TAKING STOCK 28 June 2018


IT is probably true that most people never expect to hear a full, balanced account of central or local government decisions.

Most accept that the politicians will spin the information to convert their decisions from what might be ‘’the better of two evils’’, into the ‘’best possible outcome’’.

Government, local or central, comprises very few, if any, commercial people with skills in making investment decisions, principally because such people are usually better rewarded and live in much kinder worlds than those who seek their main chance by running campaigns to be voted into public office.

Skilled people usually want to choose their workmates, not have them dumped on them, by a fickle voting populace.

So the experience of many, like me, is that those who move into public office are most unlikely to have finely-honed business skills or even skills in communication.

It is probably also fair to say that because these elected people have ‘’shareholders’’ who range from diligent, caring people, to the permanently grumpy, and then to deadbeats, the politicians, Trump excluded, rarely would take the risk of communicating in stark terms.

They obfuscate and prevaricate, sometimes pretending that ‘’commercial sensitivity’’ overshadows their desire for full and frank disclosure.

Perhaps it is for these reasons that the Kapiti Coast District Council has found itself the subject of ridicule in recent weeks.

The KCDC had announced that it would contribute $150,000 over three years towards a planto attract Air Chathams, as the replacement airline for Air New Zealand, which in April quit as the provider of daily flights between Paraparaumu and Auckland.

The Council simply announced this ‘’grant’’ to help develop the Kapiti economy, using the economic development fund it had salted away.

Many times previously, in the last thirty years, the Council has used rate-payer money to encourage economic development, with few good results.

This grant seemed like another of those subsidies to the private sector that are hard to justify, as at least three quarters of the local population in Kapiti will never use the flights to Auckland and would prefer that this seaside town stop growing, and revert to the days where there were no traffic lights and no meter maids.

As is so often the case, the Council announcement lacked any sort of explanation and simply fed the likes of the Taxpayers Union who immediately issued a condemnation of ‘’turning Air Chathams, a private, profitable business, into a charity case’’.

I myself regarded this payment as foolish, reacting to what the Council had explained, which, as usual, was not much.

I have since learned that the Council’s decision will not put a dollar into Air Chathams.

Nor does Air Chathams want any subsidy. It is a substantial company with 14 aircraft and more than 100 staff and has its own engineering base at Auckland Airport.

The real issues, that the Council did not divulge, are the Paraparaumu airport fees and Airways New Zealand fees, the latter more than three times greater than an airline pays at any other airport in New Zealand.

The unlovable Todd Corporation owns the airport.

This is a result of a dismal period of Kapiti’s history when a media character, Brett Ambler elevated his visibility, during a period of road works inconvenience, gaining headlines with his rants about road stoppages.

At the same time the TAB lost the plot and for a short while the racing sector looked likely to lose its radio coverage.

Until the TAB found a solution, Ambler stepped up, converting a meaningless radio station into the racing station. He became a cult hero for enough people that he was able to win the Kapiti mayoralty, despite having the social and business skills of a public bar brawler.

He had neither skills nor experience to bring to this job, though he did implement two Trump-like decrees which have withstood the test of time, banning gangs from Kapiti, and banning those dogs that terrorise people.

Anyway Ambler facilitated the sale of the airport, a crazy decision, antagonising the Maori from whom the land had been taken for an essential Crown facility.

A group that possibly included Ambler bought the airport for a modest price, perhaps a million or two.

Subsequently Todds have bought most of what was the airport from that group.

Todds will have every right to price its services and has probably adjusted its costs in recent weeks to reflect its desire to replace the lost Air New Zealand revenue.

The Crown’s Airways NZ has an exaggerated cost, perhaps because there are few users of the airport with whom to share the costs.

Costs are critical to viability for any airline.

Air Chathams is a profitable airline but cannot subsidise Kapiti travellers.

The Kapiti Council has decided to pay some of the Airways NZ cost, probably hoping to convince Airways NZ to review its costs so the subsidy becomes unnecessary.

Air Chathams gets no subsidy. Arguably Airways NZ gets a subsidy. The Crown owns Airways NZ.

The Taxpayers Union might argue that Kapiti Council is subsidising the Crown!

All of this information should have been put in the public arena when the Kapiti Council made its decision to contribute $50,000 a year towards Airways NZ.

The mayor of the Kapiti District was previously a journalist with the local free community paper.

He, like Ambler, has no visible business skills.

However he should be aware of the need for communication.

He is likely to have been intimidated by those who use phrases like ‘’commercial sensitivity’’, a concept that might be mysterious to newspaper reporters.

It would be madness for any council to subsidise a profit-chasing organisation but it may be smart to help solve a temporary problem and then negotiate a permanent solution.

Government and local government these days attract people for whom the remuneration is the highest they are likely to receive, ever.

Teachers, public servants, nurses, policemen and media folk are much likelier to cast an eye on a politician’s salary than would a highly-paid business leader.

Perhaps that saves us from being solely guided by commercial objectives but it might also explain why so many political practices are amateurish.

The Kapiti Council’s communication and explanation of its decision to help the Air Chathams project was inadequate and led to unnecessary angst.

The pressure should be on Airways NZ to rethink its charges. Airways NZ in turn might have to publish the true costs of its services.

