Taking Stock 27 July 2023

Edward Lee writes:

AS we navigate the intricacies of government spending and national economics, the journey often feels akin to tightrope walking. The smallest imbalance can lead to significant fluctuations that ripple across every part of society. Today, we find ourselves at a crossroads where the trajectory of government spending rapidly outpaces revenue (tax) generation - a pressing concern that demands our collective attention as it will have a significant impact on our country.

Current economic situation

To comprehend the challenge we face, we must delve into the trends of the past decade. Government expenditure across pivotal sectors such as social security, welfare, health, and education has risen dramatically. From 2013 to 2023, social security and welfare expenses nearly doubled, soaring from $22.5 billion to $41.8 billion. Health spending echoes this pattern, escalating from $14.5 billion to an estimated $29.5 billion within the same period. In effect, we've witnessed a period of significant spending expansion, underscored by an increased government commitment to public services.

Projected increases in government spending for 2027, especially in social security, welfare, and healthcare, raise critical questions. With social security and welfare expenses predicted to hit $51.1 billion and healthcare projected at $32.3 billion, these sectors may consume over half of total expenditure. Given the current health crisis, a mere 10% rise in health budget might fall short, especially considering Pharmac's existing funding deficit. Instead of escalating borrowing and spending, we need smarter strategies for long-term investment and budget stabilisation. 

But these figures aren't merely numbers on a page; they symbolise our societal commitment to the well-being of our people. However, the pace of this escalating expenditure forces us to confront an uncomfortable truth: Our current fiscal path faces challenges that require robust and strategic responses.

Furthermore, an emerging challenge that looms over both local and central government budgets is the impact of climate change and natural disasters. The exact costs of mitigating and adapting to its effects are still under calculation, but one thing is evident: these endeavours will place additional strain on our national finances. 

Is the current path sustainable?

Can our economy feasibly maintain social security and welfare spending at these elevated levels without compromising our economic stability? Alternatively, could KiwiSaver and the growth of the New Zealand Superannuation fund rescue us from the challenges posed by our ever-increasing superannuation bill? If KiwiSaver indeed offers a path to replace universal superannuation in the future, it may be prudent to contemplate raising the minimum contribution over time from 6% to 10%. Notably, Australia's equivalent stands at 11% of earnings. Such an increase in contributions could bolster individual retirement funds and alleviate the strain on the government's superannuation responsibilities.

So, we face an unenviable choice - do we cut essential government spending, increase taxes, introduce new taxes, or trim our wish lists? Or do we grow our economy by reducing barriers, red tape, and regulations so that we can become more productive? The first step should be to scrutinise every single decision economically as our future generations' well-being depends on our actions today. 

What about our Nation’s debt?

As we grapple with these expenditure trends, another crucial piece of the puzzle demanding our attention is the national debt. The core Crown gross debt has been on a precipitous climb, growing from $32 billion in 2008 to $135 billion in 2023 and forecast to reach $153 billion in four years’ time. This increase in debt has significant implications for our economy, potentially leading to higher interest rates, lower credit ratings, and increased economic vulnerability. Now debt isn’t a bad thing, if spent wisely, but it requires careful planning as the continued accrual of debt brings with it a mounting financial burden on taxpayers. Government debt financing costs are projected to rise approximately 40%, amounting to an annual total of $8.65 billion within the next four years. For perspective, this sum would represent the country's fourth largest annual expense. Our fourth largest! 

Maintaining this debt trajectory could severely impact our long-term economic stability so we need to start thinking of other ways to grow our economy. Public/private partnerships are one such way of building assets without the financial burden on the taxpayer. For example, the New Zealand Superannuation fund could build, manage, and run a light rail system across New Zealand, or potentially build a new roading system, and be allowed to charge a toll to get a return. This would remove the burden on the government of having to build such infrastructure. Given that Kiwisaver is now $97 billion in size (and growing each day), we have a substantial amount of funds which could be used in a more productive way than simply buying shares in overseas companies. 

On the other side of the ledger, tax revenue growth has lagged behind spending. Although there's been a noticeable increase in tax revenue from individuals, GST, and Corporate Tax over the past decade, it falls short of bridging the widening gap in public spending. This misalignment between revenue and expenditure raises a pressing concern - if government expenditure is set to reach $153 billion in 2027, how do we cover this vast cost, especially if the core Crown revenue falls short? It is an uncomfortable fiscal reality that needs addressing.

New taxes?

Possible solutions have been thrown into the ring, including raising the retirement age, introducing a wealth tax, implementing death duty and a capital gains tax. These measures, while seemingly drastic, could be one method to alleviate the fiscal pressure on future generations, but would hinder economic growth and would lead to tax avoidance.

Increasing the retirement age could extend our working life and taxable income, while reducing some strain on our social security system. A capital gains or wealth tax, on the other hand, would introduce a substantial revenue stream contributing to government coffers but it is not a silver bullet.

