Taking Stock

Read the latest Taking Stock

TAKING STOCK 22 March 2018


NEVER underestimate the power of the banks.

Placed in charge of billions of other people’s money, and effectively in charge of the process of trade, bankers have almost unbridled power.

Yet one should never underestimate the power of the Crown.

The Crown has the power, and sometimes the intellect, to reign in the banks.

Australia is now witnessing a battle between the banks and its Crown.

A commission of enquiry with almost unlimited power is investigating the behaviour of the banks in Australia over the past several years.

In that time the banks have cheated with interest rate setting, cheated with foreign exchange dealing, dealt with banned countries and people, and ignored anti money laundering laws.

The pursuit of profits, power and personal, revoltingly excessive wealth has been ugly.

In addition, the banks have failed to meet social expectations.

There have been allegations about boyish, offensive behaviour in dealing rooms, the banks have been slow to promote equal pay, and the numbers on boards and in executive teams have not reflected that a good ratio of the work force are not males.

The banks may be charged with making too much money!

The commission will be poking its nose into corners not usually examined by outsiders.

It may sound pious to suggest that NZ has not had the same levels of lousy behaviour.

Perhaps being smaller, New Zealand does not allow the same opportunity to behave badly, but with some hope of anonymity, though the corporate grapevine does not always work well.

Here when a Westpac lender was fired for exploiting his position as a lender, everyone in his town, Christchurch, knew about it, but somehow he emerged later with even greater authority in another financial institution.

Perhaps the trail of gingerbread biscuits does not always lead back to Hansel’s house.

The Australian enquiry will undoubtedly lead to demand for much more accountability, much better social behaviour, and much stiffer penalties for those who want to cheat.

We are already seeing the Australian banks proactively bringing about changes that might mitigate some areas of criticism.

The appointment of the former Merrill Lynch foreign exchange manager, former NZ Prime Minister John Key, as chairman of the somewhat figurehead-only NZ board of ANZ, was frankly a pretty feeble move to acknowledge that the bank wanted to show a new face, and was prepared to pay for a familiar face.

When Key was appointed to the board with real power, the ANZ Australian parent board, one could see that the ANZ was keen to display the need to have a respected fresh name at a meaningful level.

Key had a career as a fairly ruthless power broker in an American bank (Merrill Lynch). He was known as the ‘’smiling assassin’’.  He has morphed through his role in politics into someone now seen as ‘’connected’’, worldly and telegenic.

He has made speeches about the need for social responsibility and social goal-setting, in large corporates.

Whilst his old workmates may be chuckling at his transition, the fact is that his status, and his presence, has been judged by the ANZ as being valuable for the bank’s image.

It is not just the appointment of Key that illustrates the ANZ’s urgent wish to be seen to be adapting to a new order.

Within the bank now it is commonly noted that if two people want a new job, and only one is male, the man may as well not apply.

Gender, rather than merit, might be the only relevant factor, as the bank addresses an issue that grew in visibility when women became more available for executive careers.

I expect to learn that the banks are all reviewing their executive bonus schemes, while the Australian commission of enquiry continues.

The banks will not want to look like the US bank Wells Fargo where the CEO, after yet another poor year, has received a revolting multi-million-dollar bonus.

Banks are really seriously powerful; V8s, twin turbo.

Commission of enquiries are more powerful; bulldozers well able to crush any V8.

We will observe the outcome of this enquiry, soon.

 _ _ _ _ _ _ _ _ _ _ _ _

INVESTORE Properties may be pondering whether its new secured bond is paying interest at a higher rate than it required.

Its issue has been over-subscribed.

The property trust owns a large number of Countdown sites, subject to leases of an average 13-year term.

Its bond is for six years and is secured by a first mortgage over those properties.

Investore will pay 4.4%, a significant margin over similar bonds available on the secondary market, and it will pay the transaction costs, rather than dump the cost on the investors as, increasingly, others are choosing to do.

The over-subscription might make IPL wonder if its coupon was set too generously.

My view is that the secondary market rates are where the errors are occurring. I think IPL has set a fairer rate than the secondary market offers.

IPL has wisely offered a three-week collection time, the offer closing on April 9.

Those wanting an allocation should contact us urgently, certainly within a week.

_ _ _ _ _ _ _ _ _ _ _

THE Air New Zealand chief executive Christopher Luxon is being touted as the top contender for the role of chairman of Fletcher Building Ltd.

The FBU chairman’s role becomes vacant when Ralph Norris resigns, wisely accepting that his performance as FBU chairman has been inadequate.

A group of FBU shareholders have been contemplating what credentials FBU needs.

They conclude it needs a leader from the service sector, a leader who has demonstrated commitment to a culture of quality, and a leader with the energy and reputation to bring about change.

You might say that former Air NZ CEO Rob Fyfe fits that description; so does Luxon.

Ironically Norris, a banker, was once CEO of Air New Zealand.

A new chairman will be needed if the recently appointed FBU chief executive, Australian Ross Taylor, has failed to drag out of his executives all of the potential risks and costs of its construction division.

Taylor believes he may have over-provided for risk.

Market mumbles continue to speculate that Taylor may still not know the potential costs.

If FBU has yet another year of being in the public stocks, facing tomatoes, perhaps tomatoes in tins, it will need a highly accomplished leader to reverse the demoralisation of the long-term, committed staff.

Perhaps a name change, a new chairman, a new culture and a clean balance sheet might be the start point.  Did I suggest that years ago?

 _ _ _ _ _ _ _ _ _ _ _ _

THE desire of Auckland Council (AKC) to sell low-yielding ‘’green’’ bonds is being expressed at an appropriate time.

Bond yields are low, and will remain low, so the rate discounted to accommodate green aspirations will be insignificantly lower than all other rates.

Rate-conscious investors will step aside but it is easy to see an AKC green bond being attractive to some investors who perhaps have given up any hope of a fair return for risk.

 _ _ _ _ _ _ _ _ _ _ _ _

AS the financial advice sector heads for its umpteenth iteration of rule changes - this time a review of a prescriptive code of conduct - many investors will be required to adjust their expectations.

The code has always been lengthy. It was prepared by a committee.

Many will recall how the group that initially sought to create the Financial Advisers’ rules and code of conduct comprised some inexperienced, in one case inept, advisers.

Some resigned when their competence was debated in public documents, like the Consumer Magazine.

Ultimately the Financial Advisers Act was implemented in 2011 and did the nation a great favour, ensuring that the likes of Douglas Lloyd Somers-Edgar would not be able to exploit trusting investors. (He ‘’retired’’ before the code arrived.)

The FAA and the attached Code helped to rid New Zealand of at least ten thousand ‘’financial planners or advisers’’ and set up visible channels for protection from charlatans.

By far the most obvious demand of advisers became the all-embracing requirement to put clients’ interests ahead of all other considerations.

To most of us this was like the Road Code’s first requirement being ‘’Do not crash into others’’.

The change now affecting investors has come about during the logical process to merge the relevant, but in some cases different, requirements of the Securities Act with the Financial Advisers Act into one new piece of legislation, the Financial Markets Conduct Act.

An obvious anomaly previously was the different definitions of those investors who were eligible to consider financial offers that were not overseen by the market regulators.

Let us say a cousin wanted to raise $100,000 to set up a business specialising in decorating balloons.

He could prepare a one-page ‘’information memorandum’’ and pass it around friends, family, wealthy individuals and people who said they had investment skills.  (Today he might visit one of the ghastly ‘’crowd’’ funders.)

They were either ‘’eligible’’ investors, ‘’habitual’’ investors or ‘’wholesale’’ investors depending on which clause of the acts you were reading.

Effectively this meant that informal, unapproved, unregulated offers could be judged by some potential investors who certified that they were capable of making a judgement, and would not grizzle if the business venture failed.

Such investors could also participate in underwriting or sub-underwriting panels.

Well, this is changing.

The new Financial Markets Conduct Act is very specific, and will set a high bar for those who might want to invest in ventures that do not offer an approved investment statement. Curiously it will not close off crowd funding.

In practice, extreme wealth, investment experience and high incomes will be irrelevant unless the investor is working in an investment business or, interestingly, as worded ‘’the person is large’’.

(I will qualify.  There is no need to ask which of these criteria will qualify me.  By some definitions, the answer would be both.)

There will still be room for ‘’eligible’’ investors but such an investor will need to certify in writing some quite specific qualifications.

Frankly, the rule as it was before was loose, and inconsistent across different legislation.

It was exploited by financial advisers that either could not have passed the relatively modest educational standard or would not have been deemed to be fit and proper people to offer retail investors advice.

Many such advisers/financial planners chose to offer services only to ‘’wholesale’’ or ‘’eligible’’ investors, effectively requiring clients to sign certificates about their wealth or skill.  This relieved the advisers of displaying AFA competence.

To tidy up this looseness seems a useful objective.

The new FMCA law is not worded as I might prefer but if it is used with honest intentions it will do its job.

The rewriting of the Code will also be of some importance.

It is currently unnecessarily long.

I can attest that not once in seven years has any of our several thousand clients ever made reference to the Code. It seems to be written to control advisers rather than to display to investors the rules of the game.

It should be succinct and unambiguous, should demand client-first ethics, transparency, disclosure and behaviour that is honourable.

I wish it would mention good manners. (That might help Russell McVeagh to move forward with its own code.)

It should describe an obligatory complaints process (as required of all financial advisers).

I would be happier if all advisers were required to display a minimum level of capital and be constrained to manage client money in volumes that related to capital.

This would certainly put an end to those money chains, like Edward Jones in America, that will employ anyone who knows how to sell over a phone.

A capital requirement would also ensure that only those with meaningful capital can ever have control over large sums of money. As Warren Buffet once noted, there is an irony in people arriving at your office in a Cadillac to seek advice on wealth from people who ride the train to work.

I would also prefer that the new Code differentiate between those who simply sell for fund managers and those who know the securities markets, and understand the details of the securities used by clients.

I guess the weighting is probably 80% in favour of salesmen for fund managers, the sales people neither knowing nor necessarily caring what strategies or securities are used by the fund managers.

If an investor wants to test the validity of my guess he should ask his adviser if the various funds his money has entered leaves him exposed to the disastrous CBL company.

Likewise it is highly unlikely that most salesmen of ETFs would have any specific knowledge of their actual holdings in securities.

The new Code should acknowledge the difference between those two types of advisers and should apply sensible constraints on those who want a client to give the salesmen discretion to buy and sell client securities without reference.

In this area the gold standard is admirable and well enforced by competent, active compliance managers.

The bottom tier of this discretionary service might have portfolios filled with stocks in companies that are linked to the employer of the advisers.  Chinese walls may be made from penetrable materials. Again, investors can check their portfolios so see if there are links between the investment chosen, and the promoters of the original issues.

If any investor discovers his portfolio has been stuffed with poor performers, let it be said that Trump is not the only person who can fire people!  Investors have the power to sack poor advisory groups.

 _ _ _ _ _ _ _ _ _ _ _ _


I will be in Christchurch on March 27 (pm) and 28 (am) in the Boardroom, Airport Gateway Lodge, 45 Roydvale Avenue.

I will be addressing the NZSA meeting at St Christopher’s Hall, Avonhead, at 7pm on March 27. All clients are welcome. Please let our office know if you plan to attend.

I will be in Auckland April 17 (pm) at Albany Motor Lodge and April 18 (am) at Waipuna Lodge, Mt Wellington.

Kevin will be in Ashburton on 12 April.

Edward will be in Remuera on 10 April and Albany 11 April.

David Colman will be Palmerston North and Whanganui on 27 March, and New Plymouth on 28 March.

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 meeting.

Chris Lee

Managing Director

Chris Lee & Partners Limited

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 © 2018 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz