Taking Stock 28 March, 2019

Johnny Lee writes:

IF one were to consider the most unenviable corporate role within the NZX top listed companies, Martin Stewart’s name might appear on such a list.

Stewart, appointed as the new CEO of Sky Network Television last month, has inherited a job in a business at a time when it is politely described as a ‘sunset industry’.  In the company’s most recent report to the exchange, there is no denying that many of its key metrics have a distinctly ‘dusky’ feel to them.

Profit and dividends are falling.  Advertising revenue is down.  Customers are leaving.  People are using their television less, as they either leave the service altogether, or migrate away from the higher-revenue satellite services towards the more limited online streaming service.  At a time when New Zealand’s population continues to grow, fewer people are choosing to use Sky Network’s service.  There is very little positive news to be read.

Just five years ago, the SKT share price was above $6.  Sky TV was one of New Zealand’s largest (albeit, not necessarily beloved) companies, and was experiencing an increasing number of subscribers, increasing profits, while cheerfully embracing the future.  Indeed, some folk questioned whether SKT had too much control, and questioned whether the Commerce Commission should become involved.  Sky’s 2014 annual report begins by stating: ‘We will steer Kiwis through the twists and turns of technology and bring them the very best in entertainment.  Today, tomorrow and into the future. To infinity and beyond . . .’

Today’s business seems light years away from such buzz.  Sky TV is now regarded poorly, perceived as greedy, archaic and bloated with services that their own customers have no desire to consume.

What changed?

Distribution channels changed, but arguably society has changed the most.  No reader of this column would be surprised to learn that our consumption of sport has changed significantly.  59,000 do not cram into Athletic Park to watch the All Blacks play the British Isles.   Wellington, with triple the population of 1959, attracts crowds a third of that number to most domestic sporting events today.  Similarly, people want to consume media at their own pace – not at a time of the broadcaster’s choosing.

Sky TV’s service became more expensive, but to a lesser degree than commonly perceived.  The proliferation of internet usage created both opportunities and problems, including piracy, competition from abroad and greater expectations around the quality of the product. With social media came an expectation around communication that is perhaps impossible to deliver.

Sky TV made several strategic blunders, investing in services that had no real hope of succeeding, or delivering them with such poor execution that good ideas had to be sent to the scrap heap and rebuilt.

Perhaps worst of all, it allowed the brand to decay, placing last or towards the bottom of corporate reputation surveys, signalling that New Zealanders are no longer seeing the product as a ‘premium’ one.  There is a lack of trust, and a loss of connection to the business. It behaved as if it had a monopoly. Clearly, it did not.

Today, its product range includes Sky Go, FanPass, Neon and the traditional satellite service.

So when Martin Stewart assumed the helm last month, his task was immense, bigger even than Ross Taylor faced in the depths of Fletchers $1 billion of losses.  A failing brand, it was a business losing customers to competitors with a clearly superior ability to deliver their product.

Stewart’s first move was a long overdue acknowledgment: Sky TV had stopped listening to New Zealanders and delivering services they actually wanted.  It was trying to change its customers, rather than shaping itself to what the consumer actually wants.

With a share price in the doldrums, it is clear that a ‘transformative’ CEO is required.  Resistance to change will almost certainly see the sun disappear beyond the horizon.  Consolidation within the media sector is not an option.  Perhaps rebranding might be a logical early step.

Rebranding within New Zealand is usually fraught with danger, but can be effective.  Z Energy is an example of a successful rebrand, and is regarded today as one of New Zealand’s strongest brands, alongside Air New Zealand, Toyota and AA Insurance.

Sky could also examine a simplification of its product offering.  If the future is indeed streaming, and using phones instead of televisions, then simplicity, both in terms of acquiring and using the product, will be absolutely crucial.

A circuit-breaker is clearly needed, and the outcome will be relatively binary.  Sky TV will either modernise and evolve, or continue to haemorrhage customers.  Such a conclusion may cause red faces at the Commerce Commission, which rejected a merger with Vodafone in 2017 on the basis that it would substantially reduce competition.

‘Transformative’ governance is not always conducive to long-term success.  Investors in ANZ, for example, will remember the bank’s brief foray into the Asian markets during the leadership of Mike Smith.  Transformation can be negative and costly.

In Sky TV’s case, ‘transformative’ may be the only remaining option.  Stewart’s challenge will be to create a simple, elegant means of providing media content to the eyeballs of viewers.  He will not find any shortage of advice, and paid $1.5 million a year with 200,000 free shares a year, he certainly does not lack for incentive.

There was a time when Sky TV formed part of the backbone of an investor’s portfolio.  Today, investors would be hard pressed to find a financial advisor willing to recommend investment in its current state.  But one would hope that with intelligent leadership, combined with open and frank communication with customers, it can create a product that meets consumer needs and could thrive.

