thousand or two at risk but the level of protection for investors is little more than the emperor's fine silk.

New sharemarket investors are slightly better protected by NZX-enforced standards, but a high, scary number of people investing do so with little or no knowledge. This year, more so than any year in the past decade, might punish unwise investors.

Sharesies and Hatch are the best-known platforms for these investors.

Sharesies was established by a group of people with good knowledge of technology rather than fund management.

They will be flabbergasted by their success.

More than 500,000, mostly young people, with no significant wealth, have registered with Sharesies to invest in NZ or overseas shares, often buying fractions of a share through the Sharesies platform. Their average wealth is alleged to be $4000, meaning Sharesies has attracted around $2 billion of newcomers' cash.

For perspective, that is about the size of the funds managed by the Kiwisaver fund Simplicity, and roughly the wealth of the few thousand people who invest via our company.

Most of the Sharesies investors are said to have a job, but no house, and no belief that, anytime soon, they might buy into the housing market. The sharemarket might be their option to build their wealth, passively.

Sharesies offers no advice. It is simply an electronic platform enabling people to buy small sums of shares, providing they accept that their purchases will be held in Sharesie's name, on their behalf.

The big attraction begins with Sharesie's simplicity, its user-friendly technology, the ease of buying $100 worth of a share (1.4 Mainfreight shares, for example) and its absurdly low transaction costs – virtually nothing.

Sharesies is likely a loss making business, but those who back it to become profitable one day are paying a price in recent cash issues that implies Sharesies is worth half a billion dollars.

By comparison, a company like Forsyth Barr which makes tens of millions of profit as a retail Dunedin-based sharebroker and fund manager, would likely have a market value of less than half of Sharesies. Figure that out!

I know which company the founder of Forsyth Barr's model, the late Eion Edgar, would rather have in his estate.

There are some issues that should interest the FMA and its new leader.

Is the supervision of Sharesies ensuring a transparent model for people who, by definition, are not experienced and not able to afford the losses that might occur through uninformed investing?

Why would anyone offer a service that loses money? Does that imply the end game is to sell a massive database? Or would Sharesies take advantage of its extreme value by listing its shares, probably to its often inexperienced investors?

Asking these questions will lead Barrass into asking a question about the current practice, worldwide, of replacing transparent, logical brokerage with hidden, perhaps deceptive, practices of not disclosing the true cost of intermediation.

She will then have become familiar with ''dark rooms'' where, worldwide, the likes of the ugly Goldman Sachs octopus makes enormous money from intermediation without any obvious supervision.

A dark room is the description for the global sharebroker practice of buying shares at the ''buy'' price, momentarily warehousing the shares and then selling them to clients at the higher ''sell'' price, often positing that there is ''no brokerage'', the intermediation gain being the fat between the buy and sell price.

If a dark room buys Air New Zealand for $1.00 and sells it at $1.03, its intermediation gain, not discussed let alone disclosed, is 3%, vastly more than fair market rates. (Forsyth Barr charges brokerage at no more than 1.5%.) Obviously, the dark room margin enables the sharebroker to claim that he generously has waived any brokerage charge.

Years ago I recall a bottom feeder in Wellington's sharemarket whose wine consumption was high, as the broker filled in lunchtimes while otherwise flogging off penny dreadful shares, often from obscure and dodgy stock exchanges around the world. Retired, he is not missed.

Tanked up, he used to boast to anyone who would listen about how dopey investors were focusing on brokerage charges rather than observing who collected the margin between buy and sell prices. Ha ha, tee hee.

He was right. Transparency leads to informed investing. A transparent, responsible banker displays the brokerage charge.

Barrass is most likely to be confronted with this subject.

At least one large share broker handles ''dark rooms'' with integrity. If our other users of this method display equal integrity, I would be impressed.

Barrass should be ensuring that integrity exists and that audit trails support such honour.

Another area for focus might be the integrity that separates underwriting obligations from the money managed under broker discretion, on behalf of individual clients. Underwriters should underwrite with their own money, not with their clients' money.

Many years ago, the CEO of what is now Jardens, Scott St John, proved to me how carefully decisions to invest client money were made using using discretionary powers, demonstrably in tune with the clients' particular strategies.

In recent years, many broker firms around the world have been charging high annual fees based on a percentage of client wealth (Forsyth Barr's fees might be 1%-1.3%), raking in hundreds of millions of annual fees, a fairly handy source of revenue (and bonuses).

Many also charge brokerage on each transaction. Added together these fees and brokerage are higher than they were in the wild west days, in many cases.

 Brokers also gain underwriting fees, sometimes basing their underwriting fees on the ''demand'' from clients whose decisions are made by the firm, which also happens to be the underwriter.

This has the potential to lead to client abuse when an underwriting bid is accepted for a greater sum of demand than actually existed. Say Get Rich Quick brokers had client demand of $20 million bonds issued by a bond offeror but knew that the offer might be overbid, and thus all bids might be scaled, say by half. So GRQ bids $40 million, hoping to get $20 million. If GRQ is using its own capital to bid in this way, effectively trying to ensure clients are granted the allocation they wish, then GRQ would be clean.

