Print this pageTAKING STOCK 29 June 2017
ANYONE who has lived through different business cycles will tell you that there are some certainties in life.
When making money is too easy, then standards slip, corners are cut, and mayhem follows. That is one obvious certainty.
Indeed the easiest example that illustrates the point stems from the financial sector.
When market activity and prices are rising, confidence soars, trading profits rise, cowboys appear, standards fall, opportunists cheat, losses emerge, confidence collapses, tears flow.
We do not need to spend too much time with illustrations of this.
Just recall the 1980s, when literally hundreds of listed companies appeared, common crooks became corporate chiefs, crazy concepts congregated, and calamities were the conclusion.
Around three quarters of the NZ Stock Exchange-listed companies disappeared between October 1987 and October 1991, along with tens of billions of investors’ money.
There were no checks and balances because the level of activities far surpassed the available resource needed to check, to balance, to regulate and to enforce, and to ensure accountability.
Millions were transferred from many to a few.
Are we now in this cycle with the building industry?
Must we endure the inevitable chaos created by panic-induced speed?
A thoughtful article from a principal of an Auckland real estate company triggered these questions last week.
The author posed the question, asking if we were right now in NZ creating tomorrow’s leaky home debacle, tomorrow’s ghastly ghettos, such as cities like London, Chicago, New York, San Francisco, Santiago, Paris, Sao Paulo, Johannesburg and so many others have created.
Using cheap, untrained labour, cheap, imported, unsuitable building materials, and fast-tracked consent processes, might we be building in Auckland today the sort of subdivisions and apartments that in ten years will have doomed the owners of lousy properties to a life in an unsaleable property in a corner of town that would be stigmatised?
Will Fletcher Building take on leadership, to steer us free from these outcomes?
Is the pickle in which Fletcher Building finds itself, simply an inevitable outcome after the ‘’perfect tempest’’ that has come from the Christchurch earthquake rebuild and the surge of foreign interest in moving to New Zealand?
There is zero doubt that Christchurch’s earthquake has caused the initial stress.
The need for speed and the need for pragmatism forces us to waive the normal processes that would seek to provide quality control.
We know that corrupt practices are left unchecked when speed and pragmatism are the prime considerations.
Contractors and sub-contractors in Christchurch estimate that at least one billion dollars have been misappropriated during the Christchurch rebuild, pocketed by those who were able to exploit the authority they were given.
But do we know about the poor building practices, the cheap, unapproved building materials, and the short-term nature of building solutions?
The scandalous ‘’leaky’’ buildings may be in the past but unsuitable reinforcing steel and inappropriate glass imports are modern curses, not to speak of inadequate insulation, dangerous cladding and poor quality plumbing products.
In Auckland, where housing shortage grows at a rate of some twenty thousand dwellings per year, we are beginning to see the problems caused by excessive speed.
Is there anything we can do that would be effective, without stalling the building process?
Old timers from the construction industry are adamant that we ignore these questions at our peril.
They believe we need a co-ordinated intervention now, involving all participants in the sector, to avoid a calamitous outcome, visible and unrepairable within a decade.
Is this a more important issue in an election year than whether some little twit recorded some silly chatter in a provincial electorate office?
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FLETCHER Building ought to be the most obvious part of the solution.
Its dominant market position in construction and in building materials, combined with its access to capital markets and its privileged political position, ought to make FBU the inspirational leader in the sector.
As often discussed, its poor leadership and governance has resulted in FBU being a part of the problem, rather than the solution.
Old timers, who still know a thing or two, will tell you that the essential principles in construction have never lost their importance.
The pressure under which FBU is currently reeling was illustrated recently by a media item, sourced from anonymous FBU executives who sought to divert attention to former executives.
This strategy dates back to the days of the cave man.
It is as inevitable yet as risible as the political ploy of blaming governments of previous years for every political problem today.
One of Fletcher’s biggest errors was the decision to win two large contracts by under-pricing at the tender stage, perhaps in order to ward off Australian or Chinese bidders.
The strategy surely came from the top floor at Fletchers.
Quantity surveyors, engineers and project designers came up with a tender price that the executive, and probably the board of directors, approved.
The price for the two contracts was at least $100 million shy of the real cost and has left FBU scuttling around to explain the loss.
‘’I know,’’ said a gutless executive. ‘’We will blame it on Tom, Dick and Harry, who all left the firm last year or the year before and will not be here to defend themselves.’’
If Tom, Dick and Harry were not quantity surveyors, not engineers, not designers, and not at the table that approved the tender price, the ancient corporate strategy of blaming others is seen by experienced people as being just a gutless tactic to divert attention from those clinging to their jobs today.
Fletcher Building urgently needs its chairman Ralph Norris to initiate a thorough review of his company and, if necessary, needs an audit of its culture.
I understand its financial audit is being conducted by an unprecedented number of people, presumably to enable its board to present a warts-and-all start point, from which to begin the restoration of the giant NZ company.
The critical issue here will be the integrated plan to move from a lousy start point.
Capital markets are undivided in their attention to this process.
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ANECDOTALLY it is easy to illustrate the speed wobbles in the building industry.
A family member, planning to build a house, is told by a building firm that a new home with good but not absurd specifications will cost $5,000 per square metre to build, in a big city.
A provincial building firm says the rate would be $2,500 per sq m.
At face value, for a 200 square metre house, the difference in cost between the two figures would be $500,000. Who is kidding who?
These anecdotes apply to many other areas where there is a shortage of skill.
For example New Zealand miners and tunnellers are again being wooed by Australian companies, as commodity prices rise, and infrastructure needs development.
A South Island gold mine has lost four good staff who were being paid around $100,000 per year to an Australian firm offering nearer $200,000 per year.
A miner with a tunnelling ticket has been lured away on $250,000 a year, plus bonuses and ample leave.
When will New Zealand adapt its educational system to focus on real skills – technical skills – that result in problem-solving employment that robots will not replace?
Currently we are doing the opposite.
For example the care sector is highly dependent on Filipino and Sri Lankan caregivers, while immigration leaders seek to push away those who cannot and do not earn $49,000 p.a.
Within a decade our population will require twice the number of caregivers that it employs today.
Does our education system address this sort of need?
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MEANWHILE the finance sector proposes legislative changes that allow a programmed robot to provide personalised financial advice.
The Financial Markets Authority is now asking the industry to submit thoughts on such a change.
I would be fairly certain that robots can and should play a role in educating investors, a process that currently is very reliant on the goodwill of capital market participants.
It would be an uncontentious task to programme a computer or a robot to provide information on such issues as the characteristics of a bond, or an equity instrument, and then complete the educational process with questions aimed at ensuring the information was understood.
There will be much more controversy over the concept of converting basic education into the sort of questioning that leads to an appropriate personal investment plan.
My experience is that the interviewing process for investors is nuanced to an extent that cannot result in binary outcomes. The interviewer needs to be experienced and knowledgeable and a gifted listener, to interpret the investor’s answers correctly.
The worst performers in the area of financial advice are those who believe that the answers to proscribed questions deliver binary solutions, meaning the process is robotic.
Some advisers simply spout what once was ‘’modern’’ portfolio theory, preaching such tripe as ‘’timing is irrelevant’’ or ‘’diversification improves returns’’ or ‘’index funds produce the best returns’’.
Timing is crucial, diversification reduces risk rather than increases return, and index funds are awful in a market downturn.
Such advisers then charge inappropriately high fees to implement solutions, the fees being completely unrelated to any added value.
It would indeed be straightforward to programme a computer or a robot to behave like this.
However the truth is that most investors, if allowed, answer ‘’not sure’’ to most questions and need a sensitive discussion and then time to move to a final answer.
Michael, Kevin, David, Ed and I could show you countless examples of people who described themselves, originally, as ‘’conservative’’ investors yet happily owned shares or units in managed funds that were high risk, and quite outside a conservative approach.
