Taking Stock 27 June 2019


LAST week’s Taking Stock was not proof read on a busy day which coincided with my visit to Tauranga to hold seminars.

Accordingly, an original draft, littered with typing errors, was sent. The corrected version, with an apology, trundled along an hour later after I read the first version that had been sent. We, all of us, felt contrite. Our process had failed.

The version sent out discussed the new need for insolvency practitioners to be fit and proper people and defined ‘’proper’’ as being ‘’legal’’ and, as typed, ‘’amoral’’ a rather amusing error.  Of course the correct definition would be ‘’moral’’, not ‘’amoral’’, not even ‘’immoral’’.

The insolvency practitioners might have grinned.  I had been a speaker at a meeting of those insolvency specialists earlier in the week, had suggested the need to supervise their behaviour independently, and had emerged unscarred, if not quite unscathed from a fairly frank exchange of views.

To follow that meeting with the thought that insolvency practitioners had to be ‘’amoral’’ was a somewhat unfortunate, and unintended, consequence of a rare failure of our publication process.

None of that should alter the importance of a new emphasis on entry to the highly paid capital markets being restricted exclusively to fit and proper people.

The capital markets are the highest paid sector in most capitalist countries, large salaries, huge perks, and extreme bonuses supposedly ‘’earned’’ by extreme value-add and by meticulous attention to high legal and moral standards. The ANZ would not be a lone example of how not to behave, and how not to respond to inspection.

In my book The Billion Dollar Bonfire I loudly propose that there be a ‘’one strike and you are out’’ approach to the licence to operate in capital markets. That rule should apply to immoral as well as illegal behaviour.

A senior lawyer who felt it was appropriate to ambush the lives of young female interns would struggle to convince many that he was an appropriate person to work in capital markets.  Certainly I would be a dogmatic disbeliever.

Fit and proper people should be knowledgeable, moral and clear of criminal or psychopathic offences. Those who enjoy the rich rewards of capital market work should meet the highest standards.

My hope is to persuade the Reserve Bank, the Financial Markets Authority and the NZX, all of which are regulators, to apply a sensible restriction to capital market appointments, requiring all senior people to subject themselves to a ‘’fit and proper’’ examination.

Many of the past disasters in capital markets might have been averted by culling those who continued to work in the markets after being guilty of ‘’pillaging other people’s money’’, as one judge noted of a scamster who went on to head a dreadful finance company that incinerated the money of retail investors.

I think back to the rogues in organisations like Registered Securities Limited, Bridgecorp, Capital & Merchant Finance, Dominion Finance, and a large number of rogue lawyers and accountants.

I recall sharebrokers fired for front-running or insider trading, yet never expelled from the privileged world of capital markets.

My book suggests a three-pronged (and sharps prongs, at that) attack on those who are found guilty of cheating people out of their rights or money:

1. Make the outcome of the offence binary.  An offender will be put in front of a judge; not, may be put in front of a judge.

2. If guilty, the offender’s personal wealth, however structured, will be used to compensate the victim; not, may be used.

3. Guilty practitioners will not be seen as ‘’proper’’ people and will not be eligible for positions requiring fit and proper people.

My view is that such a clear outcome for an offence would be a disincentive for those who regard their rich entitlements to include the right to damage other people’s lives or help themselves to other people’s money.

Taking things, because you can, is evidence of cowardice - indeed thuggery - that has no place in a society whose standards are set with some heed, even a tiny level, of morality.

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IT is easy to imagine that the moniker ‘’smiling assassin’’ is not one that ANZ (NZ) chairman John Key would wear with pleasure, as he matures and seeks out governance roles within the private sector.

When you are young, brash and trying to show your bosses that you have a ‘’point of difference’’ such a sobriquet can be exhilarating, energising young men who love the limelight.  Key acquired his nickname when he was a dominant FX manager in an American bank.

Today he may no longer be of an age that would welcome a reputation that some might define as larrikinism.  He might prefer to portray gravitas, judgement and a respect for processes and the law as he transitions with his career changes.

His foreign exchange days of high pay, high bonuses and access to high investment returns have given him more financial substance than he could ever have imagined.

His days in politics gave him global exposure, and superficial rewards, like media recognition and brand awareness.

To convert all this into a value in exemplary corporate governance would be perhaps a challenge but clearly ANZ has given him the opportunity.

The firing of ANZ’s successful chief executive David Hisco provided Key with the opportunity to illustrate his gravitas and underline his brand in the public glare.

Hisco is the biggest victim so far of the Australian Royal Commission’s enquiry into banking practices. The enquiry led to the Australian regulator (APRA) enforcing a new control on banks, known as BEAR, an acronym for Bank Executive Accountability Regime.  Key and the ANZ will want to display acceptance of BEAR.

Hisco is a victim of BEAR.  Someone had to pull the trigger.