The hour before the bond offer is allocated, another better offer emerges, so bidding demand for the first offer falls and GRQ gets the whole $40 million, no scaling occurring.

Is there any chance that GRQ's clients might find they have been ''successful'' in being allocated twice as much as would be normal, thus eliminating inconvenience or embarrassment for the broker? Might the broker sell clients other securities to enable the client to have a double helping, thus solving the overbidding?

Barrass might find this sort of risk needs evaluating.

There will be ongoing needs to chase crooks, to focus legal minds on some of the awful property syndications which pay debt-like rates for equity-like risk, to nail the idiots who run Ponzi schemes and to micro-manage our generally greedy and inept trust companies, any dreadful receivers/ liquidators and any lazy auditors.

So Barrass will be busy.

I hope she will care about green, unwealthy, new investors, that there can be transparency brought into dark rooms, their intermediation costs will be fully disclosed, and that there will be audits of funds managed with adviser discretion agreements, ensuring this power held by brokers is not leading to dangerous behaviour by underwriters. She might also need to look at the absurd charges of index-fund managers and KiwiSaver managers.

Barrass, if she lasts the seven years Rob Everett lasted, will be an Iron Lady!

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Investment Opportunities

Genesis Energy Limited has announced to market that it is considering an offer of 6-year fixed-rate unsecured, unsubordinated green bonds to investors.

More details are expected to be released next Tuesday (1 March).

Any clients wishing to express an interest in this issue are welcome to contact us.

Adviser Updates

Michael Warrington retires on September 30 after nearly 15 years as a senior adviser, shareholder and director of our company. We invite any adviser interested in a move into our company to contact us.

Johnny is back after a seven-week period of parental duties (three little ones under four). He will burst into print next week!

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Travel

I will be in Auckland on March 14-16 and have three available meeting times on Tuesday 15 March and one time on Wednesday 16 March. I have hired a room at the Mt Richmond Hotel, Mt Wellington.

I will also be in Christchurch on March 8 and 9, but my diary is already full.

David will be in Kerikeri on Monday 28 February and in Whangarei on Tuesday 1 March.

Anyone who would like an appointment is welcome to contact our office.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


Taking Stock 17 February 2022

WE have all heard the sad stories of how we are losing the generations of professionals who would travel the extra mile to solve problems.

The GPs and District Nurses who in the 1960s would ride a horse into the bush to visit a bedridden patient, are now a distant recollection.

My aunt, the Principal District Nurse in Hawkes Bay and Gisborne, was once asked to drive into the bush near Gisborne where at the end of the track a horse would be tethered up.

''Just climb on the horse'' she was told. ''It knows the way to the whare where we live''.

Today such customer service would be rare. We are all most focussed on internet connection.

Yet I was surprised to learn how rare it is to find geologists who will live in the wilds while they go about their profession, hands-on.

Geologists, traditionally were men who like my uncle, a Doctor of Science, would venture into the wilds to advance their projects, sometimes living for weeks or months in primitive shelter, boiling a billy or preparing meals with a gas cooker. My uncle lived for six months like this studying earthworms and earning international honours for his work.

Today most geologists work in front of a computer, using models to calculate their findings, occasionally making brief field visits.

So it was a delight for me to stage a recent field trip looking at the drilling operation in a mountain range alongside one of two old-hand geologists whose standard wear are boots (or gumboots) and khaki shirts.

I learned that until the end of World War Two there were no women in NZ employed in geoscientific work.

In the 19th century women were legally banned from venturing underground!

In the 20th century there were debates about the ''moral aspect'' of a women working outside, by herself, or with a group of men.

Changes in the 1960s led to women entering the geosciences, the number of women in science growing to 4% of the scientist work force by 1992, to 17% in 2005 and 38% two years ago. 

The most recent breakdown of geologists in NZ that I can find (2018) revealed the following numbers of geologists.

                      Men   Women

Northland          6               0

Auckland       180             48

Waikato           63             18

Bay of Plenty   39               9

Gisborne            3               0

Hawkes Bay     12              0

Taranaki           24               6

Manawatu          3               6

Wellington       111             51

Tasman              6               0

Nelson                9              3

West Coast         6              0

Canterbury      105            42

Otago                66            21

Southland            3              0

Total:                636          204

Why is this relevant?

New Zealand is on the verge of learning of what looks like a major gold mine discovery, the largest find for decades, with the potential for a multi-billion wealth-creating project.

Male geologists in their 60s and 70s have done the field work.

The project might last for several decades. They will not be working in twenty more years, let alone thirty.

Finding geologists who will live and work on this project in the outdoors will be increasingly difficult, if geologists prefer clean fingernails.

The solution might be a new generation of geologists seeking to be involved in national (and personal) wealth creation. Will the new breed of female geologists lead the way?

(Footnote: Those interested in the project can google the SMI website and read the geologists' reports.)

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SEVERAL weeks ago I wrote about the imminent demise of the concept of ''star'' stock-picking fund managers.