We learn, and eventually can help clients, by teasing from them information and attitudes that eventually create a portrait that is real. Robots will not do that.
A robot asking binary questions, and applying ‘’approved’’ responses from a doctrinaire software programme, will help investors on binary matters, such as which AA-rated bank offers the best 1-yr term deposit.
The issue of whether Trustpower, with its renewable energy sources, or Contact Energy with its use of natural gas, best fits an investor’s energy portfolio is an issue that computer programmers would need to handle in a human way.
My own view is that experienced, skilled advisers charging far less than the seemingly standard annual fee (1% or more) will have nothing to fear from programmed robots.
I would advocate that robots should be introduced to educate investors but I would much more loudly advocate that skilled advice is a nuanced exercise, and requires a human interaction.
Heaven help us if academics are given a role in any programming of robots.
That would be just one step from allowing academics to run seminars on how to invest money, something that would be akin to allowing political commentators to run the economy!
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THE product-selling group IRG had the most important part of its origin in a 1990s company, Equity Research Group, founded by Phil Briggs, now known for his unsolicited offers at discount prices, via Zero, targeting small retail shareholders.
Briggs, a long time ago, developed a ‘’free’’ investment magazine based on sometimes useful investment articles and funded by the advertisements of many of the 59 finance companies that popped up in the 1990s.
Investors were invited to ‘’pay’’ for the free magazine by channelling their finance company deposits through Equity Research, generating brokerage for Briggs to add to the minor nett income from his magazine advertising.
Eventually ER created enough revenue, thanks to Bridgecorp et alia, to produce a surplus and ultimately this enabled Briggs to sell his database and concept for around five million dollars to Brent King, who had founded the Auckland-based finance company Dorchester Pacific.
King’s reign at Dorchester ended in mutiny and he went off to found Viking Capital, which sought to raise money for King to apply his magic, with the help of a retired politician, Bill Birch.
Viking Capital foundered almost on day one, after buying into some fairly lowbrow ideas, including Certified Organics, and King then sought to earn his crust by buying Equity Research from Dorchester under the branding of IRG, presumably the initials representing Investment Research Group.
Any success King has had in business might have been attributable to what I interpreted as his car dealer-like trading activities, rather than highbrow analysis, but to his credit IRG still survives and presumably its client database remains satisfied with its usefulness.
However King has surely over-stepped the boundary, within which his skill set and credibility rests, with the spam text he sent out last week.
He wrote to a database that must include the general public, given that I received the spam and I absolutely promise you that I am not one of his clients, nor do I have anything to do with the twittering on his chat forum.
His spam urged NZX shareholders to vote for Tony Falkenstein when the NZX election of directors is held shortly.
King wrote that he was personally impressed by Falkenstein and he thought that the NZX needed someone on its board like Falkenstein, so he wanted the recipients of his email to be guided by him.
He may be right about Falkenstein but I suspect that King’s endorsement may not mean much outside of his immediate family and friends, given the fate of Viking Capital, and his unimpressive reign at Dorchester Pacific.
His opinions do not exactly match those of deity.
I may be less than generous in assessing his following but I am certain I am right in saying that his strategy of spamming non-clients like me is more likely to hurt Falkenstein than help him.
I await the day when spamming becomes illegal, but in the meantime I note that those whose wisdom is highly visible rarely, if ever, resort to junk mail.
Briggs spams shareholders, seeking to buy shares, usually at significant discounts to market value, usually offering to perform a transfer of ownership ‘’free of cost’’.
King spams a database that, if it includes me, has not even the faintest interest in his opinion on any candidate for public office, or for that matter, on any matter at all!
How do we stop spam?
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TRAVEL
Kevin will be in Christchurch on 13 July.
Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.
Anyone wanting to make an appointment should contact us.
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
Chris Lee
Managing Director
Chris Lee & Partners Limited
TAKING STOCK 22 June 2017
SOME of our best decisions as a country have been based on the leadership, nearly two hundred years ago, of the British.
Our health, education, judicial and political systems, all immensely better than the systems in many richer countries, have their origins in Britain.
However dear old mother England is not what it used to be and some of its latest contributions to the world have been decidedly eccentric, if not downright potty.
An obvious example of stupidity is the way the UK has sought to make the big banks do their penance, following the dreadful behaviour of the banks in the years leading up to 2008.
Please recall how wonderful old banks like Barclays and the Royal Bank of Scotland behaved prior to 2008, fighting each other to see who could pay the most to buy the Dutch Bank ING.
Recall how the 250-year-old Halifax Bank of Scotland (HBOS) formed Bank of Scotland International (BOSI) and became a major contender for New Zealand’s most stupid lender, competing for this title with the likes of Bridgecorp, St Laurence, Strategic, Capital + Merchant Finance, Lombard, Money Managers, Hanover and others.
BOSI ended up losing hundreds of millions just from its NZ lending, let alone its similar lending in other countries.
HBOS went broke, Barclays and RBOS lost tens of billions, Lloyds, under pressure from the Bank of England to help, bought HBOS and then went so close to bankruptcy that the Bank of England had to bail it out.
For decades the UK has been a laughing stock for its inability to have logical, simple rules on matters like tax policies, encouraging savings, pensions, controlling financial advice, and ensuring transparency in banking behaviour.
Arguably it has reserved its most bone-headed ideas for controlling the financial advisory industry, devising policies that are so complex and so poorly conceived that the bulk of retail savers in the UK are forced into very low-yielding funds, or into fee-heavy regimes that make life much worse for the people who need the help. Presumably the fund managers make huge donations to political parties.
Right now the Brits claim that their ad hoc and ridiculous controls on financial advice must lead to an abolition of low corporate-paid distribution fees, in preference for an immoral and expensive fee regime paid for by investors.
And this is occurring when yields on low-risk investments are at pitifully low levels. Investors are being hit from all angles.
Globally, financial markets like to work together so now we face the real risk that ideas from the UK, colloquially known as MIFIDs (Markets in Financial Instruments Directive) might migrate to New Zealand. Currently MIFID is for EU legislation only.
Heaven help NZ retail investors if that migration occurs.
In effect Britain and Europe would be dictating global regulations that ultimately would undermine the public’s right to make investment decisions, virtually forcing those investors to pay heavy fees enabling fund managers to play in low-yielding or higher-risk securities.
Is this really a good idea? Are you kidding?
Having worked in capital markets here (and in the UK) for 42 years, and helping to run a business that serves a few thousand retail clients, I must be forgiven if I claim to have some idea of what retail investors need.
My summary is that they need:-
- Personal knowledge of financial matters that might come from a sober, relevant educational curriculum.
- Access to honest information and analysis.
- Cost-effective access to honest, competent, accountable advisers or fund managers whose fees are less than the value they add.
- Effective legal protection, overseen by properly-funded market-connected regulators.
- An informed and worldly fourth estate.
- A fair and neutral taxation system that does not encourage any particular asset class.
- Transparency from product suppliers and advisers.
What investors do not need are tax systems that are so complex that only extravagantly-paid tax experts can interpret them.
Investors do not need:-
- Encouragement to invest in inappropriately structured products, like annuities, where fees and costs produce pitifully low returns.
- Encouragement to invest exclusively in robotically-run managed funds, which by definition make no effort to avoid companies that face the twilight of their relevance.
- Laws that encourage competent, experienced financial advisers, well connected to capital markets, to decline to assist, on the basis that compliance costs and risks make retail clients a high-risk category of clients.
- Interference in the distribution market, for example forcing clients, not the issuers, to pay the costs of buying into new securities.
- Paternalistic and/or pompous interventions denying people the right to manage their own capital.
- Unnecessary costs and constraints applied to issuers, brokers and advisers.
In coming months New Zealand is likely to hear more about MIFIDs, and this unwise attempt of poor-performing UK and EU legislators to impose a global framework on investing.
So far New Zealand has not been bulldozed by Britain, Australia or the USA into adopting the most self-serving and stupid of their investment regimes.