FOOTNOTE:  Bondholders of Sky TV should not be unduly concerned with the fall in share price. These bonds continue to trade at a premium to their par value.

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BABY Boomers, or those currently between 55 and 73 years of age, are probably accustomed to being blamed for all manner of social ills.  The latest addition to this litany is low wage growth.

The Bank for International Settlements has released a Working Paper this week detailing its conclusions following research on demographics and wage growth.

It found that Baby Boomers, who are making up an increasing percentage of the workforce, have responsibility for the persistent low wage growth across the global economy. They do not demand wage increases.

Economic theory suggests that, in times of low unemployment, wages rise as competition for workers rises.  This can fuel inflation, which in turn can lead to interest rate rises.

Since the Global Financial Crisis, this pattern has not held.  Although unemployment is very low (and employment is high, two separate concepts) we have seen sluggish wage growth and almost non-existent CPI inflation.

The Working Paper puts forward the notion that so-called Baby Boomers have responsibility for this.  A decade ago, only a third of people across the OECD economies aged between 55 and 64 were in the workforce.  Now, it's more than half.  In Germany, more than 70% of people in this age group are working.

The reason Baby Boomers have once again been singled out is due to a unique characteristic of this demographic.  That is, that they do not follow the rules of the rest of the workforce in responding to price.

The Paper found that workers aged 55 and over, perhaps due to the expected short-term horizon of their tenure, were less likely to respond to changes in income.  They are less likely to pursue other opportunities, especially abroad, than their more youthful colleagues.  This has led to downward pressure on wages, which has flow-on effects to the wider economy.

This is likely to be transitory, and not repeated for another 30 years, when the next population ‘boom’ reaches that age.  There was also a discrepancy between Boomers who have worked continuously, and those who begin a new job close to the retirement age.

Increasing numbers of New Zealanders are finding themselves having to work well past retirement.  While this is often by choice, others have a financial imperative to continue working, discovering that current returns on their savings are no longer sufficient.

One hopes that with the proliferation of Kiwisaver this situation will improve for future generations.

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THE Reserve Bank’s statement yesterday held few positive surprises for investors, confirming their stance to hold the OCR at 1.75%, but that ‘the more likely direction of our next OCR move is down’.

This statement differs from the previous one, which correctly predicted that ‘the direction of our next OCR move could be up or down’.

The central bank’s views of the risks have clearly tilted towards the negative.  Yesterday’s statement highlighted several particular risks, including weak domestic growth, weak trading partner growth, and a softening housing market.

The New Zealand dollar fell following the statement by more than one per cent.

Elsewhere in the economy, interest rates continue to slide.  Swap rates are now almost entirely below 2%, and even 10-year Government stock has sunk below this level.  The philosophy loudly-touted of investing in long and liquid securities continues to prove worthwhile, albeit a philosophy that will be challenged by a recent phenomenon that has emerged in the US.

Typically, investing in fixed interest products offers increasing returns as the duration of the instrument increases.  Term deposits, for example, tend to increase their interest rate as the maturity date extends out, to compensate investors for the increased risk – both in terms of capital risk (the risk of the bank being unable to pay) and interest rate risk (the risk of interest rates increasing while you are locked at one rate).

However, in the US, this pattern is beginning to reverse, described as an Inverted Yield Curve.

When this occurs, investors are rewarded less for investing in long-term bonds than a shorter-term equivalent.  In the US, this occurred last Friday, when the yield offered for 10-year Treasury bonds fell below their 3-month, 6-month and one-year rate.  This change has been caused almost entirely by the falling yield on the 10-year bond, rather than an increase in the others.

This shift is significant as an indicator of economic health.  A prolonged inversion has occurred shortly before every US recession in the past 50 years, most recently in 2007 prior to the Global Financial Crisis.

In New Zealand, this has not yet occurred for long-term bonds, but a shift in this direction has begun. Two and five-year Government bonds now reward less than the one year, and our 10-year Government bond has fallen sharply this year.  New Zealand rates have dropped more than most of our peers, as our historically higher returns have begun to fall in to line with global averages.

With multiple banks now expecting to see cuts from the Reserve Bank over the next 12 months, investors would be wise to plan ahead when reviewing their fixed interest portfolio – particularly in regards to bonds maturing over the next year or two.

In the interim, we will continue to discuss any investment opportunities we believe may be of interest to our client base.

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ANOTHER scam seems to be doing the rounds at the moment – this time targeting Spark customers and asking them to return calls to an overseas number.

As always, unsolicited contact from companies should be treated carefully and is rarely legitimate.

Never disclose personal details (date of birth, address, etc) to people when you are unsure of who you are speaking to.  A good practice to is to simply say you are busy, but will call them back once you are free, using the publicly available telephone number on their website.  If the caller insists you use a different number, hang up.

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THE Billion Dollar Bonfire, written by my father, is now in its final stage. We have 37 copies available at a discount for clients and users of this newsletter.

For those who have already ordered a copy through our office, we will advise payment and delivery details, and send the book as soon as it is delivered from the printer.

Chris, Edward and Giovanna will be visiting many cities to hold two meetings, the first to discuss the investment outlook, the following one to discuss the book and what the research uncovered. All clients and investors will be welcome at either or both meetings.

Dates and venues will be published shortly.

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Edward will be in Wairarapa on 9 April, Auckland (Albany) on 11 April and in Tauranga on 29 April.

Kevin will be in Christchurch on 17 April and Ashburton on 9 May.

Johnny Lee

Chris Lee & Partners Ltd

Taking Stock 21 March 2019

PERHAPS seven years ago, New Zealand investors were encouraged by the falling bank deposit rates to obtain higher potential returns by buying into unlisted property syndicates.

As had happened in the 1990s, all manner of promoters arrived, eyeing up what seemed like rich clover in a nearby paddock, the fees and other intermediation costs borne by the investors who were deemed to be insensitive about fundamental factors like return for risk, management costs, and illiquidity.

A few of us here in the office put a toe or two into the puddle to enable us to monitor performance, observe changes and assess the sustainability of a fad investment.

Ultimately I quit, unimpressed by the fund managers, grumpy about the lack of respect for investors in matters like their rights to bring about change in funds management practices, or even their rights to vote down any even greedier attempts to corner available surpluses. The whole game, it seemed to me, was weighted in favour of the holder of the management contract.

My cynicism became entrenched when I observed various operators selling their management contracts for life-changing amounts.

If someone else would pay ten or tens of millions to own the management contract, what did that tell me about the amount of the future revenue that would be snaffled by the contract holder?

I had a chance to level the odds when Wellington property investor Ian Cassels, and his son Alex, asked me to examine their idea of syndicating rental accommodation in Wellington, creating a syndicate of investors for individual buildings that they had renovated in the central city. These were designed to accommodate the growing numbers of young people who in many cases were borrowing to live away from home while they completed their university courses.

Initially, I declined to help Cassels because there was no liquidity for the investors but the concept proceeded, with Cassels arranging his own finance.

A year or so later we met again. His concept was working well, occupancy rates were high, a stand-by list of tenants was lengthening. What could he do to change my mind?

The solution was that he could use his umbrella organisation, The Wellington Company, and its borrowing ability to provide guaranteed liquidity via a Put Option, once a year, for 10 years. TWC would buy out any investors at par, thus ensuring no investor was locked in. At the end of the syndicates’ life (ten years), there would be a vote on whether to sell the building or continue as is.

The concept was accepted, various Quantum syndicates were fully funded by our clients and here we are, several years later, with the individual buildings now having grown in value while continuing to pay handsome dividends.

Cassels made the unlisted syndication work by backing each project, effectively with a guaranteed buy-back at par and by investing his own money into the fund. He deserved the success he has had. Anyone wanting to exit has done so, at par.

I wish I could say the same for the remaining part of the unlisted syndicate market.

In my view, there have been perfectly satisfactory outcomes, as in rental return and property value growth, but the risk/return analysis has been unnecessarily skewed because of the greed of the fund managers. Far too much of the surplus has been taken by the managers.

Just this week, Augusta, a syndicator and itself an NZX-listed company, has written to the members of one syndicate asking them to agree to pay Augusta even higher fees, for what looks like performing its responsibilities for what is already a generous level of remuneration.

Augusta has met with a tenant and agreed to extend its lease by ten years, at some higher rental. In so doing, it has added many millions to the value of the lease, and thus the property.

Rolling over tenancies and negotiating new rentals is the task for which Augusta is extremely well paid.

Yet it is asking its syndicate members to pay it another extra fee, for performing its task well.

I guess an inference could be that if Augusta is not incentivised by extra bonuses, it will not try as hard to arrange better, longer leases.


Some years ago I suggested to all clients that if one was contemplating investing in any Augusta syndicate, one might have better liquidity, get equivalent after-tax returns, access capital gains more certainly and align one’s outcome with the young men running Augusta, not by buying into a syndicate but by buying Augusta shares.

The Augusta returns from fees seemed much more certain than the potential returns of the syndicate.

Augusta’s Managing Director is Mark Francis. His dad was Peter Francis, best known for the fortune he made, at least temporarily, from Chase Corporation before it collapsed in the 1980s, having raided the Farmers superannuation scheme when Chase bought Farmers and used the Farmers pension scheme to buy Chase shares, later to be worthless. I have never had clarity around on whose shares the pension money was spent.

Chase would surely not have succeeded with such behaviour under today’s laws.

My strong suggestion to every Augusta syndicate member is to oppose the Augusta ‘’bonus’’, vote NO and remain vigilant about any future behaviour that seeks to over-reward Augusta.

Unlisted syndicates lack transparency, lack liquidity, and should not be comparable with listed property trusts.