A wealth tax seems less feasible due to its negative impacts on investments, economic growth, and the strain it would put on many households. By taxing asset values, rather than the gains on realised investments, it will inadvertently force people to sell assets to fulfil their tax obligations. Internationally, wealth taxes have also led to emigration, in turn leading to further problems.

One possible solution is the concept of tax deferral - essentially delaying the payment of the tax until the asset is sold and the gain is realised. This would mitigate the liquidity problem and prevent forced sales of assets. However, deferral introduces its own set of complications. For one, there is the risk of moral hazard. If a government allows for tax deferral, it is effectively extending credit to the taxpayer. But what happens if future governments choose to forgive this deferred tax liability? 

Another concern is that, while deferred tax payments are technically liabilities, governments might be tempted to count them as current revenue - a form of “creative accounting”. This could encourage increased borrowing and spending based on these anticipated revenues, potentially exacerbating a country's debt situation. If the asset is never sold, and the deferred tax is pushed out forever, then the whole concept of a wealth tax would be a failure.

What about a death tax? By taxing a portion of the wealth transferred at death, the government can redistribute wealth across society and could generate substantial revenue for the government. But is this the right solution? 

Some argue that a death tax could promote economic productivity. If fortunes are not guaranteed to be transferred to descendants, individuals might be more incentivised to work and contribute to the economy, as opposed to relying on inherited wealth.

However, a death tax is a form of double taxation. The wealth accumulated by an individual has already been taxed during their lifetime, and a death tax would essentially tax this wealth again upon transfer.

Moreover, a death tax would harm small businesses and family farms. These entities may have high asset values but low liquidity, so a large tax bill upon the owner's death might force the sale of the business or farm, disrupting livelihoods and potentially leading to job losses. 

Lastly, there's the risk of capital flight. To avoid a hefty death tax, individuals will move their assets or themselves to jurisdictions without such a tax, leading to a loss of wealth and economic activity for the country.

Is there an alternative to simply raising taxes?

Instead of resorting to the conventional approach of increasing taxes, a more sustainable strategy would involve stimulating our economic growth. By focusing on enhancing labour productivity, fostering innovation, and championing high-growth industries, we can increase tax revenues without having to raise tax rates.

Improving labour productivity can allow workers to generate greater value from the same amount of work, leading to higher business profits and, in turn, better wages. This not only translates to a more lucrative economy but also higher tax contributions without the need for increasing the tax rate percentage. Furthermore, a productive workforce is an attractive asset for foreign investors, thereby expanding our tax base even further.

Simultaneously, fostering innovation can lead to the birth of new industries and the expansion of existing ones, thus creating wealth and job opportunities. This is especially true for sectors such as technology, biotech, and green energy, which are widely recognised as high-growth industries. An innovative economy is a competitive one, driving growth not just in individual businesses, but the economy as a whole. As more businesses flourish, our tax revenues will naturally rise, helping to ensure that our economy remains adaptable and resilient against future challenges.

Moreover, actively promoting high-growth industries can serve as a powerful catalyst for our economy, providing high-paying jobs and robust revenue streams. As these sectors expand, they enrich our tax revenue base even at current rates. A strategic focus on such industries can ensure our economy remains at the cutting edge of global developments, maximising benefits from international trade and cooperation.

While these strategies do require diligent planning and strategic long-term investments, they hold the potential for substantial returns. They represent an investment in our future, aimed at creating a resilient, dynamic, and prosperous economy that caters to all. This approach ensures our fiscal health while minimising the burden on taxpayers, paving the way for a win-win solution.

Addressing these fiscal realities demands collective will, strategic planning, and an open dialogue. It's about more than just balancing the books—it's about shaping a fiscal policy that promotes a fair and empathetic society. We must confront rising inequality and use fiscal policies as tools to cultivate a more equitable society. We need a dedicated government with a consistent, cohesive plan that's resilient to changes every three years, signalling our long-term commitment to economic stability and prosperity.

In this election year, it's crucial for all major political parties to present their strategic plans, rather than engaging in short-term lolly scramble tactics. It's urgent for these strategies to be publicised promptly, enabling scrutiny and informed decision-making from voters.

The steady rise in inflation, building material costs, the cost of living and interest rates present significant challenges. Higher interest rates can undermine investor confidence, emphasising the need for economic stabilisation, inflation control, and a downward trend in interest rates to restore market strength.

This uncertain environment compels one to make tough choices. Term deposit rates and listed corporate bond rates have both risen and may rise further. The sharemarket index, while volatile, remains modestly higher since the beginning of the year. Many of our listed companies are warning investors that economic conditions are worsening. New Zealand will need leadership prepared to adjust to these challenges in the times ahead.

