TAKING STOCK 30 November 2017

THE CURRENT rally for investors to react to change is based on yet another round of salesmen and academics joining to warn of imminent inflation increases, accompanied by sharp increases in interest rates.

This might be the eighth repeat of a refrain that began in 2010.

Each year the choir singers have been horribly out of tune.  Inflation, here and globally, has been subdued, especially in the area of wages.  Surplus cash has been soaked up by formal and informal taxes, with increased allocation to insurances, rates, fuel, power prices and debt reduction.

There have been minimal increases in demand; supply, except in housing (and NZX-listed securities), has been ample.

Of course my view has been moulded by the global policy of zero interest rates (ZIRP), regarded as essential to avoid a collapse of those governments, councils/states, households and corporates whose survival would be threatened by any significant interest rate rises.

Just as one simple example, the total indebtedness in the USA now is at 350% of GDP, a multiple so high that even a 1% increase in debt-servicing costs would be devastating.

In New Zealand that ratio is more like 160%, still an excessive figure.

Here in NZ, a mortgage lending rate of 7.5% would sabotage household budgets, leading to significant falls in consumer spending, hardship, sizeable increases in unemployment, a growing bank loan default rate, lower tax revenue and delays in the implementing of Labour’s generally-admired social spending plans.

Loan defaults do nothing for banking stability and inevitably lead to higher credit margins and tighter lending criteria.

What I am saying in summary is that a significant rise in interest rates would begin a process too painful to endure, so it probably will not happen.

For that reason I expect that, as usual, the salesmen and academics hollering ‘’do something’’ are either seeking instant increases of sales or seeking ‘’click bait’’.

Any government discussing rising interest rates will be talking in fractions of one per cent.

Many central banks, our own included, are still careful to note that rates are as likely to fall as to rise.

All of this is highly relevant to investors.

Cautious investors are still choosing the option of gaining incremental benefits in reliable returns by accepting duration (long terms) rather than subordination or unstable issuers.

For that reason, Christchurch City Holdings was able to raise a large sum at a cost of 3.4%.

Users of that security were seeking a high credit rating, a low level of risk, diversification from the banks, and certainty of liquidity (knowing they can sell if necessary).

Other recent issuers, such as Property for Industry and Precinct, have paid about 1% more, still reflecting low risk, but not as low as the Christchurch holding company for the local port and airport.

Now we have Kiwi Income Property Group offering a similar new bond.

I continue to forecast that ‘’higher’’ interest rates do not necessarily imply much movement at all.

Given the equal risk of a fall in global equity markets, perhaps prompted by China, and the greater risk of a gentle reversal of foreign allocations to New Zealand, it is easy for me to understand why cautious investors will tolerate low but stable returns from cash and bonds.

One client, who has benefitted greatly from his choices of stocks like Synlait Milk, Fisher & Paykel Healthcare and Auckland Airport, made the following comment, after selling out.

‘’Those stocks doubled my capital.  I could not get by on four per cent on my original capital.  Now it feels like I am getting eight per cent.  I manage easily!’’

 _ _ _ _ _ _ _ _ _ _ _ _

TREASURY, I am told, has already acted on the changes signalled by the new government.

It has alerted the various departmental heads that the expected tax surpluses it anticipates have been committed and that in effect the kitty is empty.

If the information I have is correct, Treasury calculates that spending commitments on social policies will eat the surplus revenue, meaning any capital spending will need to be linked to higher levels of debt.

One voice might argue that if the Crown can borrow a few billion at less than three per cent, why would it not do so, while it can.

The areas of infrastructure and housing were most affected by the limited spending of the Key government, tourism also a victim, with so little spent to meet the needs of massive rises in tourists.

It was interesting to collect figures recently on tourism revenues in Australia and New Zealand, where China’s influence has been obvious.

Something like 120 million Chinese people enjoyed international travel last year, with perhaps one per cent of these reaching New Zealand.

In Australia, tourism revenue fell by four per cent in 2011 but each year since has risen by up to six per cent and is anticipated to rise by an average of three per cent per annum over the next seven years.

In NZ, tourism revenue fell by nearly five per cent in 2010 but has risen sharply since, growth being 10 per cent in 2015 and eleven per cent in 2016.

Forecasts are of lower increases over the next three years and a negative year in 2021 (from a high level).

Without a doubt, our tourist numbers will be affected by our inadequate infrastructure, especially at Auckland Airport, and by our main roading networks, where barriers would solve much of our road accident problem.

The other area that would benefit from capital spending is in housing, where the Housing Corporation, under English, set about a programme that coincided with my advocacy.  (I doubt they put much weight on this!)

It is already building very modest shelter for the dysfunctional, who might otherwise sleep under a cardboard box (as millions do in Santiago, thousands do in Brussels, but almost none do in Germany).

The Housing Corp is building or modernising rental properties for those who have families but are not able to achieve ownership.

And it is building thousands of modest but modern houses for those who cannot afford to buy at prices that include huge margins for land developers and for building companies.

Those who can afford to build their own houses, often with multi bedrooms, bathrooms and internal garages, will now pay a builder $4000 or more per square metre, especially in cities where builders are so much in demand that they can virtually name their price.

In these days a house of 240 square metres, including internal garages, might cost at least $1 million to build in Wellington, Christchurch or Auckland.

The Housing Corp will address the excessive building costs by using its scale to negotiate much cheaper prices for materials, offering perhaps five-year contracts to suppliers of materials like gib board, timber and glass.

By removing uncertainty of demand it should be able to get suppliers to commit to supply at much lower margins than the likes of Placemakers would expect.

It could use the threat of Chinese imports to bully suppliers and might even be able to impose social requirements on building companies, such as the use of apprenticeship programmes.  The Housing Corp has no defined profit motive.

In return for long-term certainty of work, suppliers of materials and labour might also be sharpening pencils.

As a tax-payer, I would have no objection to the Housing Corp borrowing billions at cheap rates and then building sensible houses, in lower cost suburbs, to sell to those wanting to plant a foot on the lower rungs of the home ownership ladder.

That is exactly what my grandparents did in Newtown 60 years ago, when they bought their HNZ rental property in Coromandel Street, Newtown, one of the very first houses built by the Crown for social purposes.

I guess today that house would be worth a million, given its location, in a suburb within walking distance of the city centre.  Sadly, my grandparents sold it in the 1960s for about two thousand pounds ($4000).

If Housing Corp retains its admirable energy to solve the problems of shelter for the dysfunctional, housing for renters and housing to sell at affordable prices, it would deserve the reputation it has sometimes enjoyed in its past.

Borrowing at today’s low rates, to build assets that a wealthy country should provide, would be logical to me.

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THE rules that prevent bankrupts from causing more damage, and ultimately allow the bankrupted person to resume some sort of a life, are monitored by the person put in charge, usually the liquidator or the Official Assignee.

Rules are black and white.

Once a person has been deemed to have zero access to any money that would rightly belong to his creditors, that person is given a tiny allowance and is often barred from obtaining credit or having any governance or management role in any company, often for five years.

This rule has three objectives; it ensures the public are protected from an incompetent person, it ensures the creditors get back as much of their money as possible, and it signals to the world to be extremely cautious about engaging with the bankrupt.

People who have been bankrupted twice, especially when they have been reckless or worse still manipulative and deceptive, are most unlikely to be given a third chance.

Creditors, of course, can be duped by the cynical use of structures like family trusts or companies, hiding behind others (conduits) who might be nominees for the bankrupt person.

Bankrupted people regularly use wives, partners or nominees to ‘’own’’, to ‘’govern’’ and to ‘’manage’’ activities which might closely resemble the very same endeavours in which the bankrupt has failed. 

In my view conduits should be outlawed, with heavy penalties for those who connive with the bankrupted person.

The finance company sector and the property sector provide many examples of poor behaviour during stressful times.

But sometimes creditors, backed into a corner, make decisions that create opportunities for a hazardous person to fail again.

If one thinks back to Euronational, in the 1980s, one might recall that when this so-called ‘’investment’’ company collapsed, its principal Rod Petricevic owed the company ten million dollars.

Petricevic offered his creditors five cents in the dollar in return for an agreement not to bankrupt him.

One wonders how many people duped by the dishonest Bridgecorp company might wish that Petricevic had not been offered this lifeline, when his creditors accepted the deal.

In more recent years we saw finance company failures like St Laurence’s Kevin Podmore and Hanover’s Mark Hotchin offer to put personal wealth into the creditors’ pool, buying time and hoping to get support for their recovery plans.

I do not recall hearing of any meaningful contributions eventuating.  Family trust structures had been planned with great detail and were effective.

Now we read that one of the country’s costliest commercial failures, David Henderson, while serving time out under his bankruptcy conditions, has been observing the confidence of others who negotiated and bought back for token sums, secured creditor debt, in theory reaching a position where these people might be in the queue, should there be any repayments to secured creditors. 

He must find their support to be touching.

In his case, his companies are being tackled by a quite outstanding liquidator, Robert Walker, armed with a cheque book to pay for litigation provided by the country’s only meaningful litigation funder, LPF.

Walker is suing the directors (but not suing the bankrupted Henderson) for an enormous sum, in the hope that the Directors and Officers insurance policy will produce money for the creditors.  (I presume Henderson has no wealth accessible to the creditors.)

If Henderson’s associates bought secured debt, some allegedly for token amounts, the success of the Walker-led case might have the ironic outcome of creating a pool of money for those Henderson associates who have bought the debt.

It is doubtful that this would be an outcome anticipated by the architects of the bankruptcy laws.

The strategy reminds one of another mercurial Christchurch trader George Kerr, the man best known for his role in EPIC and Torchlight, both controversial investment funds, and Perpetual Trust, where he and Andrew Barnes did the deal that led to the formation of Perpetual Guardian Trust.

Kerr was wise to quit Perpetual, given the fit and proper person requirement which in theory applies to trust company owners.

Having borrowed $20 million of trust company money in breach of Perpetual’s trust deed and in even more serious breach of commercial practice, Kerr needed to find an exit from Perpetual.  He did this, with a deal with Barnes, a British entrepreneur who had co-invested with Kerr in Australia.

Prior to this Kerr sought to establish a litigation funding company that planned to sue Perpetual for its various failures, presumably with the intention of accessing Perpetual’s insurers, so that Kerr might benefit from suing himself, in effect, as the controlling shareholder of Perpetual.  Thankfully, this circular arrangement stalled.  I suspect the Financial Markets Authority may have had a say.

Kerr, to my knowledge, has never been bankrupted but he is often a very heavy user of debt, using levels of leverage that would terrify most people.

He has attracted money into his schemes from wealthy individuals, such as a Jewish group in Melbourne, often based on buying distressed assets at what would be bargain prices if his judgement was consistently sound.

The Henderson case, where the directors of his company Property Venture Ltd are facing a huge claim in a case set down for next year, is certain to shed light on bankruptcy, a subject that needs revision.

Corporate collapses, especially where they involve reckless trading, deceptive accounting practices and very poor audit and governance standards, are a disaster for creditors.

When such companies fail, the creditors often are left with nothing, and later deeply resent any signs of repeat behaviour by the same people.

Robert Walker, I expect, will have the right experience, having pursued Henderson and his companies for some years. He might offer useful advice on how to improve bankruptcy procedures.

If the Property Ventures case gets to court in 2018, the outcome of it ought to ensure a revision of our bankruptcy laws, as well as ensure an examination of the performance and practical responsibilities of directors.

Walker’s persistence and courage might well be the catalyst for some much tighter case law.

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I ASSUME investors in Fonterra, Synlait Milk and A2 Milk are watching, perhaps nervously, for a solution to the health scare in a small number of dairy herds in South Canterbury.

There has yet to be confirmation that the outbreak has been contained.

Less than five dozen farms in and around Canterbury provide the particular milk that is used for A2 Milk.

The health of dairy cows is important and cannot be taken for granted.

This scare highlights the value of diversification and perhaps explains Synlait’s decision to open an Auckland-based processing plant.

With any food producer, animal health or crop conditions can be affected by disease or by the weather.

The current scare in South Canterbury should provide a reminder of the value of monitoring exposure to sectors and companies, and the value of diversification.

My Xmas wish list will include one wish that the dairy herd health issue is isolated and controlled before the problem escalates.

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THE remarkably patient people who were ripped off by various parties while they watched South Canterbury Finance collapse will any day soon hear of the next step to pursue justice.

Around 1300 people contributed more than $600,000 to fund a legal team, headed by QC Chris Gudsell, to investigate some appalling behaviour by various parties.

The investigation had the ambition of achieving two purposes.

The first objective was to obtain compensation for the money lost by the SCF Perpetual Preference shareholders.

An Australian expert witness company modelled the effect of the various illegal behaviours and calculated the average figure lost.

The second objective was to identify the mistakes made and ensure they would never happen again.

Before Christmas investors will receive a detailed account of all the steps taken, exposing the illegal behaviour and naming the parties who broke laws, and the parties who condoned, in some cases encouraged, the breaking of the laws.

Their shame should be career-changing.

What astonishes me is the failure of those parties to realise the comparatively low cost of putting right the results of their errors.  Why did they not behave honourably to atone for their errors?

SCF investors have been represented by an admirable, altruistic, and generous Auckland financial adviser, Michael Connor, who has donated hundreds of hours to seek a solution to this injustice.  In this endeavour I have been his partner.  Our staff here have also clocked up the hours.

The December letter to investors will explain what we discovered, what processes we have used to seek a satisfactory outcome, and what lies ahead.

South Canterbury Finance was put into receivership when its chief executive Samford Maier Junior handed over the company to its trustee, Trustees Executors, on the last day of August 2010, seven years ago!  He had failed in his mission to sell SCF and earn a multi-million dollar bonus.

The trustee appointed Kerryn Downey of McGrath Nicol as receiver.

Treasury repossessed the company in 2013, after the worst receivership I have witnessed.

All SCF bond and debenture investors were repaid under the NZ Government Deposit Guarantee Scheme but the perpetual preference shareholders were excluded from that guarantee.

The argument of the PPS holders has always been that they were entitled by law to be fully informed of the true state of the company, enabling them to make informed buy/sell or hold decisions as the company progressed.  They were repeatedly given entirely incorrect information.

Many high profile organisations colluded to mislead the market.

The letter to the 1300 investors will outline how they were the victims of a series of illegal behaviours, and what has been done, and is being done, to pursue the two objectives, compensation and exposure of the illegal behaviour.

The latter objective most certainly will be achieved.

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TRAVEL

I will be in Auckland and Christchurch in the last 10 days of January, dates to be confirmed.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 23 November, 2017

 

IF THE speed of change in banking is not alarming the corporate world, then those who head our commercial endeavours are not paying attention.

On its own, the announcement this week that our biggest bank, ANZ, is to sell its sharebroking arm, ANZ Securities, is a relatively minor matter, but it is a signal of major change.

ANZ Securities contributes only a few million to ANZ’s gross profits.

Although it poses little risk to the bank’s balance sheet, because it avoids advice and simply offers an electronic trading platform, ANZ Securities has for a decade played an important role for bank clients.

It offered ANZ clients access to allocations in new fixed-interest issues and, at least in theory, it enabled the bank to develop big data, in turn leading to stronger client relationships.

ANZ has announced it is selling the equity business and platform to First NZ Capital, the country’s premier investment bank, funded by its own private capital, though aligned to Credit Suisse, once its owner.

FNZC, which already performs nearly half of all NZX trading, will integrate the platform, probably offering the electronic service to those who do not wish to pay for FNZC research and advice.

This platform started out in the 1990s, built by a determined and honourable young accountant, Nigel Wynn, and named Direct Broking Ltd.

Soon after, Direct Broking absorbed the Fay Richwhite broking platform, after which Wynn grew the business until a partial shareholding in DBL was sold to Dorchester Pacific.  This occurred in that brief time when Dorchester thought it had a future as a financial supermarket, despite its unorthodox behaviour.

Managed by an unusual fellow with little corporate sheen, Brent King, Dorchester itself stumbled and sold its share in DBL to ANZ, King heading into an improbable and fatal attempt into funds management, towing behind him yet another of those available ex-politicians, Bill Birch.

This venture failed within months, leaving King to move into the advice sector.

Meanwhile Wynn sold Direct Broking to ANZ which eventually relabelled DBL as ANZ Securities, providing capital, IT support and some bank culture.

The ANZ explained its strategy then as linking its customers to wealth management, enabling the bank to build stronger relationships with its corporate clients, and providing a useful low-cost service to the public, useable providing they had bank accounts with the ANZ (or UDC Finance) to pay for share trading.

It enabled ANZ to compete with ASB Securities which had a similar, low-cost sharebroking trading platform.

ASB had already learned the cost of allowing staff to sell investment advice so it had abandoned the advice service and reverted to a simple platform for trading.

Soon ASB will be the only bank with the broking service, ANZ reverting to a view that the future of banking is clearer without distractions like retail sharebroking.  The DBL sale takes effect next year.

The ANZ made another similar decision to reduce distractions when it contracted to sell UDC Finance to a Chinese conglomerate.

This latter deal has yet to be approved by the regulators, so is also likely to be effective in 2018.

ANZ has also sold off some of its Asian businesses, as they back away from previous ANZ CEO Mike Smith’s Asian strategy.

If we go back a decade or two, ANZ has had forays into real estate (the National Bank once owned Harcourts Real Estate), travel and insurance.

Perhaps the ANZ today sees that the ever-increasing intrusiveness of bank regulations, with all the new descriptions of risk, and with it differential levels of required capital, has made banking face up to tough decisions.

For example, if banks want to chase super profits by trading derivatives or speculating in currencies, much more capital is required.

As these trading activities by definition have winners and losers, and thus over a period of time are erratic contributors, the banking regulators demand that the activities are paid for by capital, not by depositors’ money.

The sharebroking platform of ANZ Securities was itself of little risk to ANZ’s balance sheet but the bank has clearly concluded that compliance was a potential problem, and that reputational risk might be a factor, should compliance issues surface.

So the first relevant observation is that our biggest bank, like so many international banks, is reversing the strategy of being a ‘’supermarket’’, offering many financial services, and is refocussing on being a money lender and a fund manager.

Even the funds management activity carries reputational and compliance risk so it is not unthinkable that the banks might reverse their focus on KiwiSaver and branded management funds.

It will also have occurred to banks that private wealth management, which involves by definition the risky activity of providing ‘’advice’’, might be exposing banks to real financial risk, as well as reputational risk.

The obvious risk is the ‘’loose cannon’’ staff member, who says something foolish, or resorts to advice that might help his ‘’bonus’’.  Good process today might minimise this risk.

However, any long time readers will recall how ASB Securities many years ago processed an investment of $1 million (plus) into the unsecured notes of Capital + Merchant Finance at a time when ASB lending staff were loudly instructed to have nothing to do with the crooks at CMF.

Today, such an error would undoubtedly lead to financial and reputational damages to any bank whose staff allowed such a clear transaction.

ASB Securities realised the risk and moved out of the advice sector.

Currently banks have very prescriptive wealth management practices, spelt out in manuals, requiring private wealth advisers to limit their advice only to those securities, or to portfolio construction theories, that a High Court might accept as ‘’best practice’’.