In my opinion, the unlisted syndicate needs a very significant rate incentive – at least 2% after tax higher than the dividends of a listed trust – just to atone for the illiquidity and lack of transparency.

The Cassels solution should not be unique to the various Quantum funds syndicated by The Wellington Company. Every syndicator should offer that liquidity. There should be no extra bonuses.

Disclosure – as a result of our use of Quantum funds, our director Edward Lee stood for a director’s role at each of the Quantum syndicates and is now a board member there.

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WHEN a 100kg man stands alongside a 200kg man, the lighter man might feel smug that his rotundity is relatively minor, and entitles him to an ongoing diet of lamb chops and jacket potatoes.

I guess the same logic was behind those of our leaders in recent governments who gloated that New Zealand is the least, or one of the least, corrupt governments in the world.

I guess we are lucky we do not live in Malaysia.

A recently published book, The Billion Dollar Whale, written by two American journalists, outlines the astonishing corruption in Malaysia, with several billion dollars literally stolen by Malaysia’s leader and by a particularly guileless, indeed half-witted, Malaysian entrepreneur, Jho Low.

Perhaps one could argue that if you can steal billions over a year or two, you might claim a higher fraction of ‘’full-witted’’ than my description of ‘‘half’’.

Alternatively, you might argue that ‘‘half’’ is over-generous. His behaviour was so stupid that one might wonder about his cerebral wiring.

The book reveals that with the detailed help of a Goldman Sachs executive, Low convinced a Middle Eastern country, probably Saudi Arabia, Kuwait or Qatar, to guarantee a Malaysian development bond fund, enabling the fund, IMDB, to borrow ten billion from fund managers (though happily none from NZ fund managers). Most of the money came from Wall Street.

The entrepreneur with some fraction of his wits stole the incoming money, sharing the loot with Malaysia’s Prime Minister, to ensure he had ‘’official’’ protection. He then built an image in America as a ‘’brilliant, successful investor’’, with money coming out of the orifices on the side of his head.

With this stolen loot, he held the sort of fantasy events that attract morons, champagne being poured into swimming pools, dopey women jumping out of massive food arrangements, Hollywood glitterati hired to excite those whose definition of beauty is a gold-dusted version of Sabrina, the fabled over-balancing cover girl of the 1950s.

Vulgarity, crassness and dishonesty all were rolled up into American capital market-fuelled events.

Goldman Sachs scored $600 million in brokerage costs but did not notice anything untoward in the transaction. The investment bank described the transaction as unremarkable.

The Malaysian Prime Minister had a bottomless pile of money to fund his re-election campaigns while he covered up the stealing. The gormless-looking moron Low had enough ‘’glamour’’ that he attracted women of gold-digging mentality.

This heist did not happen in the distant past.

Good grief. It happened in the same era as John Key was managing the National Party, and the All Blacks were winning back-to-back Rugby World Cups.

Did the world learn nothing from the 2008 global financial crisis?

Are we really a trading partner of a country where such a crooked political and financial culture can be encouraged by the leader of its Government?

Have capital markets morals in Asia and America reached a level where the world’s largest merchant bank, Goldman Sachs, can see nothing suspicious about $600 million of brokerage?

Do we believe the GS officer’s promotion to a high status in GS was unrelated to $600 million of brokerage?

Do capital market members and fund managers have such modest standards of decorum that they will even attend, worse still, enjoy such vulgar demonstrations of the disrespect for other people’s money? Surely brainless destruction of wealth insults every intelligent person.

What I found particularly amusing with the Billion Dollar Whale was the news that the ugly thief, Low, engaged an expensive British law firm to intimidate booksellers, hoping they would be cowed into not stocking the book that revealed all this crass behaviour.

The idiot thief’s plan had the reverse effect. It aroused great interest in the book, producing a clamour that led to eye-watering levels of sales, and it is now a New York best seller.

Note for readers: Its title is similar to my upcoming book on the South Canterbury Finance failure – I chose mine months ago as “The Billion Dollar Bonfire”. As I will recount, no one stole any money – but our government lost a billion of taxpayer wealth through incompetency and then a cover-up of that incompetence.

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SUBJECT perhaps to the right to appeal, some of Eric Watson’s companies have now been ordered to pay more than $110 million in taxes, penalties and interest.

A UK court has ordered him to repay Owen Glenn perhaps a larger sum, having ruled that Watson rorted Glenn, years ago.

Will the NBR this year acknowledge the stupidity of guessing the net wealth of publicity-chasing show-offs when it has not the foggiest idea of all the debts and wheels within deals that characterise entrepreneurs chasing mention on rich lists?

When will the NBR acknowledge that a fellow with $10 million of saleable securities, and no debt, is a very different proposition from a headline-chaser with a billion of wealth, as valued by someone, but $500 million of real debt?

Who is ‘’rich’’ and who lives in a sweat, when asset values fall by half, as they tend to do, when forced sales are imposed on those who cannot service their debt.