Travel Dates - August & September

Our advisors will be in the following locations, on the following dates:

18 August - Christchurch - Fraser30 August - Blenheim - Edward6 September - Auckland (Ellerslie)- Edward7 September - Auckland (Albany) - Edward8 September - Auckland (CBD) - Edward13 September - New Plymouth - DavidClients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 20 July 2023

Fraser Hunter writes:

ONE of the central themes of Chris's recent seminar revolved around the pursuit of excellence in investment strategies. Anyone open to a touch more risk could cast an eye towards Australia for quality investment opportunities with promising potential returns.

This idea isn't unfamiliar to New Zealand investors; Australia's listed companies and economy are well known to most of us. Familiar faces like the banks or the parent companies of household names such as Kmart, Bunnings, and Countdown represent some of the ASX's largest blue-chip companies.

Underpinning the Australian share market prospects is the $3.4 trillion Australian Superannuation scheme which brings in more than $60bn of net inflows each year, with more than 20% of this being invested in local shares. 

The Australian economy has been a few steps ahead of New Zealand's in terms of reopening—perhaps due to avoiding the same extent of closure—and has tamed inflation with a gentler approach to interest rate hikes than Kiwi households currently face. 

Consequently, economists predict that the Australian economy may decelerate less or return to modest growth sooner than NZ and several developed nations. While GDP doesn't directly guarantee higher stock market returns, it does foster an environment of confidence and stability for businesses, consumers, and investors. 

This sense of security is something the New Zealand market would enjoy.

The Australian Foundation Investment Company is a Listed Investment Company (LIC) which has a long-history and has an investment philosophy which aligns with ours and skews its portfolio to companies that meet our definition of excellence. 

In light of this, I thought I would look into AFI in detail.

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The Australian Foundation Investment Company (AFI) is one of the oldest and largest investment companies in Australia. Its history dates back to the 1920s, a time when the cure for polio was yet to be discovered and when Mickey Mouse first hit TV screens. Since then, AFI has been delivering investors strong and stable investment returns, while navigating through crises including the Great Depression, the Second World War, Black Monday, and the GFC. The data, history and knowledge within the company must be immense.

AFI’s investment strategy focuses on investing in companies that are leaders in their sectors, have a history of profitability, and offer attractive dividend yields. The company invests in a diversified portfolio of Australian companies with a long-term focus, avoiding speculative investments.

AFI characterises its investment style as long-term, fundamental, and bottom-up. 

The current portfolio is predominantly made up of large-cap companies, with diverse coverage across sectors. 

As of 30 June 2023, the portfolio's total value was $8.9 billion, with the largest holdings including BHP Group, Commonwealth Bank of Australia, and CSL, which are also the benchmark’s biggest holdings. AFI’s 10 largest positions represent more than half of the fund and consists of seven of the largest 10 benchmark holdings. The fund is listed on both the ASX and NZX with the code AFI.

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Despite this, the recent performance of AFI has been underwhelming, with the fund underperforming its benchmark and passive alternatives over most time frames from 12 months through to 10 years. While AFI is classed as an active fund due to its concentration in positions (60 holdings vs 200 for the benchmark), its size and focus on the large end of the market means its performance is going to be pretty similar to the broader market. 

Its focus on quality and cash flow means it misses out on a lot of the volatility, which in turn means it performs better in down markets, which is good, but also lags in strong markets and is late to invest in fast-growing successful companies. 

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AFI, along with other LICs, are closed-end funds with a fixed number of shares that are traded on the share market. This structure is a significant advantage for AFI as it allows the fund to make strategic, long-term investments without the concern of managing liquidity due to short-term redemption pressures.

However, investors should be aware that the market price can often be significantly different from the underlying net asset value (NAV). This difference can reflect the market's expectations of the strategy or manager, or simply be a result of strong buying or selling of the shares. Historically, AFI has traded at a premium of approximately 9-10% to NAV. However, this has decreased over the past 12 months, and it is currently trading at a discount. Investors should be mindful that during a time of crisis, the shares will likely trade at a discount as investors prioritise liquidity and are willing to absorb short-term losses.

One of AFI's key selling points is its offering of an 'actively managed' fund at a reasonable fee of 0.14% per annum. 

This low-cost structure, combined with active management, provides a unique value proposition to investors, allowing them to benefit from active management strategies without the high costs typically associated with such funds. However, with the recent rise in passive investing, AFI is no longer the cheapest option.

Due to AFI's focus on large-cap stocks and a low turnover strategy, its performance often closely mirrors the broader market. This approach, combined with its size and strategy, can make it challenging for the fund to deliver strong periods of outperformance. However, its focus on value and cash flow provides a buffer during market downturns, making it less prone to market volatility. 

Another key strength of AFI is its robust governance structure, which includes a vastly experienced and diverse Board of Directors. The investment team, while having experienced some turnover in recent years, is internally managed, highly experienced, and well-credentialled.