We have opted for transparency, licensing and then better performance from directors, auditors and trustees, a focus on education, and a policing of those whose livelihoods are made in and around capital markets, with a clear pathway (to ignominy and often jail) for those who either abuse their knowledge and power (i.e. David Ross), or those who pretend knowledge they do not have (Vestar, Money Managers etc.).
One hopes we continue to cherry pick only those global ideas that make sense.
To date, the extraordinary inefficiency of UK banks and UK stock exchanges, the absurdity of their different tax regimes, and the sheer stupidity of their laws regarding financial advisers and distribution fees (commission, brokerage etc.) have confirmed the wisdom of our own law-makers to decline UK/EU ideology.
May MIFIDs end up with the Triffids, in fairy tale books only.
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ANY attempt to change our regulations here should start with these questions:-
- What are the problems we are trying to fix?
- Will the changes proposed deliver better returns, or lower costs, or fewer risks (or any or all of these desirable outcomes)?
Currently we are revising our regulations.
Sadly, I observe very little input from investors, from experienced credible capital market participants, or from experienced credible advisers.
I see input from academics who clearly want to capture a new market, running faculties that aspire to teach students what the teachers have never experienced – the art of sharing investment wisdom. (I am unaware of any academic ever successfully acquiring and transitioning to a useful role in capital markets.)
I see input from bureaucrats, or policy wonks. They, too, are invisible in capital markets.
It is not clear if any of these people have ever had any contact with investing via capital markets, and I am unsure which problem these proposed regulations will address.
Our business, now in its 32nd year, has several thousand clients.
Twice in the past four years we have surveyed views and satisfaction levels.
I offered our survey and the responses to regulators to enable them to glimpse the real world. My offer was acknowledged but not accepted.
Given my age, I am unlikely to be affected by changes that might come into effect in five years, but I do care passionately about transparency, accurate and client-first advice, and cost minimalisation.
I have no confidence that change would improve these issues if the changes are based on the ideas of academics or policy wonks.
Surely change should be driven by investors, experienced advisers and issuers of securities.
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THE High Court has sentenced a corporate manager to six months’ home detention for insider trading of listed securities.
Two years ago, the executive rang a friend and suggested he sell a tiny holding of shares because the executive had learned that his company was not achieving sales at the anticipated level.
The friend sold his shares to someone who could not have known about the sales slowdown. The buyer was duped.
Very clearly the NZX cannot allow there to be asymmetry of information. If insiders know a company is doing well or poorly the insider simply cannot exploit that knowledge.
He must be silent until, compelled by its continuous disclosure regime, the company has made a public announcement, ensuring complete symmetry of all price-sensitive information.
Prices then adjust to the information and buyers and sellers can then make equally-informed decisions.
Clearly in this case the insider pre-empted a company announcement by telling his friend. The friend then exploited the information.
The friend (the seller) faces charges, as he should.
Will the buyer be reimbursed by the seller?
In the current era regulators are struggling with finding an approach that is fair and pragmatic yet does not prohibit people from making bad decisions.
It is still legal, and should be, to exploit one’s own good research, analysis or judgement and it should be legal to lose money by making poor decisions.
Symmetry of information is a key assumption in credible markets, but is it applied properly and is symmetry of information enough?
Do companies release price-sensitive information, or do they retain it so that the market is uniformly uninformed?
Have we reached a point where it is safer, at least in terms of commercial consequence, to bar all staff and all associated people from trading other than at times when the market is fully informed?
In other words, do we simply announce nothing, rather than announce everything that is price-sensitive? Is this putting too much trust in the integrity of those who have the information?
If Fletcher Building has learned that its tendered prices for contracts will cause even worse losses than FBU has signalled, is it wise for the company to ensure ‘’symmetry’’ of information by saying nothing and barring staff trades?
In my career I have observed tectonic disruptions to the way public companies behave.
In the 1980s entrepreneurial asset-stripping companies, some property moguls, so-called merchant bankers, sharebrokers, lawyers, accountants and many, many others traded on information that the public could never have known.
In those days, if Company A was about to make a surprise bid at a premium to buy Company B, all sorts of people knew about it and virtually every ratbag in town would find a way of buying into Company B and capturing the gain when the bid was made at a premium by Company A. This sort of cheating rocked Wellington and generated an army of millionaires who effectively stole their way to riches.
This cheating was not so much analogous with shooting rats in a barrel, as rats having a secret key to the storage area of every barrel of oats in town.
Then unlisted and more a fraternity to maintain a monopoly and allow its members to be enriched (even with approved cartel pricing), the NZ Stock Exchange was governed by relatively junior members of broking firms and managed by people with little proof of their excellence. (Google the NZSE directors in the 1980s – it is a revealing exercise.)
In those days the trading boards, in the different main centres, often did not co-ordinate buy and sell prices, meaning a seller in Dunedin might get ripped off by having his shares bought by someone who sold them immediately in Wellington at an unearned profit. Remember that in those days we still used telegrams and the fax machine was yet to appear.
We are in a much better era now, though it is obvious to me that our nation has yet to convince people that trading on secret information is no different from stealing.
The recent High Court conviction, following an expensive Financial Markets Authority investigation, rested on an almost laughably tiny sum, so an extraordinarily expensive message has been sent to anyone tempted to cheat.
Yet we still have not addressed the much bigger problem about the need for symmetry of information.
Imagine that some bank executive knew of potentially company-destroying information about a listed company.
Imagine it discussed that information with the board of the troubled company, with its sharebroking adviser, with Treasury, the Reserve Bank, the Minister of Finance, the Prime Minister, the NZX, legal advisers and an audit firm.
Imagine they all kept that information ‘’secret’’ and collectively decided to allow investors to trade the shares on the basis that the ‘’symmetry’’ was that no investors knew the truth.
Imagine they even allowed the troubled company to publish dishonest, but reassuring, information.
Anything wrong with that? The market was equally uninformed? Really?
NZ now is benefitting from the global financial markets’ confidence that our economy is relatively robust, that our debt levels are serviceable, and that our capital markets are fairly and rigorously regulated.
We benefit by a relatively high level of foreign savings coming here to underwrite our living standards.
Would we deserve such respect if in truth we have closeted a whole lot of ‘’bad news’’, and allowed the investors to be duped?
The subject has not closed.
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ALL investors will be comforted by the knowledge that the FMA is to resume a case against property financier Paul Bublitz and others, who the FMA allege misused finance company money around the time of the finance company sector collapse.
The first trial, lasting several months, was aborted when the judge ruled that the FMA had bungled the process of discovery, a practice that allows all parties to share documents that will be relevant to a trial.
Bublitz, a founding director of Strategic Finance, eventually departed from Strategic and was linked to Viaduct Capital and Mutual Finance.
The FMA will allege that he and others used investor money to finance property deals in which they had an interest.
Sadly, mis-use of investor money was widespread in the era 1998-2008, as we have all learned, too late.
Indeed many finance companies used conduits to hide related party lending, South Canterbury Finance and Hanover Finance being obvious examples.
A High Court trial should add to our knowledge of what went wrong.
Another High Court case which will be observed with interest is the case against the directors of Property Ventures Group, chaired by solicitor Austin Forbes, and controlled by serial bankrupt David Henderson.
The liquidator Robert Walker is filing charges against directors and several other parties, including the auditor PricewaterhouseCooper, seeking recoveries of several hundred million dollars.
The High Court has required the plaintiff (Walker) and his backers (a litigation funder) to put up $2 million, in case the defendants win the case and are awarded costs.
The case itself is set to be heard in February 2018.
One imagines any serious business reporter in New Zealand will be planning to attend a case which may well provide guidance on acceptable audit practices, as well as shed light on a company that probably registered on the Richter scale, so heavily has it shaken Christchurch.
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TRAVEL
Michael will be in Auckland on 26 June (Mt Wellington area).
David will be in Palmerston North and Whanganui on 27 June, and New Plymouth 28 June.
Kevin will be in Christchurch on 13 July.
Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.
Anyone wanting to make an appointment should contact us.
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
Chris Lee
Managing Director
Chris Lee & Partners Limited
TAKING STOCK 15 June 2017
WELL over a year ago the unheralded funds management leaders at the unprepossessing Royal Bank of Scotland found a way to capture attention by warning of an imminent collapse in global financial markets.
The RBS people advised their somewhat meagre followers to sell up immediately.
Their followers, to their credit, largely ignored this.
Global markets continued to respond to the flood of money, pushing asset prices up. Investors had another excellent year of high returns.
The RBS people discovered that the risk of stepping aside from the crowd is loss of market share and a more pot-holed motorway between the bank and its quest for credibility.
Last week a no-doubt sincere, very small Australian fund manager, Altair, made the same call. It is quitting all markets.
Its manager Philip Parker made the honest declaration that he could not justify his excessive fees if he were to take the decision to sell growth assets and revert to cash, so he will return cash to investors.
His small team of people, well distanced from high profile market leaders, assessed the value of assets they had bought with other people’s money as being unsustainable.
They cited the risks of collapse in China (excessive property market prices and debt levels, and misleading accounting standards), the unpredictability of the USA under its chosen leader, other geo-political risks, and the fear of an Australian property market crash.
Accordingly the little boutique manager, possibly in relevance the equivalent here of the NZ PIE Fund, was cashing up, returning cash to the other people whose money Altair had invested, and awaiting a day when assets would again be priced at levels that appealed.
One cannot but admire Altair for acting on its analysis but I doubt it will be followed by others.
In general the market reaction to its decision was that Altair had abandoned its duties to make the best possible decision for its investors. Implicit in this reaction is the faith that if some asset classes collapse, others, perhaps gold, would rise.
The casual observer might ask why Altair would not just buy gold, or even revert to Swiss Francs, and await the time when global asset prices fall to a level that Altair assessed as fair value.
Perhaps Altair is conceding that fund management fees are inappropriate, given the decades of low returns that most people predict.
Perhaps the answer lies in Altair’s mandate, which might not allow it to vary its asset allocation dramatically.
Perhaps Altair (and maybe the PIE fund) commit to be stock pickers rather than asset allocators.
Whatever the rationale the courage is to be admired, but the risk Altair takes, as with the RBS last year, is high.
I do not mean that the investors have been put at risk by having their money returned, though they might not like the prospect of another round of fees, should they simply move to another fund manager.
It is Altair that has accepted a risk.
Irrespective of the extreme prices being put on shares like Uber, or even Facebook, the reality is that the world’s lakes of money are being fed by full rivers of (diverted?) water.
If the world prints money yet maintains zero interest rates, the logical explanation is that world leaders fear deflation and debt servicing dangers.
Investors, confronted by zero returns for risk, either act to preserve capital by buying gold or Swiss Francs, or they take the optimistic view that corporates will keep making money and paying dividends or growing.
The optimistic view, to date, has been rewarded.
Some argue that those who capture most of the ‘’printed money’’ will spend it, without regard for value, so those wanting investment returns must invest in the companies who are selling to the moneyed classes (i.e. holidays, gadgetry, silk purses, hummus and chickpeas).
By breaking away, Altair displays courage and maybe (one cannot be sure of the circumstances) Altair displays integrity.
It would be nice to believe that the motive was altruistic.
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THE consequential question for those who are fascinated by an active fund manager’s decision to return capital, is whether this might ever be replicated by the index-following exchange traded funds (ETFs).
If a KiwiSaver fund manager selling ETFs had the ability to analyse financial markets – and there is no evidence of such a skill set – would the ETF manager close down his funds, proclaiming that an index fund is doomed if indices are facing freefalls?
Indeed if Altair were to be right, one must ask what rationale would exist to stay invested in ETFs that ape sharemarket indices.
When markets fall ETFs simply hold assets, bar adjusting for those stocks that fall the most and those that fall least.
Investors might have seen this recently when Fletcher Building’s share price had fallen while the rest of the market has risen.
The FBU share price fall has been faster because, as its weighting in the index has reduced, more sales from ETF funds occur, creating a spiral that is far from virtuous.
In theory an ETF fund manager, whose analysts (if they employ analysts) might foresee long-term market falls, would act as his original mandate promised i.e. just keep losing money.
If the mandate made no mention of an alternative response investors would have to make their own decision when to quit.
If Altair were right, investors nearing the exit age of 65 would certainly want to react now.
My own view is that no investor should stay in any KiwiSaver fund for a day longer, once the subsidies from employers and the tax department are stopped.
All KiwiSaver funds are managed with long term horizons, by definition, yet the strategy for young investors must be very different from those aimed at satisfying older investors.
Only the very rich want to invest in saplings, rather than harvestable trees, when they are no longer blessed by Father Time!
There is one other obvious question about KiwiSaver funds which simply track indices.
Why do they need any highly-paid staff or directors?
If a software programme just applies arithmetic to copy an index, what value could any capital market expert add to a board? Would such an expert have any right to offer his wisdom?
Surely all such a fund needs is selling skills, administration skill and, as is the case with one such fund (Simplicity), an advertising budget that ensures gratitude and accommodation from media outlets desperate for such advertising revenue, happy to ingratiate sales groups with a media budget.
_ _ _ _ _ _ _ _ _ _ _ _
ONE journalist who does not seem to be influenced by free morning teas or a glass of Bulls Blood, is the veteran NBR capital markets observer Jenny Ruth.
Whilst all formal media now seek to steer well clear of any litigious capital market participant, the NBR, with Ruth often the journalist, does appear to be discovering the need to address issues that affect at least 200,000 retail investors.
Whereas the professionals in capital markets are highly focussed on the developing saga at Fletcher Building, the print media generally services all investors poorly, perhaps frightened of fists that might wave writs.
Not so Ruth, now a veteran, is someone who combines experience with caution. She has skilfully raised some real issues, including the asking of the question of how best to assess the value FBU has had from its British visitor, Mark Adamson, currently FBU’s CEO.
Adamson defined how he should be measured when he joined FBU, with bold claims of how he would turn FBU into a world class company, having hired, he said, world class managers who, he said, should be paid accordingly.
These world class staff were not here out of charity, he said. Well, nearly five years later, FBU has not responded to all this British tally-ho stuff!
Far from cutting costs, FBU now spends more than ever to achieve its nett revenues, it has made expensive mistakes, its executive team looks to be inexperienced and rattled in what one could call the guts of the business, and its share price has been in reverse.
Ruth, exercising care, asks how one should judge Adamson. She points out FBU now pays 61 people more than New Zealand pays its Prime Minister (the figure was 40 just five years ago).
Those paid between $100,000 and $500,000 now number an astonishing 4440, about 1100 more people that were in this bracket pre-Adamson.
In this time FBU has returned in total gains to shareholders about one third of what the index has returned to investors. And you pay all this money for that sort of result?
New Zealand’s loudest voice in capital markets, justified by his experience and writing skills, has been Brian Gaynor, founder of Milford Asset Management.
Gaynor was to have listed Milford on the NZX nearly 10 years ago but in difficult times, and faced by loutish opposition from a highly pitched voice, reshaped his plan and found the capital and friends to retain Milford privately.
This has been a blessing for NZ as Gaynor, free of the constraints of NZX membership, has used his independence to speak out against poor performance. Clearly his stint as an NZX director in the dreadful period leading to the 1987 crash has given Gaynor a useful benchmark.
Fletcher Building has attracted his criticism.
Probably we have all read the Battle of the Titans, a book explaining how Fletchers incinerated $10 billion of shareholders’ money in the 1980s and 1990s, when Hugh Fletcher was given credibility he had never earned.
Gaynor has stayed on Fletchers’ tail ever since.
Ruth appears also to be politely asking real questions.