If the costs of maintaining safety for commercial flights were simply too high for a single destination operation, then the project would not be sustainable.

It seems obvious that the media and the Council should be discussing these issues, giving the public the basis on which to provide feedback in an informed way.

Irrespective of this, no one should forget that only a small percentage of ratepayers will ever use the proposed flight to Auckland, and many others believe that the pursuit of relentless economic growth produces uncomfortable outcomes.

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MY discussion last week about the mining of iron sands off the Taranaki shoreline incorrectly noted that the Court of Appeal (COA) is to consider the decision of the Environmental protection Agency (EPA).

The EPA has approved the project but various parties want this decision reviewed.

The review will be in the High Court, not the Court of Appeal.

If the High Court rules that the EPA process was correct then, and only then, can the Court of Appeal be approached by the dissenters.

The COA could intervene only if there were faulty applications of the law.

The miner Trans-Tasman Resources (TTR) would raise more capital only if the last of the appeals failed and the project commences.

I doubt many realise the value of the project. Now that there is a method of recovering various rare metals, the project is valued highly, its contribution to batteries so essential to electric cars.

TTR shareholders will be anxious to hear that their mining licence will convert to a project worth billions of dollars to the country and the shareholders.

TTR shareholders will know that if the Crown should intervene and cancel the mining licence, compensation would be automatic. The Crown has the power to do that but must pay the costs.

So far TTR has spent $80 million.

The other sea bed mining that is uncertain is the Chatham Rise rock phosphate project.

It seems unlikely that Chatham Rock Phosphate (CRP) will ever have access to the funds to appeal the EPA’s decision that rejected this proposal.

Perhaps it will be revived when New Zealand adopts European standards of demanding that phosphates have none of the carcinogenic characteristics of the phosphates we now buy from the northern hemisphere, principally Morocco and Russia.

 _ _ _ _ _ _ _ _ _ _ _ _

THE composition of Fletcher Building’s new board is being condemned by fund managers as a simple continuation of the mistakes of the past.

Lawyers, accountants and bankers have led the board previously.

None of these professions has succeeded in recalibrating their own cultures so are unlikely to help Fletchers, a firm that was once dynastic and is now dysfunctional.

Fund managers want to see building industry experience on the board.

They are right to observe that British merchant bankers are usually dreadful chief executives and to observe that the threat to Fletchers is in construction errors rather than in financial structuring, the latest example being the hotel development at Christchurch Airport, where human errors have been astonishing.

My hope is that Fletchers new chairman Bruce Hassall applies his mind to the culture that has badly damaged the company. That should be his start point. Executives need to learn that pride of performance is much more important than absurd salary increases.

Fletchers needs to focus on people experienced in relevant markets, with technical knowledge and an understanding of the culture that defines good businesses.

Simply overpaying their executives will not improve standards. It will attract the wrong sort of people.

Perhaps Fletchers need to be ruthless about punishing cheats – take them to court, rather than just sack them – and it needs to focus on its own standards, rebuilding trust and confidence.

Bankers, lawyers and accountants dominate boards.

However each of these professionals are cited as poor examples, as we have seen in recent disclosures about law firms and the treatment of women, and on banks, highlighted by the Australian enquiry. I am told accounting firms differ by a tiny margin from law firms, in the way they treat women.

Engineers, quantity surveyors and scientists do not seem to attract the wrong cultures.

We would not want another iteration of the Fletcher behaviour of the last two decades.

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Edward is inNelson 2 July, Blenheim 3 July, Auckland 5 July and Queenstown 26 July.

Kevin will be in Christchurch on 12 July.

David will be in Lower Hutt on 10 July, Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 21 June 2018


INVESTORS will soon learn the outcome of two crucial legal determinations, both highly relevant to the private sector.

In one case, a High Court judge is soon to release his judgement, having heard a unique case in which private sector investors are suing an agent of the Crown.

In the second case, the Court of Appeal must decide whether it will allow an appeal against the process that approved a mining venture off the Taranaki coast.

All in the horticultural, agricultural, viticultural, apicultural and silvicultural markets will be waiting for the judgement on whether the Ministry for Primary Industries (MPI) failed in its biosecurity obligations when contaminated bee pollen was allowed to enter New Zealand.

A wide range of kiwifruit growers lost hundreds of millions of dollars when the PSA virus badly damaged kiwifruit orchards.

The orchardists believe the virus was imported with foreign bee pollen. They believe MPI had a duty of care to inspect and approve the pollen.

Litigation funder LPF raised many millions from high nett worth members of its group to mobilise thiscase, seeking several hundred million of compensation from MPI for its alleged breach of its obligations.

The case was heard over several weeks, leaving the judge to find the just solution after hearing two very different sets of information and opinion.

His judgement is to be delivered within the next week after a series of delays, one delay requested by the government.

The judgement might create new case law and define the accountability of MPI for its behaviour. 

While doing so it might take a bite of the funds that the finance minister has held back to cover contingencies.

Ironically, kiwifruit orchardists have recovered from those disastrous years and are once again the group most likely to be targeted by the salesmen of McLarens and Ferraris in the Bay of Plenty.

The second case involving the Australian company Trans-Tasman Resources (TTR) will have an equally divided audience.