Australia's Magellan fund manager, a listed company that earns fees from the funds it managers, had such a rock star stock-picker, Hamish Douglass, his reputation built on the quick sands of picking technology-developing companies.

In recent months he increased his weightings, particularly in China, flouting the growing view that China's communist government was looking to stigmatise its instant billionaire technology developers.

Magellan's share price slumped, from an absurd high of around A$70 to a still high, (in my opinion), level today, around A$18.

The star stock-picker is on long-term leave, described as ''medical leave''.

The point of this homily is that prescience, let alone omniscience, exists only in the heroes of children's comics.

Yet the advertising message is that past success in picking winners implies future successes.

I guess the advertising industry still promotes Santa Claus.

One can reasonably hypothesise that research has a great value, and that the best messages come after comprehensive research but as Magellan has displayed there is no such state as omniscience.

Markets are falling. Stocks like Facebook/Meta have suffered undignified share price falls.

Those who created their reputational illusion on buying such stocks, often were providing the impetus that drove the share price up, creating their own ''magic'' with their finger permanently on the ''buy'' button.

This year these ''stars'' may have a tougher task to face how to explain the greater losses that the most hydraulicked share prices may endure.

This will not be pretty.

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SO you are going to write or re-write your will?

You might do it yourself with a simple document bought for a few coins from a stationery chain, you might go to your lawyer and pay for his help, or if you are either desperate or unwise, you might go to a trust company, like Perpetual Guardian.

Writing it yourself would be sensible for a standard estate, perhaps owning a house, some bank deposits, some chattels or some listed securities.

You would need the agreement of at least two competent people to act as trustees of your estate, and as the executor of your estate.

Competent family – sons, daughters, siblings etc – can easily execute an estate, perhaps with a few hours of advice from a solicitor. A normal estate is not as complex as changing a tyre on a car.

If the estate is complex, you might include a trustworthy solicitor as a trustee. He/she would know, or should know, how to implement your instructions, how to cash up assets, and how to do this transparently, equitably and with minimal cost.

The trust company option should be regarded as the equivalent of choosing to drive over a cliff rather than having a head-on collision. It is the option no-one should ever want to take.

Trust companies that do not grossly over-charge, attract excellent staff, do not extend the task unnecessarily, and do not seek to argue with beneficiaries do exist.

The Public Trust is the nearest to a credible example of a trust company that might do a fair job. I cannot think of any other trust company that would do a fair job, in my opinion. Their standards are average, their costs absurd and their self-focus is often visible.

My advice to all clients is that if you are a named beneficiary of an estate being run by Perpetual Guardian Trust or whatever its current name might be, then you should head to a solicitor and seek help to replace the trust company.

So my recommendation for most people is to use competent family as the trustee and executor of your estate instructing them to use a lawyer to help with any difficult problems.

Pay his/her hourly rates and demand efficiency.

This week I was confronted with a situation that challenges my standard advice, to use lawyers.

I will slightly alter two irrelevant facts to shield the identity of the troubled client.

In essence an ageing woman, unable to overcome cancer, went to an Auckland lawyer to draw up a will, leaving her share of the marital property, her cash and her share portfolio to be split between her husband and her daughters, fifty per cent to the husband.

As is fairly standard, she wanted her daughters not to receive their share till her husband died, so he could enjoy the income from the securities.

She asked the sole practitioner solicitor to manage the estate.

He drew up the will.

She signed it before independent witnesses, kept a copy, and left the solicitor with his copy.

Soon after she died.

The surviving husband found the will, called on the solicitor and asked what to expect.

The solicitors advised that they would obtain probate, get the bank deposits and shares in the name of the estate, and in due course would transfer half of the money and shares into the husband's name, leaving the daughters' half under his control.

The house would thus be half-owned by the estate, half by the husband.

When he died, his share of the house (50%) plus the half share of the deceased wife's portion of the house later would go into the husband's estate, the other half share of the wife's estate would then be split between the daughters, the house sold, the proceeds paid out.

Until the husband died, the solicitor would manage the daughters' half share of the money and the shares, and would periodically pass on to the husband any interest or dividends received into the solicitor's trust account.

As allowed by the will, the lawyer would deduct the monthly costs of his services from the income received and if necessary from the capital.

The solicitor's fees proved to be significant, the delays in receiving dividends and interest seemed unreasonable, and so eventually the husband wound up at my door asking how to solve his problem.

The answer is that other than by discussion with the lawyer and kind concessions, he could do nothing.

The will had locked in the process, and had been legally signed.

I now have a solution for others to consider.

1. When drafting a will, every lawyer should attach a letter spelling out what the administrative process would mean and roughly what it would cost. The wife (in this case) could then discuss this with the husband, before signing.

2. The Law Society could insist on this level of transparently.

3. The will could be required to contain a clause spelling out the right of beneficiaries to fire the executor and replace him with an agreed executor.

All of these suggestions would improve transparency and would put an end to the self-serving gravy train that attracts the occasional greedy driver (lawyer), or the insatiable trust companies.

As someone who has executed multiple family wills without charge and without rancour, I am convinced that where competent family exist, they should run an estate.