This in itself might lead to more change.

The banks like to charge fees of around 1% of a portfolio but if all the client money is being channelled into government stock, or A-rated bonds, then the gross yield would be at most 3%, the nett yield after fees, 2%, and after tax perhaps 1.5%.

Why would an investor accept this sort of yield if a range of term deposits could produce better returns?

These sorts of modern issues will be familiar to many investors and corporates, leading to changes, one hopes.

For example what hope does Christchurch City Holdings Ltd hold for private wealth bank advisers to sell its 3.5% A plus-rated bonds, if the client is going to have to pay a transaction fee, and then an annual fee, to acquire and hold the CCHL bonds?

Would it not be logical for a thinking client to acquire these directly and have no annual fee deductible from the very lean return?

Might this reality, arising from very low interest rates, expose computer-driven, risk-averse wealth advice as being far costlier than any nett benefit to a client?

Might the banks need to revise their participation in this activity if rates are to remain for many years at levels that make bank fees unaffordable?

The biggest changes now being signalled are even more suggestive of a new mind-set.

These are signals relating to lending which is, of course, the bank service that is basic to its deposit-taking activity.

Worldwide, banks now are required to provide capital at levels that relate not just to the risk of activities, like derivative trading, sharebroking, or investment advice, but specifically to the different risks of the various types of lending.

By far the riskiest bank lending is in credit card activity, where no specific security underwrites a loan, and where the holders of the card can use it without much supervision.

I guess the banks believe their knowledge of the clients’ behaviour and personal financial acumen plays a role in the original offer of a card and in the limit available, but we all know that this ‘’control’’ is weak.

Some 8% of all money borrowed from cards is never repaid, the user of the card simply unable to repay.

This high default level leads to ludicrous interest rates (18-23%) applied to virtually all cardholders.

Banks argue that after write-offs the nett return is reasonable.

Slowly real banks are seeing that this argument has always been hollow.

Why should any honest customer be charged a price that covers someone else’s act of theft? 

Expect banks to be reviewing this area of extreme profitability and expect regulators to be reviewing both the fairness of the charges and the amount of capital required to underwrite unsecured lending.

The regulators are ever more focussed on the mismatch that occurs when 90% of all bank deposits are repayable within a year, but corporate borrowers want to match their borrowings with their projected cashflows, perhaps with five or seven-year loans.

Will the regulators allow the same mismatch, borrowing short, lending long, without ever more capital to ensure that depositors’ money is kept at low levels of risk?

Recall that every government’s objective is to regulate and supervise banks, but NOT to underwrite them.

Some governments prescribe insurance policies to protect lost deposits, up to a nominated value.

New Zealand does not have a requirement of insurance, and does not guarantee banks, so its focus must be on capital-setting and supervision.

As the banks increasingly quit the areas where they observe capital requirements increasing, they might revert to activities which the regulators see as ‘’low risk’’.  The losers will be corporates and unsecured borrowers, like credit card holders.

Here lies the conundrum.

The regulators accept that home loans are low in risk, providing they are made carefully, the loan being to a sensible fraction of the home valuation, unless the bank has established that the borrower has an above average ability to avoid default (ample income, job security, other liquid assets).

So home lending has a small requirement for banking capital, but business loans, especially large corporate loans, are much less predictable, and thus require more capital.  Guess where the banks prefer to lend!

Governments want businesses to grow, enhancing employment, economic growth and tax receipts.

Banks are disincentivised to lend to business by regulations that require more capital to support corporate loans.

All the selling we are now seeing, as banks exit the non-core activities rather than issue more capital, suggests that NZ’s corporate world should be worried about access to cost effective term debt.

Will corporates choose to borrow much more through bond issues and much less through banking syndicates?

Clearly the late Lloyd Morrison and his then Treasurer, Tim Brown, foresaw this.

Infratil, the company Morrison created and Brown helped to run, moved toward bond issuance two decades ago.

Others, like Trustpower, came right behind them.

Right now various listed property trusts are wisely diversifying their suppliers of debt finance by reverting to the retail bond market.

It might be reasonable to assume this trend will increase.

We are also observing disruptive technology break the banks’ dominance of foreign exchange trading, another of the plum activities that sweeten bank profits.

All of these changes are caused by bank fear of compliance costs, of risk/return changes and, most of all, by banks which focus far more on the return on capital, than on sustainable nett profits, customer service or community obligations.

Meanwhile non-banks like First NZ Capital (FNZC as it is now known) face far fewer hurdles as they do not take in retail deposits and have never been, at least implicitly, guaranteed by any government.

My bet is that FNZC, rich in experienced, talented, wealthy people, acknowledged by the institutions as the country’s leading investment bank/sharebroker, will be licking its chops, salivating at the opportunities available to a high quality market participant with ample access to capital.

Its range of activities now exceed those of what hibernating old timers might once have seen as ‘’banking’’ business.

FNZC will perform these services without using other people’s money and therefore without the Reserve Bank monitoring its every transaction.

Our corporate sector, if it is not paying attention to all of this, may find itself stranded.  Investors need to be aware of the changing prospects for our banks.

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WHILE ANZ Securities ceases to offer a sharebroking platform, the NZX will be preparing to admit to the stock exchange Hobson Wealth Partners, a small but useful participant in our capital market.

Hobsons came out of a marriage between the short-lived PWC wealth management division and the salesmen at Macquarie’s retail broking desk.

It was put together by former Fisher Funds investment manager Warren Couillault.

He had had an interesting career at Fisher Funds, eventually exercising his right to require Carmel Fisher to buy out his shareholding.  Fisher, of course, later sold out to TSB and a TSB Community Trust, pocketing a ‘’meagre’’ sum, apparently well north of $100 million, for selling the rights to clip the tickets of other people’s money.

(Refer to the Taking Stock item last week, on how to amass huge wealth.)

Couillault lived through interesting times as Fisher Funds grew and, finally by acquisition, became a household name.

After selling, he had a period when perhaps he was unable to compete with Fisher Funds, but when that contractual matter passed he formed Hobson Wealth Partners, based, as Macquarie and Fisher Funds were based, on the model of 1%-2% annual fees, perhaps with bonuses based on benchmark surpluses.

Hobson has punched above its weight and is now joining the NZX, though I am unsure if it will offer a trading platform to the public.

It might instead perform its trades with Craigs or Forsyth Barr, or indeed with anyone it chooses, but it is now clear that it will seek growth, perhaps with an ultimate plan of selling to an ambitious player in the future, just as Fisher Fund has done.

Perhaps soon one of these types of companies might list on the NZX.

Craigs might be the prime suspect given the state of its major shareholder, Deutsche Bank, which departed from New Zealand in favour of Australia, though it retained its shareholding in Craigs.

The Tauranga-based Craigs is now a formidable retail fund manager, with $25 billion of client money under management, generating an income stream of around $250 million per annum, a nice level of guaranteed revenue for salaries, bonuses etc.

If one adds that to its sharebroking presence and a little investment banking income, it might be an eminent candidate for an NZX listing.

 A listing might enable it to raise capital, farewell Deutsche Bank, and revert to being a NZ owned company.

On a much smaller basis, Forsyth Barr might also be a candidate for listing, its aged founders then able to cash out, leaving the three Edgar boys, Jonty, Adam and Hamish, to lead it to greener pastures.

Perhaps the outcome of the banks’ retreat from capital heavy activities might have the ironic outcome of providing a lifeline for what have been much lesser organisations.

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QUITE why banks focus more on returns on capital than on sustainable profit growth, commitment to staff, clients and communities, and on diverse income streams needs an understanding that I do not have.

As a business owner, and with some outside governance roles, I am mystified.

If our company bought a similar company that led to more profit, more satisfied clients, more jobs and more services, then the big question would be sustainability.

If the acquired company made just a 20% return on capital, whereas our original company was obtaining 25% return on capital, I would not be concerned.  Sustainability would be an issue, as would be the value of the service to our clients.

Banks have long showed more concern for return on capital and return on headcount.

If a profitable, useful division produces a figure of $20,000 nett profit per headcount, and another division returns $30,000 per head, in a bank there would be a case for closing down the lower performer.

Banks seem unwilling to issue more shares, improve their range of services, diversify their income streams, and grow their nett profits.

That is not how they think today, though it is how they thought decades ago.

Dividends, bonuses, quarterly returns and share price seem to drive decision-making.  Perhaps that explains my concern about big companies that are chaired by ex-bankers.

Thank goodness the investment banks can see the opportunities abandoned by the banks.

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HEARTLAND Bank has shown us a different banking approach, and perhaps should be excluded from the criticism of the focus on return on capital, rather than on the sustainability of nett profits.

In less than a decade Heartland has moved from a fledgling bank into a predictable, profitable niche bank, well led by people able to enjoy a connection between executive, staff and customers that brings with it loyalty.

Many years ago the Instant Finance company educated me about their close relationship with the Pasifika community, to whom IF lends small sums, often on the basis of trust.

Many of their customers regard IF as their ‘’bank’’, with the relationship spanning generations, demonstrating IF’s skill in addressing a market niche that others might not have seen as profitable.

Heartland is mainstream, its congregation largely comprises motivated, busy, ambitious people (small business owners) and it includes the generally honourable retired sector, where its home equity loans are addressing a new opportunity for many New Zealanders.

The home equity loans for a growing number of people, provide a cashflow that offers a dignified lifestyle for those whose nett wealth, boosted by housing price increases, is not necessarily represented by access to cash.

A retired couple in most Auckland suburbs might have seen their home rise in value by half a million, their rates rise, but no extra cash arrive.