TTR applied many years ago for a mining licence to dredge a defined section of the seafloor, some 20 miles from the South Taranaki coast, in a specified area where iron sands lie.

It gained its mining licence but was opposed by various interest groups which succeeded in winning the support of the Environmental Protection Authority (EPA) when its view was canvassed.

The EPA ruled against the project, unsatisfied that there was sufficient scientific evidence to placate those who feared that the mining operation would damage the seabed, create enormous plumes, interfere with passing dolphins and whales and, perhaps most improbably, alter the beaches 20 miles away and, in the imagination of Raglan surfers, 100 miles away.

The Australian company accepted the cost of more scientific research and resubmitted its application to the EPA, this second time winning by a slender majority the right to proceed.

Having fought the second application, various parties were dissatisfied with the reversal of the original decision and now wish to have an appeal heard in the Court of Appeal (COA).

The court will listen only to flaws in the legal process.

If the COA declines to hear an appeal, the protesters would still have 20 working days to appeal against that COA decision.

Beyond that, a mining process would begin, virtually immediately, unless an appeal succeeded.

TTR has spent around $80 million to date.

Its shareholders, perhaps totalling 30 or so people, have been led by its chairman Alan Eggers, a West Australian with genuine experience and achievements, and a good reputation in the sector.

It was Eggers who kept Summit Resources together after it found uranium in Queensland and needed to survive until a new government approved the mining of the resource.

During the survival process Summit’s directors nearly gave up, some wanting to use the company to enter into software technology.

Eggers persisted, others sold out.

Those who stayed eventually found their five cent shares were worth six dollars, after Paladin issued its shares to buy out Summit.

Several multi-millionaires emerged, grinning.

Interestingly one of the biggest winners from this windfall many years ago was Allan Hubbard, the South Canterbury Finance chairman.

Hubbard was an astonishingly audacious mining investor, in fact a penny dreadful investor, who was a soft touch for various wide boys who exploited his wealth and fed his appetite for high risk.

He owned millions of Summit shares and profited by tens of millions when the shares were revalued. Other times he lost, heavily.

The TTR project has largely been funded by Eggers.

If the Court of Appeal finds there were no flaws in the process that has led to TTR being permitted to proceed, it is highly likely that TTR will list its shares, perhaps here and in Australia, asit raises the capital for what it believes would be a project that would benefit New Zealand and its shareholders.

It has issued a new feasibility study in recent days, highlighting the presence and the increasing values of some rare metals used in battery storage, a key factor in the future of electric cars.

It would not be beyond the sense of irony of miners to purport that this metal is needed by all those of green persuasion who want to see electric cars replace diesel andpetrol fuelled cars.

The COA’s decision should appear any day, as it did define a date for announcement.

The primary sector, now facing the challenge of the MPI solution for Mycoplasma Bovis, will undoubtedly be keen to learn how accountable MPI must be as it meets its responsibilities. MPI has insurance to protect it against negligence claims. It would not have this insurance if it had no liability.

The mining sector will be wanting to have evidence that legal process is defined, and not moved by possibly temporary attitudes towards its activities.

Within a fortnight, we should know more about both these important cases.

 _ _ _ _ _ _ _ _ _ _ _ _

THE decision of Ralph Norris to resign from his chairman’s role at Contact Energy, as well as Fletcher Building, can be read as an acceptance that he is of retirement age.

Alternatively it might be an acknowledgement that his future as a director has been clouded by the simply dreadful stream of news that has emerged, and is still emerging, from Fletchers, which he chairs.

He retires from this role this year.

Norris made his name in banking, where he was ASB’s chief executive at a time when ASB was quicker to embrace new technology than other banks.

Norris went on to join the ridiculously overpaid Australasian banking elite, rising to CEO of ASB’s owner, the Commonwealth Bank of Australia.

He also had a successful stint with Air New Zealand, as chief executive and chairman, at a time when Air NZ was fumbling, its purchase of Ansett amongst the poorest decisions made by a NZ company, worse even than some of Fletcher’s real lulus of earlier days, like its purchase of paper companies.

Air NZ, like ASB, also led the way in its use of technology, perhaps pioneering the airport ticket issuing machines that helped revolutionise the pre-boarding process. Every traveller today will be grateful for that innovation.

Norris may well have a skill in adapting technology to improve customer experiences.

Rightly or wrongly his curriculum vitae has now been indelibly stained by his experience with Fletcher Building.

That company has had at least a decade of arrogant behaviour, grossly over-rewarding some executives, failing to understand its competitive advantage and tolerating a deteriorating culture, perhaps seen at its worst in the rebuild of Christchurch.

Norris was chairman. Accountability applies. He had many opportunities to demand an audit of Fletcher’s culture but chose to defend it.

My instinct is that he still does not understand what investors expect of a good chairman.

Retirement is a good option.

 _ _ _ _ _ _ _ _ _ _ _ _

NEW ZEALAND is such a small ‘’village’’ that conflicts of interest are inevitable, an almost daily occurrence for some.

As I continue with my research into what led the Key government to fail so badly with its fiduciary responsibilities when it presided over the Crown Deposit Guarantee Scheme, I discover any number of conflicts that were not well handled.

Of course some people will have been particularly careful to manage these conflicts.