This strong governance structure and experienced team are crucial in implementing AFI's investment strategy and managing risks. Furthermore, the company's strong history and robust structure allow AFI to successfully attract and integrate new talent, ensuring future stability and consistent performance.

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One of the big conveniences of AFI is it is listed on the NZX, trades in NZD and pays dividends in NZD. Low liquidity on the NZX listing can often be pointed to as a flaw, but as long as the ASX is open and trading, investors of all sizes can typically trade at a price close to the AUD equivalent due to arbitrage opportunities. 

The main hurdle for NZ investors is the tax and administrative implications. While payments are in NZD, the dividend is AUD income, so will need to be accounted for in tax returns. A key part of AFI’s selling point is fully franked dividends, which are less beneficial for New Zealand investors. I’m not a tax specialist, so investors in AFI should understand their tax obligations or look to the assistance of an accountant. 

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Other forms of Australian exposure we use are the Smartshares products. 

Smartshares offers a S&P/ASX 200 ETF (AUS.NZX) which provides passive exposure to the ASX while denominated in NZD. The advantage of the Smartshares funds is that dividends are paid in NZD and the tax implications are straightforward due to the PIE structure. 

The downfall to this is the fee (0.30% per annum), which is high for a passive fund by global standards and more expensive than AFI. I expect the fee will drop as these funds gain scale and as competition drives down fees to levels seen offshore. 

Other alternatives include A200.ASX or STW.ASX, which are ASX-listed index funds. These provide the same exposure as Smartshares, but for a far lower fee 4-10bps. Again, the main downfall is the administration of receiving income in AUD, the tax implications and the additional hassle of dealing with an Australian share registry. 

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Shifting funds to Australia may evoke a sense of déjà vu for investors who were encouraged with the same idea in the early 2000s. 

Australia, once a shining star on the global stage, rode the wave of a multi-decade commodities bull run. However, the Global Financial Crisis (GFC) abruptly halted this growth, ushering in what is often called "the lost decade". The ASX struggled to regain its pre-GFC levels even after 10 years, while the NZ benchmark swiftly recovered in half that time and nearly doubled its pre-GFC levels after a decade.

But here's where we need to pause and peel back the layers. Comparing index levels directly can be misleading. The NZ index is one of the few global benchmarks quoted on a gross basis, meaning it factors in and compounds dividends. 

In contrast, the ASX 200 and its international counterparts, including the S&P 500, NASDAQ, and FTSE, are usually quoted on a capital basis, excluding dividends.

Another crucial element to consider is market composition. 

Rewind to 2008, and Australia's market was predominantly influenced by the resources and banking sectors, heavily tied to the mining industry's performance. 

Today, the Australian benchmark has transformed, reflecting a diverse array of high-quality companies recognised not only in New Zealand but also as global industry leaders.

In terms of outlook, according to economists and the International Monetary Fund, the Australian economy appears better equipped for long-term global growth. Meanwhile, New Zealand faces headwinds such as higher inflation, increasing debt, and rising debt service costs. 

Moreover, Australia's central bank has been more cautious with rate hikes and is predicted to lower rates sooner.

A significant draw for the Australian market is its links with the resource sector and China. While the market has seen limited movement this year due to delays in China's anticipated reopening, it is important not to lose sight of the bigger picture. Despite short-term impacts on demand and prices, the long-term demand outlook for commodities remains strong, which should bode well for the Australian economy. 

For all these reasons, we are pleased to discuss a slightly higher allocation to Australia and can also discuss potential Australian dollar bond funds, as mentioned during our Seminars.

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Chris Lee writes:

TWO troubled companies, Arria (natural language from data) and Babcock and Brown (failed Australian investment company), have generated news of importance to investors.

Arria has spent a decade raising equity and debt, diluting shareholders who were over-sold the short-term potential of the company.

It has angered one of its largest shareholders, a broking firm that has raised millions for Arria and was probably paid in Arria shares.

The broker is now angry, believing Arria needs a board clean-out and needs much more credible capital market lenders to help Arria list on the NZX, the ASX, the Toronto Exchange, or maybe the Falkland Islands - anywhere that would accept a listing.

Investors should watch this battle, more like a dog fight between sausage dogs then between alsatians.

Shareholders have never been provided with all the truth between the constant issuance of options, shares or debt securities.

If Arria were to list, its disclosure requirements might fill a Burke’s Bin.

The other correspondence came from what we can safely call an Australian bulldust company, Babcock and Brown. It had sought to be another version of Macquarie, funding infrastructure assets with debt, in the early 2000s.

It achieved a credit rating 17 years ago of investment grade, it sought at one stage to become a debt laden behemoth, but in stressed times, it painted lipstick over a potty mouth and hoped that it would fool its creditors and other suitors. It went into receivership 15 years ago. Deloitte, the receiver, has had multiple millions in fees fighting off typically litigious parties wanting a share of the creditors pool.

