Chris Lee & Partners Ltd

Taking Stock 26 June 2025

Fraser Hunter writes:

WHEN I first entered the investment industry, I had a well-ingrained value bias. I looked for bargains - companies on low P/Es, high dividend yields, and trading well below what I, and market analysts, thought they were worth.

Part of that bias still exists. But like most investors, my process and beliefs have evolved. Time, market experience and lessons learned have all shaped the way I invest.

Being value-minded, and given the nature of the NZ market, it didn’t take long to discover the wild west that is the ASX. With over 2,000 listed companies and a highly active retail trading community, it's a very different landscape.

One of the more unusual trends I came across early on was tax-loss selling. It sweeps through the ASX like clockwork every June, as Australian investors offload underwater positions. Often, the intention is to buy them back after 30 days.

Initially sceptical, I soon discovered the pattern was not only real but well documented. It is supported by research and prevalent in other countries with similar tax systems.

It was also a timely reminder that markets are not always efficient. Prices can be distorted by a number of factors such as tax timing rather than company fundamentals.

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WHILE a capital gains tax remains politically sensitive here (for now), it is a standard feature of most developed economies.

In Australia, realised capital gains are taxed as income, while realised losses can offset those gains if crystallised before 30 June.

This creates an incentive for retail investors, high-net-worth individuals and self-managed super funds to sell underperformers. After a 30-day stand-down period, required to meet "wash sale" rules, the positions can be repurchased.

Selling volumes tend to be higher in strong markets, particularly when investors are sitting on large gains elsewhere. While unused losses can be carried forward, the urgency is greatest when profits are high.

June 2022 saw one of the heaviest sell-offs in recent history, driven by quick gains from the post-COVID rebound. With the ASX 200 up about +8% this financial year, June activity has again been steady.

Although most tax-loss selling takes place in June, some of it has crept earlier, starting as early as April for certain stocks.

Self-managed super funds, which manage over A$800 billion (the NZX50’s total market cap is ~NZ$150 billion) are active year-round. Crystallising losses helps reduce tax liabilities on their pension income. Managed funds also take part in June, both to offset gains and to window-dress portfolios by removing weaker names from their records before client reporting is due to print.

The mechanics are straightforward. Concentrated selling of loss-making positions, sometimes combined with short selling, can push prices well below fair value. This is especially true in less liquid stocks. Strong businesses can get dragged down alongside genuine underperformers.

A rebound is not guaranteed. But studies show that quality companies often recover in July, while the weakest continue to struggle. Distinguishing between value and trouble is key.

Historically, June has been one of the weakest months on the ASX. Since 1992, the ASX 200 has fallen an average of -0.7% in June, while May has averaged minus -0.6%. By contrast, July has averaged a gain of more than +2% and has delivered positive returns for 11 years straight. This has been framed as the Australian equivalent of the “January effect” seen in US markets.

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FOR New Zealand investors, the rules are different. We are not incentivised to sell, but stocks we hold or want to hold can still be affected by the sell-off across the Australian market.

That means May or June might not be the best time to offload a weak position. On the other hand, these months can offer the chance to pick up good companies that have been temporarily oversold.

As a simple screen, I looked at ASX 200 stocks that had fallen sharply over the past 12 months but still had a buy or strong buy rating from analysts and were growing revenue year on year. Among the top 50 large caps, only Woodside (WDS.ASX) and CSL (CSL.ASX) met the criteria.

I tend to exclude energy stocks, where commodity prices often have a greater short-term impact than tax selling. This has played out recently, with Middle East tensions lifting energy stocks.

CSL, however, stands out. It has underperformed of late, but over the past 15 years has delivered more than 15% per annum in capital gains, achieving similar rates of revenue and earnings growth. While growth has slowed as the company has matured, it is still forecast to grow earnings at a double-digit pace over the next five years. CSL remains a high-quality, well-run company with a global footprint that is hard to replicate.

Mid-cap names that also meet the same criteria and have appeared in media coverage of tax-selling candidates include Treasury Wines (TWE.ASX), Viva Energy (VEA.ASX), AMP (AMP.ASX), Flight Centre (FLT.ASX), HMC Capital (HMC.ASX) and 2024’s well-loved IPO, Guzman Y Gomez (GYG.ASX).

Some NZ companies may also have been caught up in the selling, mainly due to their dual listings. These include Spark (SPK.NZ), SkyCity (SKC.NZ), Heartland (HGH.NZ) and Fletcher Building (FBU.NZ).