Given there are around 200,000 New Zealanders with direct investments in bonds or shares, and more like two million people in KiwiSaver who should be taking an interest in capital markets, you might assume that Fairfax and NZME would see the extreme relevance of the under-performance of Fletcher Building, New Zealand’s most important company.
Not a peep has come from Fairfax and, bar Gaynor’s scrutiny, NZME and the NZ Herald also seem to be oblivious to the relevance of FBU’s problems.
Thankfully Ruth has stood up.
I suggest that all investors affected by the future of FBU keep an eye out for the NBR in coming weeks, if the daily media remains cowed by the power of FBU.
One has to hope that the FBU chairman Ralph Norris puts in place the paving blocks that lead to a suitable destination for FBU shareholders, its employees, and all those who, often through political favour, have granted FBU such a crucial role in our society and our economy.
_ _ _ _ _ _ _ _ _ _ _ _
IF Norris wants a model to follow to help him to rebuild FBU into a reputable, admired market leader, he might want to wander down to the headquarters of Mainfreight.
A day or two in the company of Mainfreight’s much admired chairman Bruce Plested and chief executive Don Braid might provide just the encouragement that Norris might need.
Without any doubt Mainfreight is now among New Zealand’s most admired companies.
It is a success story I could never have imagined when it listed roughly 20 years ago, as a transport company known by the public because of its trucks that share our highways.
Freight transporters come and go in New Zealand, many having success reliant on the energy of their founders, but few succeed in maintaining standards and profits in what is a highly competitive field. Often the companies spend their depreciation reserves and then find their gear too old for its purpose.
When Mainfreight arrived and listed I failed to see the clever path its founders had envisaged, with its strong role in freight logistics, its growing roles at ports and airports, and the determination of its founders to deal well with its work force, putting people and high standards ahead of dividends, in its priority lists.
A two-dollar share is now a twenty-two dollar share, proving that long term strategies, with emphasis on people, on relationships, and on incremental improvement, are not just old-fashioned concepts, to be scorned by fund managers and boardroom salesmen.
Mainfreight’s record profit, recently announced, will be shared with some 2,000 staff, after which shareholders will get modest dividends to add to the possibly regular growth in share value.
I imagine those who dish out honours at times like Queen’s Birthday weekend must surely have been rebuffed by the two who have driven Mainfreight to its pole position as New Zealand’s model company.
Surely they have been on a list. Perhaps they do not want to be in a club which, sadly, has included some of New Zealand’s ugliest bandits.
Norris, honoured for his role in restoring Air New Zealand, might want to ask Mainfreight to discuss how it incentivises staff, how it uses qualitative measurements for its bonus awards, how it made its international acquisitions with very few mishaps and how it has succeeded in acquiring shareholders who do not obsess about quarterly results.
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THE decision by Summerset to diversify its funding requirements away from a reliance on banking syndicates is smart.
If the late Lloyd Morrison, who founded Infratil and pioneered the retail bond funding model, should be upstairs and listening he would be toasting Summerset’s decision, probably with a fine NZ red.
Infratil has a small dependence on banking finance but it has an impressive laddered retail maturity book which sometimes may have been a little expensive but has definitely given Infratil certainty of long-term finance. (Don’t mention the disgraceful, mis-designed perpetual bonds!)
Summerset (SUM) has grown impressively and has achieved a $600 million syndicated banking facility, enabling it to buy land and build new villages.
Its growth is impressive.
The industry model is to fund the lifestyles of its residents pretty much at cost until the resident dies, at which point Summerset helps itself to huge tax-free capital sums.
Add these to its development margins, which are always huge, and you get a real estate company, with a care business, that simply needs to keep its building in tune with demand to succeed spectacularly.
But it needs long-term funding commitments.
Banks will be long-term funders providing they have regular review periods, enabling them to withdraw, if bank liquidity so requires.
By moving to the retail market, offering security pari passu with the banks, Summerset is displaying caution and wisdom.
If it can establish a ladder of retail issues it will be de-risking its business, whatever the cost of the bonds (in this case 4.78% p.a. - we draw investors’ attention to the interest payments being in January, April, July and October which are useful for smoothing cash flows in most portfolios).
Barring a collapse in property prices, illogical regulatory change or illogical competition from the Crown, its profitability is destined to be impressive, and unlikely to be affected noticeably by the cost of its retail debt.
My guess is that Summerset, having tested the market, will be a regular issuer of retail bonds, perhaps sparking its competitors, Rymans and Metlifecare, to follow its lead in the bond market.
Its first issue of just $75 million is small, properly priced, pays the distribution fee (as it should) and may therefore find demand far exceeds supply.
Those investors seeking information and an allocation of this issue should contact us urgently.
Travel
I am in Christchurch next week – June 20 and 21.
Kevin will be in Christchurch on 13 July.
Michael will be in Auckland on 26 June (Mt Wellington area).
David will be in Palmerston North and Whanganui on 27 June and New Plymouth on 28 June.
Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.
Anyone wanting to make an appointment should contact us.
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
Chris Lee
Managing Director
Chris Lee & Partners Ltd
TAKING STOCK 8 June 2017
THE announcement by Orion Healthcare that it will proceed with an underwritten rights issue, at just 90 cents per share, reminds all investors of the difficulty of valuing a highly ambitious business venture.
Orion (OHE) listed more than two years ago, its price established by a book building process that in theory gave fund managers the power to assess value and set the price.
The likes of ACC, Fisher Funds, Milford, AMP and a wide range of others who invest in very large lumps brought their collective wisdom together and set the original price at $5.70, a value they would have reached by listening to the Orion aspirations, calculating the chance of Orion realising its ambition, and assessing when and how much surplus cashflow would be available, when (how many years) being of crucial importance. (There had been an earlier placement at $4.0).
Orion, controlled by a mathematician, believed it could reduce the costs of health budgets in many countries, an aspiration that everyone would regard as desirable.
Just in the USA, with its horrible system, health budgets were forecast to rise from around 18% of GDP to 24%, an additional cost of hundreds of billions, within a few years. The US, already borrowing a trillion a year to balance the gap between tax revenue and spending, simply cannot lift its health spend every year.
Orion’s plans promised to address costs with at least two weapons.
It wanted to enable all health providers to share all known health information about their clients/ patients to eliminate duplication, wastage, and mistakes and to make the different hospitals, clinics, doctors etc. instantly able to access data. For example car accident victims occur anywhere, meaning new health professionals ordinarily might have no knowledge of people coming in.
The second and more adventurous part of OHE’s aspiration was in using algorithms to develop analysed data that would reduce future health costs by sending out signals to individuals, perhaps of a need to change their behaviour.
For example someone might get a text from a Fitbit watch telling him/her that their system needs a break from alcohol, or from rich food, or that they are not sleeping properly, or forgetting any medication required.
It is in this area of analytics – prevention rather than cure – that Orion saw (and sees) a fantastic opportunity to use technology to reduce health costs.
If OHE shared just a tiny percentage of the savings it foresaw, its revenue from around the 29 countries in which it has licensed and sold software would make Orion New Zealand’s most profitable company.
Orion targeted a billion of annual income from licence sales, within five years.
I guess when they set OHE’s initial price, the book builders might have assigned a percentage chance of OHE achieving this figure in a time frame, and then guessed a price that made sense, given the risk and return.
I recall a bright, brave and energetic young man central to the process telling me that the pricing of OHE’s initial public offer was a problem. It was not scientific, as it was based on ambition and on software not only not yet proven but not even written.
Orion was, and is, a real company, used by dozens of health systems in at least 29 countries, like Britain, Canada, USA, Australia, Spain and, of course, New Zealand, the latter the home of the brilliant mind that dreamed up the process.
However it was not the only company in its field, it was second guessing the future, and sales were uncertain not just because of competition, and central government budget constraints, but also because the most ambitious part of the project had not even been developed.
Orion might argue now that its revenue over the past two years, of $200 million per year, is far from chickenfeed, an achievement that is laudable.
It might argue that progress has been real.