The energetic Auckland lawyer Andrew Harmos, now an AMP director in Australia, was the chairman of the NZX, which listed SCF securities (bonds and perpetual shares) during Harmos’ reign at NZX.

The Forsyth Barr chief executive, Neil Paviour-Smith, was a director of the NZX, during the same period.

Both retired some time after SCF collapsed.

Harmos was the legal adviser of Allan Hubbard and was closely linked to South Canterbury Finance, involved in the termination of SCF director Stuart Nattrass (Nattrass resigned after moving a vote of no confidence in Hubbard). Harmos was a key man at that time.

Paviour-Smith took over as SCF’s adviser after the Forbar investment banker Ross Mear suddenly and surprisingly resigned from Forbar, just weeks after SCF had ditched a credible rescue plan.

Being NZX directors, Harmos and Paviour-Smith both had intimate knowledge of continuous disclosure obligations.

SCF chose not to disclose on many material matters.

One would assume Harmos and Paviour-Smith excluded themselves from these conversations at SCF and excluded themselves from any discussion at NZX meetings of SCF’s behaviour.

They would have been well familiar with the need for this sort of protocol.

The village problem reaches many levels in NZ’s capital markets.

For the meantime, perhaps while the new Labour government pontificates, the ACC has at the head of its Investment Committee, Trevor Janes, a short stocky fellow selected by Murray McCully, in the National Party, for this role.

Janes was not a selection I would have expected, given his major error in accepting a chairman’s stipend to chair one of New Zealand’s worst ever companies, Capital + Merchant Finance.

Indeed in 2010 the then shadow minister of justice, Andrew Little, challenged the appointment in Parliament, berating Janes for his failure to protect investors or blow the whistle.

It is ironic that Little is now a senior member in Cabinet and will have a powerful voice over government-sponsored positions in the ACC.

As Little knows, other CMF directors wore striped onesie suits as a result of their role in a company that deceived investors.

Janes was deemed not to be accountable for CMF during his brief tenure in that dreadful company. He did retire from the board of Mighty River Power but he stepped into a plum job with ACC.

His conflicts of interest today are extraordinary. He must be excusing himself from meetings at regular intervals.

He chairs Abano, an NZX-listed company which ACC has held and probably still holds in its portfolio.

He chairs KiwiRail for the governmentyet he chairs the listed company TIL Logistics, a highly significant client of KiwiRail.

Presumably Janes excuses himself from lots of meetings, often. He must tire from jumping from board tables to seats outside, while conflicted issues are discussed.

If I were the new Labour government I would be thanking him for his previous contributions and approaching someone who combined genuine, unblemished financial market skills with a slate unhindered by potential conflict.

The ACC has some world-class investment executives whose skills need to be complemented only by transparent, unconflicted, independent governance.

There is no need for them to seek investment opinion. The executives like Nicholas Bagnall are many steps ahead of anyone who would be available to govern, so the Labour government should have ample candidates for this role.

As it is now, the ACC is subject to an independent audit of the organisation by a world-class QC.

Perhaps that audit might precipitate change.

 _ _ _ _ _ _ _ _ _ _ _ _

THE Genesis Energy subordinated bond sets its coupon next week, probably at a level between 4.65% (the minimum) and 4.85%. Our view is that 4.65% would be a bit low.

This is not a comment on the merits of Genesis Energy, but a simple acknowledgement that the instrument offered is subordinated.

A respectful response from Genesis would be to offer a slightly higher margin.

Demand will be strong, even at 4.65%.

We ask interested investors to contact us promptly as we bid for the allocation early next week.

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I will be in Christchurch 26-27 June.

Edward is in Nelson 2 July, Blenheim 3 July, Auckland 5 July and Queenstown 26 July.

Kevin will be in Christchurch on 12 July.

David will be in Lower Hutt on 10 July, Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited


Taking Stock 14 June 2018


IMAGINE you are a young dairy farmer, having inherited the family land, with 500 cows and a million A2 Milk (ATM) shares.

Maybe Dad knew Howard Paterson and liked the A2 story from the start.

The cursed Mycoplasma Bovis disease has arrived in your herd.

You need to cash up your ATM shares. You have never sold shares. What do you do?

Ring a no-frills, low-cost broker and ask them to sell a million shares and send you the money?

Do you offer them to a neighbouring farmer with money?

Do you put them on Trade Me?

Or might you find out which broker is most likely to get you a fair price for them?

Let us assume you put them on an online trading platform.

One million ATM shares to sell at market, you instruct.

Now imagine you are Falcon Vulture, a fund manager looking to increase the A2 holdings of your fund.

You spend every day looking at share registries and screens.

Up on the platform comes one million A2 shares, to sell at market. Online brokers may or may not stipulate that a market order of this size must be placed at a limit instead. This would put the pricing in the hands of a novice seller.

What would Falcon do?

The last market sale was at $11.00.

Falcon Vulture owns two million ATM shares and wants to own three.

What might be his next move?

He might sell 10,000 ATM at $10.85, and then offer to sell another 10,000 at $10.80, and another at $10.75.

If Falcon Vulture fund can move the market to $10.50 he might then expect that the online platform had rung its client and told him that the $11.00 price had gone. The new market price is $10.50.

The inexperienced dairy farmer meanwhile is buying cows.