Spark has faced a series of downgrades and a weakening outlook over the past 18 months. It has long been popular with Australian fund managers for its dividend yield and strong market position. Despite a weak result in February, and subsequent sell off, the share price has tracked upward through to June.

SkyCity has had well-publicised challenges. These include a legal dispute with Fletcher over the Convention Centre delay, as well as tougher AML rules across the casino industry. These have led to fines, higher compliance costs and reduced customer activity.

Fletcher Building had been relatively stable through the year, but a downgrade at its recent investor day triggered renewed selling.

Heartland is less likely to be on Australian investors’ radar due to its smaller size. That said, its shares are trading well below February levels following a disappointing result, and could be being cleaned out of portfolios.

This article is not personalised financial advice. The stocks mentioned are not recommendations but simply examples that stood out during the current sell-off.

Tax-loss selling can create opportunity, but it requires discipline. The best outcomes tend to come from focusing on quality businesses that have been temporarily oversold, rather than chasing every falling price.

Tax-driven selling is a well-known and recurring pattern. The discounts can be meaningful, but it is only one of many forces that influence market prices.

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Travel

• Auckland (CBD) – 27 June – Edward Lee• Palmerston North – 1 July – David Colman• Lower Hutt – 9 July – Fraser Hunter• Christchurch – 23 July – Fraser Hunter

Please contact us if you would like to make an appointment to see any of our advisers.

Fraser Hunter

Chris Lee & Partners

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Taking Stock – 19 June 2025 

James Lee writes:

“Life is meant to be lived, James.”

I was talking to a CEO who had founded a large company and was now enjoying retirement. It fascinated me how quickly he had transitioned from a busy work life into “fun-employment”, as it were.

Over the years I’ve heard every type of retirement plan – from those who worry daily about affording it, to those who never intend to stop working because they enjoy it. Retirement means something different to each of us.

As I get older, retirement occupies more of my thinking. I can’t help but notice the media and salespeople promoting KiwiSaver as the answer, while others push property or direct investing.

To me, these are all tools. But they miss the fundamental point – retirement requires a plan, and it’s the plan that matters most, not the tools.

As my focus in life shifts toward preventative healthcare, I’ve spent time learning how the human body ages. When you begin to think seriously about retirement, it becomes clear that your plan must account for more than just financial assets.(Editor’s note: James is now chairman of our company. From 1 July, he will become CEO of an ambitious Canadian-listed public company aiming to improve healthcare and reduce costs using analytics, software and artificial intelligence.)

Today, I want to discuss retirement as a plan to optimise your overall wealth – including financial assets, physical health, and enjoyment in life (or mental wellbeing).

There’s plenty of literature on the topic, but what resonates with me is the idea that financial tools should help maximise life enjoyment. It’s about balancing wealth, health, and happiness – not maximising any single one. In the US, around 20% of men don’t reach retirement age, and fewer than 20% live past 90. (New Zealand figures are better.)

To explain, I’ll break retirement into three segments, acknowledging that everyone views it differently.

We’ll explore the three phases of life that make up retirement, the tools available, and how those tools can support your plan.

I view retirement as three distinct acts of life:

ACT I (Age 25–44):You’re in building mode. Your income potential grows with your skills. Your body is likely in its best condition. Expenses increase as your social and family life expands.

You’ll probably use debt to build your asset base. This impacts your emotional resilience – it’s human nature to over-reach, overwork, buy too large a home, or take on too much responsibility. It’s no coincidence the divorce rate in ACT I is DOUBLE that of ACT II and beyond.

This is when liquidity has the most value, and the wrong type of debt is most dangerous.

This phase is best used to prioritise great experiences and avoid wasting money on depreciating assets. Making smart decisions early has powerful compounding effects.

ACT II (Age 45–64):Your asset base builds further. Non-discretionary costs begin to reduce, and your income potential typically peaks. Research suggests emotional happiness declines from your mid-30s to late 40s, then improves, often peaking around age 70 – making this act generally a less stressful period than ACT I.

Liquidity is less critical, and access to sensible debt improves.

This is the key period to focus on your health – your weight, muscle mass, cardio fitness, diet, and flexibility. These determine how much you’ll enjoy ACT III.

It’s also the right time to plan your retirement – who you want to be and what you want to do.

ACT III (Age 65+):Your asset base will peak, and you will reduce the amount of time you are willing to work, perhaps to zero. Your health will begin to decline – how much it declines will depend on the investment you make in Act II. Your expenses will fall but inflation will be real.

Balancing life to maximise enjoyment is key. While financial assets increase options, the things you will be able to do with those assets will slowly reduce.