When there are no competent family, a trusted outsider, which could be a solicitor, but would almost never be a trust company, might be a solution.

But in the interest of harmony, every will should have attached to it a letter from the proposed executor committing to admin processes and costs that the writer of the will understands, accepts AND shares with the principal beneficiaries before signing the will.

Footnote: Family Trusts are often formed to replace or supplement a will. The selection of trustees for a family trust is even more important as the trust can live for decades, allowing trustees to charge fees every year. 

My advice is never, under any circumstance, should one appoint a trust company to both write the trust deed for a family trust and be granted a role as a trustee or administrator.

In my view the law should require the deed to be written independently, and should provide a mechanism for firing trust companies or other unsuitable trustees.

Those handcuffed to fee-gobbling, inefficient trust companies or other trustees should be heading to a smart lawyer today, to exit from this highly unsatisfactory situation.

The Law Society should be addressing these issues, urgently, if it genuinely wants lawyers to be transparent and to put their clients at the top of the priority list.

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The Keys and the Chows. Marriage made in heaven. Perfect match. Congratulations.

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Seminars

With regret, I have deferred my March seminar programme, respecting the wish of venue managers, who want to avoid the risk of Omicron.

The seminars will take place when the Omicron numbers are falling, probably in late April or May. I look forward to that time.

Instead I will visit Christchurch March 8 & 9 and Auckland March 14-16, for one-on-one client meetings, Christchurch (Airport Gateway) and Auckland (two venues to be confirmed). Currently I have three Christchurch appointments and ten Auckland appointments available.

I will contact all who signalled attendance at the seminars when I have available venues in the twelve cities where seminars will be held. New registrations are still welcome and will ensure we can contact those who are interested.

Travel

David will be in Kerikeri on Monday 28th of February and Whangarei on Tuesday 1st of March

I will be in Christchurch March 8 & 9, and Auckland May 14-16, as advised above.

Please contact us to confirm appointments.

Chris Lee

Managing Director

Chris Lee & Partners Limited


Taking Stock 10 February, 2022

THE apparently imminent sale of the Kiwisaver provider, Kiwi Wealth, will probably be to an Australian fund manager, looking for a foothold in an industry that seems to have a licence to make millions for its owners.

KiwiSaver has grown to around $80 billion, of which about 8% is managed by the Kiwibank subsidiary Kiwi Wealth, the rebranded version of Gareth Morgan Investments (GMI). Morgan sold GMI to Kiwibank for about $57 million nearly 10 years ago.

Kiwibank has grown its funds under management and would expect to sell this business for somewhere around $150m, I expect. The money collected would enable Kiwibank to strengthen its balance sheet and remove a business that, whilst profitable, is a daily threat to Kiwibank’s reputation as a low-risk bank, in the view of the bank.

I doubt that its owners, effectively the Crown, the ACC and the NZ Super fund, would want to write a cheque the equivalent of such a sale price, to lift Kiwibank’s capital.

More importantly, it is increasingly obvious that banks so fear a backlash from investment setbacks, that they see any sort of managed fund as a reputational risk.

As a result, bank wealth advisers operate within manuals that are highly prescriptive, aimed at minimising blame on bank investment selections.

Portfolios focus on low-yielding government bonds, and on index funds, meaning the only value added is in the banks’ acquiring knowledge of its clients so it can accurately allocate to asset types and to overseas markets, via funds that simply buy the average.

Banks will know that no court would find against a bank that achieves ''the average'' return, be it positive or negative. For that reason, all banks will be reducing their annual fees to less than 0.1% per annum when pressured by clients. Soon 0.1% will be the maximum bank fee, representing the value added by ''buying the average''.

Buying ''the average'' is not worth more than that.

For the same reason, working in such a restricted environment, many advisers are unable to find much satisfaction if they enjoy qualitative research, or enjoy tailoring asset selection to individual circumstances.

In banks, the manuals dominate. The rewards for advisers reflect the lack of encouragement and opportunity for those who enjoy finding investment solutions for individual clients.

Yet a bank's task as a KiwiSaver operator is different as its KiwiSaver mandate anticipates risk-taking and investment errors. A trust deed defines the risk that may - indeed must – be taken.

Fear of losses and even tiny reputational risk sends bank executives into a panic, often resulting in unwise decisions to abandon activities involving risk.

Those bankers know that everyone can see the deep levels of capital that are available to repair errors. They know that litigious people sniff opportunity when they see deep pockets.

Gareth Morgan would never have gone into the business of funds management to follow such a low-value model. He prefers quantitative AND qualitative research, reaching investment decisions by exercising an excellent mind. He seemed to get decisions right more often than he made errors so he attracted enough clients to build a business.

I have liked and admired Morgan for several decades, whilst never believing that he could embrace democracy and thus could never be a starter for public office. (I long ago made the same assessment of myself!)

Morgan's foray into politics was well-intentioned. Indeed, if he were king for a year, NZ would be a much better place, but democracy rarely embraces a superior mind, much preferring telegenic, arms-gesticulating, head-nodding spin purveyors, hiding behind one-liners dreamt up by policy writers, or taught in American banks or universities.

