Taking Stock 25 May 2023


Fraser Hunter writes:

The Budget had been widely forecast as a no-frills document, and spending plans announced last week were indeed of the ''bread and butter'' variety.

Budgets are rarely market moving and this year was no exception, as we prepare for October's election.

As expected, the Government emphasised addressing the cost of living. The budget allocated substantial funds to initiatives such as extending childcare coverage to two-year-olds, eliminating the $5 co-payment for prescriptions, expanding heating and insulation programs, and providing pay parity for teachers. All measures are aimed at reducing the financial burden on families and improving access to essential services.

The budget also included substantial investments in infrastructure and housing, with more than $70 billion to be allocated to new and existing infrastructure projects over the next five years. Additionally, measures will be taken to address cost pressures in public housing and enhance resilience to climate events. The Government aims to promote economic growth, improve housing availability, and enhance the country's infrastructure.

Unsurprisingly, the budget also reinforced the Government's commitment to addressing climate change, with just under $2 billion allocated to emissions reduction and adaptation measures. This will likely be one of the key battlegrounds for the upcoming election.

Just this week we had the announcement that the Government will subsidise nearly half of the build cost of NZ Steel's new electric furnace. The announcement has been met with a predictable amount of outrage, particularly as Blue Scope, the parent company of NZ Steel has a market cap of $9bn and generates annual revenues in the tens of billions of dollars. Economically, the deal does stack up compared to other carbon reduction initiatives and looks to be about three times more effective than the clean car rebate scheme.

The budget also included investment in programmes such as the warmer homes initiative, rail infrastructure resilience, EV charging infrastructure, and renewable energy projects.

The Government aims to reduce greenhouse gas emissions, increase resilience to climate events, and promote sustainable practices.

Impact of the North Island floods

In April, Treasury provided its updated estimates of the impact of the North Island weather events earlier this year. Treasury estimates households and businesses will suffer losses of up to $7 billion, with Agriculture and Horticulture sectors the most severely impacted.

Infrastructure losses are higher at between $9 and $14.5 billion of estimated damage. The huge range in the repair bill was dependent on the quality of the repair and whether assets would be replaced or built back with the future in mind.

Treasury forecast inflation to rise by 0.4% in the March and June quarters, largely driven by shortages of fresh food. The annual rate of food price inflation, which feeds into the inflation data, reached its highest level since 1989 at 12.1% in March.

Insurance claims resulting from the recent weather events have exceeded $2.5 billion, which represents more than 80% of the total claims paid by insurers in 2022. In terms of actual money paid out, that is already in the hundreds of millions of dollars, which will likely add a significant boost to both the effected regions and the economy as a whole.

The damage and disruption caused by these events have emphasised the importance of developing strategies to replace damaged assets and upgrade key infrastructure, which was highlighted in the budget.

Other takeaways from the Budget

The Government outlined plans to counter the economic slowdown using a combination of increased migration, tourism, and cyclone recovery efforts. Debt will continue to grow, with the economy not expected to generate a surplus until 2025/26.

Government borrowing is expected to rise by $20bn over the next four years to cover maturing bonds and bond buybacks from the Reserve Bank. This prompted a cautionary warning statement from rating agency S&P, however, rating agencies have for a long time regarded NZ's use of debt as overly cautionary compared to other nations.

We may not be heading into a recession

Despite the challenges posed by slower global and local economic conditions, high inflation, and the impact of extreme weather events, the economy has remained resilient. Treasury's latest forecasts indicate the country will avoid a recession, and there are expectations of modest economic growth over the coming year.

Inflation is anticipated to reduce more slowly due to the effects of the recovery rebuild, but it is still forecast to return to the 1-3 percent by the end of next year.

Rise in trust tax rates the main surprise

The main surprise in the budget was an increase in the trustee tax rate from 33% to 39%, which mirrors the top personal marginal tax rate. The Government projects an annual revenue uplift of $350m from the changes, with minimal impact on the majority of trusts.

The move has been pitched as moving towards a fairer tax system and to deter high-income taxpayers from circumventing the top personal tax rate, which was one of the key discussion points following the Inland Revenue's published research on the financial position of New Zealand's High Net Worths.

In the tax year following the decision to increase the top personal tax rate to 39%, income tax paid at the trustee level increased by 53%, or $5.7bn, highlighting a potential for tax 'leakage'.

There continue to be a number of holes in the tax system and the move on Trusts will likely shift some of the assets out of trusts, however, it does appear that the government plans to use the wealth of data gained to drive change.

For the average trust holder, the reasons to hold assets within a trust remain. Tax-splitting strategies continue to be an acceptable practice, with lower-tax-rate beneficiaries able to take advantage of their lower marginal tax rates.

RBNZ continues to surprise

The Reserve Bank released its latest Monetary Policy Statement yesterday, raising the Official Cash Rate by 0.25% to 5.50%. The key surprise of the announcement was the tone of the RBNZ, which was not as hawkish as anticipated and seemed unchanged following the Budget release which many believed would cause the RBNZ to keep raising.

The latest forecasts align closely with what was published in February, indicating that the RBNZ believes they may have finished this hiking cycle. The RBNZ still expects to begin cutting rates in the latter half of 2024.

Within the commentary, it showed the committee was split in its decision, with a vote of 5-2 in favour of the rate hike, instead of considering a pause or a more aggressive 50 basis point increase as speculated by economists following the budget release. The Reserve Bank downplayed the impact of migration, describing it as ''uncertain'', and stated that fiscal policy would be less contractionary than previously thought.

The Pushpay listing comes to an end

Following a fair share of drama, the Pushpay scheme of arrangement has finally been approved by shareholders. The deal has been in the making since last year, with the initial $1.34 bid being quickly approved by the board, despite being at the bottom of the independent valuation range, and was accepted by several large offshore investors. The deal was rejected by local shareholders and fund managers who publicly rallied together and ended up getting a slightly higher $1.42 offer (the mid-point of the independent valuation).

Interestingly, the hedge funds which accepted the early offer were not entitled to receive the higher bid, receiving the initial $1.34 price per share. It has been highlighted by media across the Tasman as a quirk of New Zealand takeover law and a cautionary tale should anyone dare prematurely to accept any potential takeover bid for the likes of A2 Milk or Xero, which are domiciled in NZ.

While not a real 'believer' in the Pushpay business case, it is a shame to see growth companies depart from our market. Particularly when there is such a lack of listings to replace them.

Pushpay has been replaced in the NZX50 Index by Hallenstein Glasson, which comes back into the benchmark after last being removed in 2014 for being too small for the benchmark.

A Brief History

Following the conclusion of the deal, I decided to get a brief understanding of the history of Pushpay and what the experience of a shareholder from day one would have looked like.

Pushpay was founded by Chris Heaslip and Eliot Crowther after they found that giving-based solutions for the faith-based and charities sector were outdated and slow, and they decided to create a modern software-as-a-service payment product. Pushpay was officially formed in 2011 in Auckland. After trialling its solution with large New Zealand churches, Pushpay raised capital and expanded into Australia and the USA, where its headquarters are now located.

Pushpay went public on the New Zealand Alternative Exchange (NZAX) with a compliance listing on August 14, 2014. Following rapid growth in its shareholder register, its revenue and market capitalisation, Pushpay moved from the NZAX to the larger NZX main board in 2015.

Once on the NZX50, it enjoyed rapid growth, riding the tidal wave of popularity shown towards fast-growing SaaS companies in a rapidly falling (and in some places negative) interest rate environment.

At one stage in 2020, PPH had a market cap of more than NZ$2bn ($1.5bn), which compares to the US$200m reported in its 2022 annual report. Along the way it was able to raise capital and make acquisitions in key markets via cash and scrip, to help fulfil and exceed the company's aspirational growth targets.

Since its peak in 2020, Pushpay's share price slid from $2.42 in 2020 to 90c in 2022. Later that year, the company announced it had engaged Goldman Sachs to evaluate the multiple bidders wanting to have a look at the company, before the Sixth Street and BGH Capital consortium submitted its $1.34 bid.

At first glance, a $1.42 takeover price seemed a poor result for a company that closed at $1.48 following its listing on the NZX in 2014, but it doesn't take into consideration the two stock splits the company undertook in 2016 and 2020.

An investor who bought 10,000 at the close price of $1.48 on 14 August 2014 ($14,800), and sat on the position, would now be the holder of 160,000 PPH shares, valued at $227k, reflecting a total return of 1,535% or 36.5% per annum.

BNZ Perpetual Preference Share Offer

Bank of New Zealand (BNZ) is considering an offer of perpetual preference shares (PPS).

More details are expected to be announced shortly.

The PPS are expected to constitute Additional Tier 1 Capital for BNZ's regulatory capital requirements and to have a credit rating of BBB.

This investment is perpetual and may remain on issue indefinitely. However, under certain conditions, BNZ may redeem (repay) the PPS in six years' time.

The interest rate and margin have not been announced. Based on market pricing, we are anticipating a rate of around 7.00%, noting that swap rates have seen significant volatility in the last week.

BNZ will be paying the transaction costs on this offer; accordingly, clients will not have to pay brokerage.

If you would like to be pencilled onto our list, pending further details, please contact us promptly, with an amount and the CSN you wish to use.

Seminars begin

Our seminar programme kicks off at 10.30am on Monday 29 May at Southwards Car Museum, Paraparaumu.  Clients, friends and family are welcome to attend any of our free hour-long seminars.

Admission is preferably by applying via the Eventfinda online ticket booking system (links below) but some (not all) of our venues are roomy, so can accommodate walk-ins if you are having trouble registering.

The venues which have some flexibility are:

29 May Kapiti – Southwards Car Museum – 10.30am

30 May Wellington – Wilton Bowling Club – 10.30am

31 May Lower Hutt – Little Theatre – 11am

6 June Christchurch – Burnside Bowling Club – 1.30pm

8 June Timaru – Sopheze on the Bay – 1.30pm

12 June Dunedin – Edgar Centre – 1.30pm

13 June Invercargill – Ascot Park Hotel – 1pm

19 June Palmerston North – Distinction Coachman – 11am

28 June Hamilton – Ventura Inn 1.30pm

5 July – Whangarei – Flame Hotel 10am

To register yourself for our free seminar, please click on the relevant link below:
















Please note that Chris will be available to meet clients in Christchurch on June 7, Timaru on June 8 before and after the seminar, in Dunedin June 12 (before the seminar), Invercargill June 13 (before the seminar), Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to make an appointment during the seminar round.

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David Colman will be in New Plymouth on 9 June.

Edward will be in Blenheim on 15 June (Chateau Marlborough), in Nelson on 16 June (The Beachcomber), and in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

Johnny plans to visit Christchurch and Tauranga in July and August.