I suspect his executive package was poorly designed, apparently preferring to allow him to claim personal expenses at ridiculous levels, rather than over-paying him in salary and asking him to pay all of his personal costs from his salary, as other corporate leaders do.

At the Commonwealth Bank of Australia, chief executives have sometimes been paid close to A$10 million per year, an absurd figure that surely was not boosted by an authority to use company funds to meet personal expenses.

If Hisco had negotiated a salary, not of $1.65 million but of $2.25 million, still far less than many high profile NZ chief executives, he might have avoided the BEAR examination that has led to his being thrown under a bus, to use a corporate expression.

BEAR has displayed its claws.  Key, one of the world’s opportunists, now in a position of power, has been granted an opportunity to display gravitas.

Unsurprisingly, the deed has been done, though Key’s explanation, delivered in sound bytes over several days, was bumbling, more like the style of an FX dealer than a company chairman.

Of course the concept of accountability for spending other people’s money is sound.  Many, including the writer of Taking Stock, have campaigned for decades about the ugliness of corporate excesses, the vile and inevitable outcome being a loss of respect, widening the chasm between the people and those who have captured the right to spend other people’s money.

I respect the value of our banks.  I still marvel at the minimal cost of processing all my daily transactions, I am grateful for the convenience of a credit card, I am astonished at the low intermediation cost applied to those who borrow to buy houses, and I am grateful for the banks’ willingness to sort out any third party’s illegal access to my accounts.

I have many banking executives, and former bank managers, amongst my friends.

However bankers at the top level are paid at unjustifiable levels, as are foreign exchange traders. The multi-million dollar bonuses are revolting, to the point of larceny.

BEAR plans to apply scrutiny to bank executives.  Hisco is the first victim.  Key, a messenger, will find that his brand has been put in the spotlight.  Perhaps the Australian board should have fronted this.

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THE decision of Christopher Luxon to retire, at 48, from the highly visible role of Air New Zealand’s chief executive role is well-timed, coming when his personal contribution is visible and meritorious, the airline performing impressively.

Luxon took over from the highly popular Rob Fyfe, who had dealt with much tougher problems, including the ignominy that followed the crass purchase of Ansett Airlines, and a fatality, when an Air NZ plane crashed in Europe.

Fyfe’s transparent, empathetic qualities lifted the company and lifted Air NZ’s global profile.

Himself an excellent communicator and a man of charm, Luxon has built his reputation by taking the high profile NZ company to levels of global respect that were unimaginable before Fyfe took over.

Air NZ had in earlier days been a Brierley toy, had some self-focussed governance and management, had various pockets or fiefdoms in the structure, and was frustratingly unfocussed on matters of timeliness and communication.  Brierley’s ownership was never going to develop an appropriate culture.

Fyfe changed this.  Luxon had lifted the standards further.

That Luxon may now spend a term in parliament as a National Party list MP, and then take on the task in 2023 of leading National into an election, is entirely credible.

He would be the most successful business leader National would ever have signed up, in a class of his own.

Curiously he may not be the only business person with his eyes on that task.

At least two other business millionaires with a much lower profile seem to be following the practice of befriending the media and exploiting these contacts to air their political or social views.

One is Sam Stubbs, the amiable fellow in his 50s who emerged from Goldman Sachs, Hanover Finance and Tower Insurance to lead a ‘’not for profit’’ KiwiSaver fund, based on robotic, index investing.

Stubbs has cleverly developed a cosy relationship with a few in the business media and is now called upon, almost daily, to comment on social, political and financial matters.  His friendly approach has given him ample opportunities to develop a brand. At least one reporter seems incapable of penning an article without deferring to Stubbs.

It would be entirely credible that Stubbs’ next step might be into politics.  His bedside manner is impeccable.

The British distressed asset entrepreneur Andrew Barnes has also fostered a growing platform in the media and converted that airtime into political commentary, just as Bob Jones used to do.

Barnes’ recent immigration to New Zealand might well have begun with the corporate deals he arranged with George Kerr, enabling eligibility for Barnes for immigration by being a significant investor in NZ.

What was to have been an arbitrage opportunity with Perpetual Trust failed but Barnes has cleverly converted this failed idea into a platform for social and political commentary, by using the media.

He gained media attention with his offer to allow Perpetual staff to work a four-day week and now has used his media profile to pontificate on political issues, such as the wellbeing programme Jacinda Ardern is attempting.  For a recent arrival he has revealed many thoughts on how New Zealand should change.

Whether his aspiration is political, or just brand development, Barnes like Stubbs has now at least the platform to launch into politics.

Perhaps all three might be in pursuit of the role abandoned by Key in 2017, when Key recognised the inevitable cost of not being able to find a credible MMP partner.

Luxon, we are told, is a candidate. Might there be three?