(Luxon will need to be strong to break this pattern, if he gets a chance.)

Morgan is bright, quirky, humorous, an economist who thinks and cares, an adventurer, a raconteur and a wonderful philanthropist, his generosity not advertised. He never writes newspaper columns, promoting himself as a philanthropist, a description that covers even those whose donations seem self-serving and of minimal significance.

He has contributed more independent thoughts than almost any other New Zealander in his 70-odd years, but he should never have used the phrase ''lipstick on a pig'' when describing political opponents who wear make-up. That was a monumental breach of social media protocols.

If he had retained ownership of GMI, he conceivably would have today a portfolio quite unlike any other, built not on mush, but on risk-return analysis.

Someone willing to speak out about the effect on birdlife of household and feral cats clearly has the courage to break any conventions, social or investment.

Kiwi Wealth, if it is indeed sold, will be bought by yet another KiwiSaver provider, charging silly fees while paying homage to the average.

Many New Zealanders seems to love the idea of ''the average''.

Perhaps, in a year when ''the average'' is negative, some might begin to question this modest aspiration.

Morgan must be pleased Kiwibank dropped the name GMI.

_ _ _ _ _ _ _ _ _ _ _

THERE are not many universally-accepted opinions on the outlook for investors in 2022, perhaps unsurprisingly, given the myriad of quadratic equations that are required to find solutions.

But it seems pretty much everyone agrees that in 2022 the mindless option of simply buying an index will not be a logical solution.

If markets were to trend south based on higher debt-servicing costs, decarbonisation, and higher health costs, then buying or holding the index would be certain to destroy value.

From the likes of Goldman Sachs, JP Morgan and many, many others, perhaps all with vested interests, comes the assertion that 2022 will be the year to pick stocks that might thrive in the changing world, rather than buy all the winners and all the losers via an index.

As someone who has allocated some personal money to specialist index funds (technology, health, as examples), I accept the potential cost of my opting out of the individual stock selection, in areas where my knowledge is stretched.

I certainly would never buy an index full of bonds or global property stock, but a global technology fund is an important component of my allocation to sectors I favour, but whose individual stocks need to be measured by people with more contemporary knowledge than I have.

I accept that in areas where I do have knowledge, stock selection is my responsibility.

And I accept that allocations to the different asset types must reflect my age and my ability to absorb losses, when investing personal money.

Given all of this, it is clear to me that in 2022 there must be ever-greater client reliance on information provided neutrally.

I also accept that in a low-return environment, the potential value-add of services such as we offer must force us to contain costs so our modest fees allow us, as Michael Warrington expresses it, ''to keep our lights on''.

The year will include a special, interesting task for our business.

As Michael has widely signalled, he is retiring at the end of September after 14 years of valued work with our clients, having also contributed to the protocols and technology that enable our business to meet its client and compliance obligations, and informed and entertained an audience in our weekly newsletter, Market News.

I approached Michael in 2007, knowing he would honour the primacy of our client-first approach, knowing he shared our company's views on successful retail investing, and knowing he was experienced, unafraid of questioning industry practices and knowing he would relish the challenge of writing weekly newsletters.

His retirement will open the door for a replacement, likely to be an individual with specific market knowledge, an experienced financial market participant, willing to travel around NZ, happy to meet the deadlines of a weekly newsletter, committed to a client-first environment in which personal relationships are highly important.

It is doubtful that money, working conditions or any company manual will impede our selection process. We operate collegially and cheerfully. The right person will appear, will be happy to work mostly in the Kapiti area, and will enjoy a wide role of tasks including research, to service our thousands of clients.

If we had to resort to head-hunting, we would.

By good fortune, my own health issues were resolved in 2021. I anticipate the pleasure of working with clients, and the new adviser, for several years, and will continue to travel, complementing the service led by Edward, Kevin, David and Johnny.

As Michael does not retire until September 30, we have ample time to find a replacement.

If the new person has the all-round skills, the charm and the curiosity that Michael has displayed we would be delighted, as would our clients.

We know that in 2022 we will be ever-more involved with our clients. We have to ensure that investment risk is understood, and accepted by those who can afford such risk.

Industry participants interested in filling the vacancy are welcome to contact us, privacy respected.

_ _ _ _ _ _ _ _ _ _ _

EVERY business owner, and many employees, will now be pondering the plan of Ardern's government to introduce a new redundancy/ sickness insurance policy.

Current Finance Minister Robertson wants feedback on a plan to require employers and employees to pay around 2.8% more tax, to fund an ''insurance'' policy run by the ACC. He should listen to the feedback and take advice from those of other political persuasions. This time, he should set aside personal ideology and begin the process of listening to those who must execute policy.

His idea, to pay 80% of previous wages to those forced out of work by illness or redundancy, for six months. (Illness is not usually covered by the ACC wages subsidy.)

Many will wonder why Business New Zealand, a group acting as spokesperson for some bigger businesses has supported the concept of the new tax. An explanation is obvious – paying the tax allows bigger businesses to cap the cost of redundancy agreements and may even allow businesses to reduce their wages bill, previously set at a level that covered the threat of redundancy. It may also eliminate the litigation costs that so often come with dissension. For big business the new tax might be cheap.

The flaws in Robertson's concept are obvious:

- The insurance payment would allow redundant staff six months to find an ''equivalent or better'' job. I will not be the only person to see how easily this would be gamed.

- The policy would force all employers to pay the tax. Yet many businesses never make people redundant. They might fire poor performers, using a carefully-crafted procedure.

- Big business may make people redundant, rather than fire them.

Do nurses, teachers, police officers, plumbers, electricians, sharebrokers, court staff, judges, lawyers, accountants, or truck drivers often become redundant and face re-training?

My guess is that inadequate staff in those areas get fired.

Will seasonal workers be excluded?

Will bonuses be included with salary, when calculating the 80% compensation?

Do we really believe that a six-month well-paid break will be used to upskill or re-train, and do we believe that redundant people have some new right to believe that ''once a highly-paid manager, always a highly-paid manager'' is a reasonable mantra?

Would a tourism adventure company no longer attracting tourists not require the staff to recalibrate the value of their skills?

If my company chooses to make me redundant, should I be well paid for six months because my role here is not available elsewhere? So would there be an age limit? Might that be ageist and therefore illegal? Would owner/operator businesses be excluded from allowing an owner to be made redundant?

Is there any logical reason for making this benefit compulsory? Should it not be a component of a salary package offered by those who choose it? Would such an offer be a Fringe Benefit?

In my view, social policies should be created after much wider and longer consultations than I sense is the case here or, sadly, in many other areas where new law appears to have been made on the hoof, speed of implementation favoured more than sustainable, good policy.

I would bet that this idea, if it were rushed into new law, would be gamed by many, would lead to endless disputes, enriching lawyers and accountants, and would simply be another form of subsidy, leading to undesirable social change before a change in government untangled the mess.

Perhaps what some employers need is a better-defined redundancy commitment and pre-determined procedures to differentiate the ‘’fired’’ from the ''restructured, thus redundant''.

_ _ _ _ _ _ _ _ _ _ _

NEXT week will be decision week on our planned seminars.

If Omicron numbers soar into thousands every day, and are spread across the country, those who have registered to attend will receive an email from me with a new set of dates, probably in May.

If Omicron is still inexplicably not spreading wildly, I would proceed with the existing dates and confirm venues and times. That is my preference.

It is vital to have definite numbers, as each meeting is likely to be limited to 100 attendees, all doubled-vaccinated, masked and sitting with due respect for their fellow guests. I would hold two seminars or three, in those cities where attendant numbers are high.

The seminars are important. The content will be of relevance to our clients but health rules will prevail.

Please notify us if you wish to attend. We would email you regarding any required change of dates.

The plan is:

March 3 – Nelson

March 7 – Timaru

March 8 – Christchurch

March 10 – Kapiti

March 14 – Palmerston North

March 15 – Napier

March 17 – Wellington or Lower Hutt

March 21 – Tauranga

March 22 – Hamilton

March 28 – Whangarei

March 29 – North Shore

March 30 – Auckland City

Travel

Michael will be in Hamilton (3 March).

Edward's diary for Auckland in February is now full. He will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and Friday 18 February (Porters Hotel, Havelock North).

I expect to be in Auckland and Christchurch for clients in March, if my seminars were to be cancelled.

If you would like to make an appointment, please contact our office.

Chris Lee

Managing Director

Chris Lee & Partners Limited


Taking Stock 3 February 2022

IT IS nearly 40 years since Robert Muldoon was New Zealand's Prime Minister, yet I can still hear him chuckling.

His mirth would be prompted by the way our politicians today try to rein in the banks and other moneylenders, in pursuit of any, or all, of the outcomes of lower credit growth, lower consumption (with debt), consumer protection, or just to remind the banks who is the boss.

Today these outcomes can most easily be introduced by camouflaging the purpose of the battle as protecting the innocent or the desperate from taking up loans set at a usurious rate. As an aside one could argue that it is somewhat patronising to ''protect'' borrowers from lenders but that is an argument for another day.

Muldoon would be chuckling because the Crown is so easily foiled by the banks and lenders, who can dredge up a crisis while pretending to be doing what the politicians demand.

In this case, the politicians and those who draft their new regulations have opened up a raft of unintended consequences by trying to legislate the right moneylending process that should precede the granting of a loan.

This sounds like the writers of cricket rules trying to tell a fast bowler what he cannot do against tailend batsmen.

Muldoon had a simple weapon in his day.

He ruled arbitrarily, regularly ignoring Treasury, the Reserve Bank, and his other advisers, having no fear of those bankers with whom he sought to fight.

He had the power to impose higher or lower Reserve Asset Ratios (RARs) without any reference to anyone.

A Reserve Asset Ratio referred to the percentage of customers' bank deposits that could not be used for bank lending purposes, effectively forcing the banks to use Muldoon's directed ratio of deposits to invest in either NZ Government Stock or Local Authority Stock. Lending volumes had to fall.