‘’Sell,’’ he says to ASB. ‘’Sell at market.’’

Falcon Vulture buys at $10.50. Mission accomplished (unless the FMA is watching, with ‘’Warminger vs The Crown’’ under their arm).

Now imagine that instead of using a simple trading platform, the farmer locates a skilled broker in a business that buys and sells large quantities of shares to institutions every day.

The farmer rings the market professional and asks him to sell a million ATM at the market price.

The skilled operator knows which fund managers and high nett worth clients are keen on ATM.

The skilled broker rings around without disclosing his hand, using as a start point a premium price for a large holding, based on the premise that to chase a large number of shares might normally mean a sharp increase in price.

He knows that to dump the shares would allow fund manager Falcon Vulture to game the market, and that to chase the shares would skew the price upwards.

So he brings together the seller and a buyer or two and gets the transaction done at $11.00, to the great satisfaction of both players.

The smart broker gets brokerage for selling and for buying and reports to the NZX that a million ATM has changed hands at $11 million.

This trade is what is known in the broking world as being a ‘’dark pool’’ trade, done in a cone of silence, without causing grief to either the buyer or seller.

It is a trade that is analogous to a real estate salesman who knows that a farmer covets his neighbour’s spare paddock and brings the two together without an auction or tender.

If all parties like the outcome, what is there to criticise?

According to those fund managers not contacted by the ‘’dark pool’’ process, there is plenty to dislike in the transaction.

The fund managers will argue that in a trulyinformed market, every potential seller and buyer would be alerted to the need of someone to sell one million ATM and someone else’s wish to buy.

The aggrieved fund manager might argue that his fund would have paid $11.10 for a million ATM, or have sold a million ATM at $10.90, advantaging either party.

In his view ‘’dark pools’’ are distorting market behaviour and blanking out the signals that create a true market.

As an aside it would have been a bit rich if the complaining fund manager had been Falcon Vulture, who likes to distort signals by playing the games mentioned earlier in this item.

So what does the market regulator, the NZX, do about ‘’dark pool’’ activities?

Does he accept that when both parties receive what they perceive to be optimal deals then there is no victim?

Proceed with the process, he concludes.

Or does he side with Falcon Vulture, and worry about the lack of opportunity to participate in the transaction, or the lack of opportunity to ‘’game’’ either or both parties.

As for the broker, his skill and knowledge has led to happy clients and a tidy double helping of brokerage, perhaps at concessionary rates.

My guess is that in-house, ‘’dark pool’’ trading will remain a key component of the suite of services that the biggest best brokers will offer.

If I had a million ATM shares to sell, I most certainly would not display my hand without considering all options.

I would want an experienced, competent, connected specialist to ensure I achieved my objective.

Fund manager complaints would not move me.

Currently the highest paid occupation in New Zealand is likely to be the fund manager, paid a satisfactory salary, enhanced by nonsensical bonuses based on criteria that have very little to do with skill.

Such a criterion might be a return to investors from a mix of shares, bonds and other investments that is benchmarked against the return on cash. Any bonus based on the cash rate is absurd.

Fund managers, earning multi-millions, whether they manage equities, bonds or even unlisted property syndicates, are paid many times what much rarer talent would ever achieve. Their grief brings from me the tears that only a reptile might produce.

 _ _ _ _ _ _ _ _ _ _ _ _

ONE fund manager complaint that is surely frivolous is the grizzle that the NZX is not attracting enough retail investor interest.

The common explanation is that the demographic with money to invest comprises the same people who observed the appalling behaviour in equity markets in the 1980s.

This was an era when all sorts of Al Capone lookalikes were hero-worshipped by the media, their praises sung for their willingness to entertain gullible reporters, either with tales of their genius or with bottles of plonk, the equivalent of throwing crumbs to the masses, or free rides in their corporate aircraft to those who otherwise caught a bus.

Perhaps we needed an era of such extravagance to counter the grey years after the wars.

The legacy of the 1980s was a generation of disbelievers, of sceptics who would find it hard to utter a kind word about those who exploited this era, and now hide in faraway places or highly-secured residences to stave off the pitchfork remedy that would be richly deserved.

There is some irony in the decision of disaffected investors moving away from today’s NZX environment, handing their savings to fund managers, wherein lie some of those whose appetite reminds one of the 1980s.

To be fair, several fund managers today are better informed and much more diligent than the lazy, inept twerps that dominated the sector in past years.

However it is surely a joke in poor taste to condemn the smallness of the number of retail investors who regularly buy NZX-listed securities on a do-it-yourself basis.

The numbers of total investors have grown.

The NZX DIY investors are smaller in number because the fund managers have captured them either through KiwiSaver or through their heavily advertised managed funds.

It is hard to see how that trend will be reversed, even if it should be.

Perhaps the next sharemarket downturn will prompt people to ask what added-value they receive by funding high fees and utterly unearned bonuses, often activated by market rises fed by investors’ own savings.

What an absurd concept it is to argue that bonuses are needed to ‘’align’’ fund manager interests.

Does a surgeon get a bonus for not slicing off your arteries, explaining he needs the bonus to ‘’align interests’’?

 _ _ _ _ _ _ _ _ _ _ _ _ _

THE modern fund manager should review the Chinese proverb that cautions people of the danger of being granted their wishes.