Clients, and non-clients, are welcome to contact us to arrange an appointment.

Chris Lee & Partners Limited

Taking Stock 18 May 2023

THE imminent rollover/new offer of the NZX's subordinated notes, promising 6.5% for a period likely to be five years, brings attention back to an organisation that has had to reinvent itself.

Many will ponder whether a 6.5% return on an NZX subordinated note is a fair return for an organisation that receives less income from its traditional source – listing fees for aspirational companies seeking access to capital markets.

My opinion is that the return is reasonable because I see the NZX as company with a monopoly embedded in law.

The certainty of its survival is high. To thrive it simply needs an honest, competent management structure with the wisdom to manage its costs within its income, and to find ways to increase income.

It certainly did not have wise management 15 years ago, but it does now.

It now has certainty of enough recurring income, the prospect of growth through various ''Smart'' index funds it manages, and it still has an income stream from companies whose shares and/or bonds are listed and will largely remain listed.

I expect NZX to survive to produce profits and to pay dividends. Whether it can grow is less certain.

I would not have been so confident during the miserable era that led up to the 2008 global financial crisis when the NZX made a series of elementary mistakes, beginning with the appointment of the accomplished swimmer, Mark Weldon.

His period of management was marked by expansion into publishing, and by acquisitions of other platforms, but it was marred by what I saw as quite dreadful administration and mismanagement, Weldon a strong swimmer but a lousy business leader of a public company, a man with no obvious EQ.

Staff turnover was at a level that might have set a national record for a listed company, admin failures were at sub NCEA Level 1 standards, and any previous goodwill in the community was threatened by Weldon's abrasive and selfish style.

He was the best swimmer in the room but not the smartest person.

Some of the NZX's worst errors were in monitoring the various finance companies whose securities were listed. In that era, the NZX was a novice and tone deaf. Disclosure requirements were often ignored.

The NZX was in sick shape when Weldon finally left, replaced by a genuinely experienced, business-skilled, intelligent and socially skilled man in Tim Bennett, who rebuilt relationships and appointed an energetic, decent, skilled deputy in Mark Peterson, who eventually succeeded Bennett.

Peterson's eight-year tenure is about to end, his contract expiring. He and Bennett essentially rescued the NZX. He will be hard to replace.

The NZX since has built a highly valuable funds management business with its Smart brand and has regained credibility through its relationship with the corporate world, with its broking franchises, with investors and with the likes of Business Desk and the National Business review, our two media outlets with a familiarity with business news gathering.

Its biggest problem is that today very few significant businesses want to subject themselves to the requirements of being a listed public company, hence the almost zero interest in new listings.

There is irony in this.

Right up to the 1980s, when Roger Douglas virtually abolished all financial rules, the investors in NZ were regularly ripped off. Every snake oil salesman wanted to get access to sucker money by listing on the NZX.

Insider trading was so common that directors of companies in many sectors felt it was their ''right'' to exploit inside knowledge.

The directors of one large investment company would regularly fill their boots with the shares of companies they were about to pay a premium to acquire. Their subsequent extreme wealth was no sign of business genius.

Directors of property companies regularly misled the market and benefitted by selling personal shares before bad news leaked out of their companies.

Governments grossly underfunded those bodies who were supposed to monitor, regulate, supervise, or impose enforcement rules. Worse, they honoured people for all the wrong reasons.

Not for no reason was NZ seen to be cowboy territory, its sheriffs armed with water pistols.

The opposite applies today.

In an effort to protect investors from such chicanery, we now have quite prescriptive rules, with enforceable penalties for failures in governance and management.

Companies contemplating a listing often regard an NZX-listing as the least preferred way of acquiring capital.

I would suggest that so much of our public company governance is feeble and ineffective because today the elite in our business world often choose not to subject themselves to all the new liabilities associated with highly prescriptive rules.

To replace excellence, we rely on diversity. Inexperience is not seen as an ominous signal.

The NZX is the loser, because of this.

In 1987, when cowboys were scornful of sheriffs, we had around 450 listed public companies in the NZX, though to be fair many were companies that should never have been listed, and more than a few were Australian companies seeking to exploit our weaknesses.

Today the number is nearer 150, and some of those companies are Australian companies looking to avoid the double tax liability created by our inability in NZ to use Australian franking credits to offset NZ tax due.

Instead of wanting to list, many aspirational companies now attempt to woo private equity, which is subjected to very few of the constraints of an NZX-listed company.

Absurdly, some which seek capital can access venture capital supplied often by wealth and pension funds, and some can access utterly nonsensical crowd funding, where regulations are worse than our 1980s NZX standards.

As explained in a Taking Stock item recently, pension funds are attracted to private equity funds and venture capital funds because the funds operate behind an opaque screen.

Such funds report their annual ''gains'' based on theoretical valuations, not on actual, transparent, market-based valuations.

If a pension fund (or any managed fund) owns a million shares in My Food Bag, and the MFB share price tanks, the pension fund cannot avoid disclosing the loss of value and reporting it to its investors.

Naturally investors would be unimpressed. Mandates might be lost.

However, if a pension fund invests in a private equity fund that owns My Food Bag, the value of MFB is not set by daily, visible, reported share sales, but by some theoretical valuation, calculated usually by a carefully chosen process that highly rewards the valuer, who in turn might not particularly choose to annoy the organisation that favoured him with the fee-earning task.

Who regulates the valuer?