Heartland home equity loans might pay them a couple of thousand a month, with no repayment due till the house is sold, enabling the couple to have a life with a little more freedom.

This type of banking behaviour has led Heartland to steady, useful profit growth, improving dividends, and a growing satisfied client base.

Indeed Heartland has been an excellent example of a bank that adapts to the needs of its clients.

It clearly feels no need to ape those in the banking species who see themselves as the big gorillas.

Its CEO Jeff Greenslade and its board have regularly had rights issues, with one now available at $1.70, showing no fear of issuing more shares, rather than meet capital needs with hybrid securities.

Those who have become Heartland shareholders will now see the company in a shape that its board and Greenslade predicted many years ago.

Perhaps they hope that the other banks will not notice!

 _ _ _ _ _ _ _ _ _ _ _ _

Penelope writes:

HEARTLAND Bank has emailed or posted Rights Entitlement forms to existing shareholders.

If you prefer to print and post your form, we would be grateful if you would handwrite Chris Lee & Partners in the Brokers Stamp box before you post it directly to Link Market Services.

 _ _ _ _ _ _ _ _ _ _ _ _

THANKS to all Vodafone customers who have given us their new email addresses.

The cut-off date for the old Vodafone email domains (clear, paradise, ihug, es, wave, etc) is looming, so please let us know your new email address as soon as possible.

_ _ _ _ _ _ _ _ _ _

TRAVEL

 

Edward will be in Auckland (Albany) on Thursday 30 November.

Kevin will be in Christchurch on November 29.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 16 November 2017

 

THE decision by Xero to end its dual listing in Australia and New Zealand by closing its NZX subscription in February next year has raised some matters highly relevant to all investors, and especially those invested in various index funds.

I should first begin by explaining that Xero is a company that rewards its investors by growing its business (and share price) rather than by producing dividends.

It is fair to expect no, small, or certainly meaningless dividends for many more years.

To achieve growth Xero spends very large sums to develop its business in Britain, USA and Australia where its markets, added to that in New Zealand, will produce several hundred million NZD of repeat income, now that it can boast a million clients, worldwide.

Its need for a huge spending budget must be met by cashflow and a continuing placement of shares, or preferably rights issues, which are easier to arrange when the share price is rising.

Its alternative – to borrow – is now an option but would place constraints on its growth.  Lenders set rules.

To achieve a higher share price, Xero needs its shares to be included in index funds, especially in Australia, given that NZ index funds are small.

The Australian index funds will not buy shares that are rarely traded.

Currently 80% of all Xero trades are in New Zealand, the other 20% in Australia.

If Xero wants its share price to be boosted by index fund buying, it needs its shares to be traded more in Australia.

The easiest way to achieve this is to close its NZX listing, forcing all trades to occur in Australia.

Xero anticipates that the NZ trading done in Australia will lead to a significant new demand for its shares as the mindless Australian index funds witness the new surge in liquidity and are obliged by their deeds to buy, whatever the price.

Conversely NZ index funds, which buy only those shares listed here, (like NZX Smart Shares), will sell the shares, again mindlessly, and various KiwiSaver fund managers will also be forced to review their holdings, though their deeds might allow them to retain their holdings.

Had all of this been fully explained, the decision of Xero to abandon the NZX might have been viewed with less emotion but the reaction would still have been one of disappointment.

Well do I recall Xero’s first issue of shares at $1.00, and the tepid response of fund managers and retail investors.

While investor response might have been muted, the departure of Xero from the NZX would still have produced an opportunity for various NZ fund managers to pursue their self-interested agenda, which begins with attacking the NZX.

It is this subject that should interest and worry retail investors.

Why do a small number of increasingly strident fund managers want to undermine the NZX?

Obviously if there were damage to the NZX the biggest losers would be investors, and fund managers.

The strident fund managers, exploiting a chance to vent, ostensibly want the NZX to have a lower cost platform and want more transparency of pricing.  They oppose the NZX obligation of making a profit for NZX shareholders.

Currently market volumes are artificially lifted by day traders, by those who use margin lenders to speculate and by other activities such as short selling, an activity that allows punters to bet that a share price will fall.

However the biggest concern of fund managers is that a large amount of trading is done in a ‘’dark pool’’, a term used to describe a broker in-house activity, crossing sales between its own buying and selling clients.

The broker matches the buyers and sellers without reference to the exchange’s screens.  Whilst it reports the sale, lifting daily volumes, it excludes the signal of an imminent sale, denying fund managers visibility of the impending deal.

Any fund manager not invited by the broker to participate in this ‘’dark pool’’ often will feel excluded, and grumpy.

The ‘’dark pool’’ activity, or ‘’crossing’’ as brokers might describe it, places great emphasis on the relationship between brokers and fund managers who, increasingly, are in competition with each other.

The fund managers react by venting on the NZX, wanting it to take action against the growing level of ‘’crossings’’.

They see competition growing as the country’s three largest retail brokers are growing, at an amazing pace, the amount of money handed over by retail clients to retail brokers to ‘’manage’’ under their own ‘’discretion’’ rather than hand on to fund managers.

Craigs has $25 billion of such money.

To put that in perspective, all KiwiSaver managers, aggregating their funds, have $41 billion.

Forsyth Barr has perhaps $10 billion of retail money over which it has control.

Hobsons, once Macquarie, may have a billion or two.

The major fund managers, like AMP, the National Provident Fund, Fisher Funds (TSB) and Milford are handling many billions and are major traders on the NZX.

You can imagine why they want changes; these changes, of course, making their lives easier and even more profitable.

Some fund managers are also resenting the dominance of what they refer to as ‘’one broking firm’’.

The firm is FNZC, which now has a 50% share of all trades, the reward for its focus on high quality staff, who put their clients first.

FNZC has a board of directors that is a giant step ahead of its competitors, it has built the best research team, focusses on quality and has not taken the ‘’supermarket’’ approach of having branches and salesmen scattered around the country.

It has diversified its activities, most recently involving itself in what were activities performed by trading banks before the banks ran into concerns about the amount of capital required for them to participate.

So one can now summarise this argument as being one of occasional exclusion from ‘’dark pools’’, bitterness about the growing threat of retail brokers ‘’stealing’’ clients, and unexplained disappointment about the dominance of the broking firm that sets the higher standards and is rewarded for it.

Retail investors will have every reason to be confused, the more so after the venting that sought to blame the NZX for Xero’s particular decision to list solely in Australia.

There are other issues that have troubled fund managers, including their distrust of some previous NZX directors or executives, and their knowledge of some murky details about past people or past activities.

Sadly where there is money, worse still extreme money, attached to basically greedy people, there will be – there is – murk.  Front running has been a problem for decades, weak people feeling the need to cheat.

For most, Chatham House rules apply, so the murk is never displayed in public.

Instead we get generalised criticism, venting without details, platitudinous comment, which confuses the media, confuses investors and risks a fall in investor confidence, the one condition no fund manager or sharebroker ever would want to see.

Xero left NZ for a valid reason, even if the departure was a disappointing outcome.

Fund managers make far too much money compared to almost any other legal activity, and some are most unwise to draw attention to their own practices, already beginning to be the focus of regulatory intervention.

No one should condemn the success of retail broking firms in convincing retail clients to pay (absurd) fees to have broker ‘’investment committees’’ dictate investment choices.  Is that not what the fund managers themselves do?  The fees might be condemned, but the concept is competitive.

The ‘’dark pool’’ business of ‘’crossing’’ buyers with sellers is not inconsistent with the objective of mutual satisfaction with a deal, disclosed only after the deal has been concluded.

Perhaps fund managers need to make more effort to ensure they have relationships with the major players.

To suggest that these matters are a sign of NZX ineptitude is simply disingenuous.

Sadly, where there is money there will often be murk, and there will just as often be greed, self-interest and self-aggrandisement.

 _ _ _ _ _ _ _ _ _ _ _ _

AT a presentation made a year or so ago to a young audience, I was asked what were the easiest ways to make a huge amount of money.

I countered by asking what the audience thought was ‘’extreme wealth’’.

The answers received reflected the age of the audience.  To young people a ‘’millionaire’’ is still someone who has hit the jackpot, though housing ownership has made this figure seem one that is often reached.

To be fair, more than 90% of the world’s 7.5 billion people would also regard a ‘’millionaire’’ as a person of extreme wealth.

Far less than 10% of the world will achieve such a number.

If one capitalised the NZ Pension, perhaps giving it a capital value of $300,000, and added that to debt free ownership of a house, say in Napier or Timaru, one might find a very large percentage of New Zealanders qualify for the grouping of the world’s ‘’richest ten per cent’’.  In fact 51% of all New Zealanders are in that top 10% of world wealth lists.

Anyway, I answered the question on fast paths to wealth by observing that for people with ‘’normal’’ skills, the fastest paths to wealth are by acquiring land, getting it rezoned and selling, by using leverage to buy cashflows, in areas like commercial property, or by convincing people to allow them to ‘’manage’’ your funds, clipping the ticket for an amount that allows generous salaries and double-dipping by getting agreement to fund manager ‘’bonuses’’ should the risks taken with other people’s money provide returns that exceed some benchmark or expectation.

I explained that if the benchmark negotiated at the outset was low, even half-decent fund managers would gain enormous bonuses most years.

Those who describe themselves as ‘’absolute returns’’ fund managers (seeking a positive return irrespective of market fluctuations) often claim the benchmark should be the cash rate.  However they then allocate to shares, property or whatever they select, and get massive bonuses, probably in every one of the past seven years.

Benchmarking is a real problem for every fund that invests in a variety of assets.  Far too often valuations for assets, like property, are used as ‘’fact’’ rather than a biased opinion.