Eric Watson will join a long list of people who did not understand that a debt-fuelled investment strategy survives storms only if the man in charge has special talent, high standards, and can manage the risks when investing money belonging to other people.

Hanover Finance was so strong it could ‘’weather all seasons’’.

The Tui billboard said so.

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Edward will be in Wellington on 28 March, Wairarapa 9 April, Auckland (Albany) 11 April and in Tauranga 29 April.

Michael will be in Auckland (4 April, city) and Hamilton (28 March).

Kevin will be in Christchurch on 17 April and Ashburton on 9 May.

Chris plans to offer investment seminars in many South Island cities in May. Please advise us whether you would wish to attend seminars in Timaru, Wanaka, Dunedin, Christchurch or Nelson in May. He will run seminars in the North Island in Wellington, Kapiti, Napier and Auckland.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

Taking Stock 14 March 2019


Chris Lee writes:

IF investors for the foreseeable future must endure lower returns, then the offsetting goal must be lower risk.

The risks can reduce if the investor has better regulations to protect him, and better enforcers of regulations, leading to lower levels of poor corporate behaviour.  It is a grim fact of life that when returns are high, corporate behaviour deteriorates.  We all saw that in the 1980s in the years leading up to the 2008 financial crisis, and we have seen it, in a microcosm, in the Auckland property market.

In Auckland, real estate agents have become over-rewarded.  Those waiting to join that class have learned to cheat, forging signatures, using inside knowledge to steal margins by behaving like buyers, rather than agents, and all sorts of rust marks have been given a lick of paint, to facilitate a fast buck.

The opportunity to achieve instant wealth always leads to a few platoons of unprincipled people into a dash for a share of the loot, with no regard for the rights of others.

The solution is a standards-based, legal model, assiduously enforced, with sanctions that are binary, and make cheating a hopeless means of pursuing wealth.

We need to find a way of showing the morally weak that cheating will fail; not ‘’may’’ fail.  Just as had to happen with drink-driving, after decades of being a ‘’token’’ offence, we need to make corporate cheats aware that their pursuit of instant loot will have real repercussions.

The ultimate sanction should be the loss of their personal (and family trust) wealth, removed to make reparations to the victims of the cheating.  If we could take back their wealth, perhaps constrain their freedom, destroy their reputation and thus their ability to cheat again, then the sanctions might alter their thoughts of cheating.

If I think back to the front runners and insider traders in the institutions, fund management sector, and sharebroking firms in the 1980s and 1990s, I recall the names of many people who cheated, only a very few of whom were shamed out of the financial markets.

The problem was a poor regulatory framework, exacerbated by an insultingly meagre Crown budget for enforcement, further stymied by the extreme difficulty in ever getting access to the courts.

The costs of getting justice are so extreme because the corporate world spends hundreds of millions of its shareholders’ money buying insurance policies, which pay the costs of defending directors and corporate executives who are charged with cheating.

The victims of the cheating have no such bottomless source of funding, so settlements, if any, are unjustly small and the courts rarely have the opportunity to do anything about it.

Worse, New Zealand’s class action law is not fit-for-purpose, at least in part because our previous Chief Justice, Sian Elias, was uninspirational, apparently indifferent to the need for a modernising of our class action laws, and perhaps snobbishly opposed to the need for litigation funding to be a standard means of levelling the playing field.

Elias has now reached her use-by date, defined as 70 by the law, and is being replaced by Helen Winkelmann.  Hopefully she will bring energy to the planned Law Society review of these relevant laws.

Justice Francis Cooke deserves praise for his recent ruling that imposes modest, affordable (perhaps insurance-paid) awards against some indefensibly inept directors at Mainzeal, who facilitated stripping shareholder cash from what was a public listed company.

I would be happier if the awards had fully reimbursed creditors and addressed the injustice to those retail shareholders who seemed to be underrepresented by the board.

Cooke and other judges in recent cases – like the case involving Kiwifruit growers and the Ministry for Primary Industries – have raised hope that our society will do more to help victims, making their oppressors pay for their poor behaviour.

In so doing they will reduce the risks facing investors, at least slightly offsetting the low returns that will accompany reliable financial investments.

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Johnny Lee writes:


E-ROAD’s announcement earlier this month has led to a sharp rise in the share price, which will bring some relief to long-term shareholders.

The announcement of a major US signing is its biggest win in the United States yet, and saw a 30% increase in the share price.  Although its US operations are not yet profitable, this is seen as a large step towards that goal, with 4,900 units contracted with this agreement.

The announcement is exciting for several reasons.

Firstly, and most importantly, it proves that there is real demand for their product in the US, and a genuine belief that their product is industry-leading.  Investors, like elephants, have long memories, and are reluctant to swing their trunks towards firms which are aggressively expanding into overseas markets.  There are too many instances of New Zealand firms over-estimating their ability to disrupt established markets, with shareholders taking the brunt of corporate over-confidence.