Warren Buffett’s right-hand-man Charlie Munger was interviewed at the age of 99. He said the thing he regretted most was not catching a 200-pound tuna. Despite having all the resources in the world, he was no longer strong enough to want to even try. To me this reinforces the notion we need to balance the things we want to do in life with the right period in life to enjoy them. He waited too long.

In summary:-

ACT I: Building phase, highest health, your mental health will likely be threatened, liquidity matters as having safety nets helps manage that stress.ACT II: Assets will continue to build, your mental health will likely begin to improve, expenses will fall, improving your health is important.ACT III: Assets will now be used to fund your lifestyle, expenses continue to fall. Maintaining your health is a constant challenge.

In a perfect world you would use debt to help build ACT I faster and reduce the burden on your mental health; in ACT II you would repay that debt and build your financial and physical health; and ACT III is about maximising the enjoyment as you utilise your financial and physical health to ensure enjoyment of the final stage.

What tools exist to help this?

Direct Investing

Direct investing is the easiest way to begin savings and build a portfolio of assets. Building the base here with the goal of liquidity is the key. If you get advice on your asset allocation strategy it is cheap to build a portfolio using the online tools, or you can pay for advice when you make changes.

Two personal views: Think about your portfolio as a dollar value not individual ownerships, ie think I have a $23k portfolio, not that I own 10,000 shares in Spark. It makes it easier to sell something to buy something else if you emotionally detach from each asset.

The liquidity of your portfolio matters in ACT I of your life. You should value that.

KiwiSaver

I will be a bit controversial here – I think KiwiSaver has its purpose but its main advantage is the employer contribution. KiwiSaver makes sense if you can’t negotiate with your employer to give you the extra contribution in salary, opt out and invest in cheaper options that let you maintain liquidity. If you can arrange that you can then opt back in your 40s once your salary has hit a ceiling and you don’t need liquidity.

From a performance and cost point of view when comparing most aggressive and growth-oriented KiwiSaver funds it’s hard not to note they haven’t managed to outperform the Blackrock S&P500 ETF over five years, yet Black Rock charges just a few basis points to manage your money, while KiwiSaver fees range from 1.77% to 0.25%.

So my main criticisms will be that, because of the recent changes, the actual benefits of KiwiSaver are limited. The fee structures are way too high, and during your life the liquidity in your early years of direct investing will be worth a lot more to you.

My advice though would be that you set up some safeguards, so you cannot treat KiwiSaver as an ATM.

Property (mortgages and reverse mortgages)

Property is an interesting discussion. As a property owner but terrible property investor, I have taken some time to get my head around this. I have understood the benefit of property ownership being twofold – the utility of owning your own home, and the ability to use leverage.

What I have also seen more recently is the way to think about equity in a home as a curve not an absolute. Early in life you have little equity in your own home. Over time it builds up, but you can reduce that easily enough via a reverse mortgage when you are in Act III.

What I have learnt is that a reverse mortgage is a very sensible tool if used properly and for the right reasons. A reverse mortgage is best used only in certain circumstances and in conjunction with a clear plan. In New Zealand, reverse mortgages are still immature, with larger margins than the rest of the world, and only one real provider, but one day if KiwiBank or TSB decide to enter the market reverse mortgages will become mainstream.

A reverse mortgage is simple. You can borrow money from your home despite having no income, and the interest is just added to your loan, not cash paid each month. When your home is sold, the bank is repaid, and you or your estate gets whatever is left over. This actually is not all that different to the retirement village model, except for the fact using a reverse mortgage lets you participate in any house price inflation.

Two key features I think are often misunderstood – the debt can never exceed the value of your home, and you can never be kicked out. There are a few other minor features but that is it in a nutshell.

How you use a reverse mortgage is the key, and this is where I implore you to get advice.But let me demonstrate two different scenarios to highlight why advice matters on this, and how I think it is best used.

Scenario A – you take 200k out as a lump sum to buy something – vs Scenario B – you take 20k a year for 10 years to supplement your lifestyle, both assuming 8.5% interest rates.

In Scenario A you will have 420k taken out of your home’s value vs Scenario B you will have 320k taken out, so the decision of how to draw down on your home is really important.

I don’t think reverse mortgages are appropriate under all scenarios. When interest rates are very high they don’t make as much sense, and when house price inflation is negative they don’t make as much sense. But as a tool to manage your retirement they have a purpose.

Non-mortgage debt ie consumer debt including car debt

This one is harder and one that comes from the school of learning from others’ mistakes. On one hand I favour using mortgage debt to improve your life when you are younger. Get help at home, take holidays to ensure you are balancing your mental and physical health needs in the ACT I phase, not sacrificing everything to build wealth but on the other hand being mindful that mistakes in consumption are expensive.

