TAKING STOCK 31 May 2018


AMONGST the many lazy, dishonest and self-serving practices to emerge from the Australian enquiry into insurance and bank practices has been the decades-old policy of incentivising salesmen by providing expensive prizes.

One insurance company spent around $100,000 per head on a group of salesmen who had flogged off a high level of high margin insurance policies. The salesmen were taken to Europe, presumably at the front of the plane.

You can safely assume that the policies they had sold were not the low-margin necessary insurances but were the types of insurances with fat margins and inadequate transparency.

Many of a certain age will recall those 1980s and 90s policies that combined a savings scheme with an insurance policy.

Of the premium paid, most was allocated to high margin insurance, some went to commissions, and a fraction went to savings.

At one stage the premium on a policy was tax-deductible enabling the salesmen to demonstrate that the savings component was virtually a gift from the tax-payer.

Fortunately, we have progressed since those days, though the Australian enquiry suggested that progress has been sporadic.

The concept of rewarding the highest-selling salesmen with prizes is clearly patronising and implies cynical strategies to chase growth in quantity, rather than quality.

Furthermore it was stupid.

It bred a squadron of salesmen who turned their vocation into a pursuit of reward, rather than job satisfaction and client focus.

It must be accepted that the vocation has always appealed to arestricted number but there are such creatures as excellent, client-based insurance salesmen. I know a few such people.

I recall one, a prominent sportsman who had a satisfying career for more than forty years, and measured his success by the clients he helped, rather than the adequate but relatively modest wealth he built.

At one stage he was the president of the national group of life underwriters.

At an annual meeting, nearly twenty five years ago, he warned insurance salesmen not to spread their business into areas where they had no knowledge, no natural network, and no value add.

He was referring to financial advice on such matters as shares, bonds, finance company debentures and contributory mortgage schemes.

At the time he issued his warning, the pinnacle of achievement for insurance salesmen was to be initiated into the Millionaires Roundtable, a group of insurance salesmen who sold a million dollars worth of premiums, perhaps in a year. (I am unsure if there was a time limit.)

I recall observing in a newspaper article thirty years ago that this measurement of achievement was dangerous.

An inappropriate sale might win entry to the million dollar roundtable but might also destroy the salesman’s credibility.

Incentives that are earned by quantitative criteria are poor incentives.

They encourage the sort of behaviour that should be discouraged.

Of course many areas of endeavour have set off down this path.

I know well a fellow who through diligence created a network of satisfied customers of the office equipment brand he sold.

His offshore owners rewarded him with family holidays in all sorts of places.

However each years his targets would double, and in future years keep multiplying, until he resigned, disincentivised by a stupid corporate culture.

The company lost a high quality salesman because it did not understand how to measure quality.

A couple of years ago I was in Malta in a resort hotel shared by 50 financial advisers and their wives and children, all wearing t-shirts and hats displaying their allegiance to the world’s second largest financial advisory group, Edward Jones.

This American company employs around 17,000 salesmen and challenges them to earn holiday prizes by selling more.

The most successful 200 salesmen (almost exclusively EJ’s 200 winners were male) then choose one of four destinations for a 10-day paid holiday with their family.

The first to reach the target choose their destination, the last to get there goes to the destination where there is a vacancy.

The other 16,800 salesmen had no holidays at all, other than bank holidays.

Their ‘’advisory’’ model might have taken a lead from Money Managers or Vestar, those disgraceful organisations whose ‘’advice’’ was linked to an in-house brand or to a stupid finance company that would pay double or triple brokerage.

Vestar, originally Northplan, was the creation of the late Kelvin Syms, a one-time colleague of Somers-Edgar at Money Managers.

Syms combined with Southland insurance salesman Ken Swain to employ dozens of completely inept salesmen to sell the worst of the finance companies, the likes of Bridgecorp and Capital & Merchant Finance, as well as shares in scruffy private companies, Radius being one. Clients were cannon fodder.

Another dreadful finance company, MFS, then agreed to buy Vestar for $52 million, an indication of just how much wealth was being transferred from investors to a company which had not oneiota of merit.

Enabled by Donal Curtin, once an economist used by large government entities, Vestar would negotiate double or triple brokerage, and benefit from ‘’incentives’’ from the likes of Bridgecorp, which would set up competitions, based on sales volume, that rewarded salesmen with trips to the likes of the 2007 Rugby World Cup.

Vestar and Bridgecorp must have presumed that competent sales people do not arrange their own attendance at sportsevents, a somewhat patronising stance.

Money Managers would invent brands like First Step, or Orange Finance, and self-manage securities without much of a clue of what it was doing, other than coining money for its owners.

Many of its staff destroyed their careers, permanently blighted by association.

Basing one’s strategies in life on the idea that success is measured solely by dollars, or incentives won, is a recipe for dishonesty and self-destruction.

I recall how the ugly owners of Hanover Finance, Watson and Hotchin, used to incentivise financial advisers and sharebrokers.

On one occasion Hanover offered to take my wife and I to Sydney, supply us with clothing, put us up in a nice hotel, and take us to international league and rugby matches.

Hanover’s charter plane left with at least two empty seats. The charter plane contained financial planners willing to chant Hanover’s mantra and pledge the support of the clients. The clients would have been left with more money if they had paid for the planners’ trips and demanded real advice.

The Australian enquiry will have performed a practical task if it displays these sort of anachronistic incentive practices and bans them.

The world is a better place when there is transparency in every step of every transaction.

Brokerage, published and expressed in dollar terms, is a feature in virtually every transaction, if not always expressed in the financial market terminology.

Perhaps retail margin is a less monetary expression.

Incentive prizes is something quite different.

The concept implies high-pressure selling for selfish purposes.

The insurance industry will be stronger when it sprays Round Up on this noxious weed.

 _ _ _ _ _ _ _ _ _ _ _ _

The NZX will have been delighted with investor reaction to its offer of 5.4% capital notes.

The offer was small – just $35 million – but demand was so large that investors will either be heavily scaled, or be allocated none from the brokers offering the stock.

Given that the NZX is a modestly performing operation, battling to retain its customer base in the face of Australian (ASX) competition, the investor response must be gratifying.

I guess that the investor logic is that the NZX is a monopoly, a financial service provider and regulator, funding itself through a tax on every trade of shares.

It is partly owned by the sharebroking firms which use its platform to trade shares.

Its ability to ‘’tax’’ each trade, at a fee it sets, is analogous to the ability of councils to charge rates.

The brokers set their own brokerage charges to include the NZX fee.

As an aside, I think the broking world grossly undercharges.

Brokers guarantee buyers and sellers that each transaction will occur as requested. The brokers must have capital to underwrite this guarantee. Capital has a value.

If the other party to a deal defaults, the broker bears the cost.

Admittedly in the 1980s companies like Renouf Partners (NatpacCorp) defaulted, leaving its clients to whistle. It had a poor business model.

Since then, brokers have performed. Most are competent, employ properly qualified advisers, undertake meaningful research, and most are efficient.

Fund managers charge more, perform useful research, and live off the funds procured by financial advisers. Their capital does not face the same risk.

My assessment is that too much of investors’ intermediation cost goes to fund managers, largely because of the nonsensical ‘’bonuses’’ for ‘’out performance’’ that many of the greedier fund managers charge to ‘’align’’ their interests.

Of course the index funds should be all but free of any charge.

They perform no thinking, no research, and are mechanised.

The NZX has the platform through which virtually all buying and selling is done.

By and large, it is a toll collector.

This may explain investor approval of its 5.4% capital note issue, which gets reset every five years.

There is a lower risk when one invests in a toll collector.

There will be many new bond and note issues in coming weeks, varying greatly in quality. Not all such issues will fit the risk tolerance of every investor.

Our clients might be well advised to record their interest in receiving information on new issues via email by subscribing to our ‘all new investment issues’ email list. This can be joined up via our website on https://www.chrislee.co.nz/newsletters - Clients are welcome to discuss each issue and their individual merits with us.

My guess is that many of the new issues will be small, meaning access to these will be on a first-come first-served basis.

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THOSE South Canterbury Finance perpetual preference shareholders who funded a legal investigation of the illegal behaviour of various parties, including the Crown, should soon get the final response from the Labour government.

Until that response is received, we will not know enough to discuss the integrity of the response to what clearly was a series of shameful actions and responses.

The subject is far from dead.

The behaviour should never recur.

New Zealand, it is said, is the least corrupt country in the world.

The previous government has left it to the new government to address that undeserved flattery.

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I will be in Auckland(Waipuna Lodge)on June 18, Whangarei on 19 June (Mokaba Café) and Auckland(Albany) June 20.

I will be in Christchurch on June 26 and 27.

Edward is in Taupo 13 June.

Kevin will be in Christchurch on 7 June and Queenstown on 15 June.

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

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

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

Chris Lee

Managing Director

Chris lee & Partners Limited


TAKING STOCK 24 May 2018

GRANT Robertson’s narrative to support the first budget of the Ardern government would have pleased most.

The ANZ kindly hosted a luncheon for capital market participants and its major clients, providing Robertson with a large, attentive audience.

The new Minister of Finance has no history of a natural network in such an audience, but he is a skilled politician, with a background in foreign affairs, and unsurprisingly is a polished speaker.

What would have pleased most was his acknowledgement that he has inherited a country with low inflation, low unemployment, record terms of trade, record tax receipts, and record numbers of immigrants and tourists.

What Robertson did well was to articulate the priorities of a programme that aims to lift the living standards for our low income people, and modernise the assets that the country needs.

Schools, hospitals and transport will be upgraded.

Those who measure a country on social, as well as financial, criteria will next year hear the Treasury’s method of assessing social progress.

Clearly Robertson expects New Zealand to make measurable its progress on social issues.

No one could contest the value of assessing such progress, and in allocating the tax surpluses to those who are struggling.

The key will be to use the money wisely.

A clever approach to measuring the progress made by that spending will determine the public support.

Robertson will also have won attention with his commitment to use public private partnerships to help build infrastructure. That makes sense. It means the country gets better facilities sooner, and it ensures the chosen programmes will be managed appropriately.

If the forecast growth and tax receipts are validated by performance, investors would have few reasons not to see the domestic environment as being benign.

We just want no more costly events, like the horrific earthquakes of recent years.

 _ _ _ _ _ _ _ _ _ _ _ _

ROBERTSON’S presentation to the meeting did not cover two matters of high importance.

How can NZ build more houses each year?

How can NZ perform the expected no-cost doctors’ visits without a much greater number of general practice doctors?

Very clearly, the building capacity is limited by the pitifully inadequate promotion of building as a desirable career for New Zealanders.

The only solutions are to target builders as priority immigrants, to realign our education curriculum to incentivise builders, and for the Housing Corporation to sponsor apprenticeships, perhaps with a promise to employ graduates.

It has often occurred to me that one innovation might be to put inside prisons an educational unit that offers a building or construction career to those prisoners who can see the better life offered by a functional trade.

If nominated prisons had the capacity to offer the practical education and experience, then perhaps prisoners could choose to rehabilitate by focussing on a potential career.

The imprisoned could build pre-fab houses, troubled people could be given a pathway to a real life, and NZ could solve a shortage of labour.

The problem with the shortage of general practitioners is about to be obvious to most new Zealanders, and might also need a re-alignment of immigration policies and special funding, perhaps with bonded employment replacing educational fees.

The average age of GPs is now well into the sixties.

Within five years many will be retiring, some perhaps reaching boiling point over the abuse they have suffered from successive governments.

They feel abused because they have been required to provide services for ever greater numbers, at a cost that is beneath break-even.

Currently a doctor is paid $192 per annum for each of his young, no-charge patients. The figure is calculated by the Crown at $48 per expected visit.

The reality is that ‘’free’’ consultations lead to ‘’more’’ consultations, meaning the average number of visits is at least double the calculated four visits.

With the Community Services Card holders also lining up for free visits, GPs will endure even greater pressure, for less reward.

An ageing GP, facing these changes, will retire.

One less doctor increases the pressure on the other local doctors.

We are at breaking point, now. The hospitals will soon find queues of people without access to a GP.

My own GP has elected to sell his practice to a group of doctors and will now operate for private patients only.

He will charge me $150 per annum as a patient fee, $80 for each visit, and $15 for any prescriptions.

He will probably subsidise his private practice by performing skin cancer operations once a week. For this skill, he has ample reward.

The new government will find that a growing number of GPs will be reviewing their model.

The GPs will say that the ‘’free’’ consultations are not a gift from the Crown. They are a gift from the fading numbers of GPs.

I imagine in the rural areas the problem is ever greater.

Robertson and his colleagues would be wise to talk to a few dozen GPs and take action to avoid a wholesale exit from the publicly-funded sector.

Investors might want to watch developments.

It is easy to imagine groups of younger GPs seeking to offer private clinics, funding their capital needs by listing a company that is based on a sustainable financial model.

The dentists and the veterinarians in Australia have found this formula.

How long before NZ discovers it?

_ _ _ _ _ _ _ _ _ _

THE short-lived leap in Synlait Milk’s share price last week was another reminder both of the power of index funds, and the mindlessness of robotic decisions to buy at any price.

Synlait’s capital market adviser, FNZC, recently published detailed analysis of Synlait, recording with pleasure the various strategies that are helping to build Synlait into a great company.

I would guess that most analysts would now see what some saw four years ago – that Synlait was a much better model, with a much better culture, than Fonterra.

Its leadership has been impressive, its mindset to add value is one that every smart business should regard as a commandment, and its partnerships in Asia have been smart.

If one wanted exposure to our dairy sector, Synlait Milk has been a much better option than Fonterra, which for too long has been managed for its suppliers and shareholders but not with much skill, rather in the manner of how Fletcher Building has been governed and managed.

Synlait’s advising broker clearly rates the company highly.

Kevin Gloag’s recently published research also was complimentary about SML, if cautious about its current share price.

The Synlait share price that FCNZ assesses as being fair is nearer $7, yet the market, fuelled by index buying, reached a mere 50% higher than that as mindless, rule-governed, index funds bought millions of shares last week.

All the actively managed funds will be grinning. They saw the Synlait value long before its status in an index had risen.

When Synlait’s share price traded in millions of shares last week, rising nearly 10% in a few hours, it was the index funds that were buying. Small wonder their annual fees are next to nothing. Some will say that you get what you pay for.

Someone had to be selling last week. Will they buy back at a lower price when the index fund rules require them to sell?

The share price will be worth watching in coming weeks.

Obviously the exchange rate will play its role.

If the price falls, the seller will be predictable.

_ _ _ _ _ _ _ _ _ _ _

BANKERS, fund managers, sharebrokers and investment bankers display unexpected respect for the annual INFINZ awards, held last week in Auckland.

Most people who earn ridiculous incomes and are in constant demand for highbrow work do not need public accolades.

Indeed, I can think of some outstanding NZ contributors, in areas like commerce and the law, who have declined honours, regarding a ‘’gong’’ as quite inappropriate.

Their reward comes from within, from the satisfaction of solving problems cleverly and many would privately admit that the financial rewards have facilitated a privileged life that does not need recognition in a public arena.

Yet for some inexplicable reason, the INFINZ awards have held the respect of the finance sector, for many years the accolades being accepted with pleasure.

Many attend the black-tie dinner, drinking and eating heartily, while various speakers offer a view, from their angle, on the world of commerce.

Perhaps part of the interest is generated by the voting method, which in some categories is indisputably sensible.

For example, the NZ Sharebroking Firm of the Year is assessed by institutional users of sharebrokers, not by some arbitrary panel who might be disconnected from reality, such as the panel that selected CBL Insurance as an award winner just weeks before the insurance company was liquidated.

It surely must add credibility to an award when the consumers of the service are the judges.

From a prize-winner’s viewpoint, victory translates to more business.

The Sharebroker of the Year award has long been dominated by First NZ Capital, the winner 11 times in the past 15 years, and in each of the past four years, including this year.

Yet the published voting of the institutions indicates that this year the award was more closely contested, even though there were only five sharebrokers that won any votes in any of the 19 categories that were assessed.

The big improver was Forsyth Barr, whose achievements in some areas of research is an indication that the Dunedin retail broker is investing more into this area, and must now have some young talent developing.

Forsyth Barr was rated well for its research in Building and Construction, Economics, Energy, Retail, Small Caps and Transport. Presumably this research will support improving returns in the various retail funds the Dunedin broker manages.

Craig’s researcher Stephen Ridgewell won the award as the Research Analyst of the year, and will be grinning at the value this award will add when he next negotiates his salary.

For some time, Arie Dekker (FNZC) has been regarded as pre-eminent in research. This year’s award does not change that. Dekker is a genuine talent.

Of special interest this year was the emphasis on women in capital markets.

The campaign for better access for women seeking careers in capital markets must be working.

In America, and even Australia, there have long been horror stories built around the crass behaviour of either young ‘’Masters of the Universe’’ or simply bad-mannered misogynistic men who sniff cocaine and spend their absurd bonuses in strip clubs, lighting their cigars with $100 notes.

Thankfully that culture is not visible in New Zealand.

Bad language and impolite behaviour is simply not what one expects of privileged adults.

This year the INFINZ people selected seven individuals to receive an award of some sort.

Five went to women, Megan Blenkarne, of the NZX, winning an award as an ‘’emerging leader’’, an honour that will add momentum to her career.

I have no idea how these awards are assessed but it is surely encouraging that our capital markets cannot be accused of being ‘’white male, over 60, and past use-by date’’.

I write this as a ‘’white male, over 60, past use-by date’’ market participant or, as someone else wrote, ‘’pale, male and stale’’.

_ _ _ _ _ _ _ _ _ _


Edward is in Auckland on 28 May, Wairarapa 11 June, Napier 12 June and Taupo 13 June.

Chris is in Auckland 18 June, Whangarei 19 June, Auckland 20 June and Christchurch 26-27 June.

Kevin will be in Christchurch on 7 June and in Queenstown on 15 June.

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

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

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 17 May 2018


Kevin Gloag writes:


THE Turnbull government vigorously opposed a Royal Commission into the behaviour of the Australian banking, insurance, superannuation and financial services industry, but opposition MPs stuck to their guns and passed a bill through Senate in order to set up an enquiry.

They need to be congratulated for their steeliness to address what they described as ‘’appalling treatment of people who have done nothing wrong other than trusting a bank to look after them’’.

The ‘‘cesspool’’ of misbehaviour that has been unearthed during the enquiry is shameful even by the banks’ own very low historical standards of ethical behaviour.

Their sins are too many to list here but basically involve lying, deceiving, and stealing from their clients, even the dead ones.

The unconscionable behaviour wasn’t confined to just banks; some financial advisors were hauled in to face the music as well and it isn’t a stretch to believe we will soon learn of similar behaviour within the insurance sector.

The principal of one financial advisory firm, who had deliberately rorted his clients for his own gain, pleaded with the commission to be excluded from the enquiry because he appeared as an industry expert on a TV Money Show and worried that adverse publicity would be bad for his ratings.  Selfish to the last.

Another financial adviser broke into a sweat, went pale and then passed out in the witness box after he came under heavy interrogation about his methods of misleading and stealing from clients; feeling faint from such breath-taking disclosures is unsurprising.

There were photos of him being loaded into an ambulance.  You can imagine the conversation with ambulance staff “Get me outta here quick!”.

The greedy and unlawful behaviour of the Australian banks is nothing new.

Over the past decade they have admitted to multiple breaches of the Corporations Act for all sorts of misdeeds and forked out more than $1 billion in fines and compensation, an amount which surely will only be the tip of the current iceberg.

But despite their admissions of guilt there have been virtually no prosecutions and very few offenders have been held to account, let alone lost their jobs.

The Australian Securities and Investment Commission (ASIC) has the power to launch criminal and civil proceedings against big business but in the past has chosen not to do so even when it has been handed to them on a plate.

ASIC has opted for what is known as ‘’enforceable undertakings’’ – basically a slap on the wrist and told to look out if they do it again.  This is how regulators try to keep costs down but effectively step in front of the courts, blocking their ability to develop law of tort.