The dream of a billion a year by 2020 does now seem to be a dream. Perhaps more likely revenue might be $300 million a year by 2020.
Hence the share price has slumped and the slower collection of revenue rewards has led to the burning of cash reserves, and there is now a need for a cash issue (two shares at 90c offered for each nine shares owned) at a price that three years ago was unimaginably low.
The company’s founder, Ian McCrae, is a fine man, brilliant in his field, a family man with five children, no greedy instincts, and no significant wealth outside his 50.8% ownership of Orion.
He is taking up his rights at a cost that will stretch him. Other major shareholders and directors are also taking up the offer.
I will be doing the same.
Orion does have other problems, however.
Its dominant position in New Zealand requires it to meet the demands of a sector that is always stressed.
It needs its senior and middle management project staff to listen well to the needs of stressed health practitioners.
It needs to be practical, as well as to be clever.
It has competition, from the like of the US company EPIC (nothing to do with that George Kerr/ Macquarie creation that rorted many NZ investors).
Its underwritten rights issue now raises just $32 million, to add to its $6 million of cash and perhaps $30 million of unused banking facilities.
It must stem the cash bleed and will do so by slowing down its research spend from the extreme levels it has allowed in the past two years.
Orion forecasts that it will record a profit in the second half of the next financial year.
Will the slowdown on the research spend put an end to its admirable ambition or simply extend the time line?
McCrae is in his 50s, and has guessed he has a few years of energy and desire in him.
Logically a technology-based company, addressing such a fundamental need, held in respect in 29 countries, and with licensing income of hundreds of millions per years, is worth something, and noticeably more if the income is growing.
Most would guess that it is worth more than 90 cents per share. The market price confirms this.
Would NZ be the owner of the company if McCrae retired and sold?
Or would the likes of Apple be a logical owner?
The rights issue this month provides more time for OHE to achieve more scale.
It will need to make more sales, and report them carefully and regularly, if this rights issue is to be repeated in the future at a higher price.
Disclosure: I and my family hold OHE shares.
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MY reference to our wasted opportunities through poor land management in a recent Taking Stock item brought a thoughtful response from a concerned reader.
I made the comment that I often see fertile land being left unloved, covered in gorse, scrub, noxious weeds etc.
I should have noted that in Europe, particularly in Germany, great effort is made to use all fertile land, even to the point of growing crops on land soon to be used for housing purposes.
One rarely sees gorse, noxious weeds are attacked and sometimes it seems every last inch of useable land is treated with respect.
One who responded to my letter referred to a Landcorp farm displaying a good deal of healthy gorse.
He questioned the current promotion of the idea of converting arable land to ancient forest, noting New Zealand had millions of hectares of land unsuited for farming (say, Taranaki to Raglan) and had no need to allow lazy thinking about arable land. There was ample land for ancient forests, he wrote.
He noted that the Wellington regional area had declassified gorse as a noxious weed, resulting in many farms allowing their gorse seed to spread into neighbours’ land.
New Zealand is a rare country in that it is blessed with great growing conditions, rain, sunshine and top soil, allowing it to farm ruminants with much less management cost than almost anywhere.
Calls to improve our national productivity, enabling wages, living standards and tax revenues to rise, do not necessarily mean we should work longer hours, or forgo our lunch break.
Productivity would increase significantly if all we did was increase our grain production, or produce more sheep meat, by making use of land that currently is unkempt, perhaps endangering neighbouring land.
It might also improve by making better use of our water and by reversing the degradation of our waterways.
Productivity potential can be illustrated by the success of a South Island gold company, a recent mining operation that has definitely enhanced our country’s productivity in recent years.
This venture in Southland, some 50kms from Gore, began when geologists found evidence of a riverbed that existed hundreds of thousands of years ago.
It ran under some wonderful lush paddocks in the heart of Southland.
Geologists found that 23 metres below the surface of some paddocks there was gold.
The farmers agreed to provide access to the paddocks in return for gold royalties.
The project began three years ago, has produced sufficient value of gold to pay farmers six or seven figure sums per year, employed a few dozen people, and rewarded its shareholders, including me, while growing our gold exports, now our second biggest export to Australia, behind oil.
The first farm paddocks to be dug up have long been restored to a better condition than ever, the farmer has used his royalties to attack his gorse problem thus improving his productivity (and pleasing any neighbours who were downwind from the gorse).
The little town nearby, in what was the electorate of Bill English, has rented out vacant cottages, its public bar has had revenue increases, the motel is well used, the grocery shop now has an attached café, the town museum is being upgraded, the much-admired trout fishing resource has been improved, not degraded, and the grocer sells a hundred pies a day to the workers!
The Crown has received royalties, and collected more taxes out of the area than ever before. Win, win, win, win. . .
If recounting this tale puts into perspective what productivity gains might mean, then let no one recoil from the thought that productivity gains are our path to better living standards.
(And a pox on those stupid folks that bought gorse into New Zealand from Britain to ‘’fence’’ our paddocks!)
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FOR seven years at least, NZ investors have been confused by the difference between the political/ economic forecasts of rising inflation and rising interest rates and the capital market view that forecast low rates for a decade.
The position in our office has been cemented by the persuasive European argument that low, zero or negative rates are permanent.
‘’For the rest of your life,’’ one German banker told me years ago. Given he was not a medical expert, I did not take this to mean that I needed to rush off to update my will, though who knows?
What he meant was very low rates, for decades, I hope!
Zero rates would be the only possible means of avoiding a global disaster, he said. Debt could not be serviced if interest rates were even mildly higher.
I revisit this subject, for Edward has just completed a quick piece of research to share with our five advisers. I publish this below as it gives a stark view of reality, in contrast to what I see as the silly view, perhaps the salesmen’s view, that you had better ‘’buy today, because rates will be rising’’. (Or ‘’sell today’’, depending on the product).
The rates are those of bank deposits which have crept up by tiny steps, because of intense competition for retail deposits.
And he outlines long bond rates, senior and subordinated, highlighting significant falls in this calendar year, after a month or two of small rises.
The table below covers Precinct Properties, Auckland International Airport, Infratil, ASB Bank, Wellington International Airport, BNZ, Auckland City Council and Westpac.
Bank deposit rates
January 2017 1 Year – 3.50%
2 Year – 3.80%
3 Year – 4.00%
4 Year – 4.10%
5 Year – 4.20%
May 2017 1 Year – 3.65%
2 Year – 4.00%
3 Year – 4.05%
4 Year – 4.20%
5 Year – 4.30%
Bond Yields
2021 Maturity/Reset
PCT010 January 2017 - 4.50% yield on NZX
PCT010 May 2017 – 4.25% yield on NZX 0.25% lower
2023 Maturity/Reset
AIA210 January 2017 – 4.30% yield on NZX
AIA210 May 2017 – 3.77% yield on NZX
0.53% lower
2024 Maturity/Reset
IFT230 January 2017 – 6.00% yield on NZX
IFT230 May 2017 – 5.65% yield on NZX
0.35% lower
ABB030 January 2017 – 4.90% yield on NZX
ABB030 May 2017 - 4.30% yield on NZX
0.60% lower
2025 Maturity/Reset
WIA050 January 2017 – 5.00% yield on NZX
WIA050 May 2017 – 4.45% yield on NZX
0.55% lower
BNZ090 January 2017 – 5.30% yield on NZX
BNZ090 May 2017 – 4.75% yield on NZX
0.55% lower
2026 Maturity/Reset
AKC100 January 2017 – 4.10% yield on NZX
AKC100 May 2017 – 3.77% yield on NZX
0.33% lower
WBC010 January 2017 – 5.40% yield on NZX
WBC010 May 2017 - 4.70% yield on NZX
0.70% lower
_ _ _ _ _ _ _ _ _ _ _ _
MY recent item querying the composition of the NZX Board, and welcoming the addition of Craig’s manager Frank Aldridge, was written without the knowledge that change was already afoot.
The Forsyth Barr manager Neil Paviour-Smith is to resign from the board, without mention of his plans for his involvement in the industry.
