Taking Stock 27 September, 2018

IF a menswear retailer succeeded in getting onto national radio where he announced ‘’this is the week of the socks, and next week is singlets’ week’’, his listeners would probably tune out.

His objectives would be seen as commercial, not social or educational. Listeners to RNZ need not tolerate the mundane.

This thought occurred to me last week when I heard a radio interview about the need to have a will. The gushy interviewee was quick to say that last week was ‘’wills week’’. Of course it was.

We then heard, for the thousandth time, that half of New Zealand adults do not have a will and should do something about it.

The reality is that very few young adults have ever had much in the way of assets. These days many do not drive, so there is no car. Forty per cent of all adults do not own a house. Most people have no spare savings. Perhaps the smart phone is their most precious asset.

It is hard to see how their priority ought to be creating a will, though if they have been well advised, they would be in a Kiwisaver fund which one day will be worth something.

Motivating youngsters to spend hundreds of dollars to get a lawyer to type up a simple will is not going to be easy and, anyway, the speed with which youngsters switch their allegiances these days might require the beneficiaries to be re-selected on a regular basis.

Although it is not what was said on radio, there are issues around writing a will that should be plastered all over the media.

The first issue is never to use a trust company to prepare the will unless it would be done for a modest fee and would not name the trust company as an administrator or executor of the will.

No one should use such an organisation to administer an estate or a family trust unless they have no friends, no family, no one they know well enough to approach to perform the simple tasks.

The administration of an estate requires skills barely of the old levels of School Certificate and should be purchasable at modest hourly rates, with no tolerance to pay costs calculated as a percentage of the estate’s assets.

A will should simply assign one’s assets to the people or organisations that one selects.

The administrator should arrange this within weeks of a death, at a cost unlikely to exceed $2000 and certainly never worth the absurd costs imposed by the likes of the foreign-owned trust companies, like Perpetual Guardian Trust.

There are, however, two disturbing trends that should be considered.

Firstly there is increasing abuse of an ancient law that was designed to ensure parents looked after their young children. This was a guideline enabling courts to intervene if the parents neglected to provide for young children.

Today adult offspring regularly contest wills on the basis that their parents should have provided for them in the wills. This is the single biggest cause of contesting wills and so often leads to outcomes that the parents did not intend. The adults are using a law designed for children!

For most families such nurturing of their offspring is automatic but where the adult offspring have had dysfunctional relationships with the parents, such provisions ought to reflect choice, not compulsion. Sadly drugs and poor behaviour are a growing cause of dysfunctional families.

The second concern is the willingness of courts to tolerate interventions that seek to overturn the decisions of the testator, the person who died.

Judicial intervention seems logical if the testator has failed to provide for young children but seems controversial and perhaps undesirable when a testator, of sound mind, has made a considered decision. Whose money is it?

If the testator before he died chose to gift his assets to others, there is no logical appeal. Why should this change after he dies?

These alterations to someone’s final wishes are likely to be even more interventionist if the testator makes the mistake of allowing a trust company to administer the estate, especially if the will allows a trust company any say in when the assets are sold.

A lawyer known to the family, or competent family or friends, are much more likely to do as the will stated and, more importantly, perform the duties at a conscionable cost.

Happily the Public Trust is now reacting to the allegations of fee excesses.

The Public Trust now charges $499 (inc GST) for writing a will and $459 for updating a will, with the right to increase charges if the process takes more than two hours to prepare the will. The Public Trust then charges $1600 plus GST plus $750 (+ GST) for applying for probate and administering an estate. It also charges a minimum of $200 (+ GST) for finalising an estate plus a handling charge of 5% plus GST on gross income received. Conveyancing costs may also be added.

This might be an extreme figure, but read on.

If those figures sound absurd, as they do to me, compare them with those of Perpetual Guardian Trust.

PGT is conditionally owned by the British entrepreneur Andrew Barnes, through his companies, though I think Direct Capital has an option to become a co-owner if PGT performs profitably enough.

According to its website, PGT charges $150 (inc GST) for writing a will, reducible to $100 if PGT is named as an executor (or administrator) of the will. (The $150 charge should be the only option considered.)

It then charges a gob-smacking :-

First $250,000 value of the estate - 5% ($12,500)

Next $250,000 - 2% ($5,000)

Thereafter - 1% ($3,000, if the estate is $800,000).

However if a property is to be passed onto a beneficiary who already occupies the residence, that asset transfer costs just 0.4%.

Income management costs another 5%, 7.5% if rental income is involved, and further fees are charged at hourly rates for ‘’special’’ services.

So let us look at the three alternatives for a typical New Zealander who succeeds his/her partner and dies leaving behind a house, valued at perhaps $600,000, and some bank account and investments, worth say, $200,000, a figure much higher than average, but likely to be a fair estimate of some of those who read these client newsletters.

Option 1

The person plans the will by getting a solicitor to leave the assets to be evenly shared by the offspring. The will is prepared at a cost perhaps of $500. The administration of the will including arranging probate, gathering up the investments and selling the house results in further charges of say $2000, less if a family member or friend does the work.

Total Cost – Perhaps $2,500

Advantages: Lower cost, skilled law office people accountable for the work, no conflicts of interest in that the estate will be wound up immediately, with no ongoing fees.

Option 2

The person goes to the Public Trust who will have clerical staff trained to produce the will and administer it.

Cost of will            $500

Admin                $1,600

Probate                 $750

Finalising              $200

Money handling    $500

Total Cost:         $3,550

Advantage: best option if there is no access to a known lawyer.

Option 3

The person, most unwisely in my opinion, goes to Perpetual Guardian Trust.

Cost of will                                    $100

Admin on $800,000 Estate

- 5% of $250,000                     $12,500

- 2% next 250,000                     $5,000

- 1% last 300,000                       $3,000

Money Handling                            $500

Total Cost:                                $21,100

Advantages: Zip. Zero.