Of course, another possibility is that valuers might choose to have a different view of MFB's prospects and may not be influenced by the desire to retain the annual valuation fee in future.

Private equity, globally, has soared in its scale, now controlling US$13 trillion contributed by European, Asian, American, Australian and New Zealand pension and sovereign wealth funds.

Note that those who run pension funds are dealing with Other People's Money and are highly incentivised to report success with the investing, to retain their extreme salaries and bonuses.

Investing in opaque, poorly-regulated, leveraged, private equity funds is almost certain to report kinder ''valuations'' than a listed exchange would report. Thus pension fund ''profits'' are illusory.

For that reason, those with money in the likes of KiwiSaver funds will often read of how the fund now allocates more to Private Equity than it has ever done.

The NZX, to at least some extent, is the loser, circumnavigated by those who do want less regulator intervention, less transparency, much gentler governance liability.

For those who doubt that Private Equity has such a relatively easy ride, check out the recent example, even in NZ, of people trying to attract money with which the aspiring equity fund managers want to punt in private equity funds.

The ''fit and proper person'' criteria seem to accommodate people that one hopes would never be allowed to govern a listed company, one such fellow a former bankrupt and convicted criminal.

The NZX, I believe, will remain a reliable source of returns for its investors but while Private Equity thrives, it will need to be inventive, if it is to regain its status as a growth company.

Perhaps the balance will be restored when private equity funds are subject to the same level of intense supervision as listed companies.

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LAST week I applauded the wonderful contribution to NZ of the Whineray family, noting the special contributions of Sir Wilson Whineray, Fraser Whineray, and Matt Whineray.

A kind reader of Taking Stock supplied me with a little more information that justified my admiration for the Whineray gene pool.

Two more of the same family, women, are highly regarded doctors.

Another, Scott Whineray, is a respected academic, whose range of skills also stretched to playing rugby for Canada.

My thanks to the reader who passed on this information.

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IN THE same newsletter I applauded a retired lady for her determination and her research skills that eventually has led to an examination of Nelson Investment Services, its director Neil Barnes now charged with fraud.

The High Court case should give the law the opportunity to examine modern practices in property syndicate management.

Many of those practices need to be examined.

The lady I have come to know for her assiduous pursuit of justice tells me I could equally have applauded her colleague. She was just half of a team, with another woman.

They are entitled to anonymity.

They are also entitled to deep respect and loud applause for their hundreds of hours of work.

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OUR seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 5 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

To register yourself for our free seminar, please click on the link below and scroll down to click on the relevant location:


Please note that I will be available to meet clients in Christchurch on June 7, Timaru on June 8 before and after the seminar, in Dunedin June 12 (before the seminar), Invercargill June 13 (before the seminar), Napier on June 20, Tauranga on June 27, Hamilton on June 28, Ellerslie on July 3 (before the seminar), and Whangarei on July 4.

Please contact us if you wish to meet with Chris during the seminar round.

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Chris will be in Ellerslie and Takapuna next week (FULL).

Chris will be in Arrowtown on 26 May and has one available time.

David Colman will be in New Plymouth on 9 June.

Edward will be in Blenheim on 15 June (Chateau Marlborough), in Nelson on 16 June (The Beachcomber), and in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

Clients, and non-clients, are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Limited

Taking Stock 11 May 2023

EVERY investor in unlisted property syndicates should be giving thanks to an anonymous woman of retirement age, whose stirrings a decade ago is now leading to a High Court review of fund manager standards.

About a decade ago she approached our company seeking an opinion on the syndicator she has used.

That syndicator had bought, cheaply, good commercial property, perhaps a dozen years ago, using a mix of bank debt and retail investor money.

The tenancies had been stable. The buildings could not have failed to rise in value.

But the investors had endured poor cash returns, seemed to have no rights to interrogate or change the fund manager, had no ability to sell out, and were definitely not shown any meaningful explanation of what the fund manager was doing.

The woman was determined and had a skill in research.

She persisted. She knew the fund manager was not prioritising what she imagined were the investors' rights – improving returns, transparency, and a pathway to capturing the revaluation gains.

Last week the founder of Investment Services in Nelson, managing First NZ Properties, Superstore properties and Springs Road Property, was summoned to the High Court. FNZP owns a property in Symonds Street, Auckland, Superstore owns a Warehouse building in Tauranga and a Placemakers in Christchurch, and Springs Road owns a property in East Tamaki.

The founder was Neil Barnes. The properties were managed by Nelson-based Investment Services, which he directed, until 2018.

In that year the Serious Fraud Office froze assets belonging to Barnes.

Barnes now allegedly lives overseas, perhaps in Texas.

The persistent investor, who I have come to know well, doggedly pursued explanations for behaviour that never made sense to her, or for that matter, to me.

A fortnight ago the SFO announced it was charging Barnes with fraudulently moving $2 million into his personal accounts. Investors believe the High Court will address many other complaints.

Perhaps the High Court will now be able to assess the practices that led to the discontent of the brave woman who eventually prompted regulatory intervention.

Many property syndications have allowed dubious behaviour, going back to the 1990s when ''quadruple'' dipping was prevalent.

The founders were able to:

1. Clip the ticket when the building was bought.

2. Clip the ticket of all income received.

3. Clip the ticket by sharing in capital gain.

4. Clip the ticket when the building was sold.

Fund managers with captured investors had a free portal to Fort Knox.