For some reason Australian bankers seem to be immune from prosecution, regardless of the crime.

So the question now is how will the Australian regulatory authorities, with a history of failure in their supervisory and enforcement duties, respond to the findings of the Royal Commission?

It looks like there will be a few new faces at AMP but this has been directors and senior executives falling on their swords, not the work of regulators.

All those who have broken laws need to be not only sacked but prosecuted through the courts.

The breadth of the problem in the banking sector seems to stretch from the top to the bottom; where leaders set poor standards they are sure to be followed, so you can imagine the ‘‘blame-games’’ and finger pointing competitions currently in progress.

Fraud and stealing result in prison sentences for most people so, if proven, why should it be any different for bankers?  Is an apple, or a car, so different to cash once stolen?

Senior bankers are extremely well remunerated when things go right so it follows that they must be accountable when things go wrong.  Highly paid employment should not be a single-sided equation of very high rewards without risk.

Such is the scale of the corruption exposed by the Royal Commission it is not believable that senior managers and executives weren’t aware of what was going on, and if they weren’t they should be sacked anyway for not having their finger on the pulse.

Only very strong action including prosecutions will serve as an effective deterrent to repeat offending, in my opinion, starting at the top of tree.

Do I expect this to happen?  No, it’s too hard, too disruptive and every country and economy needs a strong and profitable banking system, seemingly regardless of how this is achieved.

This reminds me once again of the proverb – “he steals, but he gets things done”.

It is yet another example of regulators asleep at the wheel when the public was relying on them to do their job.  The regulators are ‘’our’’ only hope. We cannot achieve change as individuals, even when a modest collective.

The greed and rotten culture evident in the Australian banks reminds me of what we witnessed in the finance company sector in NZ.

Business as usual:  After finishing this article I read how ANZ’s Wealth Australia financial advice division is currently in the process of compensating 9,000 clients who had been given inappropriate advice by its financial planners.

The very next day I read another article announcing that the head of ANZ’s financial planning division had been promoted to deputy Chief Executive Officer.

Read what you like into that.

_ _ _ _ _ _ _ _ _ _

ONE of the most alarming aspects of the Royal Commission of enquiry in Australia was that, had it not been for the perseverance of some MPs, an enquiry would never have taken place and much of what has been uncovered would have remained buried (the original preference?).

The banks don’t simply come forward and confess their sins; they wait to be caught, and judging by the track record of the Aussie regulators that seemed unlikely.

The whole sorry affair raises the obvious question – how do NZ’s banks rate on a behaviour scale?

Unsurprisingly Reserve Bank (RB) governor Adrian Orr and Financial Markets Authority chief executive Rob Everett have written to NZ’s banks demanding that they report to them by 18 May on the actions they, their boards and senior executive teams have taken to identify and address “conduct risk” in the way they have treated their customers.

Orr and Everett want to understand how the leaders of our banks have obtained assurances from senior staff that misconduct of the type highlighted in Australia is not taking place here.

Under the circumstances they need to be seen doing something although they are relying on the banks being totally honest with their responses, which raises the question of whether the RBNZ’s current honesty system regulatory style is appropriate for our banking sector.

The RB has been heavily criticised by the International Monetary Fund for its light-handed, hands off regulatory approach and while there is some on-site interaction with banks the meetings basically discuss results of supervisory analyses and do not include direct access to bank records and files.

The most significant risks in banking are credit risk, problem assets, provisioning and reserves and the RBNZ relies on attestation provided by directors with every finance statement disclosure that the bank had appropriate systems in place to monitor and control the material risks of the banking group.

The IMF believes that the accuracy of these disclosures are not adequately tested and last year judged that the RBNZ was materially non-compliant in 13 of 29 international bank regulatory and supervision standards.

They also believe that RBNZ enforcement is currently based primarily on breaches that have already happened, rather than being a preventative tool, and this is certainly what we have just witnessed in Australia.

Also supporting the IMF’s concerns you may recall that Westpac was recently admonished for using unapproved risk models to calculate how much regulatory capital it needed to hold under the RBNZ’s self-manage, self-discipline accreditation model.

In expressing disappointment with Westpac, the RBNZ stated that operating as an internal models bank is a privilege that requires high standards and comes with considerable responsibilities and Westpac has not met these expectations.

Those are the dangers of the current regulatory model although we should not forget that NZ’s banks adopted the new global standards for bank capital adequacy, funding stability and liquidity management, known as the Basel III standards, well ahead of the required timetable and with a much more conservative bias than was required.

This was only possible because our banks are genuinely healthy in terms of funding stability, profitability and capital adequacy, so from a risk perspective I think investors in NZ bank deposits have very little to worry about.

From an ethical perspective I don’t know - certainly better than Australia, but squeaky clean? I doubt it and need some ‘’show me, don’t tell me’’ evidence.

The new RBNZ governor seems to be a plain talker with a commonsense approach so he may decide to take a look under the bonnet, perhaps for no other reason than to restore public confidence.  He has already explained that he has sought funding from the Minister of Finance for a sharp increase in the regulatory staff head-count at the central bank.

People get a strong feeling of confidence when dealing with their bank; it is like a financial fortress in their minds.

In terms of cheque, savings and term deposits I share their view but if shuffled into a room with one of their financial advisers or wealth managers I am much less confident of a good outcome, for the investor anyway.

As always, know what you are buying, and consider the incentives behind the financial advice.

_ _ _ _ _ _ _ _ _ _ _

GREEK and European banking authorities are slowly working out what the leaders and supervisors of our finance company sector took a long time to grasp – bad loans don’t just magically disappear over time regardless of how you might hide them, restructure them or misreport them.

In fact history proves that the majority of bad loans get worse, given time, and the old saying ‘’your best loss is your first loss’’ generally runs true.

Greece is preparing to exit its EUR 86 billion bailout arrangement with the European Central Bank in August so its banks have just been stress-tested for the fourth time in eight years to see how they are travelling.

Greek banks have already been recapitalised three times since the debt crisis in 2010 but are still burdened with nearly 100 billion euros of non-performing loans, or 47 percent of total loans.

Writing off the problem loans all at once wipes out all of the bank’s capital and them with it, so all they can really do is ‘’sick bay’’ the problem loans and hope for the best.

The Greek banks are under so much pressure to address their bad debt problems it is severely restricting their ability to extend credit and help with their country’s economic recovery.

Greek and European Union officials are looking for a happy ending to Greece’s bailout programme, but it looks like a good story might be hard to find.

_ _ _ _ _ _ _ _ _ _ _

AFTER 12 years at the helm Synlait Milk’s (SML) CEO and managing director, John Penno, will step down later this year to pursue other interests, and no doubt take a well-earned break.

Penno founded SML 17 years ago and under his skilful and energetic leadership the company has established itself as a leading manufacturer of high value dairy products, specialising in infant formula ingredients and finished consumer packaged infant formula products.