Deloitte has about $23m to hand out to its bond holders and genuine creditors but has yet another claim to defeat in court before Deloitte's can divvy up the pool.

Patience may be a virtue, but such time wasting will have allowed the devil to claim many of those who are owed money. A 15-year wait is nonsensical.

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Edward will be in Wellington on Tuesday 25 July.

Fraser will be in Christchurch on August 18.

Chris will be in Christchurch and Auckland in September.

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 13 July 2023

THE art of running a bank, and governing a bank, is not the same art that wins bank popularity contests.

In many ways the popularity contest is like the “Miss Friendship” award at beauty pageants.

Invariably Miss Friendship is selected by those other contestants who want to win the Beauty Award and allocate the friendship title after working out which contestant is the least of their threats.

Banks do not vote in banking popularity awards, but I am certain the best and strongest banks do not choose their executive and directors for their ability to win popularity choices.

Unless the bank shareholders are hare-brained they choose as their governors and executives those people who are most likely to manage risk and liquidity, gain healthy nett margins, comply with regulations and survive inevitable downturns.

Such people have only passing interest in awards for being the kindest to their customers.

Their definition of kindness focuses on healthy profits and dividends and survival.

In effect they view popularity contests as an award for losers.

One does have to wonder why TSB, a small community bank, sets its target on winning the popularity contest rather than on its financial metrics, according to an interview with its chairman and retiring chief executive.

It has just recorded another significant leakage in profit, having overspent on customer-friendly expansion, under a chief executive whose focus has been on “listening to customers” rather than on surviving the building storms on the horizon. 

TSB is an unusual organisation.

It is the only survivor of the distant era in which every region had a local savings bank - Auckland Savings Bank, Wellington Savings Bank, Canterbury Savings Bank, etc. This era ended when Westpac bought out all the savings banks except TSB and merged them ultimately into Westpac, Australian-owned. The ASB eventually sold to the Commonwealth Bank of Australia.

The Taranaki Savings Bank community held out and remained a tiny community bank, disadvantaged by its lack of access to capital markets, for many years, right through to 2008, having a credit rating a pip lower than the (falsely) high credit rating of the ill-fated Strategic Finance.

Ironically Strategic Finance’s credit rating was assessed by the credit rater Axis, run by Ron Keene, who had for some years earlier been CEO of a TSB competitor, Southland Building Society, later SBS bank.

So TSB has muddled along, loved by its clients, basking in its role of dishing out its relatively modest profits to community projects, more latterly becoming in effect the largest, though not the controlling, shareholder in the controversial fund manager Fisher Funds.

Fisher Funds is controversial because of the history of its voracious appetite for fees and risk.

Its controlling shareholder, though only a minority holder, is the American fund manager TA Investments, which calls the shots, while a community trust formed by TSB retains people I imagine have expertise in dishing out grants, rather than in fund management. It is the TSB people who hold the majority of Fisher Fund shares. I suspect their role at governance level is somewhat passive.

TSB’s Chief Executive, Donna Cooper, is about to leave TSB, having overseen rising staff costs, rising operating costs, rising technology costs but, scarily, collapsing profits.

The scare is heightened because TSB is not listed and has no shareholders who would naturally subscribe to a capital issue if one were needed, for example in a year when bad debt provisioning was extreme.

TSB’s chairman is Mark Darrow, a name that will be recognised from the days of Dorchester Finance, Wrightson Finance, and the ill-fated listed investment company, Veritas Investment, whose name changes did not prevent its collapse to penny dreadful status. I will never know why Veritas was formed. It had no comparative advantage, nor did its chairman have visible skills in governance.

Darrow is not someone I would have guessed would find a role in bank chairmanship, but I guess those who meet “fit and proper person” tests are as eligible as others to apply for such a role. He would not have been on my shortlist.

Certainly he and Cooper have succeeded in winning their customers’ votes as the most customer-friendly bank in New Zealand, a goal they say they prioritise.

In contrast the larger and more successful bank, Heartland, has never won such a popularity contest but in every one of its 13 years has succeeded in lifting its profits (now many times higher than TSB) and building a resilience through its respected presence in capital markets.

Its dividends have risen incrementally, as has its capital and its deposits. It has had outstanding, wise chairmen, throughout its history, and has had a constant group chief executive, who most certainly has not targeted popularity contests.

It amazes me that Kiwibank has never sought to buy out Heartland, resulting as it would in a more resilient and more profitable group, lifting Kiwibank’s ability to compete with the big unpopular, powerful gorillas based in Australia.

Conversely, there has never been any obvious special value in any of TSB, The Cooperative Bank, and SBS Bank. None have access to capital, as Heartland has had.

Had Kiwibank bought the three non-listed banks, the Crown-owned bank would have gained scale, and perhaps parochial support, and might have made savings through synergies but would have gained no immediate shareholder benefit, few executives or directors with a clear contribution to make, and no new market segments to broaden their product range.