The second reason this announcement is significant is that it gives investors confidence that E-Road is prepared to deliver on a large scale.  This is its largest contract in the US, and the addition of almost 5,000 units will increase its US foothold by almost 25% in a single contract.  E-Road has confirmed that its North American business is now cashflow positive on a monthly basis, and one hopes this will translate to long-term profitability.

E-Road’s announcement also included a brief update of its NZ and Australian operations.

Its New Zealand growth is ‘in line with expectations’ as that market begins to mature.  In Australia, where it ‘re-launched’ in October last year, E-Road is seeing strong levels of interest and it expects the cost of the ‘re-launch’ to pay off in the long-term.

E-Road’s next report is due May, and investors will be carefully watching progress in both the United States and Australia.

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GENESIS Energy is another company that should be seeing happy shareholders, as its share price has climbed steadily since its half-yearly results late last month.

Genesis reported a 78% jump in its net profit, and a modest increase to its dividend to 8.45 cents per share. Last year’s half-year dividend was 8.3 cents per share.  As with all its dividends, it does not carry full imputation, meaning the cash amount to shareholders will be slightly less.

Genesis, New Zealand’s largest operator of gas and coal-reliant generation, tends to benefit most when conditions are dry and hydro levels fall.  This was particularly prevalent during October and November 2018.  Additionally, its focus on reducing ‘churn’ (that is, customers shifting to other providers) and encouraging customers to adopt multiple fuel sources within its product range, has led to improved customer growth.

Genesis also noted it had reduced its net debt, extended the average term of its debt, as well as reduced the cost.  These all flow on to benefits for shareholders, and present a good illustration of the positive flow-on effects of falling interest rates to shareholders of cash generative businesses.

If interest rates are going to remain low, or possibly fall further, for the very long term, then the biggest winners from this would be borrowers, encompassing both home-loan owners and corporate borrowers.

All things remaining equal, falling interest rates help companies widen margins, as the cost of doing business has fallen, yet the reward does not change.

Our view remains that interest rates are likely to stay low for many years, which should fuel share price rises to stay in concert on a yield-differential basis.

In theory, competition should rein in excessive profits, and falling costs should lead businesses to offer lower prices to customers.  In practice, monopolies and oligopolies are focusing more on customer service and digital-friendliness to improve the appeal of their product.

As an aside, an obvious winner from these dynamics should be companies which provide and install solar panels and electricity storage.  With interest rates falling and wholesale prices remaining volatile, the argument for providing these services should slowly be developing into a financial one, rather than solely an environmental one.

Genesis shareholders should be encouraged by the company’s performance. The electricity sector remains one that should benefit from the current economic conditions.

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ONE issue the country will need to address over time is the chronic shortage of workers, especially in the trade and service sectors.

Greater Wellington Regional Council has cut bus services due to a lack of bus drivers.  Trains are being cancelled due to lack of train drivers.  Work within the construction sector is being delayed due to lack of skilled tradespeople, and fruit runs the risk of rotting on branches due to a lack of fruit pickers.

GWRC’s response to the cancellations was to identify correctly that commuters can have ‘certainty about whether their buses would arrive’.  Perhaps a more empathetic response would not have gone astray.

A subsequent report stated that Hastings District Council’s planned meeting to attract workers to assist in the seasonal harvest attracted a crowd of zero.  The estimated shortage of workers in that area is around 400. The target market for fruit pickers, apparently, included students and superannuitants.

One may argue that the solution to an imbalance between supply and demand is a change in price.

Having apples, pears and kiwifruit rot in orchards due to a lack of staffing seems worse than wasteful to me.

In a nation where horticulture and viticulture are among our fastest growing industries, it is essential we develop a long-term solution to what should be a relatively easy pattern to predict. Perhaps our education system should have more focus on vocational opportunities.

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ANZ New Zealand’s 5 year, unsubordinated, unsecured bond offer has closed, only three days after opening.

The rate is likely to be below 3%.  With brokerage on the offer to be paid by the investor, the bond will represent a return well below that of a term deposit with the same institution, the same duration and the same security ranking.

The two are not directly comparable, of course, as the listed bond would give you the benefit of liquidity, allowing you the opportunity to sell your investment to other buyers.  Such a sale would incur additional costs.  Whether this benefit is worth such a large premium (meaning a lower return to the investor) will be in the eyes of the bondholder.

Investors who hold a long-term, diverse portfolio should continue to be discerning as to where to invest their money, but remain mindful of the overall trend towards lower returns.  Our expectation is that ANZ New Zealand will not be the only issuer to capitalise on the prevailing low interest rates by offering long-dated bonds at levels such as these.

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David will be in Lower Hutt on 20 March.

Chris and Johnny will be in Christchurch on March 20 and 21. Chris plans to offer investment seminars in many South Island cities in May. Please advise us whether you would wish to attend seminars in Timaru, Wanaka, Dunedin, Christchurch or Nelson in May.