SML has approximately 200 contracted milk suppliers in the Canterbury region, employs 600 people and has achieved annual compound growth of 27% by volume and 38% by revenue since 2009.

SML recently reported a big jump in half-year profit with strong growth in its canned infant formula business, which is secured by long-term contracts with key strategic partners, including A2 Milk.

Plans to build a second manufacturing plant in the North Island and an advanced liquid dairy packaging facility at Dunsandel, to supply private label fresh milk and cream to Foodstuffs supermarkets, adds valuable diversity to the business and should provide the foundation for future growth.

The business of export food manufacturing is not without risks and challenges but SML has made great progress under Penno’s leadership and he will be difficult to replace, even given the careful planning and lengthy transition period.

Penno will join the Board so he won’t be totally lost to the business and SML is now well established with a strong balance sheet, clear growth plan and generating annual revenues of around $800 million.

Penno and SML have come a long way since plans for an initial public offering, and listing, in 2009 were abandoned due to a lack of support.  SML eventually completed an IPO and listing in July 2013.

Today SML has a market capitalisation of $1.8 billion.  It is instructive, in assessing SML success, that its shares trade at nearly five times their issue price whilst Fonterra’s remains at roughly the same price over the same time frame (impact of dividends noted).

A Business Update and Investment Opinion on Synlait Milk is available under Research on the section of our website for advised clients only.

_ _ _ _ _ _ _ _ _ _ _ _

ANOTHER person who should be feeling fairly pleased with himself is A2 Milk’s managing director and CEO Geoffrey Babidge.  He will also retire later this year, a very successful man.

Based in Australia and with 30 years’ experience in the fast-moving consumer goods industry, Babidge has been at the helm of one of the great growth stories of all time which, largely as a result of spectacular sales growth in its infant formula products, has seen A2’s share price skyrocket from around 50 cents six years ago to over $13 today.

Babidge was appointed to the top job at A2 in 2010, having previously been CEO at Freedom Foods, once A2’s largest shareholder.

Freedom Foods sold it 18% stake in A2 in late 2015 after its joint takeover bid with Texas-based food and beverage company Deans Foods was rejected as inadequate by the A2 board.

Looking back, A2 shareholders should be very grateful that A2’s board didn’t sell them out at the time, for what probably looked like quite an attractive offer.

Freedom Foods obviously thought so, selling its 117 million A2 shares at an average price of around 80 cents, almost on the eve of the great run-up in the company’s share price.

Babidge will be replaced by Jayne Hrdlicka who has been Jetstar CEO for the past five years and is also a non-executive director of Woolworths and president of Tennis Australia.

It might seem odd that an airline CEO would take over the leadership of a food company but A2 is purely a marketing company, and basically just owns some brands and some cash in the bank.

It owns no cows or manufacturing and processing plants, it just markets the finished products, quite successfully too, I might add.

Great story, so far anyway.

Kevin Gloag

Chris Lee & Partners


Footnote: The NZX has announced a minimum interest rate of 5.4% on its upcoming Subordinated Notes. If you would like to be added to our list for these notes, please contact us as soon as possible, specifying an investment amount.


Edward is in Auckland on 28 May, Wairarapa 11 June, Napier 12 June and Taupo 13 June.

Chris is in Auckland 18 June, Whangarei 19 June, Auckland 20 June and Christchurch 26-27 June.

Kevin will be in Christchurch on 7 June and in Queenstown on 15 June.

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

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

TAKING STOCK 10 May 2018

THE argument that active fund managers do not add value is a pretty stupid exercise, as most seasoned market investors will confirm.

Such a false premise might be akin to arguing that one brand of religion is better than another.

The zealots who attest that ‘’research’’ proves that index investors do better on average than those who invest with active fund managers (or do-it-yourself investors) are some or all of dim, self-serving salespeople, or miserably uninformed.

Any investor in the ASX-listed actively managed fund Platinum Capital would demonstrate the fallacy behind the thesis, as might anyone who has invested in Berkshire Hathaway or Infratil shares.

Both of the latter are active investors in listed and unlisted companies and far outperform any index.

Infratil could show any of its original (1994, I think) investors that those who took up their rights and take account of dividends have had an average compounding return of more than 10 percent. Berkshire Hathaway, Warren Buffet’s vehicle, also boasts double figure returns over many years.

Platinum Capital was established in 1994 by a then young man, Kerr Neilson, who had developed an admired reputation as a research-based fund manager at BT, once a manager that led the market in Australia and New Zealand.

Neilson founded Platinum Capital and ever since has published each quarter the most interesting newsletters, disclosing the sectors and countries he favours, his currency usage and his 10 top global holdings.

Last month his top 10 included five IT companies, Samsung (Korea), Alphabet, also known as Google (USA), Intel (USA), Sina (China) and Nexon (Japan).

Remarkably he also includes in his top 10 the troubled Swiss-based miner, Glencorp, and the UK based oil company, Shell.

Each quarter discloses the compound return achieved by his fund, nett of fees.

Since inception in 1994 Platinum Capital has averaged 12.6% per annum, since 2013 15.9%, since 2015 9.0%, and in the last year 22.1%.

Would 24 years be long enough to be accepted as evidence of his value-add?

His benchmark is the MSCI World Index, an appropriate base, unlike the cash rate that so many New Zealand managed funds choose to use, to ensure the managers are able to extract hefty bonuses for ‘’out-performance’’.

The MSCI index figure against which Platinum Capital measures itself, since 1994 returned 6.9%, 16.1% over the past five years, 8.0% since 2015, 14.2% last year.

As an original investor in Platinum Capital, I have now $7.35 for each $1.00 invested, a pleasing piece of evidence that selecting a skilled fund manager to manage a small percentage of my money has been fairly rewarded.  I have also had cash returned, in dividends.

I was also an original investor in Infratil at a similar time (1994).  It, too, has provided a return that justifies that decision.

Perhaps this explains my preference for listed managed funds, rather than unlisted.

The transparency (of value) is markedly better with listed funds, displayed each day.

The relevant stock exchange rules provide an additional useful comfort on matters of governance.

The returns have been better, in general, than unlisted figures, and the daily liquidity figures are easily available. The results easily exceed any index performance.

In general, I am a do-it-yourself investor who practices diversification but with some tolerance for over-exposure to preferred stocks.

I am not a currency speculator and prefer the access I have to data in NZ, especially in the bond and property sectors.

For my international allocation, which is small, I allocate to the likes of Neilson’s Platinum Capital fund.

I would never use an index fund for bonds, property or Australasian shares but I could imagine the motive to use an ETF for obscure markets or markets where transactions are difficult to perform.

I can also imagine retail investors choosing an index fund if they could not obtain help from someone with knowledge and experience.

Neilson’s Platinum Capital fund trades at a roughly 10% premium to its nett asset backing.

Perhaps this illustrates that I have not been the only person to respect his skills, and to acknowledge a value-add that could never be achieved by an index fund.

 _ _ _ _ _ _ _ _ _ _ _ _

OUR database reveals that each of our staff has more toes than the total number of our clients who bought into CBL Insurance when it was listed by UBS and Forsyth Barr three years ago.

Nevertheless, CBL is a much-discussed company, largely because it listed and collapsed in just three years, and accordingly is evidence of the variable standard of listings on the NZX in recent years.

It is now in voluntary administration, meaning its chairman John Wells and his board have stepped aside and are no longer governing the company.

(One imagines this must be a great relief to all involved.)

Last week the company’s managing director Peter Harris opined that CBL still had effective capital of some $70 million, a figure that is of no significance given CBL has a trail of liabilities through its insurance undertakings.

Those undertakings are most unlikely to cost less than $70 million.

Last week various investors, here and in Australia, revealed that they would be keen to investigate action to recover the funds they have lost.

Some big players, including the ACC and some of our best fund managers, including Harbour Asset Management, have lost tens of millions.

CBL shares were displayed by the market at last trade, just three months ago, as having a value of $3.17.

Today, you would be hard-pressed to find a buyer at three cents.

How would compensation be achieved, and who would provide it?

The two relevant regulators are the Reserve Bank of NZ and the Financial Markets Authority, both of which knew of CBL’s terminal illness long before the market was advised.

CBL alleges its directors could not honour its Continuous Disclosure Obligations to investors in its NZX-listed shares.

It claims that it was required to sign a confidentiality agreement that committed it to silence.

Investors might argue that this agreement was most unwise and exposes the regulators to High Court action.

That source of compensation seems unlikely, at best difficult.

If the faulty processes lead to any change, it should be a revision of the protocols and processes that should follow any interaction between the supervisor of insurance companies (the Reserve Bank), the market regulators (FMA and NZX), and the directors of the supervised company.

I would suggest that when there is any interaction sparked by a fear of solvency, the shares should immediately be suspended.

It is said that the NZX does not allow long-term suspension, and that any suspension is usually for a matter of days, before the particular event can be fully disclosed.

Perhaps the NZX must insist on a choice of disclosure or suspension, even long-term suspension, to prevent the trading of shares on an uninformed basis.

I regard this as being an issue that must be explained and must lead to a better process.

The second issue relates to the responsibility for such a rapid deterioration of CBL’s performance.

I guess that a litigation funder, generally speaking, likes to focus on the insurers of the different parties involved in the performance of the company, its listing, its actuaries and its auditors.

If CBL’s position was materially worse than presented during its first three years as a listed company, then a litigation funder would probably focus on the insurers of its directors, of the companies that presented CBL to the market (UBS, Forsyth Barr), of its auditors (Deloitte) and its actuaries, and those who audit the actuaries (PwC).

The insurers of any or all of these parties may be the targets of any claim for compensation.

Insurers have deep pockets and should be pricing their insurance costs to reflect their confidence in the skill and integrity of the parties they insure. They may also want to look at past claims. Premiums should reflect the record of successful claims.

Most insurance policies covering such parties would have some sort of excess that must be paid by the errant party before the insurer is required to open its wallet.

For example, a sharebroker who was required to put right an error might have to fund the first $5 million himself, if the claim was large.

The most recent successful claim against multi parties was probably the case involving a liquidator, Robert Walker, and a range of parties involved with the Christchurch serial defaulter David Henderson, whose group of companies (Property Ventures) collapsed several years ago.

Walker is an admirable and determined man who displayed great tenacity in tackling Henderson’s disastrous group.

He has won settlements from Henderson’s auditors, from some of Henderson’s directors, and from various property valuers used by Henderson.

In each case the insurers would have produced compensation of great substance, probably totalling the thick end of $100 million.

The PwC audit, for example, was of such an abysmal standard that the auditors must have been targeted for tens of millions.

In the case of CBL, the first step ought to be the application to liquidate the company, providing someone with Walker’s courage to begin an examination of the facts. The sooner this is done, the more likely will be an efficient, comprehensive, successful claim.

If there was evidence of inadequate due diligence, poor governance, poor disclosure, incompetent actuarial work, or any audit failure, one could imagine a liquidator contacting New Zealand’s successful litigation funder, LPF, pronto.

LPF now has taken up 13 claims, had a 100% success record, retrieved more than $100 million and delivered more than $60 million to investors. It has a most impressive board of directors. Its energy is visible.

Its figures suggest the legal fraternity does well from these cases as the missing $40 million far exceeds the share for the litigation funder.

Of particular interest will be the ACC’s case for compensation.

When National was the government it appointed a party ally, former Capital & Merchant Finance chairman, Trevor Janes, to the board of ACC where he chairs its investment committee.

Janes was at one stage a minority shareholder in the litigation funder, LPF.

He will not be unfamiliar with the process of seeking compensation.

If I were a CBL shareholder, I would be pressing for a liquidation order now so that the issues which determine a case for compensation could be pursued before time passes, memories decay, and mistakes fade from vision.

As we have found with our pursuit of compensation from a very guilty Crown, in the case of South Canterbury Finance, the passing of time can be detrimental to claimants.

CBL’s shareholders should be seeking to liquidate the company now, to ensure delays are minimised.

 _ _ _ _ _ _ _ _ _ _ _ _

THE mis-use of data is a relevant subject, with modern contrivances like Facebook guilty of allowing privacy invasions on a massive scale.

Hackers still play a role in this data abuse, as my wife discovered recently.

Somehow her credit card was charged with purchases in Spain, a country she has not visited recently, certainly not in the past 42 years.

The ANZ bank was helpful. She will not bear the cost of the hacker.

If she were in Germany this would not have happened.

At least some German banks send you a text when you use a credit card, seeking confirmation of the transaction before your card is debited.

For all those with a modern cellphone, this is a helpful service.

One wonders how much time will pass before such a service is standard in New Zealand.

 _ _ _ _ _ _ _ _ _ _ _ _


I will be in Christchurch on 15 and 16 May and will return to Christchurch on 26 and 27 June.

I will be in Auckland on Monday 18 June and on Wednesday 20 June.

I will be in Whangarei on Tuesday 19 June.

Edward will be in Auckland on 28 May.

Kevin will be in Christchurch on 7 June and in Queenstown on 15 June.

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

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

Chris Lee

Managing Director

Chris Lee & Partners Limited


THE Australian enquiry into insurance companies and banks is not the jolt that New Zealand investors needed.

The enquiry has indeed drawn attention to greedy and illegal behaviour in insurance companies and banks.

However these practices have been amply disclosed for decades.

The issue is that on a scale of ‘’who cares’’, misbehaviour by banks and institutions, the politicians will say, has never reached five out of ten, and on a scale of ‘’will this help my political party get re-elected’’ the marker has barely reached one.

The problem is that most people get a low-cost and maybe even a miraculously reliable deal from the banks in New Zealand, though a mediocre deal from insurance companies. Banks perform billions of transactions, make very few mistakes, and receive only the tiniest number of complaints.

People can deposit money into banks safely and get it back when they want it, unless they use a specific term deposit. They can perform foreign exchange deals, they can pay their bills conveniently, they can earn a little interest without taking any significant risk, and they can obtain a few weeks of credit by being careful with their credit card use.

For users of these valuable services the cost is very little, far less than bank customers pay their barber or hair stylist each year.

The banks perform all ofthese services well and generally put right errors that involve banking responsibility.

Of course the banks also provide housing finance, managing the mis-match of short-term deposits with long-term lending. That service is essential and is also well administered.

If this summary was all that banks did they would be profitable, perhaps a somewhat grey provider of services, but popular and respected.

By far the majority of New Zealanders restrict theiruse of banks to the above services, bar one other service they offer – managing your savings (KiwiSaver, Private Wealth products).

More than three quarters of all employed New Zealanders have only one savings plan – KiwiSaver – and of the total KiwiSaver market the banks have the lion’s share.

There is a logical reason for this dominance.

Banks have billions, collectively tens of billions, of shareholder funds (capital) and thus have ample resources to put right any error they make. Savers can trust banks to behave, if only because banks guard their capital jealously.

To be clear, the banks do put things right, most of the time.

I recall Westpac in the 1990s spent tens of millions putting right the over-selling and misleading promises relating to their own Westpac superannuation savings product.

Westpac’s untrained staff and their childishly-crafted selling brochures had been misleading clients, implying that double figure returns on savings products could be reasonably assumed.

AMP had done this relentlessly in the 1980s.

I know because Taking Stock in the 1980s and 1990s was strident on this subject, resulting in a co-ordinated industry attack on me, when I criticised the misleading selling of those products.

All sorts of boys and girls in public relations departments wrote letters to the papers that circulated Taking Stock.

I realised quickly that their silly attacks were not made out of spite, but out of ignorance.

The people tasked with countering the issues I raised had never worked in real financial markets and had no clue about the absurdity of promoting a lifetime of double-figure investment returns. They did not know their subject.

AMP at that time produced a brochure showing what a saver’s ultimate lump sum would be if the fund averaged 12% for 30 years.

One of the few, admittedly small, victories I have had in my career was to bring about the end of selling brochures that illustrated impossible average returns.

If banks stuck to their core services – banking – the Australian commission of enquiry would be irrelevant. The same ‘’keep it simple’’ strategy applies to insurance companies too.

It nearly is irrelevant anyway, as most people, certainly in New Zealand, have every reason to regard their annual bank charges as being very good value for money.

For a business like mine, the banks are an essential facilitator at a very low price.

Did the Australians need an enquiry to discover that CBA for many years handled money-laundering deposits rather than pay the costs of sifting out suspicious transactions andreport them?

Did Australia need an enquiry to discover that no bank can ever provide independent financial advice?

There will always be a bias for a bank’s own products.

No enquiry was needed to discover that incentive programmes skew the behaviour of bank staff.

Offered a cold beer or a punch on the ear, nearly everyone chooses the beer.

Go back in NZ just thirty years and we saw bankers under serious emotional distress because their Head Office was forcing them to behave badly, demanding that bankers sell credit cards, insurances, savings schemes and other high-margin bank services.

The banks turned proud people, with a service ethic, into pushy salesmen.

That was a tragic era. It is exceedingly painful to recall it.

Skilled front desk staff would be fired if they did not reach selling targets every month.Wonderful branch management people had to stop helping people with commonsense suggestions learned from years of talking with a wide variety of clients.

Those managers were renamed team leaders and had to sell.

Again, the Taking Stock files reveal dozens of vehement exchanges, banks responding with vitriol to the obvious questions about the decay that would follow the banks’ short-term and silly strategies to convert a service-based culture into a Tupperware sales opportunity.

I have come to meet many of the Chief Executives of the banks over the years, many of their directors and many of their senior staff.

I do not remember more than a tiny number who were simply ugly members of our community.

Most were good Dads (most were men), good fun, hard-working and high achievers.

Sadly, virtually all of them became consumed by ‘’the bank’’ and its relentless drive for greater size, greater profits, greater dividends, greater bonus pools, greater political influence and greater social status.

Right now we have an Australian enquiry which one could interpret as a pause button, granting time to reflect on what we want from banks, and what we will accept. It has been awful to hear of how the Australian culture has deteriorated. But it is unsurprising.

We will accept charges, fees and lending margins which generate the revenue to pay their costs, reward their shareholders, and help banks to store sufficient nuts to survive a cold winter.

We should simply not accept that the banks are the right place to sell. A true banking culture centres on survival, service and sustainability, NOT selling.

The business jargon for what banks have done is ‘’vertical integration’’, meaning they provide a one-stop location to meet all financial needs.

Years ago it was referred to as the ‘’supermarket’’ philosophy, providing and selling everything. It was then, and is now, a stupid idea.

One obvious anomaly is the link between managing other people’s money, and providing genuine, competent and independent advice to those considering the purchase of a product that the bank might be offering.

The easiest aspect to attack is the cost of the advice.

Why does anyone pay a private wealth adviser 1% per annum to buy a portfolio of bonds?

Surely it is apparent to all that once the portfolio has been purchased an annual 1% fee to oversee the portfolio is absurd and redundant, a simple act of gouging.

The harder aspect to question is the skill of the adviser.

It is obvious that the adviser will not be independent.

Without any doubt, a sane investor will want to benefit from the expertise of someone who understands the underlying risks, the likely returns, and the various special conditions of each security that the investor might buy.

It is for that reason that the quality control of financial advisers begins with an inspection of the adviser’s work history. Most have been civil servants, salesmen or bank staff (instructed to sell).

If there is no evidence of many years of experience in the hub of financial markets, the high probability is that the adviser is just a salesman, or a double intermediator.

Real knowledge comes from stints in money markets, debt markets, equity markets and funds management.

The Willie or Mary who exits government departments or real estate offices or insurance selling to make a living as a financial adviser is simply leg-pulling. They are ‘’maxing’’ their income, not the client’s.

The only things worth ‘’selling’’ are knowledge, experience, judgement and process. Knowledge is the foundation of good advice. (Integrity is presumed in every adviser.)

Generally speaking, the best equipped advisers with such knowledge find their way to the end of town where their knowledge is best used for the widest possible range of clients.

Only in recent years have banks sought to develop such people and then divert them into private wealth advisers.

Without wanting to be offensive, I would note that the few hundred of such qualified people in NZ very rarely find that the vertically integrated Australian banks provide them with the best way to share their knowledge.