TSB’s bleak profit performance now should be addressed by a chairman and chief executive who put aside popularity awards and restore those qualities that ensure survival - nett margins and profit of a size that enables the bank to attract excellent executives and directors, and enables the bank to build resilience against future downturns.

They should reflect on the wise words of an old banking friend who would say that if all loans were at nil percent, and all depositors were paid handsomely, the bank would be very popular indeed.

Perhaps such a bank might not find it comfortable to weather all storms.

In banking, profitability matters.

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THE NZ Shareholders Association, created by the energetic, innovative, bright, accountant/clown Bruce Sheppard, relied on Sheppard's showmanship to build its public membership.

He grew its profile by barking at such finance company goofs as Hotchin, Watson, Butler, Tallentire, Petrecivec etc, all of them adept at presenting financial statements that had been fed on mountain oysters. Sheppard gave the organisation momentum.

The NZSA evolved as Sheppard handed on his leadership, and transformed into a broader organisation that invites its members to corporate functions, often with guest speakers who have leadership positions in relevant companies.

Company visits to major companies have also been on the NZSA’s menu.

Its annual membership charge is about $145.

It now accepts proxies for those public company shareholders who want such an organisation to vote for them.

Its current CEO is Oliver Mander, for many years the treasurer and chair of Scouts New Zealand.

The NZSA chairman is Andrew Reding, a one-time leader of a Fletcher Building division.

Last week the NZSA displayed the sort of leadership that NZ investors have often sought.

Speaking on the proposed international takeover offer of the NZ technology aspirant, ERoad, the NZSA opined that the best outcome might be a new majority shareholder backing ERoad, leaving the believers in its future to stay with a company that aspires to be a multi-billion-dollar company.

In effect the NZSA was saying the takeover bid might collect the shares of the non-believers, and then provide the oomph that ERoad might need to reach its potential, to the benefit of those who did not want to sell.

Given the NZSA is not a likely source of financial advice, but does represent thousands of small shareholders, this response was admirable.

It put into the media a viewpoint that will be noticed, and may lead to a new chapter for ERoad, transitioning to have a shareholder that has good connections and, most significantly, a shareholder with deep pockets, able to bring to the table some genuine financial clout, sufficient to give ERoad the years it requires to reach its potential.

I can easily envisage that if the bidder, a Canadian technology company, Constellation, is able to hasten ERoad’s success in penetrating the North American market, then within a year or two there might be a huge capital raise, underwritten by Constellation, diluting those who decline to put up more capital.

Constellation, as underwriter, would creep up towards a 90% holding, at the level at which a compulsory takeover might occur.

Those shareholders who believe in the product, and foresee a bright future, would resist the company takeover. I would be an example of such a shareholder.

The way to thwart that would be to take up rights, meaning the underwriter gained few or none of the new shares.

What one would not want is a board, dominated by Constellation, to bully shareholders into a placement that was not available to the faithful shareholders.

The NZSA has underlined the breadth of its services to members by speaking out on a proposal that no doubt will have implications for all ERoad believers.

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IN most broking firms, different groups of people, relaxing over a cold beer, run fun competitions to see who can have five seconds as the star, by predicting the best and worst performers on the NZX over the next year.

Our office is no exception.

The organiser is one Johnny Lee, and you can be sure that if his pick for the best and worst is not better than mine, then the announcement to all in the company of who was the star will be revealed in Latin, Greek or Swahili, and be incomprehensible. Blame his mother.

The concept of the contest is based on our knowledge that short term guessing is fun but is not relevant to long term success.

The long term is much more intelligently analysed than trying to pick whether day traders will boost GameStop shares for a week, a month, or a year. (GameStop is an American games company favoured by college kids, day traders, and social media misfits.) Its shares have moved from US$2 to US$500, back to US$23, all based on those who love to play in the day trading market.

The NZ Herald, for reasons that seem to define those who it regards as target readers, seems to take such idle sport seriously.

The Herald convinces a few brokers (and one former broker) to publish each year their one-year picks. The Herald then reports at the half year on which broker is “winning”.

Lest anyone be fooled, let me reveal that the person in the broker firm assigned to name the firm’s picks is likely to be related to the person in the NZ Herald who each day used to write up about one’s “stars”, Virgo, Leo, Capricorn etc. The CEO is most unlikely to be involved.

The NZ Herald should ask Johnny Lee to provide the progress reports on this trivia. He is now fluent in German but his Swahili and Maltese is largely manufactured and would surely add to the fun.

I am sure his write-up in these foreign tongues would be as meaningful as the earnest words ascribed to this frivolity by the NZ Herald business reporters.

One hopes The Herald donates to the winner one of those appalling tomes of dross, books written by journalists on such subjects as “How to make More Money”, or How your personality and choice of deodorant affects your stock picking successes”.

Please, NEVER regard such newspaper guff (or such books) as anything more than an amateurish way of making a few pennies. They are the equivalent of taxi driver tip sheets.