My only advice to the three is to confer with Simon Bridges now and discuss the ability to be effective in the public and private sectors.

Bridges’ insight might be valuable.

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David Colman will be in Palmerston North on 2 July.

Edward will be in Auckland (Remuera) July 9, Albany July 10 and in Wellington July 12.

Chris Lee

Chris Lee & Partners

Taking Stock 20 June 2019

Our apologies for the second iteration of todays newsletter, the version sent earlier today was sent in error.

Chris Lee writes:

If you were lucky in life you would never have any correspondence or contact with a liquidator, a receiver or anyone that falls under the heading of an insolvency practitioner.

You would never have been involved with a failed business, never invested in its shares, lent it money, or supplied it with goods or services.

Your luck would almost be the equivalent of drawing a royal flush in a poker competition.

Sadly, nearly every adult will sooner or later be in receipt of a letter from an insolvency practitioner, advising that the usually male receiver/liquidator is doing his best, at your expense, to salvage some money from a failed enterprise.

I was told last week, by one of the country’s most celebrated receivers, that there are 111 registered insolvency practitioners.

Judging by a group of 35 of them, most are male and work for accounting practices.

They must be registered, must be experienced to win registration and, thankfully, must be fit and proper people, meaning they are experienced, knowledgeable, moral and law-abiding.

The insolvency practitioners must be subjected to the inspection of the Registrar of Companies but are regulated by its own body, contracted to perform this task by the Registrar.

Insolvency practitioners are privileged people to be permitted this self-regulation.

They are also privileged because their charges are paid for with other people’s money and are approved by people in charge of other people’s money.

A bank or a trust company is often the ‘’approver’’ of the bill, paid for by other people’s money.

Receivers usually are brought in to clean up a mess, hired by a trust company or by a secured creditor like a bank.

Often the enemy is the Inland Revenue Department, which usually has a prior call on any money available.

Banks and trust companies rarely swap Christmas cards with the IRD.

Right now, Parliament is on the edge of approving a new bill, the Insolvency Practitioners Act, which seems to reinforce the rights of receivers and seeks to define maximum penalties for errors made by receivers and the like.

Those who made submissions to Parliament on this new act include a number of powerless people, often referred to as unsecured creditors. Alternatively they are known as the unheard victims of failures.

The number of these people who made submissions would be the same if doubled or tripled.


So we have a third reading of a bill that has been created by the practitioners and those with whom they interact like lawyers, trust companies and bankers.

I was sent the proposed new act by a well-intentioned receiver who I know to be a nice, decent man, a description that might apply to many receivers.

The receiver I most admire has now left his large firm and is a tough, shrewd, fearless fellow who would not blink if faced by a drawn bow and arrow at three paces.

I hold the view that there ought to be changes imposed by the law on all insolvency practitioners.

1.     Their decisions should be overseen by a panel that includes unsecured creditors.

2.     That Committee should have the power of veto.

3.     The pathway to court hearings for disgruntled creditors should be cleared of all major obstacles, the cost minimised.

4.     Accountability for unilateral decisions (if any) should be automatic.

5.     Disbursements paid out on behalf of creditors should be at levels agreed by a court or by a regulator.

6.     Insolvency practitioners should be required to report specifically on decisions not to pursue compensation from third parties.  For example, receivers should be asked why they are not suing directors, trustees, auditors, bankers etc. I guess an alternative is to have a litigation funder on the supervising panel.

If I were a creditor I would certainly want a litigation funder to sit on the overseeing panel.

My ideas might lead to problems.

Who would ever insure receivers if there were easy pathways to sue the receivers?

Would receivers join auditors as being the ‘’deep pockets’’ so often targeted by the victims?

These would be problems.  Life is full of problems. Solve them. The new Act has a stench. It answers none of the issues that are front of mind to unsecured creditors.

Right now one of the problems is that unsecured creditors often feel that receiverships are run to achieve the best and quickest result for the secured creditors, usually banks.

The unsecured creditors are always the most vulnerable.  They are the last in the queue.

They need reformed laws and practices to give them a better chance.

Self-regulation, for people effectively paying themselves with other people’s money, is a recipe for a deep level of distrust, and a potential for a similar level of disrespect.

The politicians voting on the proposed new act need to defer their decision and consult with the people who are the most likely victims of a system that lacks checks and balances. So far their voice has been silent.

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Capital markets were abuzz on Monday when the ANZ Bank behaved in a most unbank-like way and aired its soiled linen outside its chairman’s top floor window.

New chairman John Key advised that ANZ had “parted company” by “mutual agreement” with its high profile chief, David Hisco.

Hisco’s health was a factor but Key observed that the health issue may have been related to the stress of being fingered for some rather unseemly expense claims, totalling perhaps $50,000 over many years, Key said.

When I heard the news I wondered if my right leg, if pulled, might play ‘’My old Man is an All Black’’.  Does any bank ever display a concern over CEO expense claim?