Edward will be in Wellington on 27 March, Auckland (Albany) 11 April and in Tauranga 29 April.

Kevin will be in Christchurch on Wednesday 17 April and Ashburton on 9 May.

Michael will be in Auckland (4 April, city), Hamilton (28 March) and Tauranga later on.

Chris Lee

Managing Director


Johnny Lee


Chris Lee & Partners Limited

Taking Stock 7 March 2019

Chris Lee writes:


The decision of Justice Francis Cook to require some Mainzeal directors to contribute $36 million to the creditors of the failed construction company signals a new era in NZ commerce.

The quantum of the award will not inconvenience the company’s major shareholder and director Richard Yan whose evidence at the trial revealed ownership of land in China with a value of many hundreds of millions.

Nor should it inconvenience any director with the experience and nous expected of a director of a publicly listed company in such a difficult market sector. Indeed it would be useful to know if any of them share in Yan’s land-owning companies.

According to Justice Cook the directors are likely to be covered by Directors and Officers liability insurance, for all but a third of Cook’s stated award, and there is the further possibility that the directors hold some privately-paid insurances.

In the case of Mainzeal’s chairman, Jenny Shipley, the award might cost her perhaps $1 million, easily affordable for a well-paid former politician who has attracted figurehead roles with Genesis (now retired), Mainzeal and the China Construction Bank (now retired, wisely). Her income for many years has been many hundreds of thousands per year. If a million dollar pay-out would cause her grief, she would have failed to invest with any skill.

The award and its collection ought not to contain any surprises. I would argue the quantum of the award was more modest than the damage inflicted by the directors.

What is relevant about this case is what it signals to directors of any public company.

I hope that these signals are:

1. No company may regard its creditors as its only or even major source of cash-flow.

2. No director may allow a major shareholder to use a public company’s cash as his or her personal funds.

3. No company should appoint directors whose knowledge and experience is irrelevant to the requirement of the job.

4. No citizens should accept a director’s role that is clearly outside their skill set.

5. No company or board of directors should overlook the growing likelihood that they will be personally financially accountable for ineptitude, error or ignorance.

6. New Zealand’s credible litigation funder LPF now has a huge war chest and an unbroken line of successes in funding cases against people who historically escaped accountability. Their escape tunnels are now being sealed too late to nail down the cheats in the 2005-2010 finance company sector but LPF is now primed and ready to chase other dreadful performers.

CBL’s directors might want to order some sleeping pills. So might those directors who turn down cash offers from third parties and then see their company’s share price settle at half the offered price. The Abano directors might want to consider this.

I suspect we are about to see what happens when well-paid people who perform badly become accountable and are required to face the court, their pursuers empowered by the support of a well-funded prosecuting team.

The poor performer should be very afraid.

_ _ _ _ _ _ _ _ _ _

David Colman writes:


New Zealand investors shouldn’t yet fear that a Capital Gains Tax (CGT) will be implemented in the manner proposed by the Tax Working Group.

The group chaired by former finance minister Sir Michael Cullen was tasked by the government to provide recommendations that would improve the fairness, balance and structure of the tax system over the next 10 years.

A focus on taxation in isolation tends to ignore the benefits for a productive economy that encourages and rewards investment.

The introduction of CGT in some form or another is likely to be an unpopular policy for many and the government should examine the proposals within the ‘Future of Tax’ final report carefully.

Rental property operators are likely to find it impossible to maintain the same after-tax returns they have received in the past if they are counting on the combination of rental income and the potential gain in value (effectively cut by a third if the proposed CGT is adopted). Many rental property owners require capital gains to offset negative returns from nett rent.

Investors more broadly are confronted by diminishing returns due to historically low interest rates, sedate global growth and an equity market that will find it difficult to replicate the strong performance since the Global Financial Crisis. Ten years ago the NZX Capital index (an index that ignores dividends) was at 1767.87 (27 February 2009) and this week climbed above 4,170 points (a capital gain of over 235%).

The NZ Government requires tax revenue to provide essential services but there is a point where a larger tax grab unjustifiably punishes people who through discipline, planning and maybe a little good fortune have been able to build up their investments by saving a proportion of their income - the same people who are already being punished by lower interest rates on term deposits and bonds resulting from a worldwide predilection for over-borrowing and over-spending, offset by the new strategy of minimal interest rates.

High sovereign debt internationally and even elevated levels of NZ local government (council) debt are mainly the result of spending beyond one’s means with the cost being borne by tax-payers and rate-payers who have little influence on the behaviour of politicians, other than participating in an election from time to time.

Sadly, democracy often gives a choice of the devil you know or the devil you don’t resulting in very little noticeable change to fiscal behaviour.

Regardless, I am glad we live in a democratic society and will have the ability to vote one way or another on policies including how a CGT might be introduced.