In my case my mistake was a car. When I was younger I bought a second-hand 2009 Quattroporte for $50k, not because I needed it but because I wanted it. I kept it for 3 years and eventually sold it for a 40k loss. What strikes me as I get older is the impact foolish decisions have when you are young.

I could say I don’t like car lending because the person selling the car not only makes a commission on selling the car, or that they get the difference between what they paid for it and what you pay for it, but what I find hard to accept is the dealer gets the difference between what they borrow the money at and what they charge for the money to you.

I do believe that sometimes you will need to borrow money to buy a car to live your life, but this is one decision where I think you need to take a step back and ponder the timing.

For the purpose of today let’s just focus on the impact of one bad decision in your 30s. To give context to this, borrowing 45k to buy a car when you are 30 will impact your retirement by 500k, assuming the alternative of just putting those payments against your mortgage. And that is if you make that mistake only once in your life.

My advice is that consumer debt when you are young should be for necessities and things that make life easier in the stressful years. There is plenty of time in ACT II and ACT III to worry about having the nicer things.

Summary before we talk about how to turn that into a plan

Retirement planning has three distinct phases; the goal of a happy retirement is to balance your enjoyment of life across each of those three phases. Don’t retire with too many financial assets but being left unhappy and without your health, nor live your life so well in the early years that you have nothing left in the later acts.

There are plenty of good tools to help smooth our retirement in each of these acts that have different purposes depending on your circumstances. Building a plan is vital and retirement advice isn’t just for when you are 65.

The plan

Given that everyone will have a different plan all I can suggest is how you might think about the framework of a plan, and let you know how I have thought about my plan.

In my first ACT I, I didn’t take KiwiSaver. Instead I took the cash as extra salary and invested it myself. I bought a home, wasted money on cars, and prioritised trying to balance my mental health with holidays, help around the home and experiences. Sometimes I invested well.

Now in ACT II, I have opened a KiwiSaver account because liquidity isn’t as important to me today. My goal is to balance my life between health and savings so that I have the ability to enjoy my ACT III. Given I can supplement my income for a period by using reverse mortgage to release some equity in my home before I downsize, I can consider 30% of my home’s value as part of my retirement savings.

As my KiwiSaver is the longest duration asset in my portfolio, I can use that for the higher-risk asset classes.

Retirement is a multi-faceted conversation. Therefore it is not just one to have once you hit 65. You should consider how KiwiSaver and your home fits into your retirement plan. You need to consider how you manage your health, not just your financial wealth. The goal of life is to live a life worth living, so balancing your enjoyment across all three acts and using tools to help that is important.

Footnote:

Chris Lee & Partners will offer advice on KiwiSaver decisions and will offer information and advice on the value of reverse mortgages.

Clients are welcome to share this Taking Stock article with family and friends.

Travel

Christchurch – 23/24 June – Chris Lee (FULL)

Ashburton – 24 June (pm) – Chris Lee

Timaru – 25 June – Chris Lee

Auckland (North Shore) – 25 June – Edward Lee

Auckland (Ellerslie) – 26 June – Edward Lee

Auckland (CBD) – 27 June – Edward Lee

Palmerston North – 1 July – David Colman

Lower Hutt – 9 July – Fraser Hunter

Christchurch – 23 July – Fraser Hunter

Please contact us if you would like to make an appointment to see any of our advisers.

James Lee 

Chairman 

Chris Lee & Partners

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Taking Stock 12 June 2025

DISCUSSION last week on the intended benefit of a grand merger of NZ banks generated some feedback.  The financial sector likes the thought.  To bring balance to the "dream" I should record some of the obvious hurdles to overcome.

The most obvious is the mutual structure of SBS and The Coop Bank, neither of which are large, and both of which might enjoy parochial support.

Kiwibank is the core of any plan, being a real bank with maturing bank systems. To gain political consent for a listing would require two political leaders who would work to gain the nation's blessing. My view is that the blue and red leaders might be women, Willis and Edmonds, who exhibit some commonsense.

TSB has an advantage in that it is a transaction bank, so has a low cost of funding, and a relatively low capital requirement because of its focus on home mortgages. Its access to free or low-cost money held in current accounts enables it to be a low-margin lender.

Again, parochialism may be an issue.

In any giant merger senior executives often will fight for their territory rather than look at the greater good.

Heartland in NZ is a potentially highly profitable bank but the margins it achieves in some areas of its lending have to endure high capital requirements, so its return on equity might reflect that.

It makes little sense to me that its reverse mortgage lending requires high levels of capital. Reverse mortgages (RM) have very little risk of collection problems. The average reverse mortgage today would have a loan to value ratio (LVR) of around 25%, less than half an LVR for a home mortgage. Obviously the LVR on a reverse mortgage rises each year, while the LVR on a home mortgage falls. But the bad debt ratio greatly favours reverse mortgages.

To force the banks together with a giant merger would create synergies, would lead to lower margins, and would generate NZX value.

A merger might force the Reserve Bank to review the capital requirements without threatening future bank failure.

If nothing is done, we could expect the Australian banks to enjoy nice margins here on very low-risk lending and see them maintain their focus on short-term, rate-review, mortgages.

Is this what NZ wants?

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NZ pension fund managers (KiwiSaver etc) are pleading with regulators, politicians and investors to be granted permission to invest much more money in private equity (PE).

The timing is dreadful, but these people subscribe to the theory that timing does not matter.

PE managers raise money from pension funds, insurance companies and those with extreme wealth.

The PE people then buy an asset — say a food manufacturer - using other people's money, perhaps some of their own, and usually add some bank or non-bank debt to take ownership (of the food manufacturer).

The PE manager may then sell off assets in the interest of balance sheet efficiency, or they provide capital to expand, or they cut costs to improve profitability, or perhaps they might buy another similar company seeking synergies and gains in productivity or annual profits.

When the acquisition has gained value, the PE company will either sell the improved company to a competitor in the food sector, or perhaps list the company on the stock exchange, cashing up and hoping to return cash and a nice gain to those who provided the equity.

That all sounds efficient.

The time from buy to sell may take a few years, the investors perhaps forgoing annual returns in a quest for capital gains when the eventual sale is arranged.

Occasionally, a PE company that can see long-term or high returns provided by the improvements may own the acquisition for many years, enjoying the growth and value enhancement.

NZ’s best PE company, Direct Capital, and other good performers like Rangatira, Pencarrow and Icehouse have good track records of adding value by being skilled, appropriately funded and patient.

Many others need a tailwind to survival.

Globally, the really big companies like BlackRock and Apollo have had more wins than losses.

The downside of PE investments is that they often lack liquidity, are always opaque in that the value enhancement is unknown until a final sale, and they usually richly reward the PE manager with bonuses of 15-25% of the final gain, as well as hefty annual management fees. In effect, the investors take all the risk, the manager does all the daily work, and the returns then highly reward the manager.

The concept works well when the targeted acquisition is bought at a cheap or fair price, in credible multiples of its historic earnings.

It works best when interest rates are stable, ensuring the multiple of earnings is a credible figure.

The concept rarely works when interest costs are artificially low, when valuations are at high multiples, and when economic conditions are highly volatile.

In 2020-21, the ground conditions were favourable. Covid had created fear, and interest rates were stupidly low.

By 2022 multiples were high, inflation was visible, interest rates were rising, and confidence was soaring.

All of this is my way of illustrating why the current plea for change to allow much greater investment in PE is dreadfully timed.

Sharemarket prices are extreme, the average US listed company priced at 21 times earnings, interest rates close to the bottom, bank lenders suspicious of global trading and fearful of surprises, and literally hundreds of PE deals unable to find a way to exit what are often cashflow negative deals.

Many exits are at a loss; banks are cautious about rolling loans to PE managers, and investors are vocal about wanting to exit, causing PE managers to make poor decisions.

So the timing to increase exposure to PE looks fraught.

For the pension fund manager battling to invest in PE the motivation seems to be a mix of higher fees for the pension fund, a willingness to bet against the house, a desire to reduce visibility (and accountability) OR a belief that the world is on the cusp of a new long-term rise in prosperity.

To recap, private equity made hay when interest rates were improbably low, leading to high valuations when the PE firms were selling in trade deals, or listed the companies they had been nesting.

The corporate and high-worth funders of PE had a large bucket of easily earned money. Those PE managers who sold or listed had done well until 2022.

Rising rates at the time when valuations were still high have led to a long hiatus, the risks rising, leaving the investors in PE depending on another fall in interest rates.

Clearly that has not happened. High debt servicing costs on overpriced, over-leveraged assets has led to a bulging problem.

Yet it was in this troublesome part of the cycle that here in NZ we have some fairly lightweight pension fund managers imploring some fairly uninformed politicians and regulators to make new settings, allowing the pension fund managers to rapidly increase exposure to PE, funded, of course, by Other People’s Money (long term savers).