I suspect this proverb might relate to those who wish their six yearolds would hurry up and reach teenage years!

Fund managers, in quest of emotional support and smarmy media treatment, are today preaching how investors should invest in fee-earning funds that screen out the ‘’sin’’ stocks, like liquor, tobacco, weapons of war, climate change offenders and pornography.

I read that one fund manager, using index-hugging technology, proposed to screen out pornography, and thus attract bigger allocations from all of us who are revolted by this by-product of the internet.

I hope he screens out Google, the greatest enabler of the garbage that poisons undeveloped brains and those with impaired judgement.

An index fund that screened out Google (and Facebook, for that matter) would greatly underperform every index fund that pretended not to notice the contribution of these services to an ugly corner of the world.

Perhaps those seeking higher moral ground should instead use their voting power to persuade Googleand Facebook to rid the world of this detritus.

 _ _ _ _ _ _ _ _ _ _ _ _

THE Commonwealth Bank of Australia’s payment of an A$700 million fine is a staggering penalty for the bank’s blatant refusal to obey anti-money laundering laws.

One must wonder what led that bank to believe that the cost of compliance was greater than the damage done by being caught (inevitably) and fined.

By and large it is Westpac, not CBA, with its ASB subsidiary in New Zealand, that has most often behaved offensively in New Zealand.

Even senior people in Westpac NZ refer to their Australian chiefs’ dismissive attitude to NZ, encapsulated by the reference to NZ being ‘’East Tasmania’’, in attitude if not words.

In NZ, the CBA brand ASB has had the high moral ground, perhaps because of its history with the ASB Community Trust.

Its Australian behaviour towards the law has been arrogant.

Now we hear that the ANZ bank is facing criminal charges over alleged market collusion, with secret deals to manage the price of some ANZ listed securities.

The ANZ directors will be well aware of the need to ensure this alleged behaviour is not endemic and does not escape a mention in the ANZ manual. Nor would there be any remedy other than dismissal.

The ANZ chairman of its rubber-stamping NZ board is John Key, the Merrill Lynch FX manager who went on to be our Prime Minister for nine years. (Key is also a director of ANZ Group.)

Key was not on the ANZ board at the time of the alleged infractions but is sufficiently experienced and savvy to ensure that every individual in ANZ is aware of the lack of protection from the sanctions of the law for its trading staff.

I cannot think of a better use of his skills and experience than his selling to others of the need to respect the fact that some laws cannot be bent or ignored.

Key rose to his status in Merrill Lynch by learning and applying the wisdom in company manuals and managing staff to ensure they complied in the FX sector.

CBA will no doubt echo his views, from now on.

 _ _ _ _ _ _ _ _ _ _ _ _

WHILE CBA pays its fine, New Zealand’s Citizens Advice Bureau (CAB) will be looking at the cost of braindead city councils looking to use council money to overpay administrators and bureaucrats rather than provide coins for a world-class voluntary group.

The Citizens Advice Bureau works on a voluntary basis, attracting civic minded, skilled people to provide free advice on a wide range of issues.

The CAB audience varies from those without power or knowledge, to those who cannot obtain fairly priced help on often complex matters.

Both the Wellington and Kapiti councils are looking to cut the tiny support they provide, whilst the latter is foolishly contemplating subsidising an airline.

Clearly the councillors have either not thought this through or are being influenced by inadequate staff, of a generation that fails to understand the ethic and the value of community service.

I do not wish to sound like a man of a ‘’certain age’’ but it is very clear to me that the service ethic is not necessarily locked into DNA and in some instances has been overtaken by the greed and selfishness of acquisitive and materialistic bureaucrats.

There is an online petition one can sign to support the CAB.

The certainty of its future should be a non-negotiable commitment from every councillor and politician.

Where else does one get such a range of caring, informed people, solving often difficult issues without cost?

Council information offices would not be the answer. Heaven help us if councils want to pay staff to provide the services the Citizens Advice Bureau offers.

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Edward is in Nelson 2 July, Blenheim 3 July, Auckland 5 July and Queenstown 26 July.

Chris is in Whangareion 19 June and in Christchurchon 26-27 June.

Kevin will be in Christchurch on 12 July.

David will be in Lower Hutt on 10 July, Palmerston North and Wanganui on 17 July and New Plymouth on 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee and Partners Limited

Taking Stock 7 June, 2018

It may be a stretch to discuss lawyers and the people at Mainfreight in the same context but there are a few common characteristics.

Both groups include many committed to the one career, the one employer, and both groups are relatively high earners.

Both groups typically work very long hours.

I am not sure that I can identify any other similarities but I can see the biggest dissimilarity.

Mainfreight’s culture nurtures its staff.

The law profession in general does not.

Mainfreight wants all of its work force to feel loyal to their company.

Far too many law firms accept that at least half of their work force, the women, especially younger women, will loathe their hierarchy, a loathing born of disgraceful harassment and bullying by some number of mostly older, skilled male lawyers.

Last week, Mainfreight announced another year of growth, achieving its lofty, global ambition, and achieving higher profitability, recognised by a slight increase in dividends, and a huge pool of staff bonuses.