I support the idea of a fair, balanced and optimally structured tax system but in reality taxation is an evolving concept and the Tax Working Group, including Sir Michael Cullen, are probably well aware of this.

_ _ _ _ _ _ _ _ _ _ _

I feared there may have been some slight conflict of interest in the area of taxation on retirement savings where Sir Michael Cullen is a director in the Lifetime retirement income scheme which might benefit from any special tax treatment. I see no evidence that Lifetime’s annuities would benefit from the proposed ‘Future of Tax’ proposals but I may be wrong.

The Lifetime scheme has attracted a little media attention as a guaranteed annuity (insured income for the rest of your life) which is a unique product in New Zealand.

Cullen’s fellow Lifetime directors include, among others, managing director Ralph Stewart (previous CEO of both AXA Insurance and ACC) and chairperson Dame Diana Crossan who was former Retirement Commissioner and was a former executive at AMP, which bought out AXA.

Unsurprisingly, based on the directors’ backgrounds, the scheme is largely an insurance product and the income paid each year should not be seen as a return on your investment. It should be seen as an externally-controlled method of eating one’s capital while feeding commercial initiatives.

An annuity is a complicated investment product. The initial investment will be reduced every year influenced by the performance of the underlying balanced fund, the amount paid in the form of fortnightly payments, and the obviously generous costs and fees.

Fees are considerable and include an insurance fee of 1.35% per year for an individual, or 1.75% for joint investors, and management fees of 1% per year. The insurance fee covers the annual payments even after the initial funds have diminished to zero.

The management fee is charged to invest the balance after fees into an internationally diversified balanced fund made up of shares, bonds and cash with a gross average and ambitiously forecasted return of 6.50%. This high expected return has only been achieved in the first year of the funds’ short existence so far, with the past two years below that figure. An expectation of such a high return is ambitious, even improbable.

There are also costs associated due to the buy/sell spread between putting funds into the scheme and taking funds out.

The rate at which the guaranteed income is paid is determined by an Insured Income Base (the value of your initial investment) and the fixed rate for a particular age between 60 (4.50%) and 90 (7.50%). For example, at the age of 65 (retirement age) the net Lifetime Insured Income rate is currently 5.0% after fees, performance of the fund and reduction of your balance. Perhaps the model is best assessed by its credit rater, AM Best & Co. Its credit rating of the Lifetime Fund is below investment grade (B-).

The effects of inflation can significantly reduce the value of a fixed income over a long period of time so Lifetime also has an inflation protected product which for a 65 year-old starts paying income in the first year at 3.75% of their initial investment.

Note: it would take more than 12 years at Lifetime’s assumed long term inflation rate of 2.30% (which is above current inflation rates) before your inflation protected income exceeds the fixed income described above.

A disciplined investor who chooses to self manage their investments can save themselves a huge amount of fees by avoiding annuities and will have greater control of their investments.

_ _ _ _ _ _ _ _ _ _

We have a worthless bank note of ten billion Zimbabwean dollars displayed on our front desk to remind us of the effects of inflation.

Perhaps piles of similarly worthless bolivars sit in the safe of Venezuelan president Nicolas Maduro who after the death of President Hugo Chavez in 2013 assumed power and continued his predecessor’s destruction of Venezuela’s economy.

You have to feel for the poor people of Venezuela who have been crushed by an oppressive, isolationist and corrupt dictator.

You can now find young Venezuelans in many parts of the world, having escaped from a poorly-led country with the highest murder rate on the planet (89 per 100,000 in 2018).

Recently, desperate citizens clamouring for aid supplied by trucks crossing the border from Columbia were met by troops loyal to Maduro who, after firing upon the starving crowds, set the trucks and their precious contents ablaze.

The deadly crisis has effectively become somewhat of a civil war between two factions supporting either of two presidents with Maduro recognised as president by just a handful of countries (notably China and Russia) and Juan Guaido recognised as president by the majority of nations including the USA and more importantly the Lima Group (essentially the rest of North and South America) which includes countries bordering the deeply troubled nation.

Venezuela is not a small country, having a population of 33 million people in an area greater than three times the size of New Zealand, so foreign intervention would be an incredibly costly and geopolitically risky commitment, particularly with Russia and the USA having yet another difference of opinion.

It is depressing to see such events unfold yet again (violence, theft and starving are rife).

Like a pinch to the arm, I remind New Zealanders that although there is plenty of room for improvement we do not have to fight for water, staple foods, electricity, and medical supplies. All are available any day of the week for much the same cost (if not free), as a proportion of income, as they have been for years.



Edward will be in Auckland (Remuera) on 8 March and in Wellington on 27 March.

Chris and Johnny will be in Christchurch on March 20 and 21

David will be in Lower Hutt on 20 March.

Michael will be in Hamilton on 28 March.

Chris Lee

Managing Director


David Colman

Authorised Financial Adviser


Chris Lee & Partners Limited

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