Many PE managers are not succeeding in selling their acquired company and are finding mainstream banks reluctant to rollover loans on assets that have lost value.

The observation of this problem perhaps led to the cynical advice never to buy into a new listing being sold off by a private equity manager, certainly not to buy in current conditions.

Without access to funding, or a sale, some PE managers have made the classic mistake of raising private credit (PC) funds with the plan of obtaining funding without any need to use the risk-averse banks. Private credit also is funded by pension funds, insurers and wealthy individuals.

Private credit has now raised more than US$1 trillion from pension funds and wealthy individuals, much of it used to lend to the PE assets that cannot be sold, or to obtain refinance packages from banks.

Here is where the clue appears that a major problem is looming.

To encourage funding, the private credit funds seek a credit-rating for the loans they make or propose to make.

Read on. This is important.

The major credit raters (I will not over praise them by describing them as the “credible” credit raters) are Standard and Poors, Fitch and Moodys.

They are the top tier, regulated and (mostly), respected raters whose methodology is seen as (mostly) sound.

Recall their nonsensical ratings in 2006/7/8 led to liar loans being rated AAA, culminating in the disasters of the Global Financial Crisis of 2008, when “AAA” securities became worthless (as liar loans are wont to do).

But let’s call S&P, Fitch and Moodys the “A” team.

Here is the point.

Eighty percent of credit ratings for PC loans are now performed by tiny credit raters whose methodology is “hairy” in the eyes of many.

One tiny USA rating firm is claiming it is the most prolific rater of private credit. That firm, Egan-Jones Ratings Company, rated 3000 different loans in 2024, employing just 20 analysts, meaning each analyst knocked out a full rating every second day. Many believe a full process takes a week or more. Hmm.

While the big successful private credit issuers, like BlackRock, exclude Egan-Jones, as does the UK monster Apollo Global, Egan-Jones is in full flight.

Whereas ratings are usually paid for by the potential buyer (like a pension fund) Egan-Jones is almost exclusively paid by the PC issuer. Hmm.

The industry believes the tiny rating firms on average provide a rating three grades higher than would be the conclusion of the big three.

The small credit raters rarely offer a rating of sub investment grade. There are cases where their rating is SIX grades higher than the Big Three. Hmm.

They are busy.

In 2019 there were 3000 PC loans seeking a credit rating. In 2023 that number was 8000.

Problems are surfacing with recent loan defaults arising just a few weeks after an investment grade rating was assigned.

For two years Taking Stock has been watching the growth in the faith in PE, and with it the growing dependency on PC, supported by what I have regarded as ambitious credit ratings.

If I used a pension fund manager to manage my savings, I would exclude any who uses PE or PC for those savings.

My guess is that PE and PC are approaching the part of the cycle that smells a bit like 2007.

If Egan-Jones is the biggest rater of PC and on average offers ratings higher than others, that would perhaps be a possible cause of the odour. Hmm.

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Bond issues

Infratil confirmed that its 7-year senior bond, will have a fixed interest rate of 6.16% per annum. This was set slightly higher than the minimum interest rate, with Infratil covering the transaction costs (resulting in no brokerage payable by clients).

Clients who would like this bond should urgently contact us for an allocation.

Payment will be due no later than Friday, 13 June. 

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Travel

Wellington – 18 June – Edward LeeChristchurch – 23/24 June – Chris Lee (FULL)Ashburton – 24 June (pm) – Chris LeeTimaru – 25 June – Chris LeeAuckland (North Shore) – 25 June – Edward LeeAuckland (Ellerslie) – 26 June – Edward LeeAuckland (CBD) – 27 June – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners

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Taking Stock 5 June 2025

It seems reasonable for many investors who factor into their decisions the likelihood of political change to consider the probability of an imminent period when the two relevant political parties will be headed by Nicola Willis and Barbara Edmonds.

Both seem to be skilled at presenting their ideas and both seem to be motivated about the need to change our approach to spending; call it fiscal responsibility.

Many of us will be hoping that if they do inherit party leadership they both focus on changes to our national superannuation, recognising that it is unaffordable, and acknowledging that for many people 65 is no longer a relevant age at which to stop earning, and rely on welfare from the state.

Means testing and having variable ages at which to receive the pension would seem to be a topic on which the two logical, intelligent women might reach accord, removing the subject from political debate.

There are several other areas where they might find common ground.

One obvious area is banking.

For at least a decade, the cognescenti in the foyers of power have had on their dream list the creation of a large New Zealand bank, competing with the Australian banks, which collectively control around 85% of NZ banks.