He will have some warm retirement thoughts, having seen in recent months some much-needed progress at the NZX, the process initiated by a wise, empathetic and socially ept CEO Tim Bennett, now succeeded by a determined, decent and intelligent man in Mark Peterson.
For most of the long, long period that Paviour-Smith has sat on the NZX Board, the NZX was run by Mark Weldon.
This period was characterised by short-term decision-making, leading to horrendous management and staff turnover, a complete neglect of NZX responsibilities to those who held securities in the finance companies that had securities listed on the exchange, and an ugly breakdown of relationships with NZX sharebroking members.
In fairness to Paviour-Smith it must be said that many of these failures stemmed from incompetent management, rather than poor governance.
During this period the policing of continuous disclosure requirements was dreadful.
Paviour-Smith, as manager of Forsyth Barr, will have had a challenging task in coping with the issues of the day, as well as holding responsibilities of governance at the NZX. He has had to deal with the fallout of Credit Sails, SCF, Strategic Finance, Feltex and others, like Provincial Finance.
One hopes that the NZX, under Peterson’s leadership, progresses the changes in culture that Bennett initiated, and restores some sort of unity amongst its sharebroking members. Its new board should prioritise the need to improve confidence in the NZX culture that Bennett established.
As an astute correspondent has noted, had the NZX been bought out by a share swap with the ASX, shareholders in the NZX today would be immeasurably wealthier than they are.
Hopefully the new board and the new CEO can reduce that deficit.
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Travel
I will be in Christchurch on June 20 and 21.
Michael plans to be in Auckland on June 26.
Kevin will be in Christchurch on 13 July.
David will be in Palmerston North and Whanganui on 27 June and in New Plymouth on 28 June.
Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.
Anyone wanting to make an appointment should contact us.
If you wish to be alerted about the next time we visit your region please send us an email and we will retain it and get back to you once dates are booked.
Chris Lee
Managing Director
Chris Lee & Partners Limited
TAKING STOCK 1 June 2017
RALPH Norris has had a remarkable career, embracing the senior roles at ASB/CBA and Air New Zealand, but he may now be facing his biggest challenge, at Fletcher Building Ltd (FBU).
In terms of employment, its role in the economy, and its role in the housing market, Fletcher Building is our most important company.
It is now in crisis.
Norris is its chairman.
He may well be facing a decision on the break-up of the company – the sale, probably to Australian or Chinese companies, of its various divisions.
His alternative, which I much prefer, might be to pay out its British hedge fund CEO, Mark Adamson, recruit a different executive team, and focus on building a culture in FBU that might enable it to do justice to its status as our country’s flagship corporate.
Make no mistake. Norris is facing a crisis and will be considering strong opinions on the alternative courses.
The crisis could not be contained within boardroom walls when FBU was forced into the humiliating disclosure that its signalled quarterly results were wrong by at least $110 million.
Within weeks of the confident quarterly forecasts, the CEO Adamson was forced to acknowledge that its construction company had displayed incompetence and had under-priced two major, tendered, projects by at least $110 million.
These projects were the Sky City Conference Centre in Auckland city, and the Justice Precinct in Christchurch.
FBU made a special announcement that its profit would be reduced by $100 to $150 million, through overruns at these projects, just weeks after confirming expectation of much higher profits. How robust is its forecasting?
It announced its admired CEO of Fletcher Construction, Graham Dallow, would retire and be replaced by one of Adamson’s executives, a young woman with a Harvard University MBA but with zero construction site experience.
Yet to be announced is the resignation of Fletcher Construction’s CFO, Philip King, previously the group Investor Relations Manager. He leaves, effective August.
I expect that there would be widespread resignations if Adamson returns to Britain, and if Norris decides that FBU is to restore itself, addressing at least two decades of decay, which have resulted in it being regularly cited as New Zealand’s most flawed large company.
Norris may feel that at his age he does not deserve this task.
He did not appoint Adamson to the CEO role, that decision being made by Norris’ predecessor, Ralph Waters, a CEO turned chairman at FBU.
The appointment of Adamson seemed to coincide with an acceptance of hedge fund mentality, a focus on short-term objectives.
Senior managers at FBU have described Adamson’s strategies as being focussed on FBU’s share price.
Perhaps this is unsurprising as Adamson invested much of his known personal wealth in FBU shares, a fairly good indication that he saw value in the share.
Indeed it is commonly accepted that the break-up value of FBU is likely to exceed $12 per share, whereas the market says that a poorly governed, poorly managed company that has under-delivered on its potential for at least 20 years, is worth less than $8 a share, a return of 5% after tax for those who invest to collect the dividend. A break-up would be difficult to execute and unhelpful to New Zealand.
FBU is NZ’s dominant construction business, not a play-thing on a game board.
Norris has a pedigree that suggests he is a company builder, not an arbitrage enthusiast who would focus on the split-up value.
Norris began the reconstruction of Air New Zealand, though to be fair it was Rob Fyfe’s personal skills, empathy with all parties and skill with the media that jump-started Air NZ’s elevation to its much admired current status, with Christopher Luxton maintaining Fyfe’s good work.
Norris was also a ‘’builder’’ at CBA.
I imagine he will now be bringing together the best available people in capital markets, and seeking their help to attract company builders at board and executive level, if he sees FBU as needing to be reconstructed.
If he believes the ‘’share price’’ is the major issue, he might be looking to hold on to Adamson and search out buyers for Firth, Golden Bay, Placemakers etc. Personally, I would dislike that outcome.
My guess is that the focus will be rebuilding FBU, aspiring to transform the once dynastic company into a shape worthy of accolades.
He would need to start with its culture, introducing long term goals and foregoing share price and dividend considerations while putting in place the right people, incentivised by succeeding with real objectives, rather than manipulating balance sheets to achieve higher sharemarket prices.
I recently suggested FBU should start by employing culture change specialists, by introducing scholarships for school leavers wanting trade skills, and by ensuring it has people with relevant first-hand knowledge in charge of the construction and the building companies.
Perhaps it might commit to a leadership role in social housing, working with the Housing NZ Corporation (HNZC), and the technical institutes.
If it were to partner HNZC it would find a potential friend in the HNZC CEO Andrew McKenzie, who had been CFO at Fletcher Construction for what seems like an abbreviated period, after a career as CFO at the Auckland Super Council. McKenzie has strong social aspirations for the HNZC.
If Norris is to rebuild the company he will want a board united by its commitment to long-term improvement. He needs some engineers with practical, first-hand knowledge.
Last month the NZ Shareholders Association, an increasingly vocal representative of retail investors, expressed its deep concern with FBU, and met with Norris.
It later wrote to its members reiterating its discomfort. This was a strong response.
Last week word filtered to me that the losses of Fletcher Construction may not all surface till the next financial year.
I am certain that Norris will respond to the market’s disappointment.
I hope it is by declaring that the company is ambitious and wants to achieve its potential, to be New Zealand’s flagship company.
Surely we shareholders do not want a quick capital gain from an asset sell-off, followed by the realisation that foreign corporates would then have the ownership.
_ _ _ _ _ _ _ _ _ _ _ _
IF FLETCHERS is to be rebuilt, one appalling problem it must deal with is the growing levels of corruption in the construction sector, noticeably in Christchurch.
Corruption is an insidious enemy and seems to feed on itself.
Nine years ago I observed a growing acceptance by some, including the Crown, of rotten standards, as the finance company sector imploded.
The level of stench became unbearable as people once assessed as competent and law-abiding lost their compass, driven by fear or greed into blatant crookedness. Astonishingly, many cheats escaped from accountability and are now restored to multi-millionaire status.
Eventually it was apparent that assets had been warehoused to hide from the law, equally obvious were dirty deals within deals, as we had seen in the 1980s, when corporate crime was unchecked by any accountability.
Many years ago I approached Cabinet Ministers and other energetic politicians, detailing examples of crooked deals.