Today, there are still syndicators who clip these tickets mercilessly, even at a time when investors endure little or no income, have no easy access to liquidity, cannot sack the fund manager, are not helped by lazy, inept trustees, and cannot prevent excessive payments to the likes of the friendly valuers who facilitate these transactions.

The High Court hearing of Barnes might be the place when all of what are ''standard practices'' are reviewed, disinfected by the public attendance of the case.

If better standards emerge, every investor can thank a determined, patient lady, now in her 80s.

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DRIVEN by fears of regional bank failure in the United States, and the fear of ongoing falls in household disposable income everywhere, investors globally are cautious, maybe even slightly fearful.

As an example, Warren Buffett has been a heavy nett seller of equities, and has no better idea than to stockpile US$130 billion of cash. He is highly critical of US bank behaviour.

Fearfulness is not an unreasonable response to the myriad conflating issues, but it is not an irreversible mindset.

It is capitulation that market participants would want to avoid.

Currently, there are few signs of capitulation, a state of mind that leads to cashing up assets and reverting to government-guaranteed securities, causing a collapse in asset prices.

At a time of five to ten percent inflation around the globe, such capitulation would imply acceptance of nett returns well below the level required to preserve spending power.

Clearly, the fear of capital loss already overshadows the fear of diminishing buying power, especially in the age group which no longer has the option of working and saving for longer than planned.

The global picture is indeed messy.

However, it may be premature to assume that the next step is capitulation, the first signal for which would be flight from exchange traded funds, index funds, commercial property, and sharemarkets generally.

Last week the NZ banks showed us that some of them (BNZ, ANZ) are not seeing flashing lights, signalling any need for capitulation. Westpac, more involved in property development lending, is more cautious.

The banks are still recording handsome profits, able to price risk adequately, with no apparent new velocity in corporate failures or personal bankruptcies.

Obviously all banks try hard to sidestep any exposure to those businesses and people who cannot budget to meet their obligations.

The banks producing record prices must either be skilled at using analytics to avoid disasters or they must be so overcharging their good clients that they have built in subsidies. (They certainly do this with credit card lending.) Their success rather mocks the self-described ''money expert'' who on RNZ this week sought to bracket some of our bank offers as ''junk''. (Why does RNZ struggle to find competent interviewees?)

We can all see stress in our economy, we all know that no competent government will indulge in bad borrowing (to spend rather than to invest), and we are aware that various sectors, notably tourism, property, hospitality, construction, health, education, retail, horticulture, and silviculture, are enduring a dangerously tough environment.

Weather extremes are not helping. Nor are our job seekers willing to move into the available employment, it seems.

Yet in the coastal area in which I live, the cafes are full, the takeaway food places are busy, the pubs are noisy, the petrol stations seem to be well used, and there is no visible unemployment, job vacancies notified in many shop windows.

To get a tradesman to replace my roof took many months of patience and the cost was around $130,000, suggesting there were no discounts from the very capable people who completed the task.

Last week one of New Zealand's capital market people noted that in our slowing economy the opportunity for investors was to load up on the growing number of new bond issues, observing that the interest rates were rather more generous than those rates offered last year.

Heartland has recently paid 7.51% for a subordinated note. Kiwibank is paying 6.4%, Auckland Airport a rather lean 5.29%, but the Bank of China, A-rated, offered a three-year quarterly-reviewable security, beginning at a rate around 6.5%.

Bank of China may be punting that the three-month bank bill rate, on which BOC's pricing is based, might fall in 2024, making the rollover rate more acceptable to the bank. I would not be sure about this. Short-term rates may stay high.

The market pundit who promoted the concept of buying into these bond issues would be exactly right if the investors' pursuits were of capital retention and a useable amount of reliable income.

If he were displaying an understanding of the risk in asset price falls, he would be joining a chorus belatedly. That chorus was in full voice in 2022, well before the NZX index fell by a painful double- digit amount, and well before the global markets had similar and often worse outcomes last year. Those who did nothing have been flogged.

In essence, from the day the Covid epidemic was deemed to require massive printing of funny money (US$32 trillion) the only logical response was to flee from shares in all companies that relied on cheap money for their success.

Those who prevailed upon small investors to stick to the theory that history always repeats itself (i.e. sharemarkets always revert to the norm) did not seem to have the wisdom to discern long term structural change on planet earth. It seems they do not understand what a ''re-set'' implies.

Perhaps they were uniformly self-focused. Perhaps they were just unaware of what was changing.

Nor did they appear to discern the certainty and the extreme cost of changes in human response to inequality, let alone weather events, or the global inability to maintain the services and infrastructure on which the quality of life depends.

Globally, the spending of tax revenues simply must change away from vote catching.

The local pundit now urging investors to revert to capital retention was brave to speak out, but was perhaps a year too late in reaching his conclusion.

Shortly I will tour New Zealand city speaking to clients, investors, and the public, suggesting alternative strategies to minimise the damage should the global (and NZ) markets remain fearful of capitulation.

Forty years ago I might have borrowed the phrase of American business authors ''In Search of Excellence''.

The seminars detailed at the tail of this newsletter might perhaps prefer the words ''In Search of a Survival Strategy''.

There is little doubt that NZ, stripped of accounting chicanery, will be running unaffordable budget deficits, that our current (trading) account will be unsustainably high, that our currency is vulnerable (with inflationary implications), our credit rating fragile, that our infrastructure and key services are in need of restoration, and that we will face unbudgeted costs in repairing weather damaged assets.

In this environment the very best companies, generally those with pricing power, will do well to retain investor confidence. Especially the international investors and institutions will be wary.

It might be horrible to swallow this, but capital retention and a sub-inflation nett cash return might be a result that is far more comfortable than is achieved by those who pursue capital growth in a highly stressed world.

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IF our spending on infrastructure and our ongoing repair bills in places like Hawkes Bay, Gisborne, Auckland, Northland and the Coromandel will, as Treasury alleges, well exceed 10 billion, that money will mostly come from our rising borrowings at a time when debt servicing will be high. (I think the costs will be at least double the estimate of Treasury if we rebuild infrastructure to survive another version of Cyclone Gabrielle.)

Concurrently, the Crown still has to account for the roughly $9 billion cost of selling back the bonds that it idiotically bought to ramp up bank profits three years ago.

A new tax regime would seem inevitable to me, to overcome so much incompetent spending.

However, it is most unlikely to involve an increase in GST, an idea that the Stuff newspaper group rather unnecessarily publicised last week.

More likely might be a sales tax on luxury goods, a tax that would target the roughly 20% of New Zealanders who can still spend on toys.

Meanwhile we will all await a full plan, based on private sector analysis, to prioritise and correct our greatest problems. One hopes this arrives well before the election. (Are you listening, Mr. Luxon?)

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EVERY horse breeder will confirm that genes matter.

Champion horses usually have parents that were talented.

Perhaps genes are just as important in leadership.

When Matt Whineray advised he would this year move on from his chief executive role at the NZ Superannuation Fund, those who have applauded his contribution would have been disappointed.

For decades, he has been an intelligent analytical leader, a thoroughly pleasant man, like his greater family members Fraser Whineray (Fonterra, Mercury), and best known of all, Wilson Whineray, one of the truly great New Zealanders.

Unless there is something in the water there must be something in the Whinerays' genetic composition. All have been excellent New Zealanders.

Wilson Whineray was a champion boxer and an All Black captain in the late 1950s, at the unusually young age of 23. He was chairman of Carter Holt Harvey Industries and held other important roles, including chairman of the National Bank.

Like Matt and Fraser, he worked to make NZ a better place for all. Wilson Whineray was a rare knight that most of us would be happy to address as ''Sir''. A hat tip is entirely reasonable.

The NZ Super Fund will now have to replace Matt Whineray with an equally talented person prepared to tolerate the governors imposed on the staff, effectively by politicians. One imagines the governors will be diverse, representing a cross section of New Zealand.

One hopes that unlike the Reserve Bank governors, there will be some focus on relevance and excellence.

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Our seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 5 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

To register yourself for our free seminar, please click on the link below and scroll down to click on the relevant location:


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Johnny will be in Christchurch on Wednesday 17 May (FULL).

Chris will be in Christchurch on 16 May (morning only) and Ashburton (afternoon only) and in Timaru on 17 May (morning only). He will be in Arrowtown on 26 May and has two available times. He has two available times in Christchurch, one in Ashburton and four in Timaru.

Chris will be in Auckland (Ellerslie) on 22 May and in Takapuna on 23 May (at each venue there is one available appointment left).

Edward will be in Blenheim on 15 June (Chateau Marlborough), in Nelson on 16 June (The Beachcomber), and in Napier on both 22 June (Mission Estate) & 23 June (Crown Hotel).

David Colman will be in New Plymouth on 9 June 

Clients, and non-clients, are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Limited

Taking Stock 4 May 2023

WHEN there is any rapid change in any market, there are sequential responses that over the decades repeat themselves.

We have all again watched how a rapid rise in interest rates causes a sharp fall in prices and liquidity in the property market.

We all watch as dreadful market performances force pension funds to take much bigger risks in their quest to hold onto their mandates.

We are all about to see how bumbling political fiscal behaviour leads to a change in the value of currencies.

And we can now be alert to the certainty that unnatural falls in equity prices and equity market liquidity usually results in opportunistic takeovers, effectively stealing from under-informed shareholders. This is especially true when a company has no single shareholder with a large holding. It finds itself unable to rustle up a defence mechanism overnight.

A company whose well-crafted long-term assets have a replacement value implying the current share price is absurdly low must be a real target for any opportunist whose funding is long term and whose target is value, rather than cash. Such opportunists can legally steal in times of stress.

We must look at these threats as they are hatching.

Private equity firms may be the threat. They are beneficiaries of long-term money, provided by pension funds whose incoming cash is reliable, meaning there is no pressure on cash returns from the PE investor. Other people's money is not able to be withdrawn.

Furthermore, if a PE fund buys out a listed company, the visible trading ends, and the quarterly or annual mark-to-market disciplines disappear. You cannot ''mark to market'' if there is no transparent market.

Take this example to illustrate my point.

KiwiSaver fund Gourmless, fearful of losing mandates because of miserable performance from its portfolio of listed securities, allocates $500 million to private equity fund, Be Patient.

A listed company named Undervalued has a long-term, skilfully chosen, asset base whose value will be obvious in five years, but whose ability to shed dividends now is low. As a result, Undervalued has a listed share price of $1.00, but in five years would be paying sustainable dividends of 25 cents, implying a future share price of, say $4.00. Its asset ''valuation'' might be a (meaningless) $3.00 now.

So PE fund Be Patient bids to buy out Undervalued at $2.00. The impatient or uninformed shareholders grab the offer, comparing it to the daily share trading at $1.00.

Undervalued is delisted. The PE fund then has closed off the visibility of the company.

After a year, Be Patient gets Undervalued assessed by its friendly valuer who declares that the assets of Undervalued are really worth $3.50 per share. Be Patient then tells Gourmless that it has so cleverly bought Undervalued that it has had a 75% return on the investment and that as a result its fund to which Gourmless placed $500m of other people's money has had a 50% return.

Gourmless then tells its Kiwisaver clients that, thanks to its genius, their shareholders have had a fantastic (theoretical, non-cash) return.

Who has lost in this transaction?

Of course the answer is that Undervalued's original shareholders have lost because of two reasons:

1) They were impatient and accepted a sub-par takeover offer;

2) The directors of Undervalued had failed to inform their shareholders of the good returns that were imminent.

Gourmless' dopey governors would have achieved much better long-term results by buying and holding Undervalued shares but they put the fund owners' interests first by chasing short-term, mandate-winning returns by allocating money to Private Equity businesses, and agreeing to pay the extreme PE fees for performing a transaction they could easily have done without external fees.

There is little room for debate on this. We will all soon be observing troubled pension funds telling us that they are allocating more money to invisible unlisted assets. The pension funds deserve no respect for such self-serving behaviour.

Private equity quoted returns cause distortions, veiling the truth exploiting the (meaningless) theoretical valuations from friendly valuers and stealing their huge fees and bonuses (often 20%) of such ''wins'' as they would collect when buying the guileless Undervalued.

One of my favourite companies, Infratil, plays this game with its extraordinary, vulgar bonuses based on its shareholding in the Canberra Data Centre. CDC's market value is established by a guess but Infratil has been able to extract hundreds of millions in bonuses based on that guess.

Crassly, some argue that if Infratil was not allowed to pay itself bonuses on valuations, but could pay itself bonuses only on realised gains, then, they argue, Infratil would prioritise its own bonuses by selling Canberra Data Centre without regard to its growing value, rather than allow it to accrue value, albeit at an unmeasurable and uncertain annual amount.

The organisers then say this example proves that the alignment of private equity and retail investors only occurs if these ludicrous bonuses from valuation gains are paid in cash (from borrowings) every year, ensuring the fund manager does not prioritise its bonuses.

What an abomination to posit such an argument! (I argue that if bonuses have to be paid at all, then as is the case with a capital gains tax, payments must be made only on realized gains)

Private equity lives on the funds provided by wealth funds, pension funds and high wealth individuals. Usually its owners also provide personal capital.

Its annual fees are extreme.

It can easily leverage the money it raises by subordinating contributor cash behind a prior security, often given to banks for loans that might double the investor contributions, enabling Private Equity firms to target big, expensive ideas. Such lending is what helped destroy Credit Suisse.

If the ideas backfire, the banks seek to be repaid before the failure destroys the fund, stripping the value from retail investors, who will always be the last in the repayment queue.

Crucially, the pension fund will then argue that the loss was not the fault of the pension fund.

Private equity funds can tackle long-term deals, whereas most banks will provide only short-term lending. Pension funds of any value do not need Private Equity to make long-term decisions.

All of these thoughts are relevant today because the world's markets now in many areas quote daily trading prices that are a falling percentage of the long-term value of the assets employed.

As an example, Ryman Healthcare in New Zealand might have assets which are genuinely worth $10 per share but its shares might trade at $5.30, because of various reasons:

1) The dividends have been cancelled while debt levels are high;

2) The banks will not lend at fixed rates for terms that match the duration of the asset;

3) The media criticise the sector, somewhat unknowingly;

4) The institutional shareholders crave short-term returns (to keep their mandates);

5) Various goofs, including our public sector-trained Retirement Commissioner, attract headlines by blowing up the relevance of minor, rare blemishes in the industry. These people imply there is something astray in a sector which would have a higher user-satisfaction rating than almost any other sector in society. I suspect their arguments are more attention-seeking than problem-solving.

Ryman, and its sector, is enduring a period of being out of favour. Unless the goofs destroy the sector, Ryman will in the coming years be seen as having been unfairly disrespected and undervalued in 2023.

Let us hope no PE fund scores hundreds of millions of bonuses at investors' expense when the company is again respected and shown to be adding value while it generates wealth.

As night follows day, when interest rates rise, stupid short-term stresses prevail and sad consequences follow.

Interest rates do not rise inexorably forever.

A company's best prevention method to ward off PE funds is to communicate so well that when exploitative takeover offers are made, the shareholders will have the knowledge and patience to decline to be a victim of stressed times.

Board directors and chief executives take note: it is your job to ensure your shareholders are properly and fully informed and thus will be protected.

In my career, I have watched various strategies, used well, to defer exploitative takeovers.

I have a mission to share what I have learned, if only to reduce the number of rorts imposed on retail shareholders.

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TAKING Stock is not an organ of the Retirement Villages Association, nor do I have a mission to sniff out and repel snouts that, through long-time burial in public troughs, have highly-tainted ambitions to vilify those who lead a lifestyle, somewhat more luxurious than may be enjoyed by others.

A summary of my view of retirement villages is that they offer a variety of models that are often appealing to those who have the resources to buy what is offered. Usually governed by competent people and staffed by angels, the villages provide a luxurious, supported lifestyle for those who choose, and can afford to pay.

The naysayers argue that the sale and purchase conditions of a licence to occupy are oppressive or too expensive and that the residents are bullied by greedy owners, leaving disputes unresolved.

Sadly, this sort of bunkum is a symptom of a divided country. Here are the facts:

1) Trust companies are paid to be a neutral dispute resolution authority;

2) The structuring of the payments to live in retirement villages is created to be transparent and to meet buyers' needs (live well now, pay for it when you are dead);

3) Poor operators, of which there will be a few, are sorted out by the existing laws (Fair Trading Act for example) or by the market (Metlife often had vacancy levels greater than, say, Summerset).

An operator might silence these goofs by offering an option to potential buyers:

a) The current model – a deferred maintenance charge averaging around $250,000, payable on exit (usually on death);

b) An elimination of a deferred maintenance charge, replaced by monthly charges of an additional, say, $3000 per month (ie, pay as you go). The formula used to repay those who die or exit would then change.

The villages would probably prefer the second option. The superior cash flow would be helpful.

Of the literally thousands of people I have met as financial market clients, or as residents of the village which I served as a governor, most would prefer to pay the true cost at the end, enabling them to live to the full while they have health, vigour and desire.

To insult these people by implying they are witless and ''have no choice'' is indicative of arrogance and ignorance.

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IT would seem inevitable that the wasteful over-spending prompted by Covid, and the ongoing new costs to offset severe weather events, will lead to a political choice.

Those politicians chasing their ''main chance'' salary may opt to dump the problem on future tax-payers by simply borrowing ever-greater sums, in so doing generating inevitable inflation and long-term high interest rates. (Do not be fooled by the current game of off-setting national debt by the money held, and pledged, to other matters, like future pensions.)

Those wanting to relieve the tax on the future will increase taxes now and will eliminate the extravagance, some would say the absurdity, of ever-increasing public sector expense.

As a first step we see research performed on 311 of our more moneyed people, uncovering their annual taxes at an average of $3 million of tax per person, producing around 1% of the country's total tax revenue.

Politicians and our generally low-paid media then argue that those people's unrealised asset value growth, not being taxed at all, means that their tax rate is effectively less than 10%, implying that including their temporary, inconsistent, sometimes illusory unrealised ''gains'' should be regarded as  assessable income.

If the unrealised, often illusory valuation ''gains'' were included, the additional tax, it is argued, might be around $5m per person per year, instead of $3 million.

The argument overlooks the truth that some 60% of all tax-payers also have unrealised gains if they also own property or an asset that has increased in value. To compare apples with apples we cannot argue that the ''rich'' should pay tax on unrealised ''income'' but the rest of the people should not. This is a specious argument.

The recent research has been weaponised as ''proof'' that the 311 people should pay more tax. The argument is fuelled by university academics like Max Rashbrooke, who see wealth as ''undeserved'' or ''unearned''. (Heaven knows what our university students are being taught to write in their examination papers, in pursuit of A grades.)

There will have to be new taxes, but no doubt they will have to focus on REALISED gains. Only by realising gains is true value established and cash made available.

The current ''research'' being based on valuers' reports is as much use as a sack full of wet pencil shavings.

Why do the media, the university academics and the politicians fail to see this?

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Investment Opportunities

Auckland Airport plans to offer a 5.5-year senior bond next week. The interest rate is unknown at this stage, but we are expecting around 5.30 - 5.50%.

Kiwibank will be closing its offer tomorrow (Friday) at 9am. The 10-year subordinated note will have a rate fixed at approximately 6.50% for the first five years. After five years the bank has the right to repay.

The NZX is likely to open a 10-year (5 year + 5 year) subordinated note in the coming weeks. Existing noteholders (NZX010) will be given the opportunity to roll their investment into this new offer, or request to be repaid. The NZX will also likely offer these notes to new investors. More details to follow but we would expect an interest rate of between 6.50 – 7.00%.

The Bank of China plans to offer a 3-year floating rate senior note next week. The interest rate will change regularly and would suit those who hold the view that interest rates are likely to continue rising. It will have a strong credit rating of A. More details to follow.

Anyone who would like to be penciled in on one or more of these lists should email our office. We will then contact you once more details are known.

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Our seminar programme begins on 29 May in Kapiti and finishes in Whangarei on 3 July.

The hour-long seminars aim to help investors survive an era of investment uncertainty.

Free admission for clients, friends, family and the public will be by an online ticket booking system, as we need to know attendance numbers.

Seminars will be held in Kapiti (May 29), Wellington (May 30), Lower Hutt (May 31), Nelson (1 June), Christchurch (6 June), Timaru (8 June), Dunedin (12 June), Invercargill (13 June), Palmerston North (19 June), Napier (20 June), Tauranga (26 June), Hamilton (28 June), Ellerslie (3 July), North Shore (4 July) and Whangarei (5 July).

Our booking system details will be announced next week.

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Edward will be in Auckland tomorrow on 5 May (Wairau Park), and will be in Blenheim, Nelson and Napier in June.

Johnny will be in Christchurch on Wednesday 17 May, meeting at the Russley Golf Club Boardroom, and has one appointment available.

Chris will be in Christchurch on 16 May (morning only) and Ashburton (afternoon only) and in Timaru on 17 May (morning only).

He will be in Auckland (Ellerslie) on 22 May and in Takapuna on 23 May.

He has appointments available in each of these locations.

Clients are welcome to contact us to arrange an appointment.

Chris Lee

Chris Lee & Partners Limited

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