So it is the ‘’advice’’ and ‘’selling’’ process that generates most of the angst for banks when some outsider pokes their nose behind their curtains.

You might argue that the simple solution is for banks to revert to being banks, and if they feel so inclined allow them to buy, as passive investors, into those areas where they perceive nicer margins.  The retirement village sector might be a higher margin sector, than the sector that is accountable for financial advice.

Let banks buy into higher performing sectors as partners but not as principals.

It there is a problem with this it might be that banks are expected to pay (provide capital) for all errors. If a bank were a part-owner of a business, would it be seen as the ‘’deep pockets’’ targeted by grumpy clients?

The banks refer to this as ‘’exposure of their balance sheet’’, expected by the public almost to be a guarantor of propriety.

However the clients tag on to that ‘’guarantee’’ that some compensation should follow if ‘’I do not get what I think is a fair deal’’. There is an element of blackmail in this attitude.

The banks clearly want to exit such implied responsibility. They should extract themselves from advisory roles and from risks they cannot control.

That would explain why ANZ, for example, has sold ANZ Securities to First NZ Capital.

It might explain why ANZ sold parts of ING and rebranded the funds a few years ago, after costly compensation for some brainless over-promotion of ING, and in particular its tax-based yield funds.

Perhaps this Australian enquiry might help clarify whether banks should be running managed funds (such as KiwiSaver in New Zealand), or even running Private Wealth advisory services.

We did not need any enquiry to discover that these are modern banking conundrums.

The enquiry will not have wasted literally hundreds of millions of dollars if it helps banks to identify long-term strategies that are sustainable. (One bank alone has paid $50 million to present its case to the commission.)

Banks are welcome to some free advice.These little clues might help join some dots.

·         High margins require products or services involving risk.

·         Usually these services require entrepreneurial skills.

·         Risks and entrepreneurs often combine to produce costly errors.

·         Big balance sheets (deep pockets) are often targeted by people wanting errors to be put right. Often people want high returns but no risk.

·         Banks dislike the expectation that a customer can benefit from successfully taking a risk, but be compensated by claiming the risk was not discussed when the investor took the risk and lost money.

Might the joined dots lead banks to get out of funds management and financial advice?

If banks cannot afford to assess and take risks, they cannot add value.

 _ _ _ _ _ _ _ _ _ _ _ _

ONE service the banks provide to all investors without a direct charge is the monitoring of corporate behaviour.

Banks and active fund managers, far more so than regulators, are able to influence their corporate clients effectively; they have skin in the game.

The banks can impose covenants on those to whom they lend large sums.

They have the data to monitor corporate day-to-day behaviour and even monitor the behaviour of the executives of the corporate that has borrowed a large sum.

For example, banks can observe the credit card behaviour of any individual they might regard as relevant.

Foolish behaviour and excessive personal spending sometimes provide some sort of insight into corporate mentality.

If necessary a bank can withdraw its credit facility or increase its cost, both strategies being a powerful means of improving behaviour.

Active fund managers do not have the same database but they should be employing skilled, streetwise, networked individuals with high levels of inquisitiveness and an ability to be predictive, using maths as well as observation as the basis of the predictions.

If banks withdraw from funds management, active managers will be of even greater importance.

Sadly, the global respect for analysis continues to fall, leading ever more people into investing in index funds, which do no analysis, no research and give you what you pay for.

These index funds do have the ability to screen out sectors (tobacco, guns etc) and screen out issuers of security on notional criteria (credit rating, market capitalisation) but the index funds (exchange traded funds) do not engage in essential research and usually employ salesmen, like Sam Stubbs at Simplicity, and engage with ‘’advisers’’ who are simply double intermediators, ticket-clippers by my definition.

If banks withdrew from funds management, the number of skilled people performing research in banks would need to find a home with an active manager.

If that were not to happen, investors would be the losers. One group of our guard dogs would have vanished.

We know from the Australian enquiry into banks and insurance companies that the status of financial advisers in Australia is undermined by poor behaviour and by the absolutely stupid complex rules that Australia (and Britain) introduced trying to commoditise advice.

All this has achieved is to add to the cost of advice, ultimately excluding more of the population from access to cost-effective advice. For some, their next move is to low-cost index funds which should have no voice on corporate behaviour.

Heaven help New Zealand if we succumb to the lazy mindless temptation to simply ape the baboons who created the adviser laws in those countries.

Right now, in New Zealand, we have yet another iteration of adviser law reviews in New Zealand.

By far the best person to have overseen this review would have been Murray Weatherston, one-time economist for the Manufacturers’ Federation, long-time financial adviser with a small practice in Auckland. Weatherston, in his 60s, cares deeply about the subject and understands the big picture.

Put Weatherston and Gareth Morgan together and that two-man team would very quickly identify the problems and produce a workable environment for the few hundred financial advisers who actually do add value to investment decisions.

Yet Weatherston has been excluded from the process.Experienced, bright and well-meaning, Weatherston should be the key man in any rewrite of our laws.

The people least likely to achieve ‘’cut through’’ of the many issues, often motivated by self-interest, are from the banks, the other sales group and from careers in bureaucracy.

Years ago, select committees were polite and attentive when Michael Warrington and I made our presentations on the need for sensible adviser laws.

We wanted ‘’client first’’ and ‘’value add’’ and less prescriptiveness to be the mantra for those who draft law.

We wanted ‘’knowledge and experience’’ to be the essential qualities of approved advisers, and believed that apprenticeships were a much more useful source of learning than academic, book-based learning.

We wanted hefty penalties for the self-serving.

We wanted product providers (like fund managers and finance company debenture issuers) to be accountable for the behaviour of the salesmen of these products, effectively forcing the product provider to assess the advisers, who would represent their products and force those representatives to understand the products they were selling.

We wanted plain English, and meaningful disclosure in documents.

We wanted financial education to be injected into secondary school curricula.

If we were asked to present again our thoughts we would just dig out those files and forward them to the next panel of ‘’experts’’. Michael questions whether the current code committee hearing is any better than the original select committee.

We wanted one other word to be headlined: integrity.

The response of the bureaucrats to such suggestions was to put great emphasis on academia, and to undervalue the importance of market experience, knowledge and integrity.

Their solution seem to be caveat emptor: buyer beware.

Nothing much has changed.

Investors must still perform their own due diligence to locate advisers who do have the ability to add value at a sane price and to put clients first (and second, third and fourth!)

 _ _ _ _ _ _ _ _ _ _ _ _


I will be in Christchurch again on May 16 at the Airport Gateway Motor Lodge.

Mike will be in Auckland on 8 May.

Edward will be in Auckland on 28 May.

Kevin will be in Queenstown on 15 June.

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

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

Chris Lee

Managing Director

Chris Lee & Partners Limited

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