It celebrated by publishing the following sage decisions:

1. It wanted all staff to be paid at least $60,000 per year and was awarding pay increases and bonuses to achieve this.

2. It wanted all staff to achieve personal financial security and to stay on Mainfreight’s payroll.

3. Its planning was calibrated to ensure it had a 100-year future, based on staff loyalty and a client, value-added focus.

On the same day the NZ Law Society released some information.

Of the 14,000 NZ legal practitioners, those who answered a survey revealed an astonishing level of harassment and bullying of mostly younger women (nearly 35 per cent).

Less than 1% of all such criminal behaviour was referred to the NZ Law Society and even less to the police.

The NZ Law Society was seen as ineffective and predisposed to maintain the long-ridiculed image of respectability, reliability and omniscience, as well as prioritising the interests of its eight largest businesses.

Law firms tolerated high-earning male practitioners, partners and managers even when their personal behaviour towards female lawyers was offensive, criminal or destructive of a productive working environment.

Law firms have shrouded this dirty secret for decades.

It struck me, listening to these two narratives, that there were two potential solutions:

1. Law firms should be asking Mainfreight to come in, displaying the benefits of caring about your staff.

2. Women lawyers should assemble formally and work out how to open women-only law firms, well away from gropers, bullies and locker-room talk.

Given that women graduates now exceed the number of male graduates, and have done for some years, it is likely that by now there are women proficient in virtually all aspects of law, at all levels.

There are female QCs, many highly-regarded women judges, the NZ Law Society president is a woman, and these days the growth in legal activity is in areas where many women lawyers excel; the environment, family court, employment law and dispute resolution are examples, and not exclusive examples.

If my wife, sisters, daughters-in-law or granddaughters were in law, I would be a keen financial supporter of a new all-women law firm. I would buy shares in it, if that were possible.

I guess that most male-led law firms could no longer compete successfully without their female colleagues.

Perhaps even the threat of such a plan might bring about the obviously needed clean-out of ugly, criminal, covered-up behaviour.

There is one suggestion that the NZ Law Society should lose its self-regulation rights and become an independent body, with people like the governors of Mainfreight on their controlling committee.

It is surely a matter that disgusts every decent person that women lawyers feel so distrusting of the Law Society that they would rather risk more instances of bullying and harassment, than put their trust in a NZ Law Society enquiry into a complaint.

The obvious anomaly is the failure to go to the police.

Do women lawyers have equal distrust of the processes involved in initiating a criminal investigation?

That, too, would be a telling comment on what they have observed. I sympathise with their scepticism.

This week a former lawyer, a woman, named a lawyer who THREE times has been the subject of serious charges of cowardly, serial sexual bullying.

He was fined a few days’ pay and continues to practise law after the third complaint.

I personally knew a law firm owner, through a most unsatisfactory business deal, which left me in no doubt about his truthfulness.

Some years ago while visiting a client, he took the opportunity to photograph a teenage girl showering in the client’s home. A complaint was made.

The Law Society fined him modestly and cautioned him.

Not long afterwards he molested a contractor working after hours in his office, or so the contractor claimed.

He was fined modestly again, and cautioned again.

I am unsure if he still practises. He should have gone to jail, if the allegations were true.

If these examples are not exceptional, it is small wonder that the Law Society is so ineffectual.

For most people their only contact with lawyers is when they make a will, require conveyancing, or break a law, perhaps a driving offence.

Those rare visits are unlikely to be handled poorly.

Those in business often need the law practitioners to guide them on complicated matters, such as dismissing poor-performing employees, and tax matters. Often QCs are needed when complex law is involved, such as occurs in international commerce.

My own experience, too often, has been when I have contested the behaviour of different people who I believed were cheating others, or behaving shamefully.

Defamation is a specialist’s area.

I have occasionally teased those lawyers who write childishly aggressive letters, pretending to their client that they can scareoff any critic of their client’s poor behaviour.

Usually such inadequate practitioners begin by announcing that their client has been ‘’seriously defamed’’ as though the issue involved was binary, and a single lawyer could decide the issue.

I have learned to grin, reply politely, and to appear gracious, perhaps only as an aside pointing out that what is defamatory is decided in a High Court by a qualified judge, or by a jury, not by some ambulance-chasing lawyer, chasing a fee, for writing risible letters.

On one occasion one such weak legal practitioner demanded I pay the lawyer’s cost, estimated to be at least $18,000 for the time spent talking to the offended little prig and spent writing me the pretentious letter.

A QC friend estimated that such a conversation and letter could not reasonably have cost a tenth of that figure.

One hopes the ‘’offended’’ twit paid the $18,000.

To be fair such goofy behaviour in law firms is rare, but it does relate to the rotten culture of many law firms, where fee-charging is almost the only strategy, and where the biggest fee collectors are celebrated, promoted, and, if male, seem to be tolerated, even when guilty of the most demeaning behaviour.

Possibly the finest New Zealander I have met is a QC, a man combining intellect, compassion and humour, embracing a wide range of endeavours, within and outside the law.

Sylvia Cartwright and her team have been appointed to investigate the culture in law, and the performance of the NZ Law Society.

Perhaps the QC I admire would not want that task, as I personally would not. It would destroy any hope of my sleeping at night if I had to listen to thousands of examples of brutish, cowardly and creepy behaviour.