Bonuses based on benchmarks will one day be an anachronism, I hope, certainly if the benchmark involves ‘’valuations’’.

Fund manager fees should cover costs and allow salaries that recognise skills and market supply/demand of such skills, but I will never understand why there is another tier of income during years when markets rise.

Perhaps I could believe a bonus based on a genuine skill demonstrated by superior analysis, rather than by taking greater risks with other people’s money.

George Soros might claim such a skill in analysis.  Few would easily join his club.

In NZ, fund managers like Devon, Milford, Salt, Mint, Aspiring and Harbour have sometimes demonstrated valuable or unique insight.

Of the three routes to rapid wealth, land rezoning, leveraged property, and funds management contracts, the last of these is probably the hardest to achieve, as the aspiring manager ought to spend a decade or two in capital markets before having any support from retail investors.

New Zealand has a patchy record in selecting the right fund manager to back.

I see several people today, sitting on huge wealth through funds management, yet with track records that were themselves patchy, to use the kindest word.

I guess David Ross was the obvious example, as were many other mining enthusiasts who found a backing from optimists and punters.

To be fair I see many in property sectors who have succeeded personally after costing investors or banks millions, even hundreds of millions.

So the easiest method might be to gain an option to buy some land, bribe or bully a mayor or council into rezoning, and then flip the rezoned land to a genuine developer.

Happens all the time, the world over!

 _ _ _ _ _ _ _ _ _ _ _ _

Footnote to the above item:

I wished the answer to the ‘’path to wealth’’ might have been to ‘’invent something to solve a real problem’’.  I would have been pleased if that were an honest answer, and cited the likes of Woolf Fisher and Jim Wattie as examples.

Perhaps another feel good answer would have been to find solutions to providing better food to the mis-fed or the underfed.

A2Milk, Synlait . . .  But who wants to be a scientist?  Arbitrage assets like land – much easier.

_ _ _ _ _ _ ___ __

WHEN the so-called incubating investor Powerhouse Ventures Ltd (PVL) decided it would renege on agreements it had with HydroWorks and would instead call in a receiver, the general public was horrified.

They did not know why PVL took this stance, nor did they know what would have been in store for HydroWorks if instead it had been ‘’incubated’’ and developed.

PVL quit, in my opinion, because HW needed more capital than PVL could ever raise, given PVL’s failed capital-raising last November when it raised the bare minimum ($10m) of its much-needed $20m offer.  (Did PVL pay bonuses to its executives to invest in the issue to reach the minimum level?)

HW needed at least $3.5m to enable it to join with Genco, which had found a growing market in Indonesia.  This pipeline of projects had the promise to secure a great future for HydroWorks’ ideas, products, staff and shareholders.

PVL, lacking a credible board, lacking a credible CEO, lacking the ability or capital to ‘’incubate’’ HydroWorks, took an honest decision.  Its promise of support had always been empty.

Jobs were lost, creditors unpaid, shareholders stranded, noteholders ripped off, PVL’s credibility destroyed, some clever NZ engineering skills wasted . . . these were the results.

We today know that Genco, a project management team whose preferred partner was HydroWorks, has now partnered with a Tasmanian company, having given up on HW.

Tamar Hydro is seeking 20 skilled people to construct turbines in Tasmania to deliver hydroelectricity for different regions in Indonesia.

The first of many Indonesian contracts will create $45 million in revenue.

Ultimately Tamar Hydro and Genco anticipate hydro plant projects in Indonesia worth $300 million, according to the Australian media.

Meanwhile HydroWorks is being liquidated, costing its supporters around $10 million, leaving dozens of skilled people seeking a new employer.

Yet to be answered are some serious issues that the Australian regulator will be asking, and yet to be seen is how PVL can survive such a blatant display of ignorance.

PVL produced a prospectus 12 months ago, seeking to raise A$20 million, promoting itself as an incubator whose biggest single asset was a shareholding in HydroWorks, displaying in the prospectus an obsolete valuation of HydroWorks of nearly $20 million.

Given PVL owned roughly a third of HW, this allowed PVL to claim that its own (PVL) shares were each worth A$1.07, of which HW’s contribution was a significant percentage (in value).  Within months HW was shown to have massive negative value.

Kerry McDonald was PVL’s chairman.  He was a director of the National Australia Bank, Ports of Auckland and Comalco, which owns the aluminium smelter in Invercargill.

Rick Christie, ex BP, was for some years chairman of Ebos and a director for Acurity Health and Tourism Holdings.  He was a signatory to the PVL IPO prospectus.

Would PVL prospective investors be inclined to believe that the commercial nous of McDonald and Christie was relevant to a decision to buy PVL shares?  Would they expect the prospectus to have met the highest standards of disclosure, using demonstrably accurate valuations?

Did PVL believe that the aspirations of HW in 2015 were still relevant in late 2016, given the HW board had abandoned the margin-heavy product range on which the 2015 valuation was made?

If the Australian regulators do not address these issues, a litigation funder would, I suspect, and so might the FMA, perhaps looking at what was said during PVL’s crowd funding exercises.

McDonald, Christie and the various academics and public sector people who governed PVL cannot reverse their mistakes, though they might be asked to reimburse those who bought the PVL shares in the IPO, if the IPO prospectus was found to be inappropriate.

But nothing will replace the lost jobs, the lost HW contracts, and the money lost by HW, because of its inept ‘’incubator’’.  PVL has been a disastrous ‘’incubator’’ of HydroWorks.

_ _ _ _ _ _ _ _ _ _

PVL and HW might have a problem but it is not on the scale of a problem facing the US bank JPMorgan.

It faces a US$4 billion penalty, awarded by a jury in the US to the beneficiaries of an estate, very poorly administered as trustee, by JPMorgan.

What JPMorgan did (or did not do) was typical of how NZ Trustee Companies repeatedly behaved in previous decades.

Awarded the task of handling an estate, JPMorgan was inattentive to the beneficiaries, failed to meet reasonable deadlines, was lazy, incompetent and self-serving.

The estate, of some $74 million, was so poorly administered that the beneficiaries sued and sought huge damages, as a penalty for the incompetence and laziness.

To everyone’s amazement, a US jury awarded the beneficiaries everything they asked for – four billion dollars.

Unsurprisingly, JPMorgan will appeal.  I expect it might pare that number back.

But the decision highlights the public’s dissatisfaction with the self-focussed, greedy and incompetent trustee companies that use huge ruddy great clippers to clip the tickets of other people’s money without exercising skill or care, in many, many cases, I would say virtually all cases.

My advice continues to be to find a family lawyer, or better still, competent family members, to run estates or family trusts.

To its credit, the Public Trust in New Zealand has quit the revolting practice of trustee companies charging a percentage of the value of an estate or trust, rather than charging an hourly rate or a fee based on value-add.

I continue to believe that the Public Trust will soon be joined by its competitors in this new, fairer model for fees, and in so doing will so dramatically pop the bubble that trustee companies will revert in value to a sensible multiple of low profits, reflecting the mundane tasks performed and the low skills required.  Trustee companies are in a low value area of a sunset industry.

Perhaps the JPMorgan outcome is an extension of my logic.

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

THE Precinct Property bond offer will price itself at a few basis points less than the issue of Property for Industry, basically wanting to be seen to be a very slightly better credit risk.

Both companies in my view (and the market’s view) are very sensibly funded with very low debt levels, strong, reliable tenants with long leases, and well governed.

In the NZ context, Precinct, PFI and Vital Healthcare (VHP) are the three strongest property entities, marginally ahead of Goodman, Kiwi Income Property and Argosy, with Stride and National Property Trust a step or two behind.

None of the first six mentioned have been poorly managed in recent years and all six appear on the list of the shares most commonly owned by our clients.

Precinct will be funding its properties with less than 20% debt, more than 80% equity.

This ratio seems almost unnaturally conservative given the nature of its tenants and its focus on prime properties.

Conversely, unlisted property syndicates regularly use 50% debt models, allowing little leeway in the cycle when banks get nervous.

I can find no support level at all for unlisted, illiquid syndicates whose gross yields of seven or eight per cent equate to very little, if any, more than the yields offered by listed, liquid, lower debt ratio property trusts.

The private sector is packed with high-risk property owners who gear up to 60, or even 70, per cent bank debt.

Those fellows with 70% debt levels are on a hiding to nothing when their bankers are told to demand debt reduction.

They will be selling into a buyer’s market.  Current valuations will mean nothing.  Many will be wiped out.

This has happened often before, and will not be new to those who recall the 1980s.

Generally it is fair to say that properties not wanted by overseas buyers, private investors or the powerful property trusts will be flogged off by syndicators, often grasping real estate groups trying to please a vendor and double dip on fees.

Even worse are when the syndicated property offer is from across the Tasman, where all other sales methods have failed.  Be wary of an Australian deal offering riches!

Unlisted, illiquid . . . no real yield benefit – what would anyone find attractive in that?

_ _ _ _ _ _ __ _ _

Travel

Edward will be in the Wairarapa on Monday November 20 and in Auckland (Albany) on Thursday 30 November.

Chris will be in Christchurch on November 21 and 22, at the Airport Gateway Lodge, Roydvale Ave.

Kevin will be in Ashburton on November 23 and then in Christchurch on November 29.

Anyone wanting to make an appointment should contact us.

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 9 November 2017

 

AS regular readers of our newsletters will know, there are a handful of court cases happening, or about to happen, that will have a profound effect on New Zealand business behaviour in coming years.

Sadly, those in progress are ignored by the media which seems empty of the sort of informed or inquisitive people with the patience (or budget?) to sit through court hearings.

One of the most extraordinary has taken place overseas, where the distressed asset arbitrageur George Kerr has been fighting to retain control of his mysterious Torchlight Fund, itself a buyer of distressed assets.

Kerr is being challenged as the fund manager of Torchlight by various parties who have found themselves locked into his version of managing assets.

Torchlight had lent to South Canterbury Finance and concocted a deal which left the Crown unable to exit Torchlight.  In addition the ACC was similarly captured by Kerr’s mysterious fund.

The court case was held in a tax haven and has been reported in the British press but has barely been reported here though it raises the critically important subject of what must be done to be rid of an unadmired fund manager.

Readers will recall how Kerr long ago captured the funds management of a Macquarie-created company sold under the name of EPIC to NZ investors.

EPIC owned shares in Thames Water and later bought other assets from Macquarie, including a UK motorway petrol station chain (Moto).

Kerr was paid multi millions to ‘’manage’’ EPIC, initially a single asset company, later a company owning four or five shareholdings in UK companies.

EPIC was mis-managed, grossly over-borrowing, resulting in negative cashflow, leading to a fire sale to another cleverer hedge fund operator, after Kerr had ‘’sold’’ his ridiculous management contract for $8 million, a reward for ineptitude and self-focus.

Stretching credibility, Kerr then tried to buy back EPIC’s assets by offering to swap the assets for shares in PGC, the owner of Torchlight.

This might all sound like a plot to be weaved into a Mills & Boon tale but it was true.  If nothing else, Kerr is a pachyderm.

Utterly unsuited to any role dealing with retail investor money, Kerr set up Torchlight with total control of its plans, locking in the captured shareholders whose only hope of escape rests with court intervention.

The case highlights the importance of including in every management contract a mechanism that enables the fund manager to be replaced and a formula for establishing the cost of that dismissal.

The formula might be a low multiple of the margins above market returns achieved by the fund managers, not a high multiple of absurd annual gross fees.

Of course the current practice is for an incumbent to extort a ludicrous price, effectively naming his own ransom.

A court ruling on a fairer process, and a recommendation that all such contracts have a formula set before anyone invests, would be a welcome outcome.

Kerr is also involved in another mouth-watering case that is imminent, involving another arbitrageur, the British visitor Andrew Barnes, who joined with Kerr to dream up the idea of buying distressed trust companies, dress them up, and sell them.

Kerr and Barnes had co-invested in what I regarded as an unlikely fund manager in Australia, undone by some odd behaviour by its management, leaving Barnes somewhat the poorer, Kerr similarly affected.

Kerr controlled PGC which owned Perpetual Trust.  He sold PT to Barnes with various conditions which seemed to include bonus payments should Barnes succeed in building PT with similar (ugly) acquisitions, then flogging off the new group to the public or to a trade buyer.

Several years later the new grouping, now called Perpetual Guardian Trust (PGT), is unloved, unsold, at least one leading broker believing the price put on the new grouping to be inappropriate, and at least one potential buyer having withdrawn his trade bid, wanting his deposit returned.

All this leads to the imminent court case, as the British asset trader Barnes is wanting to bank the deposit, claiming the Australian trade buyer (two 32-year-old Australians of no relevance) must lose the $20 million (or $30 million) deposit for withdrawing from the deal.

What is of relevance in this case is the rights of a potential buyer of a company to withdraw if he feels under-informed about the state of the intended acquisition.

If one looks back seven years ago, one recalls how South African Duncan Saville was planning to buy the distressed South Canterbury Finance, effectively reducing the liability of the NZ Government which had guaranteed some of the SCF investors.

A thoroughly improbable deal was hatched by Forsyth Barr, involving the Crown paying Saville $400 million to take over and be responsible for SCF’s future, presumably ridding the Crown of its guarantee liability.  The concept was superficially attractive, but in the real world was childish.

Treasury had made so many errors in its supervision of SCF that all hope had been lost of a happy ending.  Fortunately Treasury ignored the idiotic plea to fund this deal and advised the Crown not to listen to the plea for a subsidy, somewhat ineloquently sought by a strident Forsyth Barr, acting as adviser (and shadow director) of SCF.

Treasury must have realised that Saville might later sue the Crown when he discovered the SCF structures were sitting on termite-devoured piles.

What we saw here was a convenient solution discarded because the new buyer would have had a case for compensation when he found the piles had been rotten.

In the case involving Barnes and the two young Australian buyers, Barnes is claiming the deal was unconditional, while the Aussie boys are claiming they were insufficiently informed about all relevant detail of PGT, and therefore entitled to cancel the deal.

At face value, we could argue that the buyers had themselves to blame for inadequate due diligence.

One hopes the court decides what MUST be divulged, discussed and accepted when an offer is made and accepted.

If the new buyers were simply guilty of changing their mind, then their bid should have been worded in a way that permitted their withdrawal.

One other curiosity here is that Barnes has publicly stated that he chose not to list PGT on the NZX, despite what he said was widespread broker enthusiasm.  He said the trade buying interest was compelling.  I suggest this extreme enthusiasm may have been an illusion, as I cannot imagine why anyone would see PGT as a desirable acquisition, given the future of its sector.

One wonders where the other trade buyers have gone and why a sale cannot be concluded at a similar price.  Barnes now resumes ownership of an organisation for which I have no respect.

My own expectation is quite different from what Barnes appeared to describe as widespread demand.

I view PGT’s value as being no more, and more likely less, than the cost of the trust companies that Barnes put together, a figure less than half of the sum that the Australian lads had appeared to bid, but the money is of no interest to anyone other than Barnes and his bankers, who bankrolled the various acquisitions.

The court case should be of great interest as it will give us the Court’s view of what buyers are entitled to know.

Surely the buyers are not entitled to change their mind for fickle reasons.

Obviously there will be guidance about the details of disclosure.

Also intriguing is the ongoing High Court claim of a group of kiwifruit growers, seeking to prove that the Crown has responsibility for controlling our borders, not allowing the importation of products that endanger NZ businesses.

In this case the group of growers wants $300 million of compensation for the failure of the Crown to stop the import of infected pollen which led to a virus in many kiwifruit vines, in the growers’ opinion.

This case is also grossly under-reported, yet it involves a huge issue, in effect demanding an answer to the question of who controls our borders.

If it is not the Crown, who is it?

Who would say ‘’no, thanks’’ to a shipment of fertiliser in which animals with foot and mouth disease had been wallowing?

This case reaches its conclusion soon.

Then, early in 2018, we will finally hear what a High Court believes are the minimum standards of behaviour for company directors, when the liquidator of Property Ventures Ltd sues the Property Ventures directors, chaired by a Christchurch QC Austin Forbes.

Creditors lost far more than $100 million, an impossibly large sum for what was in many ways a company whose property development dreams were perhaps visionary but were most definitely inadequately backed by capital, cashflow or commercial acumen.

This case might also shed light on how its chief adventurer David Henderson coped with the constraints placed on him after he was bankrupted.

More so than any individual I recall, Henderson has for decades challenged the boundaries of what is acceptable commercial behaviour, developing ploys to annoy law enforcers that, whilst amusing, were often absurd.

For example he might carve off from a property title, the entrance way to a property, and serve trespass notices on any creditor wanting to enter the property to pursue a debt.

Henderson is nothing if not imaginative and irritating.

If a very much admired, stoic liquidator gets to have his case against the directors heard in a court, rather than settled out of court, there should be a packed visitors’ gallery at all times.  I would be keen to be in the audience.

As often discussed, NZ has a poor record of having these matters heard in court.  From such hearings we would have clear guidance, cast in bronze, outlining the legal boundaries of commercial behaviour.

One must ask why our regulators of commerce have so often been unwilling to go to court, preferring the cash settlement approach.

Why were the directors, auditors and trustees of the likes of Hanover Finance, Strategic Finance and Capital + Merchant Finance allowed to settle, mostly with insurance money, rather than face a judge?

Are we really allowing insurers to become an obstacle to the development of clear case law?

Yet no ‘’offer’’ of money has to be accepted.

Of course the most pertinent question, for 200,000 NZ investors, is why we did not have a Commission of Enquiry into the behaviour (and failure) of 56 finance companies in the period 2006-2010.

I know the answer to this question.

The answer is simple: John Key.

 _ _ _ _ _ _ _ _ _ _ _ _

SPECULATIVE investors will be well familiar with the rollercoaster experiences of miners, especially those seeking to mine the ocean floor.

Globally there have been a small number of successful mining operations on the seabed, including a mining operation off Africa, which hoovers up diamonds washed into the seas.

In New Zealand we have witnessed two recent attempts to obtain licences to mine the floor of the sea, one from Trans-Tasman Resources, and one from Chatham Rock Phosphate.

TTR involves some of the people who made their fortunes from what was Summit Resources, a tiny penny-dreadful that hit pay dirt when a changed Queensland government allowed Summit to mine its uranium deposits.

Summit’s shares rose from 10 cents to $7, making a small number of punters an enormous fortune, including Colin Beyer, and probably his brother Trevor, once of Brierley/GPG fame (infamy?).

Some of those who made their fortunes are behind TTR which wants to hoover up ironsand some tens of miles offshore from the coast near Hawera, in Taranaki.

The original TTR proposal was declined by the Environmental Protection Agency (EPA) after some colourful presentations from a range of people, including Raglan surfers, local primary schools and, of course, many sincere environmentalists.

The EPA decision was appealed, a second hearing took place, and a different group of EPA people, presented with perhaps more specific plans, approved the application, by majority vote.

This has resulted in a further appeal for a court review, from those who believe the hoovering operation may endanger the marine life, may threaten the passageways for transient whales, or may in some way despoil the distant beaches for local users.

I assume that the EPA may receive some new political ‘’suggestions’’ now that the composition of the Government has changed but my assumption may be quite wrong.

We might soon find out as the other project previously declined by the EPA is also to reapply.

The appellant will be Chatham Rock Phosphate, which wanted to hoover up phosphate pebbles from the Chatham Rise, some tens of miles offshore from the Chatham Islands.

It has a compelling new argument, supported by a recent European Union ruling that has the potential to make CRP’s phosphate pebbles the rock star of phosphate producers.

Currently much of the world’s phosphate comes from North Africa (Morocco) or Russia.

The phosphate, which fertilises depleted pasture land and is therefore critical to the production of grass (and hay), contains the carcinogenic ingredient cadmium.

In North Africa and Russia the cadmium levels in their fertiliser are now assessed as dangerously high.

The EU is to ban phosphates with high levels of cadmium, reducing the tolerated levels year by year, implying the phosphate exporters will need to re-engineer their phosphate, perhaps using technology to extract the unwanted element.  This might be an expensive process, if it is even achievable.

CRP’s water-soaked pebbles have virtually no cadmium levels, certainly well below the EU’s target, so its phosphates ought to attract premium prices, making its economic story even more credible, especially given the greatly reduced leaching into waterways of their pebbles.

CRP has a known resource, worth billions.

Of course sea-floor mining has objectors not in the slightest moved by economics.

They will want proof that the mining has no impact on marine life, and will not be persuaded simply by the very obvious other benefits, such as our self-sufficiency, with a superior product, of an essential fertiliser that is central to the health of our pastureland and waterways.

The argument between the environmental people and the potential miner is akin to a bar room argument as to whether Colin Meads did more for our nation than Ernest Rutherford.

Commercial initiatives cannot be easily compared with environmental concerns which often end with unanswerable questions such as ’’how would you cope with an alpine fault line total rupture’’, followed by the comment that if you have no credible plan for such an event, then how can we take your preparations seriously!

CRP, with its new restarted case, will help us discover whether the new government will focus on the incremental improvements in our pasture conditions, the greatly reduced problem with our waterways, the elimination of a carcinogenic element in our fertilisers, the replacement of imports with our own product, the reduction of our carbon footprint (reduced shipping costs) and a greatly improved future for the Chatham Islands.

The alternative focus will be on any possible negative effect on marine life.

The EPA’s weighting of these issues will be of interest not just for CRP’s investors, but as a guidance to all those who are considering projects that have environmental positives and negatives.

One point should be made, firmly.

The fishing industry has a dreadful reputation for straddling these issues, and posturing its arguments as ‘’environmental’’ when the real underlying motive is greed.

Well do I recall a fishing company which sought monetary advantage in return for a supportive submission on a past proposal.

When the ‘’bribe’’ was spurned, the submission changed to being highly negative to the project, under the guise of concern for marine life.

The EPA will no doubt weigh the fishing industry’s submissions after analysing how much of the submission is disingenuous.

_ _ _ _ _ _ _ _ _ _

THE strange sight of major companies repaying debt to retail investors is recurring, almost each week.

One must ponder why.  Perhaps the banks are flush and are willing to ease restrictive covenants that control corporate behaviour.

Perhaps there is less growth than once was anticipated by various sectors.  In the case of Rabobank and Credit Agricole they have chosen to repay subordinated debt to meet what financial markets would consider to be a moral obligation.

But Infratil and Trustpower have repaid bond issues without an offer to replace their debt instruments.

Perhaps their capital expenditure plans are modest and well met by cash flow.

Fortunately the listed property sector is taking the opportunity to reduce their reliance on bank debt (and bank covenants).

The reliable property manager Property For Industry now offers a bond (7 years – 4.55%) and today we heard of a similar offer from Precinct Property.

I hear that a third such issue is likely before Christmas.

Investors are welcome to register interest in receiving details from us on those issues.

I expect PFI’s bonds to be overbid, meaning it may be hard to avoid scaling, but the other two issues will offer alternatives.

One hopes that one offer extends to December 20, the day after Credit Agricole repays $250 million.

Our Paraparaumu Beach office will remain open until December 22 to cope with late mail.

_ _ _ _ _ _ _ _ _ _

THE extreme share price volatility of two real companies, A2 Milk and Synlait Milk, has been driven not by sudden swings in their forecasts but by derivative traders of shares.

In one day, Australian day traders bought $300 million of ATM shares!

The price was pushed up by speculators and is now being shunted around by short sellers, who borrow stock from fund managers, then sell the borrowed stock, promising to return the stock after buying it back, hopefully at a much lower price.

All of this is not relevant to real investors who believe that the company in time will increase production, increase profits and one day will use profits to pay healthy dividends.

The extreme share price volatility provides adrenalin rushes but is not a signal of some instant unexpected success or some underlying, just revealed, problem.

ATM is one of the main stocks that appeal to day traders and derivative speculators, especially now it is listed in Australia.

Synlait Milk is now shaping up to become a similar plaything.

Those who are genuine investors will hope that the company performs well, rather than measure it each day on the behaviour of punters.

Of course real investors who sold SML at $8.00 would feel enriched if a week later they bought back 20 per cent more shares at $6.40.

The price would be irrelevant.  They would like the increase in their holdings at no cost!

Please do not ask me where the day traders might push the stock tomorrow.

_ _ _ _ _ _ _ _ _ _

Travel

I will be in Christchurch on November 21 and 22, at the Airport Gateway Lodge, Roydvale Ave.

Kevin will be in Ashburton on November 23 and then in Christchurch on November 29.

Edward will be in the Wairarapa on November 20 and in Auckland on November 30.

Anyone wanting to make an appointment should contact us.

My dates for a further visit to Auckland depend on another project that is coming to a head, as will any other trips before Christmas.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

 

 

Chris Lee

Managing Director

Chris Lee & Partners Ltd


TAKING STOCK 2 November 2017

 

A CONUNDRUM is troubling many investors, our clients being typical of the concerned savers.

On the one hand many issues of the past – Rabobank, Infratil, Credit Agricole being examples – are being repaid in cash.

The money needs to be put to work by investors.

Their process is being complicated by the arrival of a new, inexperienced government, led by an admirably sensible young woman in Jacinda Ardern.

Ardern will spend coming weeks exploiting the ‘’honeymoon’’ period, when she will outline some exciting plans, based on real values that few Prime Ministers have exhibited for decades, to my memory.

So far she has revealed plans to spend multi billions on social housing, billions on health and education, billions on regional development, and billions on much needed infrastructure.

It is hard to deny the desirability of her plans.

It is just as hard for investors to foretell what these plans will do to our currency valuation, our interest rates and our equity market prices.

For Ardern, the best advice she will get is never to overlook the power of the banks, and the power of capital markets.

Decades ago then Prime Minister Robert Muldoon believed he could control banks and capital markets.

If banks exhibited any uppity tendencies, Muldoon could unilaterally increase the required ‘’Reserve Asset Ratios’’ (RARs), effectively a tax on banks.

He had the right to state the level of bank assets that had to be invested in government or local authority stock.  That was the method of that time to minimise the risk of bank failure and control lending growth.

In the 1970s and early 80s, the yields paid on these government securities was much lower than bank deposit rates so the RARs were hated by bankers.

Muldoon thought he could control capital markets, stating the maximum interest rates chargeable, and limiting the rates for deposits, and dictating wage increases.

He figured these powers sated his control freak personality, but the banks proved to have far more power than Muldoon had.

They controlled the timing of bringing back overseas receipts, for example, from Dairy Board sales.

In those times the NZ dollar was sold at rates fixed by Muldoon, who operated through the Reserve Bank, as Minister of Finance (and PM).

The RB had to buy and sell foreign exchange at the rate Muldoon declared.

However Muldoon needed foreign currency to pay bills, and the banks controlled the flow back to NZ of the foreign currency he needed.

To control Muldoon, the banks would slow down the process, effectively forcing Muldoon to devalue the currency so that banks would repatriate offshore money after he had devalued, creating windfall profits for the banks, though the Reserve Bank had some revenge in March 1985 when our dollar was floated.

The banks actually controlled Muldoon.  He hated it.

In that era the banks lost tens of millions by investing in low-yielding RARs but they made hundreds of millions by shuffling foreign reserves to force Muldoon to devalue currency.

The banks always won.  Capital markets were the boss. Today the capital markets determine foreign investment in our much-needed bond issues, they buy and sell our currency, and they hold up or sell down our equity market.

They have a huge influence on property prices.

They fund our deficits, and they set the price of any support.

They have great influence on our credit rating.

Ignore them at your peril!

We pay the cost of being a developing nation dependent on global capital markets to bolster our savings and fund our lifestyle spending and our government spending.

This is the challenge Ardern faces and is the cause of our investors’ uncertainty about investing in the new era over which the young lady presides.

To her credit, Ardern, with more emotional intelligence and integrity than we have seen in the Beehive for decades, knows what she does not know.  She must now embark on a mission to learn about economics and capital markets.

When she told the nation that her business nous came from a teenage stint working in a takeaway shop, she was being characteristically honest.

She wants to learn.

I know she has sought to connect with at least one savvy capital market leader, seeking ongoing advice.

She cannot expect capital market wisdom from her Finance Minister Grant Robertson until he himself connects with an area of the economy in which he has no experience.

Robertson was a Foreign Affairs fellow, a Student Union President, but never a student of commerce.  Some of his former workmates are bewildered by his appearance as a finance minister.

Ardern’s policy wonk is said to be David Parker, the fellow who, with the Greens, sought to disrupt the state asset sale programme with the absurd threat to strip the power companies of their profits, when National was reducing its ownership of the power companies.

Parker’s threats led to the resetting of the sale prices of Meridian and Genesis, costing the Crown at least a billion dollars, because of the reduced buying enthusiasm after Parker’s idiotic threats.

Those who did invest have made at least a billion of extra profit.

In China, Parker’s behaviour might have led to a death warrant.

Investors naturally look now for the political support that will ensure Ardern interacts wisely with capital markets.

No doubt in time her ministers will develop their relationships with capital market leaders here, and globally.

Meanwhile, investors observe plans to massage the Reserve Bank’s obligations, some desirable but expensive social objectives, some loose and undefined goal of vastly reducing the value of the NZD, some desire to reduce housing prices, and a sensible but unspecified desire to rewrite our tax laws.

Investors, loaded with cash and observing pitifully tiny short-term deposit rates, want to know which sectors will not be disadvantaged should the new ideas be implemented.

Will the retirement villages have their vulgar profits cut back as housing prices fall, or will Ardern’s desire to improve care for the aged lead to increases in the subsidies for aged care, thus building the profits of the care sector?

Will she fund the Cullen Fund and make KiwiSaver compulsory, forcing new money into the New Zealand equity market?

Will her plans to spend on infrastructure and housing help the construction and building materials sector (Metro Glass, Steel & Tube, Fletchers etc.) or will we see contracts priced even more leanly, with foreign operators dominating the tenders?

Will a falling dollar do more to help tourism than the unwanted negative of a rise in fuel prices caused by a falling dollar?

Will Parker learn to subsidise power prices for the genuinely needy, or seek to slash power company profits to the benefit of all power consumers?

Will New Zealand delay debt repayment, perhaps borrow even more, at least temporarily, and see credit margins rise, leading to costlier mortgages?

Or will interest rates continue to fall, an event requiring foreign approval of Ardern’s programme?

You will see why investors are keen to hear of her plans and to observe the response of those who fund our spending wishes.

My guess is that she will listen to the banks, listen to our global funding partners, and make sensible decisions that will not create the vortex that might terrify those of her constituents who have KiwiSaver funds, big mortgages, or tight budgets.

Investors might cut her some slack.

My guess is that interest rates will remain low, that company profits in most areas will be stable, that housing prices will be stable, and that she, Robertson and Parker will listen to those whose support they need, if they are to govern effectively.

The outcome they would not want is a credit rating reduction, wage inflation, price inflation, a rise in unemployment, rising mortgage rates, and grumpy global investors, observing the NZD fall.

I expect good companies will remain good companies.

Investors should not react to shadows, or to shallow commentary in the media.

Ardern may surprise on the upside!

 _ _ _ _ _ _ _ _ _ _ _ _

THAT the Fletcher Building annual meeting was hostile, was inevitable, a natural consequence of a dreadful annual result, incompetently signalled by a company that has long suffered at all levels from a view of self-entitlement.

Fletchers has become synonymous with epithets like ‘’self-serving’’, ‘’bloated’’ and ‘’unfocussed’’.

Perhaps the old Jardens analyst Brian Gaynor is right when he attributes the lack of focus to the clumsy conglomerate structure, where fat from one division can cover up scars from lost battles in other divisions.

He advocates a narrower range of activities.

Surely the aging banker Ralph Norris was fighting a battle with boomerangs when he sought to appease shareholders by offering to cut directors’ fees by a couple of hundred thousand dollars for 12 months.

Having just discussed egregious errors that burnt hundreds of millions, he was not likely to win much support with such a meaningless display of penitence.

Fletchers clearly needs a new chairman, some hard-nosed, experienced directors, a committed CEO with a desire to hold down his job for a decade or more, and it needs to adopt the sort of culture that has helped Mainfreight achieve universal respect with bankers, investors and staff.

Perhaps Fletchers could make the first step on a new path by declaring it will publish the name of any of its staff who cheats, and will prosecute that person.

Going back decades ago, Fletchers discovered a group of thieving tradesmen who were bribing a manager to look elsewhere while the tradesman stole building materials and took them out from builders’ exit gates.  They stole for years.

When caught, the thieves were allowed to pay off a sum Fletchers calculated was equal to what had been stolen.  No prosecution followed.

The branch manager was allowed to leave.

More recently a major Christchurch project was managed by a fellow who created false invoices which were duly paid, enriching him and stealing from the company.

He was allowed to leave, no prosecution pursued.

In Christchurch sub-contractors were furious.

So they should have been.

Fletchers needs to publish a new commitment to strive for excellence, measurable by the quality of their work, the standards of their management and staff, and the financial outcomes for investors.

An aging banker may not be the right chairman to see such a strategy through.

New Zealand has a pitifully thin pool of chairmen and directors who earn their celebrity status.

Those that do achieve this status have rarely come from the law, from banking, from accounting and never come from politics, in my experience.

They usually come from people who have built companies, producing things, learning to grow sustainably, exercising good judgement, a great work ethic, and a commitment to the staff.  John Anderson, Jim Wattie and Woolf Fisher come to mind.

They often have learned to accept that nourishing good employees may in the long run be a better objective than quarterly profit growth.

Fletchers needs a chairman, and a CEO, who will work together for a decade or more, to restore respect for the dynastic company.

  _ _ _ _ _ _ _ _ _ _ _ _

STRATEGIC Finance is not a company any investor will recall with respect, its directors, founders and executives disgraced by their greed, after a conventional and credible few years which preceded the venal behaviour.

The market had come to trust Strategic, largely because of the mana of the late Jock Hobbs, and the apparent regulatory respect for Denis Thom, Strategic’s chairman.

Thom was the lead of one of New Zealand's largest law firms and was chairman of the likes of Wellington International Airport and Kirkcaldie & Stains.

Hobbs, of course, would have been knighted for his effort to secure the 2011 Rugby World Cup, except for his association with Strategic which stained his career.

Ultimately Strategic’s key people were judged by their behaviour and greed when Strategic should have been consolidating into a sustainable provider of bridging finance, not a Bridgecorp-like grasping financier of high margin development loans to small-time crooks.

How often have I asked why people with unusable wealth pursue even more fast money, at the risk of their reputation?

To use another analogy, why would a boxer, having knocked out his opponent, then leap on his prone opponent and continue to punch him, resulting in disqualification?  Is not enough, enough?

Strategic Finance closes its final chapter in the next few weeks when PwC’s liquidator John Fisk pays out another tiny figure, maybe a cent or two in the dollar, meaning the secured debenture investors eventually will have had back a disgraceful 21 cents in the dollar, after nine years.

No one has gone to jail.

There was an out of court settlement, the equivalent of three buttons, a hairpin and an old handkerchief, organised by the Financial Markets Authority and the liquidator.

Market professionals believe a High Court might have been harsher, had it determined the cost of the dreadful behaviour of Strategic’s key people.

Perpetual Trust, invaded by country mice who had migrated to the city, may have contributed to the settlement.

It is an indelible black mark on our nation’s devotion to integrity that Perpetual could escape so lightly.

Perpetual Trust did not prevent practices in Strategic Finance that might have been acceptable in Idi Amin’s Uganda but should never have been permitted here.

Investors wondering who were the real rogues in Strategic might want to refer to our Never Again list.

Twenty-one cents in the dollar was the outcome, yet when Strategic Finance had defaulted, its founder Brian Fitzgerald, a man of immense wealth gained from Strategic profits and personal property trading, was adamant that ALL investors would be repaid in full.

He told me so.  His future in financial forecasting might be roughly the same as his future in finance company management.

Strategic Finance has enough letters in its name to make four four-letter words.  Bull dust might be two of them.

 _ _ _ _ _ _ _ _ _ _ _ _

PERPETUAL was also the trustee of Capital + Merchant Finance, an even worse company than Strategic.

CMF’s directors bar one, did go to jail, having fleeced investors for years, with their dishonest presentation of the company’s real financial substance.

Eventually Perpetual settled out of court for its appalling trustee behaviour, its share of the settlement now known to be five million dollars.

I repeat, it settled out of court, just as the Strategic people had done.

Does anyone see a pattern here?

Does anyone else wonder why there is so little case law about the court’s expectations of the integrity of directors, the behaviour of executives, the supervision of trust deeds, the audit of performance, and the role of regulators?

In the case of CMF, the utterly misleading information presented to investors led all bar one of the directors to jail, the chairman of the board in 2006, Trevor Janes, not included because he did not sign the particular prospectus that the prosecution had selected as the basis of its case.

I hear the comment that raking over the embers of the finance companies’ inferno is hurtful, reminding the victims of their scorch marks.

However recalling these events should have several good effects, including a reminder never to have any financial or business relationship with those who so mis-used other people’s money.

Another effect might be to remind investors of the damage that can be done by weak, perhaps underfunded regulators, junior auditors (charged out at senior audit rates), clueless trustees (paid like experts) and lazy directors, picking up fees without earning them.

Directors are amongst the prime culprits, some for cheating, and some for lack of knowledge or diligence.

I recall saying to one director of Dominion Finance that he appeared to be some fathoms out of his depth, a tadpole swimming amongst barracuda.

Somewhat forlornly he nodded.  He should never have accepted the appointment.  He was a hammerhand being asked to oversee the design of a nuclear bomb.

Lest we forget.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

 

Edward will be in Taupo on Wednesday November 8.  He will then be in the Wairarapa on Monday November 20 and in Auckland on Thursday 30 November.

Chris will be in Christchurch on November 21 and 22, at the Airport Gateway Lodge, Roydvale Ave.

Kevin will be in Ashburton on November 23.

Anyone wanting to make an appointment should contact us.

If you wish to be alerted about the next time we visit your region please drop us an email and we will retain it and get back to you once dates are booked.

Chris Lee

Managing Director

Chris Lee & Partners Limited


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