I am not one to abuse the Australian owners. Strong resilient banks have regularly underwritten NZ living standards by negotiating us through disasters, often man-made disasters.

But a strong NZ banking entity would provide real pricing tension and might put an end to the often silly claim that bankers are "ripping off" New Zealanders.

Is now the time for Willis and Edmonds to meet over a green tea and a seaweed muffin to find common ground and agree to bring about change, when (or if) they become the leaders of out two major parties?

Kiwibank is currently owned by the Crown, having flirted with others like the ACC and the NZ Super Fund as a means of growing its capital.

It started out as a bank for low-value customers, the bank operating from bleak surroundings in NZ Post offices, probably more like a bank in Bratislava or Budapest than in Sydney or Melbourne.

Queues did not appeal to those with options to bank elsewhere.

Governance was sometimes of third-world standard, as were some of the bank’s policies, but gradually it matured, attracted some keen minds and is today a small but effective bank, with maybe 12% of the country’s banking business.

The Labour government bought back minor shareholdings from the other Crown entity owners and pledged that Kiwibank would remain in government ownership.

Willis and Edmonds might have the selling skills to persuade the country that there is a much wiser option for Kiwibank than being wholly-owned by a shareholder that has no desire to allocate more capital to fund growth.

The option is obvious, as it was ten years ago when NZ was locked into lazy leadership.

The answer is to merge with a listed bank (Heartland) and buyout three hamstrung unlisted banks, TSB, SBS and The Cooperative Bank, to form the Crown Bank of New Zealand.

The merged entity could remain majority-owned by the government, though if political leadership were wise the new entity would not be forced to have political appointments dominating board numbers.

The four new players would add only a few percent to the combined share of the banking market, but they would achieve for New Zealand a listed bank with access to capital and with the goal of competing with the Australian banks, making profits and providing dividends for all shareholders.

Furthermore, the transaction would greatly enhance the survivability of the likes of TSB, SBS and The Cooperative Bank, none of which can rely on access to new capital.

Of these banks, the TSB is community-owned, the ownership in a community trust structure.

TSB also owns a share of Fisher Funds, which has grown by buying the Kiwibank’s Wealth Management business, originally bought by Kiwibank from Gareth Morgan Investments. Fisher Funds is managed by the former MP Simon Power.

The other Fisher Funds owner (34%) is the American fund manager, TA Associates.

In effect, the TSB’s community trust, comprising directors hardly likely to be skilled in wealth management, have allowed TA to run Fisher Funds.

TSB Bank is a careful, low-risk, low-profit bank, its risk aversion acknowledging its lack of access to capital.

It focuses on unthreatening home mortgages at low margins.

Its profitability is thus constrained but it is highly regarded by its customers and rarely challenged, albeit now embroiled in an argument over responsibility for clients who lose money to scams.

SBS is smaller, a bank that was a building society, again without commercial shareholders, yet also trusted and stable, with a focus on low-risk, low-margin lending.

The Cooperative Bank has had a hairy history, saved from receivership by the good work of Bob Stannard in the 1970s when it had insurmountable liquidity problems.

At that time it was a cooperative, funded by its public service clients, lending to its public sector borrowers. It had no shareholder and thus no access to capital.

Known then as the Public Service Investment Society (PSIS), it was expected to return bonuses to its depositors, rather than accrue surpluses to build resilience.

Stannard did a remarkable job reconstructing the PSIS.

Like SBS, The Coop Bank profits are lean, its focus also on low-margin lending. Its capital access is zero.

So these three banks would collectively add billions of loans and deposits to Kiwibank, creating ample opportunity for savings through efficiencies.

But the real prize would be the link with Heartland Bank which, within another three years, is likely to be contributing nearer $200 million of surplus per year.

Heartland, itself an entity grown from multiple smaller companies including Marac Finance, now has ample capital and a shareholder strong enough to stave off any marauder looking to exploit its low share price as it transitions to an Australasian lender.

It bought Challenge Bank in Australia to access the Australian Government Deposit Guarantee, enabling Heartland Bank to reduce the cost of its funding because of that guarantee, which makes all banks “equal” for retail depositors.

Unlike New Zealand, the Australian guarantee was not available for non-banks, so the acquisition was in effect a payout to the Challenge owners in return for a long-term reduction in funding cost, thanks to the guarantee.

It will not be until 2028 that the last of the more expensive deposits have been cleared out but the nett result by 2028 will be a funding saving of around 1.75% on what by then might be a $3 billion loan book.

This saving would equate with an interest-rate saving of around $52 million a year.

Other synergies, growth in its Australian and NZ lending, and a fine tuning of its unwise matrix lending in NZ should enable Heartland to achieve the level of profit that its directors have forecast for 2008 — $200 million, with an implied dividend of perhaps 12 cents.

If Kiwibank merged with Heartland, used Heartland’s listing, acquired three hamstrung but tidy regional banks and cut banking duplications, it would not be hard to envisage a NZ Bank majority crown-owned, earning more than $500 million after tax per year, perhaps nearer $750 million in its second year.

The new merged entity would be one of the most profitable companies on the NZX, most certainly in the top ten by that criterion, and would attract strong fund manager support.

It would be a source of revenue to the Crown and would add a tension to the pricing of many bank products, yet still be required to have some sensible social policies.

To get there would require political support from the two major parties, to overcome the opposition from uncommercial ideologues who the MMP system delivers to the Beehive.

That might seem awkward given the leadership today but if there were tacit respect between Willis and Edmonds, and if it takes two smart women to display genuine care for the betterment of NZ, there may be a chance!

If they could concurrently reshape national super, and bring to an end to idiotic subsidies for the well off, a much stronger NZ balance sheet could be achieved, without adopting any shades of communism.

The required political cooperation could start tomorrow, with Willis and Edmonds displaying the necessary maturity to put New Zealand’s welfare ahead of blue or red nonsense.

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Fixed interest investors will have become well accustomed to the retail funding strategies of Infratil, the highly successful investment company which was created by the late Lloyd Morrison and listed on the NZX in 1994.

As an admirer of Morrison, I supported his listed company from the outset and have been well rewarded both by share price growth and by a consistent flow of bonds. Infratil is the company most supported by our clients.

Infratil by now will be approaching $2 billion of bond issuance, putting it up the top end of all NZ bond issuers.

Having learnt through his failed company, Omnicorp, how banks panic in tough times, Lloyd Morrison determined that Infratil would escape future bank panic by funding largely from a retail base, thus avoiding the sort of covenants that are brutal during bad times.

He appointed a money market-trained young man (at that time), Tim Brown, to manage the funding of Infratil’s required debt. (Brown, now in his mid-60s, has retired.)

Brown did a great job in most cases, accepting that the pricing of the bonds (the coupon rate) would have to be set at a level that acknowledged Infratil’s lack of a credit rating.

Morrison had always been cynical about the methodology and therefore value of credit ratings.

Curiously thirty years later, we are again learning a lesson about credit raters as Taking Stock will discuss in the near future.

The problem now for Infratil is that many of its faithful borrowers are just about replete with Infratil bonds , some like me, probably over-indulging with exposure that borders on the highest level allowed by any normal diversification guideline.

Rules can be flexible but are sane reminders of the value of diversification.

Infratil in 30 years has never caused any alarm for its followers and remains one of New Zealand’s best public companies, likely to be our biggest in terms of market capitalisation, given that the Australian banks are a secondary listing.

As a result, its bond issues are always fully bid, its latest issue this week being overbid by a level that forced Infratil to scale all broker requests.

What this means is that many retail investors will obtain less than they bid, scaling often occurring at extreme levels, despite Infratil not being considered by those fund managers who pledge to buy only those bonds subjected to a credit rater’s investigation.

The bidding was lopsided for a reason.

Those brokers with client permission to invest as the brokers see fit, sometimes bid for the whole of an issue, knowing that if by some miraculous event they were allotted the whole issue, they could simply stuff the bonds into the accounts of those clients who have handed over the investment decisions to their broker.

If a broker really wanted, say, $30m of bonds but bid the whole $75 million of an issue, it would create a scaling exercise that means all the honest bids became swamped. If the “bids” total $225 million, including the false bids, all brokers would receive 33% of the sum allocated.

Years ago I pestered the Financial Markets Authority and the NZX to consider quite how a broker could dump excess stock on those clients the broker did not have to consult.

However was such behaviour in the best interests of the client? Was not the broker abusing the privilege of using other people’s money to manipulate the scaling process?

That issue was never addressed.

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Bond issuesInfratil confirmed yesterday that its 7-year senior bond, will have a fixed interest rate of 6.16% per annum. This was set slightly higher than the minimum interest rate, with Infratil covering the transaction costs (resulting in no brokerage payable by clients).

Clients who would like this bond should urgently contact us for an allocation.

Payment will be due no later than Friday, 13 June.

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Travel

Whanganui – 11 June – David ColmanWellington – 18 June – Edward LeeAuckland (North Shore) – 25 June – Edward LeeAuckland (Ellerslie) – 26 June – Edward LeeAuckland (CBD) – 27 June – Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners

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