Why cannot more occupations and organisations understand what the founders, governors and chief executive of Mainfreight clearly do understand?

Perhaps Mainfreight’s key people are already in demand.

In my view Fletcher Building and Fonterra should also be queuing outside Mainfreight’s boardroom door.

However that is a debate for another day!

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THOSE investors who currently have a satisfactory relationship with their sharebroker/financial adviser will no doubt understand proposed law changes for those advisers.

If the recommended changes are implemented, all existing Authorised Financial Advisers will be ‘’grandfathered’’ into the proposed regime and can continue to service the roughly 80,000 people who obtain advice from sharebrokers and obtain access to new issues of listed securities.

I am unsure how many other investors use authorised advisers but if we accept that perhaps 400 of the 1,800 advisers work for banks and insurance companies, and that perhaps 400 work in sharebroking firms, then that would suggest there are 1,000 who primarily sell managed funds or insurance.

If half that number sell insurance, mortgages and superannuation that leaves 500 authorised advisers who typically might have 50-100 clients, perhaps serving, say, 35,000 investors, selling managed funds.

If the banks are advising a similar number, that suggests that maybe 150,000 New Zealand investors are receiving financial advice from an authorised adviser.

That leaves one heck of a lot of people obtaining financial information from a fairly modest base of knowledge, skill and experience, such as friends, taxi drivers, bank tellers and insurance salesmen.

So what is the new proposal going to do about that?

My analysis is that the Crown proposes to change the approach to advice, to engaging with academic, unknowledgeable people, with no experience in capital markets and probably no personal experience in managing wealth.

Alternatively, they will send people to a robot, programmed by academic people, mindlessly repeating the totally discredited dogma of modern portfolio theory.

I guess the robot will not charge and will not be incentivised by cynical issues, like offering the robots family holidays to Rarotonga or the Chatham Islands. That is something for which we can all be grateful.

The new proposal is that new advisers will need to complete some sort of commerce-related papers at an approved tertiary education supplier.

Once again, the law will endorse a measurement of suitability in a lazy, meaningless way.

Someone who can parrot the views of tutors and the mantra of other academics will then be let loose on a category of investors – the currently unadvised – that is the most vulnerable grouping of all.

That there is no specific NZ tertiary qualification that even remotely converts a student into an adviser is not seen as a problem.

At the risk of repetition, I suggest those proposing the new laws should talk to the existing clients of skilled advisers and seek to identify why that customer satisfaction level would be high.

Forget the childish practice of asking the media to survey the populace. Most of the respondents, indeed 95% of all New Zealanders, have never experienced a session with a skilled adviser.

We have already established that less than 10% of the working public need investment advice, beyond how to choose a KiwiSaver provider, and what sort of such fund suits any particular investor.

A robot would score high rates for customer satisfaction by matching solutions to answers to a small number of basic questions.

Surely we all know that the secondary school curriculum should be addressing the most basic questions, like credit card usage, budgeting, mortgage finance, use of savings accounts and even, as the Dominion Post’s Saturday ‘’money’’ columnists love to discuss, how to buy cheaper meat cuts and make marmalade from windfall oranges, lemons, limes and grapefruit. (Do newspaper readers really read this Aunt Daisy stuff?)

The issue the legislators face is that education at secondary schools is useful but such ‘’money’’ advice has no relevance to middle-aged and senior adults, who must manage large capital sums of perhaps six figures, and need real investment advice and real knowledge of the particular securities they are buying.

Capital market knowledge, experience with financial market securities, research-based knowledge, and personal experience of wealth management, beginning with an apprenticeship mentored by ethical people, would be the hallmark of any adviser I would use were I to lose my memory or wits.

The remarkably low number of complaints about sharebrokers and real advisers implies that grandfathering the existing AFAs is logical.

Setting the bar for new entrants at some meaningless measurement is surely yet more evidence that it is easier and lazier to use a meaningless measurement, than to create one that would make a difference.

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New Issues

WE expect a flow of new senior bonds and subordinated bonds in coming weeks, hopefully benchmarked on the sort of margin that the current NZX capital note issue used.

It seems highly likely credit margins are increasing even if base rates have hardly moved.

We anticipate an end to the constant reductions in yields, culminating in the past few weeks, when even unrated NZ long-term bonds were being bought by fund managers at rates below four percent.

Clients might want to join our email list ‘’Investment Opportunities’’, via our website or by emailing our office, and should respond smartly when an offer is potentially of interest.

I expect many new issue announcements in the next three months.

The 7 year Meridian senior bond (with an expected interest rate of between 4.20% and 4.40%), issued to raise just $200m, is the first such issue. Those interested in this bond should contact us promptly.

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I will be in Whangarei on 19 June (Mokaba Café) and in Christchurch on June 26 and 27.

Edward is in Taupo 13 June, Nelson 2 July, Blenheim 3 July and Remuera 5 July.

Kevin will be in Queenstown on 15 June.

David will be in Lower Hutt on 10 July, Palmerston North and Whanganui on 17 July and New Plymouthon 18 July.

Our future travel dates can also be found on this page of our website: https://www.chrislee.co.nz/request-an-appointment

Any person is welcome to contact our office to arrange a free meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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