As the yields on those stocks were usually much lower than deposit rates, Muldoon in effect imposed losses on the banks while forcing them to reduce mortgage business and, especially consumer, loans. Some regarded this as an arbitrary tax on banks.

In Muldoon's mind banks would be forced either to:

1. Pay less for deposits, thus reducing costs for borrowers.

2. Lend less to feckless borrowers whose demand caused higher inflation.

3. Increase bank resilience, forcing them to buy more no-risk stock.

4. Supply money when the government wanted to issue more stock.

5. Understand that he, Muldoon, was the boss and required deference.

Muldoon often threatened to increase RARs to ''jawbone'' the banks into doing as he wanted.

He may well be chuckling behind the pearly gates but so too would many bankers of that era, who inevitably had the last laugh.

They would defy him, not by refusing to obey the new regulated RAR instruction, but as we all know running water will find another route if one blocks just one exit point.

The banks could respond by cutting back lending in important areas that the country needed; they could alter the pricing of other banking services, for example foreign exchange commissions, to offset the problems.

Most particularly, they could refuse to repatriate export receipts, causing a liquidity crisis for the Reserve Bank, which in those days set NZ's exchange rate, and needed the constant in-flow of foreign currency from export proceeds that arrived (or did not) from the banks, to maintain their ability to supply other currencies.

By holding back export receipts, a bank could create a crisis, forcing Muldoon to devalue the dollar as an incentive for the banks to repatriate export receipts.

A 20% overnight devaluation simply converted to a windfall fortune for banks. Bank profits often depended on such windfall gains. Muldoon did everything he could to avoid devaluation, but the banks had the most ammunition.

Eventually, Muldoon learnt it was best to work collaboratively with banks, though I think he had long lost power when this penny dropped.

Ardern, Robertson, Parker, our nation's current royalty, and their less-empowered colleagues, will now be turning the pages of the book that taught Muldoon his lesson. They have lost the weapons that triggered his most effective artillery.

I do recall the fun I had in that era – the 1970s and early 80s – when money markets needed to develop a skill in anticipating Muldoon's antics and needed to foresee the probable response of the banks.

I learned that banks have a life of centuries, if their shareholders so choose, whereas politicians have power for just a few years.

Banks usually win in the long run. They will win this time. The cloddishly-formed Credit Contracts and Consumer Finance Act will be rewritten.

What has changed since Muldoon's days are the composition of government advisers, and the use of private polling as an influence in political decision-making, the latter perhaps a prime determinant of Clark and Key's policies.

Just as one can feign ''in the interests of desperate borrowers'' as an excuse to act, so can one argue that ''in the interests of diversity'' when one selects politically-compliant candidates for public service offices.

As one grumpy public servant recently explained to me, ''You will not be told off for recommending something the Minister does not like, you simply will not be asked to participate in the next interesting project.'' So much for a neutral public service. Ministers, no matter how raw, know best, in their arrogant self-assessment.

A politicised public sector chief executive does not survey all the voices on proposed regulations. He/she knows what the Minister wants to be told.

The result is dopey regulations that cannot be executed, that open up all sorts of unintended consequences, and eventually have to be rewritten at great financial and social expense, not to speak of the cost to careers, when there is a change of government.

Muldoon will be chuckling, but he did not have the last laugh.

He was thrown out in 1984. The banks survived. Indeed the banks flourish, scooping billions from NZ and largely passing the dosh on to Australia.

In 1985, Roger Douglas floated the NZ dollar, removing the banks' ability to force devaluations. In effect he capped the money supply, driving the cost of money to scarcely believable heights (the overnight money market rates reached 1000% during March 1985), and he deregulated financial markets, enabling the banks to compete in all areas of the money markets, eventually forcing all the second-tier finance houses to close down.

These were sane responses to an irrational era of politician/banking bellicosity.

Ardern, Robertson, Parker, and the politicised public service, will now need to find a stand-off that results in the banks again lending at a fair cost, with reasonable processes, and without fear of potentially absurd consequences on those people who currently are having their loan applications declined.

The economy requires a solution, sooner rather than later. One obvious solution is to reduce the $200,000 penalty for bank officers who approve a loan without following the new processes.

The one thing neither Muldoon, nor Ardern, will ever achieve is forcing the banks to lend to anyone, at any particular rate, with any particular lending process.

Nor could cricket's lawmakers instruct fast bowlers not to hit poor tailend batsmen.

The tailenders just had to learn to bat better.

 _ _ _ _ _ _ _ _ _ _ _ _

THE great irony of the Ardern/Robertson/Parker error, ostensibly initiated by the then hapless Commerce Minister, ex-journalist Kris Faafoi, is that banks, in defying Ardern, are losing good profitable lending business to make their point, while sound lending requests from good people are being declined.

My guess is that the banks' main point is that a $200,000 fine for making a loan to a weak borrower is a nonsensical tariff, acceptable to no moneylender, the punishment far exceeding the culpability.