I recall talking to Leanne Dalziell, then, most inappropriately, the Commerce Minister. I used the analogy that there was a train wreck event at which the rescuers were pillaging the victims’ handbags and molesting the women.
She used that analogy that night on television, giving me hope that my message had been received.
But nothing further was done, at least visibly, and corruption grew, with the Crown often the victim, as Crown-guaranteed finance companies had their assets sold at giveaway prices, often to friends and colleagues of those with the power to sign off the sales.
Sadly those early signs of corruption have bred, and were offered further opportunities by two events, the Pike River Coal tragic explosion and the Christchurch earthquakes.
When Pike River’s dreadful governance and management was not confronted by the law, its appalling directors barely told off for their cynicism and disregard of life, the opportunity to display accountability was lost.
Those who exploit such opportunity saw a weak government response, no accountability, no sanctions.
There should have been strong, virile responses, with directors barred from commerce, as a start-point.
One Pike River director, Stuart Nattrass, was also a director of South Canterbury Finance, where by his own evidence he had been a yes-man, following the wishes of the late Allan Hubbard, who himself reacted to commercial adversity by shunning the law.
The response to the Pike River disgrace reflects badly on many areas of government.
When the earthquakes shattered Christchurch many pointed out as loudly as we could that the post-earthquake environment would feed the rats who exploit disorder.
PricewaterhouseCooper specialists warned that corruption was a huge risk, indeed almost a certainty.
The evidence of corrupt practices has been overwhelming, beginning with anecdotes from distressed property owners, who were watching the Crown and insurers being cheated by unsupervised, ridiculous repair bills.
The stories escalated.
Twice the managing directors of major companies in the rebuild sector have bothered to tell me of their observations of corrupt behaviour.
They spoke of major discrepancies in the awarding of tenders, of contracts awarded with variable estimates that led to 40% more final cost than would have occurred had a fixed tender price been accepted.
Their stories were harrowing, and described a level of cheating that both companies believed were measurable in hundreds of millions, if not billions.
What they said was happening was what PwC predicted.
Last week a third major company approached me, the caller an engineer and a company shareholder/director, with real experience.
I was told of a process of procurement that was so exploited that sub-contractors were being directed to pay secret amounts ($60,000 in one case) to nominated bank accounts, and told to pad the variables on the tender to cover the $60,000.
Another sub-contractor was told that to win a tender it needed to pick up the monthly progress payments for a private house.
As the engineer noted, putting together a tender is a time consuming task. Why bother if you know the tender will be awarded to a company that will play the corrupt game.
That engineer guaranteed to me that at least 10% of the spend on the rebuild had been because of inappropriate control of the tendering process. That sum exceeds a billion dollars.
Often the tender is not competitive because potential contractors believe that the process is rigged.
Who is controlling the process? Is it the Ministry of Business, Innovation and Employment?
Who is watching? Who measures and challenges the variables in each tender? Who oversees the procurement?
Balefully, the engineer asks ‘’who is supposed to care?’’
I recalled seeing evidence of the Crown being rorted when a grubby little crook was able to sign off the sale of land to a colleague at a price that was less than the new owner would make from pre-sold parts of the land.
In effect millions of Crown money was given away, perhaps hundreds of millions, in total.
I saw no evidence from those to whom I reported these transactions that anyone either cared, or felt compelled to investigate, though they said they would take action.
Corruption, once it is omnipresent, does have the effect of leaving dispirited people empty of the energy to tackle the problem.
If corruption is unchecked at the start, it feeds on itself, and it crosses into other sectors, and other geographical areas. For example, Dunedin has seen ample evidence of appalling practices.
Unless I am sadly misinformed, and I reject that as being most unlikely, then the sector that Fletcher Building so dominates in Christchurch is rife with underground practices that will make it hard for FBU to disinfect. Perhaps the new initiatives Norris would need to oversee might address corruption in the sector. Fletcher leadership might be enough to scare off those who cheat.
Of course there are other problems in the sector, such as skill shortages, the need for speed, the rising cost of materials, a shortage of labour, Crown incompetence and the element of the unknown that affects all remedial work.
How much more acceptable would these real problems be if there were strong leadership that dealt to the corruption with prison, with huge financial sanctions, and a heavy dosage of ignominy?
Perhaps Fletcher Building can leverage its own need to be restored by offering effective leadership in the fight to disinfect the city of rats who are exploiting the opportunity to cheat.
Ralph Norris might just be the man with the energy to face the challenge.
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THE FINANCIAL Markets Authority has expressed pleasure at the result of a recent survey, which showed that investors were regaining confidence in the investment process.
Those with confidence have increased from around 50% to 60%. Undoubtedly the better regulations prevailing today have been a factor in this recovery of confidence.
Those that worked for Money Managers, Reeves Moses, Vestar and Broadbase have long been identified and largely have left the industry. Their influence had been dreadful.
It still rankles with me that the media so assisted these rogue companies, the media jockeys perhaps blinded by the advertising sales they were making, yet the media’s childlike promotion without any probing questions had no financial penalty.
Google that era and one still sees sycophantic and frankly dim-witted journalists publishing stuff that praised Money Managers and its long discredited senior staff.
Fairfax/INL in particular, but also Radio Pacific might be counting their good fortune that regulators allow such blind promotion from gutless journalists and editors.
Some might wonder whether the lure of advertising revenue leads to simple corruption.
Happily those days are gone. The boiler room salesmen and the gushing media supporters undermine the confidence of investors much more rarely than was the case 10 years ago.
So you would expect the recent FMA survey to reflect this.
However an even greater influence on the positive response is likely to relate to investor returns.
In the last seven years the NZX has risen each year, perhaps by around 10% per annum, if one accepts that the index measures dividends as well as capital gain.
Seven years of consecutive gains is impressive. It would be a poorly-advised or poorly-informed investor who had not participated in any of these recoveries and gains.
Indeed any investor who bought relatively low-risk listed property trusts, the Crown assets (Meridian etc.) and bank stocks would have had a most impressive rise in value.
Many investors did, despite some idiotic media commentary, especially at the time of the Crown asset sale program.
You might ask why investor confidence was not nearer 100%.
Some of the lack of confidence might relate to the well reported errors of the Serious Fraud Office, which bungled its case against South Canterbury Finance directors (see Judge Heath’s various comments) and maybe some might ponder the recent bungling by the FMA during the process of bringing to account some finance company directors who allegedly used investor money to underwrite high-risk personal projects. (Surely that case will be reinstated.)
You can be fairly sure that the FMA will be reviewing its own behaviour after this trial was aborted because of errors in the sharing of documents.
In recent years there are several reasons for NZ investors to have gained confidence: -
1. The regulations are better and the regulators are better funded.
2. The NZ dollar has been stable.
3. The underlying economy here has been stable.
4. Most of the crooked advisers have been removed, some now living behind high fences.
5. The Crown asset sales strengthened the NZX.
6. The NZX has had competent leadership for nearly six years.
7. The banks have performed strongly.
8. International capital has flowed into NZ.
9. KiwiSaver funds have grown to be a significant source of local funding.
10. The global economy has not deteriorated (yet?)
11. Tourism has grown.
12. The Christchurch rebuild insurance brought many billions back to NZ.
13. There have been very few NZX failures (Wynyard a horrid exception).
14. Immigration has created demand.
In this environment how would the FMA have felt had the survey revealed falling confidence?
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TRAVEL
I will be in Whangarei on June 12 and 13(am), at the Mokaba Café and in Albany on June 13 (pm).
I will be in Christchurch on June 20 and 21.
Kevin will be in Christchurch on 22 June.
Edward will be in Hamilton on June 7.
Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.
Anyone wanting to make an appointment should contact us.
If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.
Footnote
Our confidential advised client newsletter will be mailed out this week. Investors interested in FBU, OHE, SKT and the retirement village sector may want to read this newsletter.
Chris Lee
Managing Director
Chris Lee & Partners Limited
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