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THIS will be my last Taking Stock for July, Fraser Hunter and Edward Lee lining up for the next fortnight.

I expect to pen one from Malta, in August.

I hope readers enjoy the fresh views that will be on display.

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Infratil Bond Issue

Infratil has announced that it intends to launch a new 6-year senior bond issue next week.

While the initial interest rate has not been announced yet, based on current market conditions we are expecting it to be around 7.00% per annum.

If you are interested in being added to the list for these bonds, please contact us promptly with the desired amount and the CSN you wish to use, and we will pencil you on our list.

Next week, we will send a follow-up email to anyone who has been added to our list once the interest rate and terms have been released. 

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Edward will be in Auckland on July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD).  He will also be in Wellington on Tuesday 25 July.

Johnny will be in Tauranga on July 26 (FULL).

Fraser will be in Christchurch on August 18.

I will be in Christchurch and Auckland in September.

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee and Partners Ltd

Taking Stock 6 July 2023

THE debate over the development of Auckland’s airport has been conducted by the two major parties, the airport and Air New Zealand, in the popular media.

While this is unusual, and probably conflicts with best practice, the debate has had the helpful outcome of displaying the contrast of long-term thinking with the very short-term.

The airport CEO argues that the airport’s infrastructure and domestic terminal are not fit for purpose and cannot accommodate traveller expectations or future growth.  She cannot be challenged on these observations.

Air New Zealand’s CEO believes the $4 billion cost will impact its passengers, lifting individual air fares by several dollars per person, and thus threatening to reduce passenger numbers.  This view cannot be challenged.

The airport says it has consulted multiple times with the airlines considering all their design proposals and has now decided on its $4 billion plan.

The airline wants a cheaper plan and wants more consultation.

Perhaps both parties have also surveyed a meaningful number of those who use the two terminals at Auckland.

I expect they would find a horse’s head in the airport’s letterbox if the sole focus of domestic travellers were the absurd queues at the security and bag X-raying processes, which are decidedly third-world.

Clearly there are insufficient portals, insufficient staff, and far too many flights programmed to leave every hour, given the inability to move through security.  Missed flights or flight delays must be mundane.

I doubt that many respondents to research would care about the array of bars, retail shops, lavatories, fast food outlets, or even the bag collection process.

Most of the focus would be on the queues at security.

Conversely the international terminal is reasonably functional, from the viewpoint of a traveller who uses an airport to access a destination, rather than to shop, browse, or drink.

One wonders how thoroughly the passengers have been consulted.

But what the two organisations must have considered is what air travel might look like in five, ten and 20 years.

For example, aircraft that land vertically, like a helicopter, are likely to be on their way.  They already exist.  Will that lend to air landings in multiple Auckland locations?

We are told electric aircraft are on the horizon.  Will that offset the green concern?

Most loudly of all we are told that casual long-distance travel is inconsistent with a planet whose defenders believe that they are fighting for the planet’s existence, and simply will not allow more flights, or even existing levels of flights.  Globally activism is growing.  Airports are regularly disrupted by zealots.

France, for example, is effectively barring domestic short-flight travel that can be replaced by quick land transport.

On a slightly different axis, Europe is voting to place super taxes on casual use of cruise ships, acknowledging the 1800 cruise ships plying their offerings around the Mediterranean contribute more to atmospheric pollution than the total vehicle fleet in Western Europe.

One imagines that Air New Zealand and Auckland Airport have contemplated the long-term value of new facilities should the market be diminishing as it becomes subject to social pressure and new carbon taxes that aim to reverse the current commodisation of air travel.

If the sages of the world are correct in forecasting a great re-set - a fourth turning in the words of the Americans – then Air NZ and Auckland Airport might also model the shape of air travel should a high percentage of people resist its lure or be unable to afford its cum carbon tax cost.

Auckland Airport does need to adjust to meet the screening obligations that followed the 9/11 aircraft terrorism.

Will it also be modeling the outcome of a downward change in the numbers of those using domestic and international casual travel?

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ANYONE whose occupation requires them to read research papers from multiple sources will have an opinion on the skills of researchers.

Financial advisers should read extensively.

If they have experience and knowledge they will come to differentiate between balanced research (offering analysis of all information) and childish nonsense, the latter usually aiming to sell a product or to appeal to a segment that will agree with the discernible ideology.

Some of the lowest-grade researchers regularly present a paper based on an ideology expressed by those people who pay for slanted research.

For example, if I wanted to prove that gambling destroys life and should be banned, I would focus on the group whose personal financial management skills are limited, and then find a link between poverty, mental health, the need for and cost of counselling, and the effect of their losses on the quality of food they ingest.

If I dressed up my report with multi-colour graphs and pictures of sad people in straitjackets, I would know who might buy this research, and who might pay me to do more of it.