Compare that fine with the piffling punishment for appalling receiver or liquidator behaviour. A receiver who gives the cattle from a farm in receivership, to his brother-in-law, now would face a maximum of $75,000 if he were charged with incompetence, itself a rarely-used constraint on poor behaviour. Many receivers clip tickets and earn huge salaries. Bank lending staff are often on modest salaries.

A bank whose previous lending processes approved 90% of all loans by eliminating just the other 10% had reached a position where only one of its 90 loans resulted in a default or write-off. There would be no banking requirement to alter the lending criteria. A collection record of nearly 99% would be most acceptable.

The threat of the fine has meant that now the same bank might approve only 70% of those same loans.

The 20 people whose loans the bank now does not approve will head off to a group of lenders who charge more and are unlikely to be subject to as much scrutiny as a bank, where reputations do matter, especially in this new, more litigious, era.

The declining of more loans was a certainty, not a probability, not a possibility, once the CCCFA was childishly imposed on banks.

No one is laughing. The public is furious. The banks wear a Mona Lisa-like mysterious smile. Either they win, or the Government loses. The mysterious smile does not signify, as it might do with my youngest grandchildren, that they have wet their pants.

Sustainable lending laws are created carefully, after widespread consultation, drafted by commercially-skilled people, and must be able to be executed cooperatively, after consideration of the likely banking response.

The current changes imposed on lenders simply reflect inexperience and arrogance and, worst of all, might imply a political public service.

 _ _ _ _ _ _ _ _ _ _ _ _

A RECENT Taking Stock item praised LPF, the litigation funder that has offered to assist, without charge, the Dilworth School victims of paedophilia in past decades.

The item prompted many responses, mostly praising LPF for its decency, but many were curious about Dilworth, a school set up to help boys from disadvantaged homes.

The founders and patrons of Dilworth were James and Isabella Dilworth, Irish immigrants who more than a century ago acquired huge tracts of what was probably farmland in areas that now are known as Epsom, Remuera, and downtown Auckland.

Childless, they put their land holdings into a trust, donated it to facilitate what is now Dilworth, and left it to trustees to administer the assets of the trust and govern the funding of Dilworth.

All of this occurred before World War I (1914). Dilworth now has a roll of around 500 boys. The trust funds various scholarships, and literally thousands of young men have had better lives because of the Dilworths' foresight and generosity.

Others, including Old Boys, have donated to the school, one recent donation totalling $8 million. Wrongly, I thought of them as patrons. They should be described as donors.

The donors' generosity is dwarfed by the value of the assets owned by the trust, principally land, much of it leased to major users, like St Cuthbert's school. The assets easily exceed $1 billion in value, the trust's income many tens of millions, which fund scholarships and fund the school costs.

One Old Boy explained that in early decades the molesting of children in schools was widespread, Dilworth being just one school that attracted such despicable teachers. In his era there were no paedophiles, to his knowledge.

Those like me, who seek to be respectful to the various religions, prefer not to dwell on this dreadful behaviour. In my case I attended a boarding school where a previous headmaster had hanged himself after being exposed as a paedophile.

The school's response in the 1960s was to clean out any sniff of aberrant behaviour so I enjoyed the privilege of being untroubled by such foul people, the school magnificently led by a strong, decent man.

Perhaps a hundred or more boys at Dilworth, in different decades, were not so lucky.

They may soon receive settlements, or payments after a court case, that might be some sort of compensation. Perhaps the payments per victim will each be six-figure sums.

It seems to me to be regrettable that the paedophiles might escape judgement, the trustees of the Dilworth assets effectively having to pay the bill for the foul miscreants.

Nothing should alter the fact that thousands of Dilworth Old Boys give thanks to the original patrons, who have achieved their goal of helping people obtain an education that might otherwise have been unaffordable.

 _ _ _ _ _ _ _ _ _ _ _ _

AT this stage, my seminars are being planned for the following dates. It is almost certain that numbers will be capped, due to Covid. I may hold two seminars in some cities, to accommodate the cap on numbers.

Please advise us if you, your family, or friends, intend to attend, Covid-allowing. I expect to proceed on the displayed dates.

If the Omicron bug interfered, I would rearrange the dates for a different month and would contact all those who had registered an interest. I would defer the dates if those registered preferred me to do so.

My expected dates are:

March 3 – Nelson

March 7 – Timaru

March 8 – Christchurch

March 10 – Kapiti

March 14 – Palmerston North

March 15 – Napier

March 17 – Wellington

March 21 – Tauranga

March 22 – Hamilton

March 28 – Whangarei

March 29 – North Shore

March 30 – Auckland City

Please note I would welcome suggestions on a convenient meeting hall in Whangarei and Hamilton, where I have not previously held seminars.

Travel

Michael will be in Hamilton (3 March).

Edward's diary for Auckland in February is now full. He will be in Napier on Thursday 17 February (Crown Hotel, Ahuriri) and Friday 18 February (Porters Hotel, Havelock North).

I will be in Auckland and Christchurch in March, if my seminars were to be cancelled.

If you would like to make an appointment, please contact our office.

Chris Lee

Managing Director

Chris Lee & Partners Limited


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