Taking Stock

Read the latest Taking Stock

Taking Stock 10 October 2019

In the minds of some, the Todd family, who own Todd Corporation, have been clever investors, careful guardians of the fortune the family created, and now are philanthropic, dispensing some of their income to the family and some to charities selected by the Todd Foundation. 

There is some truth in that narrative.

They have certainly built a multi-billion dollar empire over the past 80 years and the Todd Foundation is an admirable example of wealth-sharing, but there are some obvious matters that should be considered by those who acclaim their omniscience and their investment skills.

There is at least some truth in the observation that the Todds built their fortune by shooting rats in the import licensing pork barrel that dominated business in the mid-1960s, an era which granted politicians the power to anoint various families and businesses with licences to print money, in the decades before deregulation.

Todd imported fuel and retailed it through their fuel brand Europa; they captured the agency for Fokker Friendships, one of the workhorses of the NAC, the predecessor to Air New Zealand’s domestic affairs.

They had the licence to import the components and then build vehicles for Mitsubishi, Chrysler, Hillman and other motor vehicle brands, leading to their advancement from a tiny Petone plant to a giant assembly plant in Porirua.

By far their biggest coup arrived from simple good luck. Six decades ago, they decided to invest in oil exploration. The first two holes in which they participated as junior partners with BP and Shell hit pay dirt.

The holes became the Kapuni and Maui offshore oil and gas wells, still by far the most productive holes ever drilled in New Zealand, producers of billions of dollars of wealth.

Not many novice oil players have ever had such luck, anywhere in the world.

Maui and Kapuni turned a family from one that was merely blessed by the munificence of politicians into a seriously wealthy family, almost the sheiks of New Zealand.

However, the key word here was luck, not genius. Many say it is better to be lucky than clever.

The Todd family’s leaders had varied greatly in cerebral endowment, varying from the canny, like Brian Todd, to the skittish, like the late John Todd, to straight out C Streamers, whose names need not be published.

Nor did the Todds always select the smartest outsiders to bolster their corporate team, one remarkably uninsightful figure once declaring at a 1980s board meeting that the kiwifruit industry would be a five-minute wonder, its core product unlikely to be eaten widely.

Perhaps the biggest blunder in public was committed by the late John Todd who, as a neighbour of the slick salesman Bruce Judge, agreed to invest $70 million of Todd’s money into Judge’s thin-air company, Judge Corp, an investment that within a year or two was worth as much if doubled, or halved. 

This error may not have been the worst Todd investment, but it was surely the most obvious example of fallibility.

Today Todd Corp has an excellent chairman in Geoff Ricketts, who wisely retired as chairman from Russell McVeagh in its days of pomp, and now chairs the solid performer, Heartland Bank, as well as Todds.

As far as I can see Todd’s greatest decisions have often not been to buy, but to sell. Unlike many large corporations Todds has always seemed willing to quit while it was ahead, a trait that differentiates the Todds from their Auckland dynasty rivals, the Fletchers.

Todds quit Fokker Friendship ties before that aircraft was usurped.

It quit Mitsubishi Motors, returning its franchise to its Japanese suppliers, before the fall of the car assembly industry.

It quit the finance company sector in the mid-1980s, before the ’87 crash, selling its share of General Finance to the National Bank.

It sold Europa to BP, rather than fight outside its natural division, lightweights rarely beating heavyweights.

Now Todds is quitting hundreds of millions of dollars invested in land holdings in Auckland, Christchurch and Paraparaumu, selling to a property-holding company with connections to investors in Qatar, as well as New Zealand.

In Auckland Todds has land at Long Bay and Stonefields, in Paraparaumu it owns much of the land around Paraparaumu’s airport and in Christchurch it owns land at Pegasus Bay.

That Todds is abandoning an interest in developing what others might see as land ripe for residential development suggests either that the Todds are reducing debt, dispersing some hefty chunks to the various family offshoots, expressing a view about risk and return in the area of land development, or perhaps preparing for a large overseas call on an investment the family intends to fund.

The Todds have made most of their wealth through Maui and Kapuni but they have also made good returns from land development, in their long history.

For example, Todds was a major investor, with Fletchers and National Mutual, in the land that has grown into the Wellington suburb of Whitby, the shareholders wealthy enough to outlast various market downturns leading to painfully slow sales.

Whitby is now a splendid suburb, but it would have remained desolate had the major shareholders not been deep-pocketed, in the 1970s and 80s, when holding costs reached towards 20% per annum.

I have no insight into why the Todds sold land last week but if the decisions were strategic many small developers should pay attention.

Perhaps the Todds can see that Kiwi Build is going to dominate the scene for some years; perhaps the family sees global events impacting on New Zealand; perhaps the family is now influenced by short-termism, the virus affecting so many big businesses.

Maybe they struggle to find contractors to sign up to land development deals with a player that has often been seen as hard-nosed, if not brutal, in its relationships.

It will be instructive to watch the progress of the new owners of the valuable land sites. Has Todds timed its exit with prescience, or does it simply need funds for other purposes?

 _ _ _ _ _ _ _ _ _ _ _ _

Global tremors certainly struck Australia’s capital markets last week.

In two days the ASX lost $80 billion, or 2.2% of its total value, and this was despite the Australian central bank dropping its cash rate to a historic low.

The ASX market capitalisation must be getting close to $4 trillion, a formidable figure compared to New Zealand’s equity market value of barely $150 billion.