In contrast, a real research paper would be balanced by consulting those people who can afford to gamble, choose to engage in it as part of their “fun”, and who gain pleasure from the challenge of guessing a winner of such an event as the recent Chiefs vs Crusaders Super Rugby final.

Real balanced research considers all factors and then develops a conclusion.

What I consider trite, valueless, amateurish research would collect and analyse only that information that supported the underlying views of the researcher, perhaps aimed at selling a future research service to a buyer with a shared ideology.

These thoughts often arrive at my door, and did recently when I was sent some research originated by a tiny organisation which I guessed might be keen to expand its revenues.

The “research” seemed to me to be an unintellectual attack on the providers and users of retirement villages, disguised by some mundane readily available statistical analysis which, I concede, was clearly presented.

I guess the report might be saleable to those in charge of a budget supplied by Other People’s Money, themselves very likely never to have been accountable for earning the public money they spend.

To be of any value the report needed to address the very obvious benefits of retirement villages, and the very loud satisfaction of the 95% of village users who chose to buy into the model.

The “research” failed to address the chasm that would exist if there were no retirement villages with the capacity to provide geriatric care for those residents that need it.

It ignored the wide benefits of social inclusion that villages offer.

Egregiously, it virtually ignored the development risk in creating a new village.

It ignored the value delivered, the costs (like rates and some insurances) that are removed from resident budgets, it ignored the immense savings achieved by the scale of a village.

It appeared to me to believe, quite wrongly, that retirement village providers are not competitive, as though there were some sort of cartel between the bottom-tier operators and the top-of-the-market operators.

It appeared to me to be searching for a regulatory environment that would impose almost communistic standards on a lifestyle that some choose and others do not.

I do not know the people in the research-providing organisation, who I believe fell into the trap of staking their reputation on a narrow ideology.

Research produced by proven leaders, like Ari Decker at Jarden, usually leaves me pondering for hours on the issues that need to be weighed. He raises the issues, provides the facts, and then editorialises.  He is smart.

The papers I was sent seemed to me not much better than the stuff you observe from the supporters of a beaten finalist in super rugby, whose understanding of the game is that the result is decided by a biased referee.

My bin overflows till collection day.

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NOBODY is compelled to move into a retirement village.

For most of my life they were somewhat glum places, usually built by well-meaning organisations like religious groups or charities.

The modern model is incomparably better.

Absent from the providers is the Crown, some of whose less impressive representatives, in various Crown entities, want to micro-manage the sectors perhaps to please their political masters.

Their base case is that the users of these villages have no power to prevent them from accepting offers from the providers that might be unduly expressive in the opinion of the public sector people.

So these people want regulations to impose the commercial conditions.

Others, like me, who have deep knowledge of villages and the process, believe the commercial conditions vary, are transparent, and are either accepted or declined by the person buying the service.  Compulsion is not evident.

Some people buy Jaguars, some people buy Morris Minors.

As long as both cars perform to their promises, the market will determine which car it wants to buy.

Visit the Alpine View resort in Christchurch; magnificent and expensive, designed for the wealthy.  People with modest resources are priced out of this option.

Visit a Radius Care Village in Timbuctoo; quite different, and designed for a different market, a backpacker by comparison to a 5-star resort.

So we ask Radius to adopt Alpine View standards?

Those who want to intervene should be wary of getting what they want.

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IN my experience, retirement villages have been used by retired Governors General, retired public company chairmen and business leaders, retired doctors, schoolteachers, public health leaders, nurses, artists, musicians, farmers, office workers, council staff, and retired lawyers and accountants.

I concede that they had a common ability to sell their home, consider the wide range of options, read a contract, confer with a lawyer (compulsory), and then make an informed decision.

Slightly more women than men move into villages.  Security is obviously an issue, as is freedom from neighbourhood risks.

Because the family culture of Indian, Chinese, Maori and Pasifika is different – they often prefer to live with families – these people are under-represented in the villages.

Retirement villages are not generally an option for those with little wealth.  There is a move towards offering units to rent, though this is unlikely to be a low-cost option.

It is bizarre that there is a notion that legislative intervention is needed by the wide range of generally successful, wealthy people who choose to buy into a licence to occupy a dwelling in a retirement village.

Competition and the Fair Trading Act, perhaps supported by the Consumer Guarantees Act, ought to weed out anti-social operators.

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OUR seminar programme is now completed.

Apparently 1000 people in 15 centres attended.

We would be pleased to receive comments from attendees on the length of the seminar, the content, and its educational value, in brief emails.

This might help us make adjustments next year, if necessary.

Thank you.

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Johnny will be in Christchurch on July 12 (FULL) and Tauranga on July 26.

Edward will be in Auckland on July 19 (Ellerslie), July 20 (Ellerslie), and July 21 (Auckland CBD).

Fraser will be in Christchurch on August 18.

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee and Partners Ltd

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