Key’s statement was astonishing.

A bank CEO paid three million per year is ‘’parting company’’ over expenses that he thought he had the right to claim?

A New Zealand bank is airing this sort of issue?

Banks have no track record of being transparent on matters of executive, or even junior staff, excesses.

In the 1990s a junior New Zealand corporate banker prepared a loan application for a property developer.  The application was successful, though as it transpired the loan was to lead to write-offs.

The junior banker would have been especially pleased that the loan was approved.  He had privately negotiated with the applicant, to provide the banker with a free 15% ‘’corner’’ of the equity in the development, if the junior banker could persuade his bosses to approve the loan.

The junior banker’s behaviour was later outed by the developer when the bank called him in at a time when the loan was in default.

The developer disclosed the ‘’secret corner’’ arrangement, when he was asked to contribute new capital.

When exposed, the crooked banker was asked by his boss whether he wished to quietly resign, or be pushed out.  He resigned. Silence reigned.

Years later this appalling lack of scruples surfaced elsewhere when the crooked banker emerged in another financial institution.

He should not have been able to work in the sector again.  He should have been fired and handed over to the law, judged for his ‘’secret’’ illegal arrangement.

By allowing him to remain anonymous over a clear swizzle, the bank created future problems for others.

Yet now we have a bank effectively eviscerating a chief executive over disputed expense claims.

Something has changed.

Has Key, a master in schmoozing the media, signalled a change which, if it had been introduced strategically, might change the face of business? Might all executives be forced to spend company money with restraint, and become accountable through the clear disclosure of such use of other people’s money?

Perhaps this might be Key’s legacy that convinces his admirers of his ability to add value to his role.  Is Key going to become the leader of a campaign to reinstate corporate morality? What a coup this would be, for an FX trader, now comfortably retired.

At a Wellington meeting on the night of Key’s announcement, the reaction to the explanation provided by Key was one of astonishment. Was this a media spoof?

What a dramatic change to the corporate environment it would signal, if now new standards were set and enforced, retired FX trader being the pilot.

Might accountability might return at all levels?

Is this a one-off, perhaps representing a solution to an incompletely-disclosed problem, or a recognition that the banking sector needs to display rectitude and apply its standards consistently.

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Johnny Lee writes:

Readers may recall, about a month ago, the launch of US IPO, Beyond Meats. The company uses the proteins found in some vegetables, and turns them in to a product with qualities similar to meat. In its simplest form, Beyond takes a natural process performed by livestock, and performs it in a laboratory.

Beyond’s competitors are now struggling to supply the huge demand for its products (a good problem to have!) and Beyond are reporting rapidly growing revenues in its first report to market.

Beyond is now considered a ‘market darling’, and has more than doubled in price since last month. It is now trading above $150 US dollars. Its IPO was priced at $25. But not everyone is a believer in the company.

It is among the most shorted stocks on the market, at one stage having over half of its stock on issue sold short.  

Short sellers are those who sell a share without owning it. Normally, this is facilitated by a third-party agreeing to lend the stock to the seller, at an agreed rate. This rate varies with supply, sometimes to eye-watering levels. The short-seller wins if the price falls, allowing them to buy them back at a cheaper price.

The short sellers lose if the share price increases. The short seller loses immensely if the share price quintuples over a two-month period, as has been the case with Beyond.

Short selling of an IPO is not as odd as it sounds, and can be used to stabilise a share price by effectively creating a floor in its value. In practice, this usually works by overallocating stock in an IPO, with an agreement in place with the issuer to purchase these shares if need be. This convention, known in the US as a Greenshoe, gives underwriting brokers the ability to sustain a share price once it has listed.

However, short selling without these backstops is far riskier. As these sellers of Beyond have discovered, short sellers have no natural cap on their losses.

In New Zealand, short selling is permitted but rarely practiced. Some of the larger fund managers are either exploring, or have established, managed funds that specifically allow short-selling as a tool to bolster returns. Some are able to engage in stock lending for the same effect.

Smartshares, for example, is permitted to lend stock for short selling on some of its funds, with a proportion of the profit from this being attributed to the fund investors. This practice is justified internationally as allowing funds to maintain low management fees.

In Beyond’s case, traders saw an asset listing in a highly priced market, with many competitors in a field that some see as a flash in the pan. However, with losses in the hundreds of millions and no more stock left to borrow, the market is reinforcing the adage: no one is bigger than the market.

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Infratil’s rights issue has now closed, and those who participated in the issue have had their shares allocated to them. They would be pleased to see the share price rising following the issues conclusion.

Those who chose not to participate will be credited the value resulting from the retail bookbuild process, which equates to approximately 35 cents per entitlement. Those who took part in the retail bookbuild will be pleased, as the current price represents a handsome profit.

Barring any intervention from regulators, Infratil will soon be a part-owner of one of New Zealand’s largest corporates, Vodafone.

It is pleasing to see capital markets producing outcomes for the benefit of all parties; shareholders, companies and the economy at large.



Chris will be in Auckland (Mt Wellington) June 24, and Albany June 26.

David Colman will be in Palmerston North on 2 July.

Edward will be in Auckland (Remuera) July 9, Albany July 10 and in Wellington July 12.

Johnny Lee

Chris Lee

Chris Lee & Partners Limited

Taking Stock 13 June 2019


Chris Lee writes:

As the Australian banks adopt their brinkmanship tactics with our Reserve Bank, those who want to chip away at the Australian dominance of our moneylending are licking their lips.

Despite the banks’ skilful use of former Prime Minister John Key they have not much of an artillery and will not resist when the firing starts.

My expectation is that the sequence of events will look like this:

1. The Australian banks will threaten to withdraw new lending to our productive sector, including our agricultural and horticultural markets.

2. The Reserve Bank will press ahead, continuing to warn about the probability of a damaging US-led recession. The Reserve Bank will not shift far from their current position, which requires banks to double their capital levels and to disallow their Tier Two instruments from capital calculation.

3. The Australian banks will conform but will shrink their lending to low-margin, medium-risk clients.

4. The NZ banks will grow at the expense of the Australian banks, accepting that they can embrace more risk. They will easily fund their new capital requirements.

5. There will be continued talk of mergers between some or all of Kiwibank, Heartland, SBS, TSB and Cooperative Bank, which collectively are about as big as the NAB/BNZ.

6. A new round of finance companies will arise, exploiting the low deposit rates and the opportunities to grow into markets abandoned by the Australian banks. UDC Finance could be listed and take prime position in the non-bank sector. In theory the Australian banks could sell down some of their holdings in their NZ bank branches though I see this as less likely than a general shrinkage of their loan portfolios.

What most interests me is that our legislators and regulators reform our relevant moneylending laws before the non-bank sector is reborn. They must also strengthen their ability to supervise the sector and ensure accountability for poor performance.

The discussions on reform are already beginning. I sense that reform is inevitable. The new standards must be strong if the public is to fund the new players.

My hope is that the non-bank lenders will be owned by institutions or organisations with the grunt to ensure survival, over many decades.

I can imagine a cash rich organisation like Ngai Tahu forming a non-bank, based in the South Island, where productivity is high yet the key sectors are starved of sufficient banking tension to provide effective competition.

Imagine Ngai Tahu Finance, capitalised with $100 million, raising money with secured debentures, its behaviour controlled by a carefully drafted trust deed, supervised by an appropriate regulator, the governors and key executive having achieved a ‘’no objection’’ from a wised-up Reserve Bank.

Impose on that a properly resourced Financial Markets Authority to oversee and enforce the new regulations, backed up by much better accounting laws and by a much more accountable auditor.

The deed supervisor would be accountable, and would sign off each significant loan as being compliant with the trust deed.

The governors and the executive would be committed to instalment lending, skilled in cashflow planning, and experienced in moneylending.

Investors would be paid 5% for three to seven year money, which can be comfortably lent to the plant and equipment sector, to the productive sectors and to the least risky group of all, the car loan sector.

The deed would spell out standards, maximum exposures to sectors and the commitment to instalment lending.

The non-bank sector would bring tension to bank pricing and even bank lending policies.

Maybe the margins achieved by Ngai Tahu would feed back to their 50,000 members, via dividends.

Perhaps Tainui might also have the expertise to consider such a move.

However it all starts with reform.

The book The Billion Dollar Bonfire is not solely an account of how Allan Hubbard and John Key’s government wrecked an important company and set fire to a billion of ‘’chump change’’.

It is especially a plea for reform on all aspects of capital markets, but particularly the non-bank sector, and the behaviour of those who would feed from it, including trustees, auditors, receivers, directors and executive management.

The Reserve Bank governor Adrian Orr has rattled the Australian banks, prompting a poorly thought-out strategy of a public protest, implying the banks think they could win the battle for social media ‘’likes’’.

Fat chance.

If the outcome is NZ bank mergers, and a new round of strong non-banks, Orr will have won a famous outcome for the country.

The Australian banks were a great source of strength for New Zealand in 2008, and they set standards of customer friendliness that far outstrip standards in the UK or the USA.

However the Aussies will know that the best plates of the feast are now empty.

The new chapter of an intriguing saga is about to be revealed.

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Many of us now facing our ‘’golden years’’ will recall the days when New Zealand virtually stopped, during the rare All Blacks test matches of the 1950s.

Some will recall the skill, speed, and the pinpoint centre kicks of Ron Jarden, a stylish winger who lit up the matches he played for Varsity, Wellington and the All Blacks, around that time in 1956 when the Springboks were here. Others might recall his feats as a yachtsman.

Yet others will recall his innovation when he formed R.A. Jarden & Co and quickly assembled the best talent in the NZ sharebroking sector in the 1960s.

His premature death brought all sorts of nutty speculation but his legacy was the biggest pool of talent to address the changes needed in New Zealand.

His old firm has now returned to his name after many name changes, twice prompted by the international purchases of the Jarden brand.

The company now has a strong relationship with the international investment bank Credit Suisse First Boston (CSFB) but is owned and controlled by New Zealanders.

As an old-timer I am delighted to see the name Jarden being honoured, the renaming of our leading investment bank a recognition that innovation and strategic leadership is again surfacing with a Jarden name.

As an old-timer I cannot forget Jarden for his centre kicks, often brilliantly anticipated by the flanker Bill Clark, who so often scored from Jarden’s genius.

Jarden, the broking firm, dominates institutional broking and now is widening its product range to include property lending and hedge-fund-like investment in private companies (Pearlfisher and Principal Investments).

This is a sign that sharebroking is changing rapidly.

In recent years, as brokerage costs have been commoditised many brokers have moved to a model that is even more lucrative than sharebroking fees, charging a 1% or more annual fee on portfolios that might or might not need any modification!

A broking-only model obtains no broking fees if the portfolio needs no adjustment but the annual fee soaks up returns, even if no adjustments are advisable.

A cynic might ponder whether changes are periodically made to justify fees.

Jarden himself is likely to have spotted that the money being made today is mostly being captured by hedge fund managers, fund managers and by assembling the best and most creative thinkers to solve corporate problems.

Perhaps we will also see the re-emergence of the Renouf name, Frank Renouf being the other great innovator of the 1960s, even if his social behaviour was somewhat undignified.

The Jarden people today will need to lead the market in best practices, to pay homage to Ron Jarden, one of the great All Blacks who, like Wilson Whineray, was a force in commerce, as well as rugby.

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Johnny Lee writes:

The new Smartshares Exchange Traded Funds (ETFs) have sparked some response among readers requesting more information, particularly regarding the Robotics and Automation ETF and the Healthcare Innovation ETF. Their codes are BOT and LIV, respectively, on the NZX.

The Robotics and Automation ETF invests 100% of its assets in to another ETF, the ‘RBOT’ iShares ETF, which is listed on the London Stock Exchange. The Healthcare Innovation ETF has the same structure, and invests along the same terms to the ‘HEAL’ iShares ETF. Effectively, the NZX has appointed BlackRock, the world’s largest fund manager, to manage these funds on its behalf.

In my view, the chief advantage these products offer is access to securities and industries that are not conventionally available within New Zealand. Other ETFs also offer the benefits of diversification, giving investors the opportunity to buy a ‘basket’ of stocks across a range of industries and strategies. Buying the DIV ETF, for example, gives investor’s exposure to Contact Energy, Spark and Infratil, among 25 different companies based on a dividend payment measure.

The BOT and LIV ETFs do not offer the same diversity advantage, as the funds are typically invested (by design) in to the same narrow field of industries, with predominantly growth companies within its holdings.

BOT, via its holding of RBOT, is almost exclusively invested in Information Technology stocks, its largest holding in a company that was losing significant sums only four years ago. Its major investments include companies listed in the US, Australia, London and Brazil.

LIV (via HEAL) is smaller, and invests primarily in health technology stocks. Its largest holding is in Dexcom, a company diabetics may have some familiarity to, using technology to monitor glucose levels. It also invests in Acadia Pharmaceuticals, a company specialising in the treatment of some of the symptoms of Parkinson’s Disease, as well as Divis Laboratories, a large Indian pharmaceutical company.

The past performance of the two underlying ETFs has been mixed. RBOT has performed slightly better than global markets, while HEAL has underperformed. This underperformance has been reflected across the US Healthcare sector, which have generally underperformed the market.

Investors buying these ETFs will also be exposing themselves to currency risk, as both products are ultimately priced in USD, but are locally bought using NZD.

The new ETFs provide a valuable tool to investors who wish to diversify in to sectors currently unavailable via the NZX. The two mentioned do not pay dividends, and are unlikely to do so in the future. The Smartshare ETFs are structured as PIEs, affording a tax advantage to some investors. The fees charged to manage the funds are the highest of the Smartshares ETFs, and investment in them should be towards the specialised, growth end of an investor’s portfolio.

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Further details on the new Mercury bond (MCY020) have emerged.

The offer, which is subject to a minimum rate of 3.60%, has a legal maturity date of 30 years, but a reset and possible repayment after five. This structure is the same as the initial bond (MCY010).

This arrangement is designed to facilitate recognition of a portion (50%) of the funds as Equity for Mercury Energy’s accounting. This Equity content is expected to fall to nil after ten years.

Existing bondholders will not be able to rollover their bonds without a firm allocation from a market participant. We will be seeking an allocation.

Existing bondholders will be given no preference by Mercury, but will be supplied the option to have the proceeds from their existing bonds used to settle the application for the new bonds. The application form can be found on our website.

Our expectation is that the rate will be close to the minimum of 3.60%, reflecting both falling margins and swap rates.

Mercury Energy is paying brokerage on this bond issue. Clients do not pay brokerage to invest in these bonds.

Existing bondholders, and new investors, are welcome to contact us to request an allocation, but will need to do so by 5pm on Tuesday 18th June.

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Chris will be in Tauranga on Thursday 20 June, to deliver two seminars. The first meeting (investing in today’s low interest rate environment) will start at 11am, the second (The Billion Dollar Bonfire – how Allan Hubbard and the government destroyed SCF) begins at 12:15pm. He will be at Hotel Armitage, 9 Willow Street, Tauranga.

If anyone would like to attend this meeting, please contact our office.

Chris will be in Auckland on 24 and 26 June, and Whangarei 25 June.


Ed will be in Nelson on 18 June, Auckland (Remuera) 9 July & Auckland (Albany) 10 July.

David will be in Palmerston North on 2 July.

Taking Stock 6 June, 2019

Chris Lee writes:

THERE will be much corporate chatter about the call for former prime minister and Merrill Lynch FX manager John Key to resign from his figurehead role with the ANZ.

Key has been urged to resign by former BNZ director, Kerry McDonald.

McDonald, of course, was a commentator on economics in his younger days. The natural affection levels between those applying the art of economics, and those practising the modern art of FX shenanigans, is not always obvious.

In McDonald’s case, his reputation for corporate sagacity was somewhat undermined by his role as chairman of Powerhouse Ventures, the ill-fated incubator investor, which thoroughly rorted the public with an ASX-based issue of shares, its prospectus grossly misleading investors.

How those directors escaped judicial scrutiny is not something I will ever understand.

McDonald, as chairman of Powerhouse, signed a prospectus that valued its key asset, Hydroworks, on a basis far removed from any meaningful criteria that might have been current at the time of the issue.

He resigned weeks later, Hydroworks collapsed, and the hapless investors in Powerhouse, including me, lost 90% of their investment.

McDonald now lives in Wellington, has no governance roles to my knowledge, but clearly is happy to share his knowledge of the sort of banking responsibilities that Key has sought.

He urges Key and other ANZ directors and governors to resign, because he sees the ANZ’s misuse of models to calculate bank capital requirements as egregious.  He has the view that a director who does not understand the importance of capital modelling, and the obligation to ensure that modelling matches the requirements of the market regulator, is a director unfit for purpose.

Perhaps McDonald hankers for the day when bank directors could display detailed knowledge of the banking sector, rather than be good communicators with a high approval rating by the television audiences, and with more ‘likes’ than ‘dislikes’ on social media.

If these are McDonald’s expectations of a bank director today, he may be displaying the same mistakes that many of us of a certain age continue to make.

We still expect directors of all companies to have detailed, relevant knowledge and we expect the companies in which we invest to accept the jurisdiction of those who create regulations.

Modern boards have slightly more liberal frontiers.  They often expect legal opinion to define the flexibility of regulations, and often will use those legal interpretations to be a tool to enable marginal improvements in short-term performance.

Quarterly measurements of profit are often enhanced by the use of clever legal opinions on the flexibility of regulations.

The ANZ, and its recently-appointed director Key, say its accidental misuse of a ‘model’ to calculate minimum capital requirements led to it holding $23 million less capital than the regulators required, an amount of no relevance.

The bank has been heavily censured for its under-providing of capital.

McDonald wants Key to resign and has the same message for other directors and various executives.

It is pleasing that he has raised the issue of accountability, a subject that many, including me, might have wrongly thought was no longer a concept that was relevant.

Key is unlikely to be intimidated by McDonald’s public outcry. The ANZ will regard this error as little more than a parking offence, perhaps the equivalent of stopping on a broken yellow line, while stocking up on a Big Mac and a box of fried chips.

My thoughts are darker.

Until we have a fit and proper person criteria applied to all directorship appointments, until we have accountability for all man-made financial disasters, and until we disregard clickbait and ‘likes’ as being worth of display, I will have very low expectations about the contributions of directors.

As my book The Billion Dollar Bonfire discusses, we need a pathway to the High Court to allow potential victims to achieve rapid, low-cost reparations for governance errors that are not eligible to fit under the heading of ‘market risk’.

Accountability seems to be an outmoded concept.

Compensation seems to be a naïve expectation.

My book calls for standards to be enforced, especially applied to those who are extremely highly-rewarded by capital markets.

My solution is to have a three-pronged outcome for real miscreants; take their wealth off them to compensate victims, take from them their privileges (and freedom) and bar them from employment in capital markets.

I cannot agree with McDonald’s view that Key and others at the ANZ have erred to a degree that demands such a strong response.

McDonald’s own error with Powerhouse strikes me as having more victims than ANZ’s errors.

But I will support him for raising the subject.

When will we see accountability for outcomes that do have real victims?

The Billion Dollar Bonfire, one hopes, will help McDonald to move this discussion into more boardrooms.

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Johnny Lee writes:

IF there is one inescapable law in the field of economics, it is the law of supply and demand.  Market prices are fundamentally determined by these two factors, representing those who wish to acquire something, and those who wish to meet that demand.

Different market cycles produce different pressures on these points.  In the years following the Global Financial Crisis (2008, 2009) New Zealand’s largest companies, including Fletcher Building and Sky City, went cap in hand to their retail shareholders to raise money at deeply discounted prices.

Primarily, these rights issues were used to repay debt, which for many of these businesses had ballooned to excessive levels.  Some were forced by their lenders to do so.

Investors were nervous, and demand was low.  Banks were sometimes unwilling or unable to lend.  Companies were desperate to reduce their debt levels, clambering over themselves to raise money from the market.  Those willing to take risks were rewarded by this imbalance, as rights issues were priced at levels that rewarded that risk.  The long-term losers, largely, were those who chose not to participate, having witnessed their investment fall alongside world markets, fearful of throwing good money after bad.

Today, of course, most equity markets are either at, or close to, record highs.  The imbalance has shifted, as record low interest rates are seeing people absquatulate fixed interest markets in favour of equities.  It is not so much a vote of confidence, as a vote of necessity, as returns elsewhere are simply unacceptable to a growing number of investors.

The best listed companies will remember their retail shareholders’ support during leaner times, and continue to treat them fairly when markets move in their favour.

This growing supply of investible capital should, in theory, lead to more firms choosing to raise money from this capital as the cost of doing so falls.  In New Zealand, we may finally be seeing this, with several firms coming to market to raise capital.  Upon us shortly is one of the country’s largest export ports, Port of Napier.

The timing of the float will coincide with several hundred million dollars returning to investors’ pockets, as the slim pickings available on the debt market show no sign of improving.  Coupled with a utility type (Port), which have historically been highly valued, the offer is likely to see some scaling and a price that reflects the demand of the issue, which will be heightened by the lack of alternatives.

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LONG, long-suffering Pacific Edge shareholders may find themselves asked yet again for more capital, after the company’s annual result last week disappointed the market.

The biotechnology company, which has created and patented technology used to detect the presence of bladder cancer, has been listed for more than 15 years.  During these years, it has more than justified its annual NZX fees, raising tens of millions from its many, many rights issues over that timeframe.

Some investors may feel their patience beginning to diminish.  PEB reported a $17.9 million dollar loss for the year, with cash on hand of about $12.8 million.  The arithmetic should not require further explanation.

With a share price below twenty cents, the repeated failure of Pacific Edge to achieve even modest revenue is a cause for concern.  A comparison could be drawn to Orion Healthcare, another company with long-term aspirations and short-term pressures.

The potential of its product has never been in question.  Bladder cancer remains one of the most expensive cancers to treat, with the bulk of these costs surrounding the surveillance and treatment of recurrences.  More than a million Americans each year conduct tests for bladder cancer, costing them collectively over a billion dollars.  The market is real.  The product is real.  

Pacific Edge expects its New Zealand operations to be cashflow positive within 12 months, but may require additional capital to accelerate its growth overseas.  After more than a decade of shareholders stumping up cash to support the company’s ambitions, the share price is now virtually where it began.

Pacific Edge is a company that society wants to succeed, with a product that can quite literally save lives.  However, the consistent failure of the company to meet its targets has left the market wondering whether the company will ever reach this potential.  After 15 years, shareholders will need to ask themselves whether they wish to further commit to the company when the cash next runs out. Will Pacific Edge ever successfully monetise its clever technology?

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Edward will be in Nelson on 18 June and in Remuera on 9 July & Albany 10 July.

Chris will be in Palmerston North on Thursday 13 June, to address seminars on ‘The New Norm for Investors’ and then the background to ‘The Billion Dollar Bonfire’.  The meetings will be held at The Coachman, 140 Fitzherbert Avenue. The first meeting will start at 11 am, the second beginning 12:15pm.

Chris will hold the same seminars in Tauranga on Thursday 20 June – venue and times still to be confirmed.

Chris will be in Auckland (Mt Wellington) on 24 June and at Albany on 26 June. He will be in Whangarei on 25 June.

David will be in Lower Hutt on 11 June and Palmerston North on 2 July.

Please contact us by phone or email if you wish to attend any of the seminars or make an appointment to see any of our advisers.

Johnny Lee

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