The Aussie dollar’s loss of $80 billion last week was equal to more than half of our NZX total market value.

Australians fear a recession. They fear a series of poor corporate results, they fear the effect on their banks of the current mood of regulators, they fear the global scene, and they fear a devastating drought, described last week by its farmers as the equivalent of a  ‘’GFC’’ (global crisis).

Climate change is gradually being acknowledged in a country which still burns and exports coal, which has until recently resisted a move to renewables, has procrastinated over the building of dams, and the spending on desalination plants.

Perhaps the most painful change for Australians to accept is the irreversible and distressing degradation of the coral reefs around the Tropic of Capricorn where the Great Barrier reefs are iconic.

The demise of Holden, and indeed the car assembly industry, has demoralised many.

Right now the finance sector is focused on its main four banks, which are making provision for multi-billion dollar compensation payments to those customers who were cheated by the banks in the last 20 years, the CBA the worst offender, the ANZ agreeing to another half a billion of compensation earlier this week.

The banking era of unjustifiable bonuses is certainly stalling. Vulgar salaries should be next in line.

Dividends have to fall and costs, including executive remuneration, have to be cut.

There will be job losses, more branch closures, and lower share prices, the latter of great concern to Australian fund managers, who tend to be over-weighted in bank stocks.

Indeed fund managers like Perpetual are already announcing job (and bonus) cuts.

Perpetual in Australia is in a different stratosphere from the ugly Perpetual Guardian Trust in New Zealand, but it performs similar tasks.

It has conceded that large swathes of jobs will have to go.

My view has long been that the managers of wills and estates should never be allowed to allocate their captive clients’ money into funds managed by the company, enabling them to double and even triple dip into the funds of the trusts and estates.

I do not have to try too hard to persuade those people who ignore the sales pitch and observe the nett return to estates and trusts.

Trust companies like Perpetual in Australia, and any trust company in New Zealand, would never manage any money for me. They simply do not, and cannot, exhibit the skill or the culture that I would expect, and their costs are exorbitant.

If the Australian ‘’big four’’ banks are facing scrutiny and difficult market conditions, their reduced prospects will have a material effect on pension fund returns there and in New Zealand. Ten percent of the returns of managed funds in Australia depend directly on bank dividends and share price.

The commission of inquiry into the Australian banks, coupled with the determination of the regulators to force the banks to increase their capital, might lead to long-term gain but the short-term pain will be unavoidable, the big banks virtually certain to reduce dividends for many years.

Academics might argue that the regulators are being too tough on the banks, but the momentum will be hard to slow. The reality is that the banks have lost their mojo with their absurd bonuses, their greedy fee-setting and their ghastly selling culture.

Australian finance companies, like Latitude and Pepper, soon might be stealing some of the banks’ plums, if they choose to structure themselves properly, with real capital, independent governors and transparent, sane operational rules, covenanted in a modern trust deed.

Both are raising capital.

It may be improbable but if either of these genuinely large Australian finance companies sought a retail funding base in New Zealand, they would add some much-needed competition for long-term retail funding support.

 _ _ _ _ _ _ _ _ _ _ _ _

I will shortly review in depth the book Banking Bad, a non-fiction account of how the banking leaders in the past three decades have destroyed customer confidence in big Australasian banks.

From a personal viewpoint I have been a grateful user of bank services, largely because I have declined their fee-rich products, refusing to buy into their managed funds, not using their lending products, and not seeking their ‘’advice’’.

The banks have processed our transactions well, at minimal cost, and safeguarded any money deposited with them.

Probably I would be seen by bankers as a ‘’free-loader’’ as I decline to buy the guff they sell.

Banking Bad, the book written by journalist Adele Ferguson, tells the story of what led to the commission of inquiry into banks, and what horror stories the commission unveiled.

Regrettably, various New Zealand bankers in Australia emerge from the stories with ignominy; greedy bullies, some of them psychopaths, apparently indifferent to those whose lives were ruined.

The insurance and funds management industries were just as active, so many focussed on pursuit of revolting, meaningless personal wealth.

Salesmen whose internal fame came from quantitative sales glory were not reported or sacked when their criminal behaviour was detected (such as signature forging, document altering).

Banking Bad reports the outcomes that were forecast in the 1990s, even in Taking Stock, when banks moved their culture from meticulous, caring administration of other people’s money, to a quest for high, short-term profits, high dividends, and, most of all, obscene salaries and bonuses for those in charge.

I will detail this decay by reviewing the book in coming weeks.

Do not read the book, or my review, if you have a weak stomach or have a favourite son-in-law involved in running the banks in this era!

 _ _ _ _ _ _ _ _ _ _ _ _

TRAVEL

I will be in Christchurch on Tuesday 15 and 16 October.

Edward will be in Auckland (Remuera) on 16 October.

Kevin will be in Ashburton on Wednesday 6 November.

Chris Lee

Managing Director

Chris Lee & Partners Ltd

This emailed client newsletter is confidential and is sent only to those clients who have requested it. In requesting it, you have accepted that it will not be reproduced in part, or in total, without the expressed permission of Chris Lee & Partners Ltd. The email, as a client newsletter, has some legal privileges because it is a client newsletter.

Any member of the media receiving this newsletter is agreeing to the specific terms of it, that is not to copy, publish or distribute these pages or the content of it, without permission from the copyright owner. This work is Copyright © 2019 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz