Chris Lee & Partners Ltd

TAKING STOCK 26 October 2017

 

THE car bombing slaughter of a Maltese journalist last week will have outraged the people on this tiny Mediterranean island but is undoubtedly linked to its fast-growing prosperity.

There are lessons that New Zealand should contemplate.

Malta’s rapid transition from a peaceful, religious, laidback population without financial aspirations, into a rapidly growing, European star with table-heading GDP growth has occurred, almost too quickly to notice.

My wife, whose first 16 years were in Malta, and I have holidayed in Malta for the past 15 years, celebrating its extraordinarily laidback lifestyle, its rich history, its glorious weather, its helpful people and its almost zero rate of crime.

Even five years ago its wages and costs were so low as to be barely credible to New Zealanders, or those from its biggest suppliers of tourists, Britain, Germany, Italy and Sweden.  But very few New Zealanders visit Malta.

Even now the NZ passport is seen there fewer than 100 times a year, bar a significant spike in the year my son Ed married his Canadian wife there.

Change has crept up, with five obvious causes, and they may have some relevance to New Zealand.

To attract IT employers, and exploit their excellent education system, Malta offered the world’s internet gambling sector handsome tax concessions to shift the global gambling sector to Valletta, its capital.

This multi-billion dollar sector transformed employment opportunities in Malta and directly led to a larger tax base and a lift in wages.  Malta now is buzzing in the technology sector.

However internet gambling has a huge money laundering element.

Malta thinks it patrols the cash smugglers well but if the defences were impenetrable, Malta would be doing the equivalent of walking on water.

A second lift in GDP has come from its rapid growth in foreign students, many sent to Malta for secondary education by their parents, the wealthy one percent of Eastern Europe, most of whom are Russian.

A third initiative was to sell Maltese residency rights to virtually anyone of extreme wealth.

For a million euros, the buyer could buy a passport and gain access to their excellent health, education and pension scheme.  Criminals might have been banned but clever cheats were not.

The new buyers had to build a new home or buy/rent top-end apartments or houses, to avoid messing with the relatively low-cost housing for local people.

Malta raised several billion by selling the passports and reduced its sovereign debt with the proceeds.

The fourth big project was to convert its national energy grid from Libyan oil to Russian gas.

In the 1970s Malta had negotiated a 40-year deal with Libya, entitling it to low-cost Libyan oil, in return for Malta’s agreement not to drill into an underwater elephant oilfield that stretched between Libya and Maltese territory.

When the 40-year contract was finished Russia agreed to sell cheap gas to Malta, and China agreed to build the new infrastructure for the grid.

Malta has no rivers, very little wind, and no nuclear power plant.  It liked the idea of switching from oil to gas, to reduce its carbon footprint.

China required Malta to pay for its contract to build the new network not in Euros but in gold.

Malta obliged.

Gold movements are not recorded by banks.

At about this time various members of Malta’s ruling Labour party formed trusts in Panama, with some domiciled right here in New Zealand.

Finally, having joined the EU and become entitled to EU funding and grants, Malta began to improve its infrastructure, most obviously its roads, its coastline accommodation and its airport.

Tourism soared.

Today Malta, with just 450,000 people, hosts more than three million tourists per year, a similar number to New Zealand’s visitors, yet we have ten times the population and a thousand times the land space.

Meanwhile next door Sicily, the home of some Mafia, has been watching its living standards sink, Italy a cot case with a dreadfully inadequate willingness to help the poor, the weak, the sick or the unskilled.

Suddenly Malta imported a Sicilian base, visible through large numbers of new, some excellent, Sicilian restaurants.

I wish not to put too crude an overview of all this but murders went from once in a blue moon to several a year.

For the past year or two a strong media lady has been investigating strange events and has reported in a small newspaper and on her website that corruption had accompanied all these sudden changes.  (How sad that NZ has no such courageous journalists or media owners.)

A country with a 4000 year history of modest, even humble, living standards has suddenly been showered with wealth by some big players.

Gamblers, Russian students, Russian business people, Chinese entrepreneurs, Sicilian restauranteurs . . . all these newcomers created exciting GDP growth, more and better paid jobs, a sharp rise in tax collections, better infrastructure and far more tourists.

Globalisation had reached the tiny, blessed islands that make up Malta.

If it is to really benefit in the long term from all these riches, Malta needs to have the protocols, the processes and the right people in place, to avoid what most would regard as the inevitable consequence of sudden, large gifts not from heaven, but from strangers wearing sunglasses.

Young people love the change and the higher wages.  Those of my age do not much love the rate of change.

Is there any of this that might be analogous for our country?

Might any regular reader recall earlier articles that queried the risk of our own rapid acceptance of globalisation, a focus on rapid, perhaps uncontrolled growth in tourism, and a lowering of standards, in quest of sharp rises in household wealth?

We might all gain by paying attention to Malta, observing how it adjusts to ensure its best qualities are not fractured by its economic success.

 _ _ _ _ _ _ _ _ _ _ _ _

THE composition of the new government last week was obviously an exciting event for our media but had been well signalled by Winston Peters months ago, in a candid interview.

He said then that when previously he had been granted the power to anoint another party as the government, he had followed the conventional path of aligning with the most popular party.

This had not worked out well for his plans to change the way the country was governed, presumably because he had little leverage once the deal had been signed.

Peters said well before the election in a newspaper interview that if he had the power again he might change his strategy as it might be the last chance, at age 72, that he would have to bring about the changes he favoured.

There should have been no surprise last week when he made his choice after using his leverage to gain as many concessions as he could.  The media simply had to read what he had said.

The only matter of investor concern now should be how the inexperienced and obviously excited and energised new government displays caution with, and respect for, those of our creditors who underwrite our living standards.

It was quite idiotic of the media last week to headline a 30 basis point fall in our exchange rate as a ‘’plunge’’ caused by fear of the Green (Values?) Party.

Thirty-point movements occur at different times in virtually every week, often every day.  Volatility is what earns young FX traders their ‘’master of the universe’’ bonuses.

What adult investors will want to observe is a respectful approach to global markets, without any threat to wave a finger at those who have funded our bond issuance, lifted our equity markets and provided liquidity for all our asset markets, including our property markets.

Perhaps we will refocus on the real problems behind our housing market, which are a lack of young tradesmen and ridiculous margins in our building product prices.

Fresh eyes may see this.

I can report that last Friday the sun rose, the sky was blue, the sea flat, the car started when the key was turned, and the Paraparaumu Beach Golf Club was full of people who seemed quite unmoved by the excitement in the Beehive!

New Zealand will remain a wonderful country!

 _ _ _ _ _ _ _ _ _ _ _ _

THE rage that greets disclosure of ridiculous farewell packages for chief executives is entirely justified but it may be misdirected.

Who would blame the likes of the inept chief executive of the Dunedin City Council subsidiary Delta Corporation for negotiating himself a farewell gift of nearly a million as he leaves a role that many would say he has performed dismally?

It is both fashionable and deemed ‘’smart’’ to negotiate an employment contract that from a selfish view provides maximum reward.  At worst, it is just greedy but the real blame should be directed at those who granted the contract, not those who benefit.

That Delta and its sister Dunedin company Aurora have both been poorly managed and governed badly has nothing to do with the chief executive’s negotiated package.

The package is entirely the fault of the nincompoops who were given the authority to hire the chief executive and negotiate the employment contract.  They should be ashamed of themselves.

You might expect this task to have been performed by Dunedin’s elected council.

After all, Delta is a Dunedin Council owned and council-created company, established to allow the council to appoint the governors and to ensure that Dunedin’s assets, like its power poles and power lines, could avoid a level of public scrutiny.

The council is accountable for the selection of the people that governed Delta, but Delta itself is run well outside the range of the public’s radar, its governors protected by the council’s ownership of Delta.

Those people – boofheads, as some have described them – who are given governance rights (and remuneration) for running council enterprises are the people who should be scrutinised for signing up stupid contracts.

Sadly, New Zealand long ago became consumed by the blatant lie that organisations fail without a celebrity chief executive, paid as though he was an international star, in the centre of the universe.

When councils appoint unelected people to govern the council’s business enterprises, in effect the councillors are paying others what they themselves were elected to do.

The quality of those available for such sweetheart roles often cannot be assessed fairly but many I have met have just been grasping people without governance or social merit.

In the case of Dunedin for a very long time a cabal of grasping people have performed these roles, with some notable, but not many, exceptions.

In Dunedin they refer to the people who pull the strings as the Tartan Mafia.  They do not see philanthropy as the motive of these ‘’mafia’’.

What is the chance that they will be meeting the expectations of ratepayers when they are not accountable to ratepayers?

Of course the subject of idiotic contracts enrages the public, and shareholders.

How can negotiations be so one-sided that one of the probably dozens of applicants for a $500,000 p.a. chief executive role is able to get a board to agree to a contract that over-rewards the chief executive and provides a farewell gift of $900,000 (for a job poorly done)?

One can look back at examples of this stupidity over many decades, starting with star-struck or boofhead directors in the 1980s who signed contracts that led to shareholders being pillaged.

Think of the cost of buying out absurd management contracts, time and again.

The listed property trusts provide recent examples, none more risibly than the amount paid by what has morphed into Stride Properties to rid itself of the venal freeloader, Douglas Somers-Edgar.  As soon as his contract ended, the share price rose sharply.

Think of the supposedly professional board of the NZX, and the one-sided contract it signed that allowed the surly Mark Weldon to depart, enriched by at least 10 million dollars.

Think of those in TVNZ that signed a TV announcer’s contract so thoughtlessly created that he had to be paid more than five million dollars after performing his new duties for just a few days, before feeling saddened by the lack of camaraderie and resigning, apparently unable to overcome the sadness.

Who signed the employment contract that led to that outcome?  What were they thinking?

Obviously the private sector can do what it likes.

However public companies and publicly funded organisations surely have an obligation to treat other people’s money with great respect.

It is surely a sick joke to claim that executives or directors need to be ‘’compensated’’ when their contracts come to an end.

One of these unfunny jokes that still rankles with me was evident in the case of South Canterbury Finance, which after being underwritten in large part by the Crown, appointed a most inept chief executive as a contractor, paid around $100,000 a month.  The fellow had no track record as a competent CEO and proved to be unconnected with the power players in financial markets.

When his mission to sell SCF failed, there was no course to follow other than for him to be retired and a liquidator to take over that role.

Indeed he left, having cost the tax payers a ridiculous sum, spent trying and failing to reduce the Crown’s liability under its guarantee.

He then negotiated an extra $160,000 from the liquidator to compensate him for the ending of his failed contract!  The liquidator negotiated with him.  Taxpayers’ money was granted.

Words fail me.

Surely at some time soon, perhaps with the energy a new government might have, we will see new law that places personal accountability on all those who pledge other people’s money in a stupid, reckless or unfair way.

When the SCF story is eventually told, there will be horror at the way so many people were complicit in the appallingly managed rescue plan, with the queue reaching the top of many buildings in Wellington.

New law is overdue!

 _ _ _ _ _ _ _ _ _ _ _ _

THE speed with which the world of banking is changing probably terrifies all the middle-aged bank executives who have seen stability as the strength of banks, and the glue for their careers.

Even in Australasia change is sudden, with banks switching their views on what are sustainable, profitable aspects of banking.  Banks are now exiting from expansionary strategies, frantic in their pursuit of simplicity, a reversion to deposit taking and moneylending.

Undoubtedly wholesale lending and deposit taking are core services but might you also mistakenly have believed that funds management, private wealth, financial advice, credit cards, mortgage lending and personal loans were the permanent territory of the banks?

The astonishing Chinese giant Alibaba, which recently sent senior people to promote their business in New Zealand, might be a disrupter for those in banks who enjoy the status quo.

The Alibaba internet platform in China now transacts 57% of all Chinese money transactions.  Fifty- seven percent!

It transacts credit card transactions worldwide ten times the number of Visa International.

It will soon be a money lender in areas like mortgages and retail lending vastly greater than banks, exploiting its recent database on the behaviour of a billion or more people.

Meanwhile the absurd 1% (or more) fees for managing money are destined to fall dramatically, not because of no research robotic type investment strategies, but because of the need to respond to low returns to investors.

As some of my age group see the inevitability and imminence of these massive changes as a threat to our comfort levels, younger people – the new breed to whom rapid change is intuitively understood – see the changes as opportunity, not a threat.

Might this explain the age of the new leaders in Austria, France, and New Zealand?

Alibaba’s arrival in Australasia, along with the appearance of Amazon, might be far more significant than the consequences of the arrival of Apple, Facebook and Alphabet.

Threat?  Or opportunity?

My assumption is that as banks sell off ‘’non-core’’ subsidiaries in pursuit of simplicity and compliance cost reduction, the investment banks, overseen far less rigorously, will beef up their capital and pick out those activities where margins are likely to remain generous.  While banks sell, investment banks with capital will buy.

Perhaps the trading banks will downsize to a level where their capital can genuinely absorb bad debts.

I guess in all this activity the young leaders in financial services are right to see change as an opportunity, not a threat.

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

TRAVEL

Edward will be in Hawke’s Bay on Tuesday November 7 and Taupo on Wednesday November 8.  He will then be in the Wairarapa on Monday November 20 and in Auckland on Thursday 30 November.

I will be in Christchurch on November 21 and 22, at the Airport Gateway Motor Lodge, 45 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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TAKING STOCK 19 October 2017

SO WHAT do we do with $900 million?

That was the question addressed by investors and fund managers last week when the powerful Dutch bank Rabobank returned to New Zealand investors and institutions the $900 million it had borrowed in 2007.

The return of $900 million has had a dramatic effect on yields in the bond market.

Perhaps half of that money has been returned to individual bank accounts, some $35 million to our clients, $100 million to the clients of Craigs Investment Partners, and very likely more to FNZC, which organised the issue in 2007.

Never before 2007, or since, has any issue attracted such a level of support.

The issue was open for just a few days in 2007, offering a 0.76% margin over the annual swap rate, at that time 8.66%, meaning the rate was 9.42% for the first year.

The credit rating of Rabobank was then AAA.

World credit markets were disintegrating in late 2007 and here the worst of the finance companies and trust company mortgage funds were collapsing.

It was a great piece of timing by Rabobank.  Most people were seeking a sanctuary.

In one week our company fielded calls from all parts of New Zealand, some wanting allocations of millions.  Complete strangers contacted us, and I suppose every trained member of the advisory sector had the same experience.

Of course after 2008 the global recovery depended on decades of zero interest rate policies (ZIRP), so when Rabobank reset its rates each subsequent year, the payments fell, eventually to an unsatisfactory 2.88% last year.

As rates fell, investors sold off the securities till the price reached 70 cents.

Those who understood the instrument, had competent advisors, expected it to be repaid in October 2017, and did not need higher quarterly cashflows, made a killing by buying in at 70c, with just a few years to wait for the $1.00 repayment.

Now that it has been repaid, the security can be said to have been a great choice for investors in 2007, even better for those who bought at a discounted price in subsequent years.

At roughly the same time as Rabobank raised $900 million, Origin Energy, the majority owner then of Contact Energy, raised $250 million through an Origin Energy redeemable share, which enabled the Australian-based Origin to use Contact Energy imputation credits, useable only in New Zealand.

This issue was priced at a 1.5% margin over one-year swap and was also based on an annual reset.

ASB arranged this issue.  At the time it was made clear that there was an intention to redeem the shares, though not a guarantee of timing.

The issue was also successful, paying in its first year more than 10%.

As rates fell, the security became less valuable, falling in price to less than 60c for a while.

Those who understood the security, and believed the company would eventually repay, bought at 60c, received their interest each quarter, and made a handsome gain when the securities were repaid at the $1.00 par price.

I recall all these events well for they led to the events that shall not be forgotten, and highlighted the dark side of the moon, for those people who do their damnedest to offer real information and help investors.

This sad saga began when an Auckland man rang and asked for an allocation of $2 million of Rabobank perpetuals.

I commented that that was a huge sum to put into one security and asked what percentage of his wealth that amount represented.

I was told that his wealth was none of my business.  Today I would politely reply that I could not help and hang up, but in 2007 the role of a broker included offering all credible choices to the public, and so I persisted, asking why he might not split his sum and include other options, such as the Origin Energy security.

I sent him both prospectuses, with a letter correctly outlining their features. He invested most of his money in Rabobank and some in Origin Energy.

When rates fell, and their market prices fell, he rang and told me we had misrepresented the securities.  I told him if that were true, I would buy them back at par, but our letters describing the products were precise and unarguably accurate, so he had no right to abuse us.

So he went off to a dishonest journalist who wrote about the wicked broker who had ‘’talked him into buying’’ these ‘’rotten’’ securities.

I challenged the feeble journalist, seeking an apology, provided proof that the investor was lying, but as my name had not been used I did not persist, though I wrote to the editor.  He did not seem to care, perhaps in part explaining my disrespect for that newspaper.

The incident made me resolve not to accept as clients those who refused to disclose their financial matters and it illustrated the lamentable state of journalism, where a weak or dishonest practitioner would not want the facts to spoil an attention grabbing headline.

Now that Rabobank and Origin Energy have both repaid the securities they have performed precisely as they were expected to perform.

Of course, those who held Rabobank now have to find replacement securities.

The flood of money has largely chased other fixed interest securities.

Soon the compulsory repayment of an Infratil issue (IFT170 on 15 November, 2017) will add to the problem.

Because there have been few new issues, and because so many of the listed debt securities have few sellers, to winkle out bonds from the secondary market causes significant price increases, hence lower yields.

As an example the ASB reset security (ASBPA) has risen in price by nearly 10% in 10 days, to a high of 87c.

It pays interest, reset annually at a rate 1.3% higher than the 1-year swap rate, and resets shortly, probably at a rate of around 3.4%.  If one buys the security at 80c, then the effective cash yield of 3.4c per dollar of face value, is a real return of 4.25% (on the 80c cost).

A fortnight ago ASBPA were 80c; today, because of the flood of money from Rabobank, the ASBPA might be 87c, meaning the yield is not 4.25%, but 3.9%.

Investors would be hoping that when ASB no longer can claim equity credit for the subordinated security, it would repay the $1.00 par cost, so if one bought at 87c now, and was repaid $1.00 in , say, four years, there would have been a 13c gain, as well as the interest received.

Many other fixed interest securities have been scooped up by those repaid by Rabobank.

The recently issued Heartland Bank bond sells at a significant premium because of this buying spree, as an example.

The problem will grow further, in all likelihood on December 15, when it is expected that the French bank Credit Agricole will repay its subordinated bonds.

Credit Agricole issued $250 million of five-year reset securities in December 2007, to raise NZD to lend to the Canadian pension fund that most unwisely borrowed nearly two billion to buy the Yellow Pages from Telecom.

Telecom, whose clever strategist was at the time Marko Bogoievski (currently Managing Director of Infratil) was working then for Theresa Gattung.

He had the foresight to observe the risk of the Yellow Pages losing its dominant position in business advertising so he looked for a buyer and found a Canadian teachers pension fund that had a contrary view of the future.

The Canadian fund borrowed a huge sum from the likes of Deutsche Bank, Goldman Sachs, and many banks, including Credit Agricole.

The syndication of lenders have now no hope of collecting the repayments, in fact much of the debt is now converted to fairly useless shares in the company that owns the Yellow Pages.

Credit Agricole will have written off its loan but it will need to repay investors one day, and the most likely day is December 15, 2017.

It has the right to rollover the loan but the expectation is that Credit Agricole will repay.

The bank is barely known in New Zealand, though those with good memories will recall Calyon Investments, which laid the rotten egg that hatched into Credit Sails notes, an infamous issue to New Zealand investors in 2006, organised by Forsyth Barr.

This was the issue that was so mis-described  that the Commerce Commission sought a prosecution against the issue organiser after discovering some fairly unsavoury processes and some foolish behaviour which culminated in a Forsyth Barr senior person describing, in an email, the investors as ‘’flies’’.

The Commerce Commission files did not show any of the parties in a favourable light but agreed ultimately to a huge settlement ($61 million), paid for by insurers and Forsyth Barr, the latter’s share being $5 million, as I now have been told.

Calyon, owned by Credit Agricole, is unlikely to have much success in New Zealand and even Credit Agricole itself might be tainted by the dreadful Credit Sails behaviour.  Investors should never forget such behaviour.  A permanent boycott would be an understandable response.

If Credit Agricole repays on December 15, there will be even more downward pressure on secondary market rates.

Those brokers, economists and analysts who continue to forecast interest rate rises will be aware that the global strategy continues to be ‘’low rates forever’’ and will be aware of the bundles of money returning to investors.

I am unsure how that matches with their expectation of great increases in yields.

Globally these events are the cause of much higher allocations of investments to assets like property and shares, forcing these prices up, in pursuit of yields higher than the very low bank deposit rates, and the low bond rates.

It is extraordinary, but still true, that rates in New Zealand are higher than in any country with as strong a balance sheet as our country currently enjoys.

So what does one do with $900 million?

I guess the answer is to get knowledge of what is available from sharebrokers and financial advisers or those who actually understand the various securities available, and describe them accurately.  No useful information is likely to be sourced from the newspaper!

The likelihood is low rates for even longer, and a sharemarket still being fed by KiwiSavers, yield chasers and (probably) foreign money.

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

THE Chinese institutions, sovereign wealth funds, and their high nett worth individuals are keen to invest in New Zealand.

Investments here provide diversification, high yields, and lead to relationships, particularly in the food sector, that are seen as desirable.

By and large they have proved to be honourable investors, with long term strategies.

The wealth of the top 1% in China has helped lift our asset prices, has helped maintain low interest rates, and has enhanced our ability to trade with an enormous market in a country with over four times the size of America’s population.

As you will have seen through their involvement with Synlait Milk, of which a Chinese company owns about 35%, relationships have been most helpful in opening doors and satisfying regulators.

The Chinese investors, however, have one significant feature that New Zealanders will never share.

They greatly respect politicians, even more so cabinet ministers, and they seem to revere prime ministers, no matter how inept, immoral or uncommercial they may be.

There is an explanation.

In China, politicians have great power, can make or ruin by intervening in commerce, and are greatly feared because of that power.

Perhaps they assume at least a little of this power rests with our own politicians.

Perhaps they assume that networks of government officials ensure squeaky doors get oiled.

It is probably from this mistaken respect that, as an example, Jenny Shipley was unwisely asked to chair the Asian controlled Mainzeal Construction.

Mainzeal, shockingly governed by Shipley and her team, was a serial poor performer, trading at a level way beyond its meagre capital resources, and eventually collapsed, costing sub-contractors, creditors and shareholders almost as much, say, as Bridgecorp cost its investors.

No one in the sector was surprised, except, apparently Shipley and her equally inept directors, who seemingly had no idea that the company had no real access to capital, terribly thin cashflow, millions of unpaid bills, and such a dreadful reputation that some experienced contractors simply would not work with Mainzeal.

These matters will no doubt be aired in court, if no earlier settlement is achieved.

To be fair, it is not just Shipley that the Chinese applauded.

There are many politicians with no or meaningless corporate skills who have been allowed to make a living through figurehead attraction, rather than relevant skills.

The likes of Roger Douglas and Fran Wilde were effective politicians but in my view were as relevant as directors of Brierley Investments Ltd as the All Blacks props Jazz Muller and Keith Murdoch might have been.

Going back into previous decades, I recall Brian Talboys, once dragged into the appalling Pacer Pacific Group, a spectacular example of a company driven by hope rather than reality.

Lombard Finance Ltd had THREE absolutely inappropriate figurehead politicians, Hugh Templeton, Bill Jeffries and the pompous Doug Graham, presiding over an activity and some drongos with whom no experienced commercial person would have shared a cup of tea.

I do understand how the likes of Jim Bolger and Michael Cullen came to chair a government owned monopoly, where commerce, competition and sales/marketing are not as relevant as government sanctioned process.

John Key will be a good ambassador for Air New Zealand, perhaps opening doors and attracting deal makers.  Air New Zealand will have others who focus on strategy and compliance.  The Chinese will like him.

His new role in the ANZ has been grossly misunderstood.  The ANZ NZ board has a token role in decision making, approximately equal to my role as chief culinary advisor to my wife.

Perhaps it was the Chinese respect for retired politicians that led to Ruth Richardson being paid to sit on the board of Synlait Milk.  I cannot imagine any other reason.

 _ _ _ _ _ _ _ _ _ _ _ _

I guess this subject of choosing appropriate directors who add value to governance and performance will come up if the Litigation Funder LPF is allowed to present its cases against Mainzeal and Property Ventures Group.

In both these cases, the vast majority of experienced people knew that failure was imminent YEARS before the liquidators were appointed, just as was the case with some of the worst finance companies.

The performance of directors needs to be assessed in a High Court.

We need more case law outlining the legal standards expected just as we need more case law around the performance of our trust companies and auditors.

The sad fact is that out of court settlements often mean the Court never gets to hear the truth, assess it, and adjudicate on what is acceptable.

We do have a fit and proper person assessment made of people.

It would be useful to know the matrix used when making these assessments.

One wonders whether the matrix examines such considerations as relevant experience and subject knowledge, and whether previous corporate failures are considered.  Would Donald Trump be ‘’fit and proper’’?  Pardon?

 _ _ _ _ _ _ _ _ _ _ _ _

IF, as rumoured, the Wellington property developer, syndicator and property owner Willis Bond plans to achieve an NZX listing, it will need a particular focus on governance.

Property developers and entrepreneurs are involved in an activity that seeks rich returns for real risk.

This sort of model needs ample capital, access to more emergency capital at quick notice, ample banking confidence, high levels of skill and experience, and a totally transparent approach to all stakeholders.

Willis Bond has done remarkably well over the past 20 years, with virtually no public disasters, gradually building a reputation that has attracted deep-pocketed admirers.

My warning is this.

Strategic Finance, when the late Jock Hobbs was at the helm, also built up a band of wealthy admirers, and it too won bank admiration, working transparently and co-operatively, for example, with the Maori money in Wellington.  The retirement village at Athletic Park was an example of this teamwork.

However it allowed irrelevant people into its governance, its key shareholders wanted money out without regard to the quality of the buyer, its management and some directors began to behave without transparency – for example allowing staff to underwrite projects to reach minimal sales requirements – and when Hobbs was ill, no longer a shareholder, and no longer in charge, Strategic decomposed, exposing some dreadful people who now feature on our ‘’never again list’’, Allco Hit providing some of those people.

Ultimately its founders, its directors and its key people were seen to be weak, greedy or self-focussed, or all of the above.

Willis Bond is not in an identical field but it is in a similar activity, attracting similarly entrepreneurial spirits, and people willing to accept higher risks to achieve higher returns.

Currently it enjoys a status that few of its competitors have achieved.

If it does list on the NZX it should engage with the very best of our corporate directors, and should lock up the existing shareholders for a long period, ensuring their shareholdings are not liquid for some years.

If it does list, perhaps next year, it will be one of the largest listings of the year.

It will want to seek blue ribbon status, so will be hoping to attract the best of our investment bankers to guide it.

Sure as anything, it will not want retired politicians on its board!

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TRAVEL

I will be in Christchurch on October 24 and 25.

Edward will be Hawke’s Bay on Tuesday November 7 and Taupo on Wednesday November 8.  He will then be in the Wairarapa on Monday November 20 and in Auckland on Thursday 30 November.

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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TAKING STOCK 12 October 2017

 

THOSE who attend schools and colleges get their teacher reports in a few weeks.

New Zealand as a country is about to get its report.

One report will be delivered by international currency markets and by bond markets.  Another report may come from the credit rating sector.

We have a system that produces a government, and we have a coterie of politicians who then manage a programme.

The currency and bond markets do not have any obvious role in our political process, or any control on the behaviour of our politicians, but their reaction is highly significant, will signal their response, and may influence government behaviour and plans.

The continued support of bond markets is of critical importance.

To simplify matters, the currency market will have much influence on our fuel prices and holiday prices; the bond market will affect house mortgage rates, housing costs, government budgets, bank liquidity, corporate profits and ultimately employment.  The equity market dictates KiwiSaver wealth, as well as ACC performance (as a single example).

A government policy mix that disturbs currency and bond markets would penalise any country that required the savings of other countries to help it maintain living standards, which in our case are extremely high by global measurements, and funded by other people’s money.

In recent years our living standards have risen for most (but unnecessarily and sadly, not all), most obviously if you observe new car sales, overseas travel figures, the size of our new houses, our restaurant, bar, and coffee spending, and our growth in retirement savings.

One explanation is our improving terms of trade, another is the respect we have earned by maintaining relatively low sovereign debt, government budget surpluses, sane policies, a transparent and non-interventionist approach to the floating of our dollar, and a determination to repay debt to an even lower level, in the near future.

Currency markets deliver the report by buying (or selling) our dollar.

A strong currency is a mark of respect.

Bond markets deliver their respect by buying into sovereign, local government, bank or corporate debt instruments.

Strong support equates with lower interest rates.

If we want to be able to service our debt we need low rates.

Countries like India, where government spending is less controlled, pay interest rates of 7%-10%, meaning debt servicing costs eat up government revenue, denying the government the ability to spend that revenue on social services, for example.

In Japan, government debt is so extraordinarily high that a three percent increase in bond rates would result in Japan needing to spend its total revenue on debt servicing, with nothing at all to run the country.

Obviously that would lead to massive tax rate increases and dreadful poverty.  It is fair to speculate that interest rates will remain very low there, for decades.

New Zealand has succeeded in charming currency and bond markets for some years, largely because its Minister of Finance through most of this period, Bill English, is a Treasury acolyte, a man who understood the link between sensible policy and favourable interest rates and currency rates.

To be fair, English was helped by John Key, a Prime Minister of very little merit, in terms of any particular philosophy or morality, but a man with developed skills as a chairman, and a man who understands the power of the international currency and bond markets.

Key, at Merrill Lynch, was never a genius foreign exchange trader, never a leading analyst or research-based decision maker but he worked in an organisation that highly rewarded its team leaders, expecting them to inspire their clever people to work towards achieving the goals of their company. 

In return the team leaders received huge bonus payments.

Key became a skilled team leader for Merrill Lynch, as he later was in government.

Many would regard Merrill Lynch as being as rotten as Lehman Bros, Citigroup, Goldman Sachs, Bank of America, AIG, and all those others who grossly overfeed their team leaders after chiselling absurd margins out of their clients, and pouncing on government bail-outs to use as a bonus pool.

Key was a charismatic and clever team leader, and deserves credit for his government’s success in holding New Zealand on a steady path after the 2011 earthquake and the 2008 finance sector collapses.

English was the clever guy, highly respected by bond and currency markets.

International support for NZ was possible because of our relatively sane policies, our low level of debt, and our improving terms of trade.

Just a very tiny number of New Zealand officials and investment bankers sold our story to the world, visiting sovereign wealth funds in countries like China, Singapore, Germany, Britain, the USA and other Asian countries which run current account surpluses.

As a result of these presentations, international respect for NZ rose, their faith in our economy rose, and where they once invested, say, 1% of their huge funds in NZ, gradually their allocation rose to, say, 1.5%.

Our bond and equity markets were the beneficiary, resulting in higher living standards (for most).

In dollar terms this meant tens of billions of global savings were invested in our bank deposits, government bonds, and in our listed shares.

Foreign wealth funds, often through exchange traded funds, now own around a third of our sharemarket, perhaps nearer a half of all the listed shares that are available.  (Many of our listed companies have some shares that are not for sale e.g. Air NZ, Meridian etc.)  They own nearly half of our bond market.

This foreign investment has grown, enabling us to suppress interest rates and to enjoy astonishing gains in our share portfolios and KiwiSaver accounts.

The NZX has nearly doubled in the past four years.

Foreign money has been arriving because many global markets had been visited by our best investment bankers, often with corporate executives, government officials or politicians in tow.

They liked the story of our economy, they accepted the goals of our government leaders, they liked the high yields available (term deposit rates, bond rates, dividend yields) and they like our currency, which has been strong against virtually all currencies.

So we have had a great few years in this respect.

This week is the week of new government and a new ‘’report’’.

Whatever compromises Jacinda Ardern or English are forced to accept to win the support of the minority parties will be observed by currency and bond markets, and then judged.

A slow-down in debt repayment, additional borrowing for social spending, tax rate changes or new taxes will all be the subject of discussion in foreign offices when they discuss their exposure to New Zealand.

Key may be judged for his hair pulling, his locker room behaviour on talkback radio, and his failure to prioritise help for the disadvantaged, but he deserves credit for his understanding of the importance of bond and currency markets.

These markets are an essential part of the checks and balances on governance.

Ask the Greeks!

Ardern has had a career that has led to no contact at all with these markets.

She has clearly the right mind to set about learning what would currently be a language and a concept that is foreign to her, as it is to most people.

She has been wise enough to reach out to the best in our capital markets, seeking an open line of communication that will help her develop an understanding of the markets she will encounter.

Her finance minister is also unconnected but he too is likely to be doing the rounds, politely learning of the likely responses to the various policies he will be considering if he is in power.

The capital markets in NZ seem to be relaxed, believing that the alternative governments would both be smart enough to consider the effects on our currency, bond and equity markets, of any change in direction.

Our markets have supported the concept of better social spending and a focus on the underprivileged (sometimes described as the poverty stricken).

When we hear of the composition of our new government and then its borrowing and spending plans, we will await with interest our ‘’report’’, written in the language of currency and bond market players.

If the currency is unmoved, and interest rates remain very low, then the signal would be ‘’business as usual’’ for our equity markets.

These signals are important for us all, as they will be a pointer to the returns on KiwiSaver accounts, as well as on our government accounts, and our living standards.

One hopes that schools and universities are already preparing to have this sort of discussion with the youngsters who will be most affected, in the long term.

Does our curriculum perform this role?

 _ _ _ _ _ _ _ _ _ _ _ _

THE behaviour of KiwiSaver managers has been soundly criticised by the Financial Markets Authority.

The FMA is now moving into the role of commentator to add to its role of regulator and enforcer.

Last week it commented that the KiwiSaver managers were not doing enough to communicate with one particular, large group of savers.

It referred to those savers who decline to engage with the KiwiSaver concept, simply allowing their contributions to be placed in the lowest risk, lowest return default funds, and never connecting with the highly paid, perhaps overpaid, managers of these funds.

As an aside, there are too many of these default funds.

I have no idea why we need to hand on money to market tiddlers, often privately owned, without institutional supervision or special merit.

Default funds in essence invest in bank deposits and low-risk bonds, with little if any allocation to shares or property.  These are designed to be liquid, stable in value, and cheap to manage.

An allocation to such a low-risk fund makes absolute sense for investors who plan to extract the money in the near future, either to use as a home deposit, or to spend upon retirement within a few years.

Those people need to know with certainty that they will not be nastily surprised by market falls at the time the money is needed.

Default funds are also logical for those who foresee a collapse in sharemarket values, perhaps because of excessive debt, geo-political events (North Korea) or other dreadful events (nature?).

The FMA is observing that the KiwiSaver managers are grasping the full fees but making no effort to engage with the savers to ensure that the default funds are a logical choice.

A good KiwiSaver manager would be writing, texting, emailing or phoning each client, seeking to encourage them to learn how each investment philosophy differs, and how each philosophy has a fund that is available to the investor.

Of course, a philosophy, or a management style, is not guaranteed to perform to plan.

It will always be true that the greater the aspiration of high returns, the more often there will be volatility and awful negative years.

There will always be decades when a 3% annual return looks much better than a decade when annual returns vary between minus 20% and plus 20%.

To illustrate the arithmetic gymnastics required of investors, a static fund that grows by 3% per annum for eight years will result in $100 growing to $126.70 before fees.

The $100 fund that grows by 20% for five years, and loses 20% for each of the other three years, would end up at $127.40 before fees.

Five good years and three bad years is roughly what investors should expect.

The tortoise who gets $126.70 would have paid much less in fees than the hare, so if this example of returns were ever real, even the hares would have to wonder about the merit of volatile returns.

Of course, the hare would hope that there were only two bad years in each cycle, not three.

Most unusually, there have been no bad years since 2010.

The point is that a KiwiSaver investor is paying fees and deserves to be contacted so his/her views can be considered.

At very least, the KiwiSaver manager would be acknowledging that the fees do require some degree of effort to help the saver come to the right decision for him or her.

I like the behaviour of the FMA in entering this debate.

 _ _ _ _ _ _ _ _ _ _ _ _

KIWISAVER managers will now be reviewing their investment philosophies if they are picking up the soundwaves of their much bigger and more experienced overseas counterparts.

Offshore, the fund managers use their codespeak, referring to the new need to focus on ‘’alpha’’ rather than ‘’beta’’.

This code, one of the little games that highly paid people play to protect privileges, means that the world markets might no longer be rising, based on the flood of money, so fund managers might actually have to do some research to find the best companies which might perform well even in a market downturn.

In essence global markets are saying that any mindless fund (like the robotically run exchange traded funds) will report good results when money is pouring into every stock.

However when markets are falling, only the best companies continue to thrive.

ETFs never focus on research based selection.  They let the index and the weightings of stocks determine selections.

Research-based ‘’active’’ or ‘’alpha’’ fund managers try to find the equivalents of A2 Milk, Synlait, Heartland, Mainfreight etc, and try to avoid the likes of Fletchers, Metro Glass, and, heaven help us, Veritas or Intueri.

Internationally, any research-based fund that found Alphabet (Google), Amazon, Apple, Facebook or even Uber would have had huge capacity to shield any bad decisions.

The ETFs that bought everything have saved more in costs (no research) than the stock pickers have made by avoiding losses.

That happens in a rapidly rising equity market.

The reverse occurs in a falling market, when the likes of Veritas and Intueri are not offset by bigger gains elsewhere.

Our KiwiSaver managers, with more than $40 billion under management, will be very wise to take up the FMA challenge, ensuring that savers are very carefully and fully informed about the prospects of market change.

Internationally, markets are finely balanced, their seat on a pinhead.

Here in New Zealand we are in a hiatus, while we await our international ‘’report’’ on our new government, but we are also at risk of being complacent, after seven consecutive years of handsome gains, fuelled by foreign money.

Turn off some of the foreign money and watch out – the response would be no fun for those who have not planned properly.

 _ _ _ _ _ _ _ _ _ _ _ _

THE VALUE of liquidity of public shares is never better appreciated than when it is not available.

A tiny example of this is the transport software company Connexionz, a Christchurch company which seeks to sell software to solve transport problems.

For example it introduced to Christchurch the software that tracks public buses and displays the expected arrival time of the next bus.

Connexionz raised money, a few million, from its shareholders and the public and has spent that on research, recording losses most years, burning its cash.

Its largest shareholder is the colourful Auckland accountant Bruce Sheppard, who did such a good job founding the NZ Shareholders Association, and who did an unrecognised public service in highlighting the appalling behaviour of those buffoons who governed and ran Hanover’s toxic group of finance companies.

Sheppard these days also serves NZ by part-owning LPF, our only serious litigation funder, which has done a great public service in calling to account those involved in the collapse of David Henderson’s Property Ventures Group, and has also challenged the Crown for its biosecurity failure with Kiwifruit growers.

Connexionz might have seemed like an interesting concept but it has never hit pay dirt, nor is it likely to do so.

Sadly its public shareholders cannot escape.  The shares are not listed and therefore there has been no market in them to enable those with contrary opinions to buy in at low prices.

From the 2017 balance sheet I saw, it appeared that the shares might have a tangible asset backing of a cent or two but any real value would be the intangible asset of software.

The company, with virtually no cash left, has decided to open an American branch where it will contest various tenders.  Its competition will be American companies with far greater research budgets, local market knowledge, and with the helpful bonus of national fervour trumping any foreign-owned competition.

Those who see no growing value in the shares, and no sign of any dividend ever, can do very little about it.

Perhaps they could ring Sheppard and see if he has an appetite for more shares at a giveaway price.

Liquidity, via a listing, is a valuable asset, the more so when there is divergence of opinion on the future.

Perhaps we need a platform, like Unlisted, to provide a forum for such companies.  Unlisted, however, does not guarantee liquidity.  Connexionz itself is tradeable through Unlisted but there is no liquidity, no buying interest.

Perhaps Unlisted needs to do more to attract investor attention.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I will be in Auckland on October 16 and 17, and in Christchurch on October 24 and 25.

Kevin will be in Invercargill on 19 October and Christchurch on 26 October.

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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TAKING STOCK 5 October 2017

 

ATTENTION continues to focus on the astonishing saga of the sale of Perpetual Guardian Trust, controlled by a British-owned company, Complectus, which ultimately is owned by British entrepreneur Andrew Barnes.

We are now told a whistleblower might have interrupted the sale process.

One might ask why any investor would care, given that Barnes is simply a transient entrepreneur and that trust companies are of fading relevance to New Zealanders, or should be.

However, the reality is that PGT is still an aggressive advertiser for New Zealanders’ business, seeking retail investors to sign it up to design and manage wills and estates, and it states in public that it wishes to convert its document design clients into signing over funds to PGT’s management.

It also seeks to oversee the trust deeds of various KiwiSaver providers, various other managed funds, and a smattering of retirement villages.

So its significance at this stage is still real, and it claims to be managing more than a billion dollars of assets captured from trusts and estates whose funds PGT controls.

I have often expressed my view that estates and trust ‘’owners’’ should find much more skilled and cost effective funds management services elsewhere, and that trust deed oversight is of very low real value, so I see PGT as being at peak value now, not worth anything like the multiples of its last year’s profit that it might have been worth during earlier eras.

Its progress is well worth monitoring.

Barnes, an abrasive fellow with considerable ambition, put together Perpetual Trust, NZ Guardian Trust, Foundation Trust, Covenant Trust and another tiddler or two, initially with the help of George Kerr, a Christchurch entrepreneur.

The total cost of these companies was likely to be in the low tens of millions, though understandably the exact cost is not clear.

Barnes then added to the combined business the idea of storing data in the clouds, a sensible but hardly revolutionary concept that might make will and trust administration slightly more simple.

Designing wills and trusts provides a token amount of income for PGT, perhaps low millions per annum, at best.

The cream, of course, is in the fees for managing the assets of those trusts and wills, which PGT aggressively pursues.  PGT charges around $22,000 per year to manage a million dollar estate.

As stated, my view is that trust companies should not manage any such funds.

As a previous trust company CEO has demonstrated to me, trust companies never attract the best talent in funds management.

PGT’s other target, somewhat more like top milk than cream, is the income from overseeing deeds of other fund managers.

If PGT could earn a few million from document design, say $10 million or more from deed oversight, and maintain $1.4 billion of funds under management, then today it might be able to explain forecasted revenues of $50 million and show that its nett income would be a few million.

If the funds under management grew, without reduced fees, and if deed management could hold the current fees, then PGT might be worth $100 million to a new owner.

However, my guess is that funds under management will fall, that the fees for this function will halve, and that deed supervision will attract fees that relate to value-add, maybe a million or two.

So in the world I foresee, PGT might be at peak income now, facing gross revenues levelling out at maybe $10-15 million, nett profit settling at a few million, and thus its value to a new owner might be tens of millions, not hundreds of millions.  Such an outcome would suggest Barnes made an error embarking on this project.  The desire to sell would be obvious.

I note that the Public Trust has reduced its funds management fees by a significant percentage.

Other capital market participants disagree with me, Forsyth Barr and Goldman Sachs valuing the company as though the fees will not fall and the funds under management will maintain the steep trajectory that could be displayed while Barnes was putting the companies together.

We know that Goldman Sachs found an Australian buyer for PGT, a new company called Sargon, and that Sargon paid either $20 million or $30 million into a neutral trust account as a deposit on a $200 million offer, arguably conditional, to buy PGT/Complectus.

Sargon is owned by two 32-year-old Australian entrepreneurs with no history in trust company matters, but obviously with great courage, given their willingness to borrow or find $200 million.

Anyway, Sargon soon after withdrew its offer and now wants its deposit returned.

We now know Barnes is suing Sargon for $49 million claiming that the non-completion, of what Barnes sees as an unconditional contract, might cost Barnes $49 million.

Sargon in turn is making a counter claim and is suing Barnes for defamation.  These outcomes were predictable, in my opinion.  The sale was hardly a deal made in heaven.

One thing is certain: lawyers will be having a lucrative time.

Barnes is himself not unaccustomed to the practice of threatening defamation, and is a litigious fellow generally, as his recent behaviour with the like-minded George Kerr has shown.

Barnes bought Perpetual Trust from Kerr and then went through a public spat involving various filed legal claims between Kerr and the British newcomer.

Sargon says that a whistleblower warned Sargon, after it had placed its deposit into a neutral trust account.  The whistleblower warned that PGT had some issues that Sargon should clarify before moving to ownership.

Sargon says it sought and did not get clarification from Barnes on these matters, hence its withdrawal from the arrangement.

Barnes’ silent response leaves the inference that he saw no issues to be clarified, or maybe believed the purchase of PGT was unconditional.

Barnes had said that there had been strong interest from potential buyers of PGT, an indication that surprised me but presumably makes it easy to find another buyer at a similar price.

Meanwhile PGT’s chief executive Grant Kemble, previously a corporate lawyer with the small Auckland law firm Russell McVeagh, has left PGT and now says on his personal Linked In site that he is looking for new opportunities.

Complectus/Barnes borrowed a great deal of money, perhaps north of $60 million, some at mezzanine level, to put together PGT and naturally wants to clear this loan.  The holding costs might be rather more than PGT’s profits.

Barnes is not an obvious long-term owner of the asset.

The various trust and estate clients would be forgiven for wondering whether their assets are being managed by an abrasive and ambitious British entrepreneur, an unknown and apparently unhappy new Australian company, or are again being marketed by Goldman Sachs to anyone who will pay the asking price.

It seems all of these questions must now be resolved by court hearings.  By definition these are disputatious and expensive, but provide good insight into the logic and behaviour of ambitious entrepreneurs.

My views are well known but can be repeated.

Family trusts and estates might be designed by trust companies but should not be managed by any trust company unless there is simply no sensible alternative.  Any existing arrangements should be reviewed, renegotiated or cancelled.

Fees should be negotiated down to a much lower level than are routinely charged and every deed or will should provide for the trustees to be replaced when there is any discomfort from the beneficiaries, the settlors, fellow trustees or the testator.

Barnes and PGT will need to be most attentive to client comfort while these disputes are being resolved, if only to avoid ceding its share of a diminishing market to its competitor with lower fees, the Public Trust.

 _ _ _ _ _ _ _ _ _ _ _ _

WHEN Synlait Milk Ltd (SML) was listed on the NZX in July 2013, its initial offer came around four years later than intended.

SML had approached NZ’s main investment bank, FNZC, with an intention to list in late 2009, and had a convincing story to tell.  It needed working capital to execute its exciting plans.

Sadly the listing was delayed because of a self-centred intervention by Goldman Sachs, which at that time was a real market participant and saw itself as a rival of FNZC.

Goldman Sachs could have been a distributor of the shares issued but not the paid organiser of the float.

It opposed the issue and thwarted the listing, convincing SML that it needed widespread broker support. 

The media wrongly reported the issue was delayed by lack of public support.  The public was never asked.

This was a lousy outcome for our clients as we could see the merit of its business model, could see it might be valuable for our clients, and in 2009 most investors needed real opportunities to recover from the horrors of the 2007-2008 global financial crisis.

However the opportunity was thwarted by GS intervention and it was not until July 2013 that a public offer was made, jointly managed by FNZC and GS.

Synlait obtained the money it needed in 2009 from its Asian shareholder.

The 2013 offer was at $2.20 per share, at least 60c higher than the price suggested in 2009, so I guess it is fair to say those who in 2009 prevented the float could argue that SML received a price benefit for deferring the new issue by four years.

Those clients who would have taken the chance to buy at $1.60 would have quadrupled their money by now, the current share price being $6.50, following a flurry in recent days, after SML received licensing endorsement in China for its infant milk product.

Meanwhile GS has withdrawn from any retail presence in New Zealand and now has a tiny group of deal makers in Auckland with no retail client following, a similar status to UBS and Macquarie.

As far as I know, the US money machine’s exit from retail markets is not lamented.

Synlait Milk’s model, away from all these broker games, has proved itself.

It buys milk from only those dairy farmers it selects, usually with clean water tables, superior quality controls, and usually with farms accessible from sealed highways.

Its Dunsandel plant, south of Christchurch, gets bigger every time I drive past, with more driers enabling it to produce value-added products.  It has also expanded by buying a facility in the North Island.

It has a special relationship with A2 Milk, which it supplies, and it has benefitted from its relationship with its Chinese shareholder (Bright), most obviously evidenced by its success with Chinese regulators.

It ticks all the boxes, whereas Fonterra requires dairy farmers to tie up capital in Fonterra shares, is obliged to pick up milk, even from obscure destinations, is behind the curve in value-added products, and is cursed by what insiders view as poor governance, demonstrated over many years.

Fonterra’s arrogance is noted by the public, its executive remuneration policies regarded with contempt.

If you wish to invest in our food export sector, SML has demonstrated that it is a viable option, and has delivered the growth and profits it forecast.

Its key person is John Penno, the managing director.  It is chaired by an experienced dairy sector participant, Graeme Milne, and has two Chinese directors, as well as Sam Knowles (ex Kiwibank), Bill Roest (ex Fletchers) and, to my regret, Ruth Richardson, the latter a former director of IP Mezzanine Finance (and others) whom I would prefer not to see on the board of any company in which I invest.

Much credit for its progress is earned by Penno who has delivered, and not over promised.

Synlait’s share price has doubled in the past 12 months though it has yet to provide a dividend.

The NZX must regard Synlait as one of its great success stories.

 _ _ _ _ _ _ _ _ _ _ _ _ _

THE Fletcher Building annual meeting has always been destined to be a gathering of the grumpy.

A giant like FBU cannot so mislead the public about its profit prospects without repercussions from disgruntled shareholders.

Fletchers earns very little of its normal nett revenue from construction work, but in the past year produced a huge negative amount that almost wiped out all the hundreds of millions earned by the other divisions (Placemakers, Winstones, Firth etc).

Its poorly led and inept board accepted the information provided by its self-acclaimed British go-getter Mark Adamson, resulting in appallingly inaccurate market guidance.

Adamson, abusive as well as abrasive, returned his chief executive’s rifle, gathered up some pieces of silver, and fled with a target on his back.

Various senior executives also chose to leave, others might have been encouraged to leave, and, as one former senior executive has suggested to me, the organisation is again back in the hands of accountants and MBA students, under a board that is incapable of recalibrating the company.

Most in the media have presented these problems as just being market related.  The media, with rare exceptions, seems to be happy to buy the board’s version of the problem.

Previous senior executives, many with long records of achievement, are nauseated by the repeat failures and scornful of the shallow daily media coverage which ignores long term flaws in Fletcher’s governance, culture, and executive decision making.

The annual meeting is the place for shareholders to discuss firmly what they want to see change.

I have sold out of FBU and shifted the proceeds to a better managed company (Mainfreight), believing Fletchers will never face up to the need for the changes I would want.

I believe Fletchers needs a new chairman, not from a banking background, with a mind that wants to build a 50-year future.

It needs a new culture, of wanting to be a great New Zealand company that contributes to New Zealand’s living standards, for example by building superior homes, roads, buildings etc.

It needs to respect its creditors, its sub-contractors, its suppliers, and its staff.  It should pay its creditors on a normal commercial basis, 20th of the month following the invoice, not nine months after the event, as outlined in a letter to creditors some years ago.

It needs experienced, hardened divisional managers with expertise in the product/service offered, not people who ‘’manage’’ but have no actual work skill.

It should have a budget to sponsor students at technical institutions, a huge commitment to apprenticeships, and an objective of building a loyal workforce that produces its managers of the future.

It needs to play the lead role in stamping out the corruption that pervades the Christchurch rebuild, prosecuting any case of misbehaviour it might see, never taking the easy way out of sacking, but not prosecuting, miscreants.

In this way it would separate itself from Westpac Bank, which many years ago allowed a corrupt manager to resign, and go on to rip off others, rather than frogmarch the idiot to the nearest police station.

Fletchers needs, in summary, a board of experienced, relevant, wise people whose focus would be on long term competitive advantage, NOT dividends, share price or executive bonuses.

No doubt the above recipe might be scorned by the likes of Fletcher’s recent chiefs.

Do let me balance the implied criticism by saying that Fletchers still has a chance to be our greatest company, our greatest builder of a better New Zealand, and our most sought-after employer.

The AGM could be the start of a new 50-year strategy.

 _ _ _ _ _ _ _ _ _ _ _ _

A GREAT signal from Fisher & Paykel Healthcare, Fonterra and Trade Me reached government last week.

The three large employers publicly announced their disconnect with the public thrust to herd school leavers into academia.  The three companies confirmed their hiring policies do not centre on tertiary qualifications earned at universities.

The modern dogma that academia should be the almost compulsory first step in a corporate career has been accepted by consecutive governments, which quite stupidly sought to measure our ‘’progress’’ as a nation by measuring the number of graduates from universities.

The mantra was ‘’more degrees will drive progress’’.  Learning is not limited to academia!

FPH, Fonterra and Trade Me have very sensibly noted that their recruitment guidelines are not based on such flimsy evidence of excellence.

No one, least of all me, should mock the value of advanced learning but especially in this age, when universities are motivated by revenue rather than excellence, it is surely childish to rely on the numbers of certificates (or gowns) issued, when discussing value for money.

As an employer, I confess that I would have literally no idea which of the last dozen staff I have employed would have a ‘’degree’’ issued by a university.

My focus has been on knowledge, integrity, intellect, experience, work ethic and emotional intelligence.

The proof I have sought when moving through the employment process has come from mutually known and respected people in relevant occupations.

A person in his/her 40s, with ample evidence of these qualities, is not defined by his/her university certificate.

Obviously a doctor, lawyer, dentist, engineer, accountant or physicist will have a certificate, as will most investment bankers or sharebrokers.

But often the best people in their field will have preferred apprenticeships, formal or otherwise, and have been inspired by mentors rather than by lecturers.  My own mentors were probably my parents, my siblings and my grandparents.

Today one meets quite brilliant writers of code who have barely reached the age of puberty.

If cyber security is a key issue of the future, there are many hackers of teenage years who will be tomorrow’s leaders.  They do not have degrees (yet).

I have a friend who is head of Software Security at a huge American bank.  Guess where he targets his recruitment programme?

In my lifetime the best people I have met have had integrity, work ethic, knowledge and experience.

If FPH, Fonterra and Trade Me have recognised those same qualities as being most relevant, then the designers of our education system should pay attention.

We need apprenticeships and technical colleges if we accept that problem solving is the key to future employment.

If the mentors can also teach integrity and work ethic we will be a great hunting ground for the world’s wisest employers.

 _ _ _ _ _ _ _ _ _ _ _ _

REFERENCE last week to the failures of the Crown to fund properly our health and care sectors brought an unusually large number of responses.

One was from a recently retired general practitioner.

In his career he never earned $100,000 per annum, in later years averaged $70,000, and in one year, when costs were high, his take-home pay was nil.

Others endorsed the conclusion that we will witness inside 12 months the switch of many Crown funded GPs to private practice, with the consequence that most New Zealanders will resort to public hospitals for their daily medical needs.

Is the Crown listening?

One correspondent wanted me to point out that the Crown is not the sole source of funding for caregivers in rest homes.

She does not qualify for any subsidy for the total care required for her husband so her fees have risen to meet that cost.

Various small rest home providers responded, one confirming it will employ no ‘’carers’’ at the new hourly rate but will employ casual ‘’home help’’ staff, at a much lower hourly rate. 

Our next government, whatever its composition, would be wise to focus on the health and care sectors.

Private suppliers, like GPs and rest home providers, cannot be expected to donate their services in some sort of subsidised support for Crown budgeters.

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

 

I will be in Auckland on October 16 and 17, then back in Christchurch on October 24 and 25.

Kevin will be in Invercargill on 19 October and Christchurch on 26 October.

Edward is in our Wellington office (Level 15, ANZ Tower, 171 Featherston St) on Tuesdays, available to meet new and existing clients who prefer to meet in Wellington.

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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