My message is that getting a will prepared is a simple clerical task, costing nothing if one uses a standard form, but costing, say, $500 if one uses an experienced practitioner.

Administering a standard estate (a house and some money or investments) is a simple task perhaps involving hours of genuine work, achievable by a modestly-paid clerk. Say $2000 of time.

To use any trust company charging 5%, 2% or any per cent of the value of the assets is simply absurd. The formula should have been dropped when six o’clock closing ended.

Please explain the difference in getting a bank account emptied whether the money involved is $100, $1000 or $100,000.

The percentage-based charge is an anachronism.

If we must have a ‘’wills’ week’’ as National Radio allowed a salesman to claim, let us ensure that there are some basic messages

1.Get a will made if you have not done so. Remember your Kiwisaver funds.

2.Make the will simple to administer and fair to your family (if possible).

3.Do not use any Trust Company unless you have no alternative.

4.Never, under any circumstance, sign an agreement that allows a Trust Company to charge percentage costs. You are burning money.

5.If you have already made the mistake of appointing such a Trust Company for your own estate or trust affairs, immediately (today) write to that company cancelling the arrangement and start again. A change cannot easily be made after death, but at any time you can change your estate or family trust administrators, executors or trustees.

_ _ _ _ _ _

Taking Stock has previously acknowledged the analytical and investment skills of Platinum Capital founded by Kerr Neilson in 1994.

Its shares are listed on the ASX and cost around A$1.95. 

They produce useful dividends, which can be taken as additional shares. The share price has in effect doubled in value over 24 years, while producing income at a variable but handsome rate.

As is the case with all Australian shares, the tax credit with the dividend is not available to New Zealanders so the nett dividend is taxed again in NZ.

Neilson and PC has earned my admiration because over 24 years Platinum has outperformed most of its competitors through analysis and discipline, rather than taking greater risks, the latter so often the case with outperforming fund managers.

Platinum’s newsletters are readable and thoughtful, its analysis interesting and insightful.

The Chief Investment Officer these days is Andrew Clifford, a sober, experienced operator whose thoughts are worth repeating.

Confronted recently by a journalist seeking his views on the likelihood of another 2008-like market collapse, Clifford pointed out that there were few similarities between 2008 and now.

The system was devastated in 2008 because no one knew which banks had liability for which of the nonsensical liar loans, default swaps and idiotic collateralised debt obligations (CDOs).

But for government interventions, the banking system would have collapsed, destroying world trade and eviscerating confidence in capitalism.

The financial services sector was claiming huge profits, paying rich dividends and even richer bonuses but the alleged profits were reversible as soon as confidence was lost.

Clifford points out that two separate events have allowed recovery – the quantitative easing that provided immense cash sums to the banks and China’s decision to accelerate growth, funded by debt, driving global demand and underpinning asset prices.

To Clifford, I am grateful. He thinks we should all be grateful to China.

Almost every week some lecturer from Pennsylvania, or fund manager from Moldova, will make the headlines with a claim that next week (or month) the world financial markets will be engulfed by pessimism, leading to catastrophic falls.

I recall from recent years, various Australian and New Zealand fund managers selling up and reverting to cash, in expectation of the apocalypse, finding in their tea leaves a pattern that looked like 2007-2008.

Clifford’s sober presentation helps counter such media presentations.

Would that he was in New Zealand to articulate his logic!

He would no doubt observe that our 10-year bond rate is now a full 40 basis points LOWER than the 10-year rate in the world’s biggest economy, a fairly certain signal that world financial markets see no apocalypse here.

He might also observe perky GDP growth, an equity market delivering dividends at rates exceeding bank rates, a Government committed to operate in surplus, and committed to a low level of sovereign debt (to GDP).

He might caution that we have rising levels of strike action, and that our unions are becoming more aggressive but he would surely see that tourism is bringing in unprecedented income, that meat prices are healthy, as are fruit and dairy prices, and he would see ample opportunity for NZ to meet any unexpected downturn by committing to new infrastructural building or maintenance.

Those seeking media headlines by screaming ‘’fire’’ will need to holler out louder, and for longer, to get the attention they want.

Of course market confidence can change. An earthquake, a bio security incident, lost trade deals, a change in attitude of foreign investors . . . any of these events could reverse the direction. Those who chart swap rates should continue to be vigilant.

The most likely signals of change would be higher inflation, leading to higher interest, higher unemployment and ultimately mortgage defaults, lower house prices, and weaker banks.

The whole of our strategy depends on very low or zero costs of servicing the extreme debt levels that characterise most large economies.

A signal to fear would be a slump in confidence. Every user of ETFs would try to get out first.

But right now there are few signals of distress here.

None of those signals are visible now.

Indeed lamb prices are at all-time high levels, our fruit, fish and wine sectors are smiling and dairy farmers are grumpy only if they are frustrated with Fonterra.

I suppose we all expect the European Central Bank to keep buying Italian bonds, even though it has said that buying stops in December. I would have a sly dollar on that idea being deferred.

Yes, there is risk. There always has been. Hopefully, investors who are well advised have their strategies around tolerable risk settings.

Thank heavens for capital market leaders like Clifford, in whose views we can have some faith.

I guess that the easiest way to sell newspapers, or to get attention, is to predict an apocalypse.


Infratil is to raise up to $250 million with a bond issue. The six-year offer may be of interest to investors. As always, advise us if you may be interested in participating in the offer.

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Edward is in Nelson on 2 October.

Mike will be in Tauranga on October 5.

Chris will be in Christchurch on October 9 and 10.

Kevin will be in Ashburton on 31 October.

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


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

Chris Lee

Managing Director

Chris Lee & Partners Ltd

Taking Stock 20th September 2018

IF I ever found myself in Parliament, in government, and elected to be Minister of Sewing, Knitting and Embroidery, I reckon that in time, I could learn the job and do it.

Such an appearance in Parliament would have followed a full lobotomy but a brain change is not behind my logic, that such admirable and skilled tasks would represent new learning for me.

The thought that I could accommodate such a new task first came to me when Michael Cullen was appointed Minister of Finance by Helen Clark.

Cullen was a left-wing academic, a history teacher and revealed his attitudes towards wealth creation when he referred to wealthier politicians and their friends as rich twits, or something similar.

This disdain for wealth creation and capital markets did not make much sense for a task that must focus on lifting all boats rather than sinking the flash yachts.

Cullen, aided by an experienced Reserve Bank governor, and by a benign economic environment, proved that even the most unlikely mind-set could handle a crucial task in government.

The same thought occurred again when Grant Robertson was chosen by Jacinda Ardern for the Finance Minister’s role.

Robertson has had a Wellington based career in the politics of foreign affairs and had had as much contact with the private sector, or capital markets, as the ex-All Black Keith Murdoch.

His was the weirdest of choices yet at a post-budget function I attended he mouthed all the words that his capital market audience expected to hear and displayed the sort of respect that, I guess, diplomats are taught in their apprenticeships.

So why did Robertson last week believe his few weeks in the new role qualified him to do the equivalent of what I would have been doing as Minister of Sewing, Knitting and Embroidery, had I taken it upon myself to declare how bridal outfits should be prepared.

Robertson intoned that Kiwisaver managers should alter their allocations of the money they manage in favour of supporting New Zealand asset prices.

Presumably the ACC and the NZ Super Fund should make the same adjustments.

Robertson knows this.  How?

The amount of money invested by Kiwisaver managers now exceeds $50 billion, feeding those people around a billion a year in fees, not all visible, and is largely invested overseas in accessible markets like Australia, Britain, Western Europe, Japan, USA, Canada and I hope Singapore.

Some would be invested in emerging markets like India, China, South Africa, Russia and South American economies.

The pouring of this money into these markets is not what I choose to do but the Kiwisaver managers have a problem that makes their behaviour logical.

Fifty billion as a quantum of money is too great to invest in a tiny market.  If it allocated largely to NZ, our sharemarket would offer much less value, share prices swollen by the weekly buying power of Kiwisaver funds.

Bank deposit and bond rates would fall, property prices would be even higher and pricing logic be undiscernible.

Robertson perhaps had developed his thinking to the logical point that Kiwisaver money could reduce a little of our dependency on foreign savings but that response would create more issues than he could imagine.

One of the reasons that our policy wonks in Treasury lost the right to supervise government superannuation funds was because Treasury simply directed money into convenient, low-yielding government stock, nice for Treasury, awful for returns.

The result, of course, was such miserable returns that the fund had ever greater inability to meet its commitments.

A slightly more obvious logic was behind the Crown’s decision to direct the Earthquake and War Commission to invest in global assets.

In a time of great stress we would want to cash up unaffected global assets, like shares, rather than cash up assets ravaged by our own disaster.  The Kiwisaver $50 billion wants to avoid such risks.

For most individual investors I am no fan of the common practice of bundling up money and directing it to global bonds, global property and global shares, especially if the countries selected have laws and protocols that are opaque, or have commercial practices that are not sustainable.

An example of an unsustainable practice would be revolting executive bonuses and salaries, careless attitudes towards spending company money (US is an example), or clear executive disrespect for shareholders, as happens often in Asia.

For most individual investors with ‘’normal’’ wealth, New Zealand offers transparent laws, much better than they have ever been, and more predictable corporate behaviour.  Profits and dividends are reasonably signalled.

Our top fifty companies are predominantly providers of real goods and services.

Obviously we have no significant participants in some sectors including pharmaceuticals, technology (hardware and software) and our dominant sector, agriculture is barely represented.  We need to invest offshore to participate in the best companies in these areas.

Our bond market is well developed, though we could do with longer duration (10 and 20 years would be good) and we have a good range of listed property trusts, though none in the growing residential rental sectors, yet.

But for individuals, the NZ market is big enough, relatively high-yielding, eliminates currency risk without the cost of hedging, and is much more transparent, with useful research reasonably available.  Only when the sums are huge would I tolerate the extra costs and risks of other jurisdictions.

Had Robertson advocated that retail investors should allocate more to New Zealand, he would have disclosed some recently-acquired knowledge.

Advocating that the institutions should focus on New Zealand simply stated the obvious – that financial markets are a book whose first chapter he is reading, when he gets time.

Of course Robertson has also said that he aspires to change the culture in Treasury, where its advocacy role is channelled either directly to Cabinet, or through other government departments to Cabinet.

Treasury suffers because of the lack of interplay between our public and private sectors.  In bigger, more mature economics, it is common for private sector leaders to be seconded to Treasury, improving the networks for both sector leaders and providing both with broader insight.

For inexplicable reasons, this freedom of movement in New Zealand is rarely championed.

Treasury is the loser.  Its many expensive errors in dealing with the private sector, such as was seen with the finance company guarantee scheme, exacerbates a weakness of our political leaders, rather than offsets that shortcoming.

Robertson had his chance to intervene by proceeding with the promise of his party’s leadership, made in 2010 and 2011, to prosecute the issues that led to enormous Crown losses with South Canterbury Finance.

He had his chance but the words proved to be out of sync with energy, action and respect for innocent victims of all the chicanery and deceit of the time.  Treasury should be restructured.  Robertson has missed a chance.

Robertson, like Cullen, is privileged to be learning during a period of relatively benign conditions, though this could change quickly.

He might consider the first years of learning as a time when he seeks to draw on help from financial markets, rather than lecture them on investment policies.

_ _ _ _ _ _ 

Cullen, of course, has left behind academia and politics and is now enjoying Crown-allocated roles in the private sector, as he has with his chairmanship of NZ Post, as well as a short term gig providing the Crown with an ‘’independent’’ plan for tax revision.

He noted in a recent newspaper interview that he is now ‘’wealthy’’, earning more from these roles than he did from his salary when in Cabinet.

Judging by his recent comments he has gained clarity on one really critical aspect of tax collection – people cannot pay tax if they have no cash!

Cullen noted that a land tax would be unlikely, observing that a farmer who made a nett loss one year would be in no position to pay tax based on the value of his land.

Tax made on the change in value of an asset is problematical for the same reason.  If one pays tax on a gain, one receives a refund on a loss.  If a new tax required people to sell assets to fund their tax bill, logically asset prices would fall.  Falls imply losses, losses imply refunds.  Would you introduce such a system when prices are at all-time highs?

It seems improbable that those who buy shares in strong NZ companies will lose while interest rates are so low, but if shares had to be sold (probably to foreign owners) to fund tax payments, then losses might follow, leading to claims for tax refunds.

Currently foreign ownership accounts for more than half of our bond market, around 40% of our sharemarket, a significant chunk of our commercial property market, a growing percentage of our residential property market, a tiny share of our land but around half of our bank deposits.

One would have figured that this was enough, though the offset is that NZ, via the likes of Kiwisaver, owns a growing value of foreign assets.

Adern has pledged that Cullen’s tax initiatives would not be implemented without being specified in an election manifesto, meaning implementation would follow endorsement by the electorate.

To me that seems a fair process, though I struggle to see why old timers like Cullen, and Jim Bolger, are dragged back into a changing world to head matters like tax and labour law changes.

_ _ _ _ _ _    

Another of Cullen’s gigs has been a role as chairman of a company seeking to sell annuities to people who retire.

Enough has been said by a wide range of people, including me, about the downsides of annuities and their providers.

Those who attended seminars from salesmen on this subject need to ask:

How the providers propose to achieve superior returns on investment from low-risk securities, (an oxymoron)?

Why fees and sales commissions are so high?

Why credit raters are so suspicious about the ability of annuity providers to meet their promised returns?  (Junk ratings are an alarming signal.)

Why the annuity providers have so little working capital on which to survive the short-term, let alone 20 year terms?  Indeed the company Cullen chairs has had to issue new shares recently to ‘’improve working capital’’.

If we are ever again to need annuity providers, and I doubt that, my view is that they would need to have ‘’undoubted’’ financial strength, such as might come from the backing of an organisation with billions of capital, rather than capital from a handful of well-meaning investors, trying to make a shilling from an obsolete concept.

I was recently shown, in confidence, a presentation of one such seminar, so I cannot share the detail.

What I can say is that seminars from salesmen are an unlikely source of valuable knowledge.

Cullen, in my view, was unwise to accept a position with a junior annuity provider, just as Doug Graham was most unwise to accept a role with a junior finance company (Lombard) when he retired from politics.

_ _ _ _ _ _ 

Ministers of Finance are on much more stable ground when they offer their advice to Kiwibank.

Unlike Kiwisaver providers, Kiwibank is government owned, along with co-owners of government controlled organisations, like the ACC and NZ Super Fund.

The formation of Kiwibank was justified by its political enthusiasts because it ensured that there would be a bank available to New Zealanders of any economic status.

The trading banks owned by the private sector had no mandate requiring them to serve people of low economic value to the bank.  Accordingly private sector banks could set fees and adopt policies that chased away people who either had little money or used their banking facilities carelessly.

This mind-set is commonplace.  In many countries, including Britain, millions of people do not have access to banks.

Kiwibank was going to service all groups and was not going to focus on quarterly returns, or shareholder demands for dividends.

The model began with shared occupancy facilities with Kiwibank’s owner, NZ Post, leading to lower accommodation costs but queues, and a speed of service more like that of a 1950s Russian bank than an Australasian institution.

Kiwibank has evolved, has better branches, offers a wider range of services, including business loans, and has sharper standards, both in the branches and at Head Office level.

The Minister of Finance has every right to suggest that Kiwibank should include social considerations when it plans its branch network, though if these social behaviours led to lower returns then the ACC and the NZSF might be somewhat aggrieved.

It seems to me that every town ought to have some sort of central mail service, to which a modest banking service could easily be added.

Alternatively the golf carts that the mail deliverers now use could be a part of a fleet that includes an electric vehicle like a mobile caravan that could call into small towns each day for two hours of a banking presence.

Indeed a Kiwibank travelling caravan could act as a ubiquitous service for all banks, with customers in smaller settlements.

I sense that for some years yet there will still be people unfamiliar with modern technology, and therefore unable to perform internet transactions, or scan documents.

Such a mobile bank might also provide help in those areas, for a small, profitable, charge.

In the USA there are laws requiring those who use the US Postal Service to submit to other US regulators.

The laws in one instance were written in the 1920s.

A recent court decision is that the emailing service today is to be subject to those same 1920s laws, and is therefore regarded as a US mail service.

If the mail services were to be available in every town, perhaps the US would also need mobile vehicles everywhere.

I see no obligation for any private sector bank to have a branch in any particular town, city or suburb.

If providing representation in small towns helped Kiwibank to soak up some valuable banking business, might that not improve NZ’s share of banking profits.

If at the same time Kiwibank issued shares to buy TSB (paying out the community trust owners), SBS and most of all, Heartland Bank, then we would soon have ownership of a bank with the scale and the profits to change the behaviour of Australian banks.  They might be forced to adopt more social standards!

Such a banking scale might also do more to achieve the social aspirations that led to Kiwbank’s formation.

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Edward (as a director) and I (as an investor) will attend the Quantum property company’s annual meeting on September 27 in Wellington and will report back on any relevant news.

_ _ _ _ _ _


Edward is in Auckland (CBD) on 24 September, then in Nelson on 2 October.

Kevin will be in Christchurch on 27 September and in Ashburton on 31 October.

Mike will be in Tauranga on October 5.

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

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

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 13th September 2018

IF IT were ever the bizarre objective of a country, a household or an individual to achieve poverty, the paths to reach that destination would be obvious.

- Spend more than you earn, living at a level beyond your achievement.

- Borrow money from countries with strong currencies and low interest rates, promising to repay in the strong currency.

- Consume your income rather than pay your bills.

- Pretend that tomorrow’s world will be the same as yesterday’s.

Anyone challenging these signposts to poverty might want to ask Greece, or Italy, or many others of both the developed and the undeveloped world.

Those asking the questions will have a most attentive audience in countries like Argentina which, to keep borrowing costs down, agreed to huge loans denominated in US dollars.

The best sources of anecdotal evidence of how to destroy a country’s wealth may be from

Greece, from which Italy seems to have learned.

As the Greek economy has subsided, the obvious casualties have been the young people, 20% of whom have not succeeded in gaining a job (since 2008) and 500,000 of whom (in a country of 10 million) have left Greece to live in some other country where work is available.

Those young people who stayed in Greece live with their parents until they are 37, the average age to become independent in Greece and some other poor European countries.

Greece did everything wrong. It consumed everything, it neglected its infrastructure, it wanted to behave like a rich country, bidding to host the Olympics, and it succumbed to its unions, allowing excessive pay, excessive holidays, and extremely young retirement age based on excessive pensions. Manually ‘’demanding’’ jobs like hairdressers, led to early retirement concessions. (For hairdressers and physiotherapists retirement and pensions came at 55.)

You might surmise that Greece paid for this with high taxes, as Sweden does.

Yet the country’s attitude towards paying tax was scornful, cash jobs were mundane events, and any laws that were mildly troublesome were thwarted by civil disobedience.

I used to holiday in Greece each year in the European summer, expecting to see the remedial responses to obviously stupid and unsustainable practices.

A few examples come to mind.

New houses attracted a residential home tax, when the houses were completed.

In response the builders never finished the masonry on the door frames or window sills, so the house was never ‘’finished’’ and therefore not taxed.

The Greek law enabled surgeons, doctors and other medical professions to avoid filing tax statements if they would sign a document confirming that their personal income was less than $10000 euros per annum.

Trusts and other structures enabled every such professional to make such a declaration.

High earners paid nothing.

When those in wealthy suburbs were identified as non-tax-payers, the government introduced a swimming pool tax, ostensibly based on water usage.   The government advised it would use satellite coverage to identify pools and addresses.

The well-heeled, non-tax-paying citizens bought camouflage canvas as their response, rather than pay tax.

And then there were the traffic congestion laws, recognising that Athens, home of six million people, had an ancient roading network that could not cope.

The people were told that cars with an odd number as the last digit on their number plate could not enter Athens on Monday, Wednesdays or Fridays, and those with even numbers were barred on Tuesday, Thursday and Saturdays.

Within weeks hundreds of thousands had bought personalised plates with no numbers on display.

The results of this antisocial, law-ignoring behaviour was that Greece was unable to service its debt, the state had to halve its public service, pensions were cut by two thirds, and the average standard of living fell to third-world levels, as the country’s creditors took command.

Those who had borrowed money cheaply from the German-backed low-cost euro to buy German-built Mercedes Benz had to return their cars and revert to foot traffic or public transport. At one time Greece had more Mercs per head than Germany.

Rubbish collections were rare. Crime rose. Overseas suppliers of pharmaceuticals and other key commodities refused to offer credit. Public sector wages were slashed.

Greece had to pay the cost of decades of decadence.

Italy is now facing the same agenda.

It is threatening to engage in tax cuts and to increase social payments by borrowing even more, in low-cost euros, breaching the European Union’s levels of fiscal deficit to GDP.

The composition of Italy’s government has changed and is currently threatening to revert to its own currency and to exit the EU, though in recent days this bravado is being expressed in less aggressive tones. Perhaps a dose of reality has been foreshadowed.

In effect Italy would leave the EU, revert to florins (or lira) and seek the help of the private sector bond market, without EU protection. The bond market would slaughter the Italian economy.

Italy would then find its cost of debt servicing rises by several per cent, meaning it would have to follow Greece’s example, slashing costs rather than handing out borrowed money.

Argentina provides evidence of what would happen next.

The new Italian currency would decompose, its value in free fall, making bond market access even more improbable.

The only real solution, again as Greece discovered, would be a most unpleasant, machine gun-enforced, fall in living standards for many years, enabling the government to balance its budgets and eventually to reduce debt levels, so it could re-engage with other countries.

All of these thoughts are escalated when one watches the USA preparing to lift its interest rates, making the US dollar stronger and making it even more expensive to service debt when it is denominated in a strong currency.

Many countries, like Argentina, have borrowed in US dollars, to reduce interest costs. These decisions look a bit silly when the US dollar rises.

The debt looks completely stupid if the country has used it not as a means of raising business levels and national income, but as a source of handouts to people who have a lousy work ethic and a belief that the fairies will provide all the luxuries of life, including champagne, Mercedes Benz cars and free health services.

If Italy succeeds with its threat, the victory would be pyrrhic unless the EU were pushed into a cancellation of its plan to stop buying EU bonds by Xmas.

If the EU cancels this initiative and spends another few years financing Italy at 2%, then Italy might be able to defer the nasty decisions.

If the EU retains its stated intention to stop buying Italian bonds, then just at the time the UK leaves the EU (March 29, next year) Italy may also be leaving the EU.

Most of Europe believes that if the UK and Italy abandoned the EU, the Union is doomed, whatever Trump might have planned. Italy would indeed revert to its own, shattered currency. Heaven help the poor, mostly in the south of Italy.

The moral to this story is that if you want to have a life in poverty spend more than you earn, and borrow the deficit in a strong currency, with a country that will capitalise the income you owe (if you can find such a lender).

_ _ _ _ _ _

THE last of the four paths to poverty is to ignore the certainty of change.

The transport industry might be a useful one to consider when thoughts turn to change.

A few random statistics:-

1. In developed countries, the number of young adults who obtain driving licences has fallen by 20 per cent in the past three decades. In Australia fifteen years ago 77% of young people (under 25) held driving licences. Today that figure is 65%.

2. The New York subway users are falling in numbers, not rising.

3. Personal car transport currently consumes 45% of the world’s transport fuel supplies. If autonomous electric cars were to replace that demand, that fossil fuel demand would be erased.

4. In urban areas of the developed world more than 25% of all land and building space is dedicated to storing personal transport.

5. Five million Americans are employed in driving trucks, ride-sharing vehicles, and taxis or as chauffeurs.

6. If autonomous electric cars were to achieve such scale that they were cost effective, and demonstrably reduced accidents (and insurance costs) such vehicles could reduce the need for cars by 90%. But if every household wanted its own autonomous electric car, the congestion would perhaps be worse, as empty cars buzzed around awaiting a text from their owner.

7. A personally-owned car is used on average for less than 50 minutes each day.

The point of this random data is to prompt thinking about how consumers must adapt to changes which many believe will arrive and have massive scale within seven years. Poor countries will, as Greece did with its debt, pretend that an easy solution will be delivered by the fairies.

If these changes occur rapidly, the demand for fossil fuel will fall, potentially by half. So will its price.

But millions of jobs will disappear. Currently, truck driving is still the most common job in around ten of America’s states. (Go back 40 years and the office secretary was the most common job in 21 states. The figure now is 5 states, and falling!).

Cities will have to be mapped to cater for autonomous cars.

If a country or household wishes to be poor, it can spend more than it earns, it can borrow to take holidays and it can pretend that there is no need to focus on the future.

Footnote: One argument against autonomous vehicles is that these cars often do not suit families. Nor do many ride-sharing vehicles.

BUT in one developed country the percentage of young women who state they would never have children is more than 20%, and rising.

Their demand for station wagons might change, too!

_ _ _ _ _ _

TWO of New Zealand’s recent corporate disasters are still being examined, with somewhat different outcomes likely.

The disastrous Wynyard Group collapsed after spending extreme sums on staff and software in pursuit of what it hoped was sales for its security systems in the Middle East.

Governance 101 might include a unit warning against any reliance on expressions of interest from Middle East governments or corporations.

False sales are much more disastrous than no sales.

I know of no credible attempt to litigate Wynyard’s failure but I understand there may be a tiny sum available to shareholders, once the liquidator has completed his task.

The other recent disaster, CBL, has led to grim investigations.

The FMA and the Serious Fraud Office are both pursuing the truth about how this company behaved and why its shareholders were so poorly informed about its behaviour.

At very least I expect its directors to be absent from any other governance role, permanently.

At best I expect to see an outcome for shareholders that atones for any behaviour that is eventually deemed to be inappropriate.

Litigation funders always urge that full investigations are initiated immediately. Delays, perhaps caused by inertia, straight laziness, lack of resources or simple incompetence, can allow ‘’the bodies to be buried’’, according to skilled people.

My view is that both the SFO and the FMA owe the CBL shareholders and the general investing public a detailed update on their progress of their investigation, published every month.

The Romans used to say ‘’Beware the Ides of March’’.

Investors should be saying ‘’Remember the sort of appalling inertia that surrounded the South Canterbury Finance investigation. Beware of the Limitation Act!’’

_ _ _ _ _ _

WITHIN a week, Synlait Milk will announce its result, expected to demonstrate that it has patiently built a model that adds value to milk products, benefitting consumers and shareholders.

As discussed last week, Fonterra moves backwards, while Synlait Milk advances. Fonterra’s result will have underlined this.

My expectation for Fonterra is that it will fail to modernise its plants, fail to convert to a value-add model, and ultimately will go the way of so many co-operatives around the world.

Lacking the capital to realign or modernise its manufacturing plants, and lacking the metrics that attract banking support, and being burdened by debt, Fonterra will eventually be forced to sell off the best of its businesses, to reduce debt.

It would then have a low-value business, managed and governed by average performers servicing those producers on back country farms, up pot-holed shingle roads.

Its farmers would have debt levels because they must hold the share capital that Fonterra will not attract from external sources. Perhaps Forsyth Barr might arrange a subordinated debt issue to meet Fonterra’s needs.

But if the value-add businesses, having been sold off, does not supplement the returns from commodity-selling, how much more debt would be needed? How many subordinated note issues could be sold?

What would break this cycle?

A mix of vision, energy, capital, patience and banking commitment would be required.

Would someone show me evidence of any of these ingredients?

Perhaps the optimists will be hoping that the money burnt on Beingmate investments in China might be recouped by litigation. The Chinese legal system would need to accommodate such a plan. Good luck with that!

_ _ _ _ _ _

Summerset and now Properties For Industry, are tapping the market for long-term funding via senior bond issues.

More will follow.

Both of the above seem to be respected debt market participants.

If clients have an interest in these securities they should notify us immediately.

_ _ _ _ _ _


Edward is in Auckland (CBD) on 24 September, then in Nelson on 2 October.

Chris will be in Christchurch on 18 and 19 September.

Kevin will be in Christchurch on 27 September.

Mike will be in Tauranga on October 5.

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


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

Chris Lee

Managing Director

Chris Lee & Partners Limited

Taking Stock 6th September 2018

THE clash between Vector’s chairman Michael Stiassny and its 75% public owner Entrust is being stylised as a clash between private and public sector standards.

The Entrust trustees are elected by consumers, possibly the worst possible way of attracting relevant people and selecting the best of them.

It is difficult to think of such election processes without recalling the outcomes of public elections in such areas as hospital boards, local councils and even the electricity consumer trusts.

For the vast majority of people asked to elect people to these boards the selection process is similar to that of the monkey who chooses his shares by throwing a dart at a newspaper list of all companies.

The candidates will be an eclectic bunch, some with knowledge of relevant issues, some zealots with a particular social objective, some well-meaning people with a desire to serve the public and some being those who see the stipend as the incentive to stand.

The public will be sent a pretty brochure, outlining the potted histories of the candidates. Doug will be a rugby club stalwart, Mabel will be a retired health worker, Liz will be a pianist and Harry will be a project consultant.

How the devil does one choose two of these with any hope of picking the best two?

Generally those elected will over time discover the real issues, form their own opinions, and if they enjoy the task will stay on the board for as long as they can.

Those who rely on the board of trustees making good suggestions and applying the best principles of governance will have no idea of the merit of these who were elected.

The old adage that democracy is a dreadful system but better than any other system is not an adage to which I subscribe when it comes to corporate governance.

In my experience relevant knowledge, energy, integrity and talent are not discernible from election pamphlets.

Vector has had a colourful history since its shares were listed probably because of the personality of its chairman. Michael Stiassny is a member of the Auckland Jewish society with a distinctive approach to corporate matters.

Stiassny communicates in an unusual way, often answering a question by asking a question. He is undoubtedly bright, definitely street-wise but far more focussed on results than on attracting a request to create a Swiss charm school.

In my view he was right to see off the likes of Tony Gibbs and the Hanover Finance Chairman Greg Muir ten years ago, neither being examples of decision-makers or governors that I would select for such roles.

Stiassny has been Vector’s chairman for 16 years and is no longer the senior partner of Korda Mentha. Indeed his biggest contribution may be yet to come through his new role as a partner and a director of LPF, the litigation fund that is doing more to introduce accountability to New Zealand than any other organisation.

Heading the publicity campaign to oust Stiassny from Vector is Bill Cairns, also semi-retired after selling his 50% interest in the tiny mortgage-lending finance company, General Finance.

I recall Cairns as a jovial fellow, tall and awkward, but pleasant. He obviously has a sense of irony. He began his career with the large Wellington-based finance company General Finance, then a subsidiary of the National Bank and Todds.

When General Finance was merged into UDC nearly 30 years ago Cairns applied to use that name for his aspirational finance company which was about two per cent of the size of the original General Finance. But he could joke that he took over his first employer. His General Finance, to its credit, largely stuck to real lending. Despite its peppercorn capital it survived the 2008 finance sector collapse, its borrowings at such tiddly levels that the two shareholders were able to meet any unplanned obligations.

If Cairns is the right man to chair Entrust, its role must be passive, for his experience in small ticket lending, though useful, is hardly comparable with Stiassny’s and makes it highly improbable that the Entrust group is likely to improve Vector’s governance.

Whatever, Stiassny wants out. He announced his retirement plan before Cairns began his campaign. One hopes that a replacement chairman will not be elected by others who themselves are elected by the implausible method of public votes based on electioneering pamphlets.

Cairns’ campaign does sound suspiciously like a plan to elevate his own role and eligibility for similar roles.

Irrespective of Stiassny’s unusual communication skills, Vector has performed well for its shareholders and does not need to descend to the standards of a public committee of trustees, perhaps few, if any, with relevant experience.

_ _ _ _ _ _

THE stark difference between the bloated self-serving Fonterra board and executive, and the energy of Synlait Milk’s founder, key shareholders and executive needs minimal discussion from me.

Fonterra, as a disproven business model, has made bleak investment decisions, been slow to spot market change, and displayed little vision when it declined to take up holdings in Synlait Milk and A2Milk, in their formative days.

By contrast the progress and value-add at SML and ATM has been astonishing.

Both companies would appear near the beginning of any book entitled ‘’Great NZ Corporate Successes’’.

If the Otago opportunist, risk-taker and entrepreneur Howard Paterson had not suffocated as a result of mis-swallowing a potato crisp, he would surely be touted today as a key figure in ATM’s beginning and would be forgiven for those of his ventures that failed.

John Penno’s modest aspirations to build Synlait Milk have been vastly surpassed in just seven years, in part because he has made the right connections with capital markets, enabling his business model to be nurtured through a period of great debt.

Today SML’s relative debt has been normalised. I have little doubt it will be a dividend-payer within the next three years.

It does face one problem. So few of its shares are now accessible, its ‘’free float’’ of shares must restrict its appeal to investors who focus on a fair price with any new investment. At $13, Synlait’s price can be justified only with the help of imagination.

When ATM lifted its holding to 17%, SML then had permanent shareholders sitting on the majority of its shares.

ATM’s buying spree pushed SML to prices that no model could explain but also pushed SML into a global index, triggering the brainless buying by the robots that control index funds. That led to even further upward pressure on the share price.

The only motive to sell SML has been the excessive price available.

NZ’s award-winning researchers believe the share price today is nearly double its current underlying worth.

But index funds have no algorithm to assess value.

Buying continues, so buying pressure further inflates the price. The index funds will report ‘’profits’’ from this process, if the price is pushed ever higher.

Our clients were quick to spot the potential of SML and might return to buy more, if an event or a trend or an algorithm led to the index fund robots being required to sell at any price.

But my expectation is that the buyers would look for the shares at the price indicated by qualitative research. That might indicate fair value at half of the current figure being paid by index funds.

Of course that ‘’event’’ may not occur.

But what SML and ATM do highlight is the absence of a value test in index buying.

It also highlights the risks taken by short sellers – those who borrow shares, sell them, and gamble that they can repurchase the shares in the future at a lower price, to enable the return of the borrowed shares.

Their qualitative research can be made to look silly by unthinking index purchasers.

There will have been much short selling of ATM and SML.

So far, the index buying will have lightened the pockets of the short selling gamblers.

Short selling is not a game for the faint-hearted, or for those with limited access to funds.

_ _ _ _ _ _

OFTEN, Michael Warrington and I have discussed the vulgar grasping of fund managers, helping themselves to handsome fees and then double dipping with bonuses.

Vital Healthcare, coded VHP, has an absurd arrangement with an external fund manager who is well paid, then grossly over-incentivised, to perform its relatively uncerebral role.

The company has just advised that it has issued 6.5 million new shares, at a value of some $13.5 million, to its fund manager, as its 2017-18 bonus payment. How absurd!

The VHP share price has not risen significantly in nearly two years but the assets have grown, as has the debt. Dividends have not.

I have long contended that property companies are simply stealing from shareholders by incentivising growth in assets or growth in revenue, without a focus on growth in nett profit after tax.

Anyone with any remaining memory cells will not forget how such inappropriate rewards were discredited in the 1980s or in the years before the 2008 financial crises.

That a company like VHP should indulge in these inappropriate practices is most disappointing and makes VHP difficult to recommend as a property trust.

Since when must one be incentivised to perform one’s well-paid job properly?

_ _ _ _ _ _

WHAT chance do PGC shareholders have of making an informed decision if they wish to quit their shares?

For years PGC’s majority owner, George Kerr, has been claiming that when he sold Perpetual Trust to the British asset arbitrageur Andrew Barnes there was an agreement for a second leg to the sale price.

In my opinion, the details of this agreement should have been spelt out to PGC shareholders and the NZX under the continuous disclosure regulations required of all material matters.

Kerr and Barnes have been co-investors before, are of similar instincts, and contrived a deal which Kerr says meant one thing, while Barnes says it meant something else.

If the deal was immaterial one would regard this as a little boys’ game but Kerr is now again preparing, and having audited, accounts that claim that PGC is owed a massive $20 million (approx) by Barnes.

Barnes threatens to sue PGC/Kerr and says he owes nothing.

What are the PGC shareholders to make of this?

The undisclosed (in detail) deal seems to relate to a Kerr/Barnes plan to join PGC’s trustee company (Perpetual) with the equally unlovable NZ Guardian Trust, tart up the new group, and sell it to the public via a new listing, presumably trying to find buyers to accept a valuation much greater than the price paid by Barnes for the two companies.

No such new share issue has occurred. The country’s leading investment bank did not accept the value put on the assets. A trade sale collapsed. Barnes, who borrowed heavily to buy the companies, had to fund the cost of the debt until he granted Direct Capital a call option, enabling Direct Capital to study the new group from the inside.

So far Direct Capital has not signalled an interest to convert its option to a purchase, presumably wanting to see sustainable revenues and profits that might help set a realistic listing price. Certainly, any listing will be closely scrutinised, given the doubt about trustee companies’ roles in the future.

Barnes, a British fellow who has made his way down to New Zealand, is ex-Macquarie, and in public is refusing to accept Kerr’s view of the second leg to the original deal.

He says the second leg arises only if he sells the new combined company via a public listing. He has previously said that the trade interest was so high that an IPO was unlikely. The trade interest, sadly, did not convert to a sale.

In his view PGC should not be accounting for a $20 million revenue gain.

Why are the Financial Markets Authority and the NZX not intervening? PGC is a listed public company!

Why did PGC’s auditor allow this debated revenue to be displayed?

My own view is that the trust company business model is at the sunset stage, adds virtually no value, and is a model that should attract revenue solely from drafting wills and estates. At most the sustainable income would then be a million or two.

It should have no hand in managing money, an area where it has no competitive advantage and in the past, has been a poor performer. Trust companies do not attract Alpha performers.

I think Barnes paid too much for his acquisitions. Sometimes asset arbitrageurs get it wrong. I think that boat has left the port.

Of course he will have an argument to say that trustee companies are at sunrise, not sunset, and that if the nett revenue is now around $10 million, the new grouping is worth far more than he paid.

My interests in his views are nil. We disagree.

I want to see the FMA and the NZX intervene and give the PGC shareholders the details of the deal he made with Kerr so that shareholders in PGC are able to make an informed decision.

Let us offer the investors symmetry of information.

_ _ _ _ _ _

FULL marks to the Air New Zealand chairman Tony Carter for his decision to exit the role of chairman of the Auckland Blues rugby franchise.

Auckland has had some fairly brittle people involved in sports governance in the past decade but Carter has shown he is not one of them.

He is resigning, saying the rugby franchise should be chaired by someone with more knowledge of rugby than he has.

Hooray! How refreshingly sensible.

Chairmen should have a deep knowledge of the sectors of their company.

The concept that they are just there to ‘’chair’’ is absurd.

Many other large organisations should pay attention to Carter.

_ _ _ _ _ _


Edward is in Auckland (CBD) on 24 September, then in Nelson on 2 October.

Kevin will be in Christchurch on 27 September.

Mike will be in Tauranga during early October.

Chris will be in Christchurch on September 18 and 19.

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


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


Chris Lee

Managing Director

Chris Lee & Partners Limited

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