Taking Stock 23 June 2022

THE creaking and groaning of the NZ health sector has for some time been audible – maybe decades – but the noise is getting louder, as the listed company Arvida is now warning.

Our health system relies heavily on the private sector to provide geriatric care services.

The public sector abandoned such care decades ago. It can deal with injuries or events like cancer.

The public sector cannot deal with the needs of people who through sickness or attrition have become dependent on daily care.

Ryman, Summerset, Oceania, and Arvida are public-listed companies that built models that provided access to care, by offering property (villas, care rooms), at a price that effectively covers most of the cost of care.

In the better retirement villages wonderful care facilities cater for the chapter of life when high-cost care is required, often by just one of the retired couples who might have lived in the village together, for as long as they could each be independent.

For many years the threat casting dark shadows over this model has been the practice of successive governments of grossly underpaying for the cost of the care.

Governments, and health boards, have demanded the right to place people with licensed care providers, with the obligations to pay the costs.

But the Crown decides what the cost should be, and has long under-subsidised the cost of nursing, by nearly $20,000 per nurse.

Guess what?

There is a shortage of New Zealand nurses, there are inexplicable limits applied to overseas nurses wanting to work and live in NZ, so naturally all nurses have the choice of earning $20,000 more by working in hospitals or in the public sector, or earning $20,000 less by working in the aged care sector.

Last week this issue blew up.

Arvida’s Strathallan Village in Timaru advised care residents that this apparently powerful, profitable, public company could not recruit nurses for the village, and would be closing its care facility, transferring the ailing residents to another village.

That means care patients will be moving, probably to Christchurch.

This is hardly joyous news for the couples, where one partner has lived in a villa, self-sufficiently, while the other lived in the care facility, across the road.

If this closure was by a tiny Mum-and-Dad owned facility, with an overdraft, a mortgage, and a few oily rags to squeeze to supply the old lamp used to see in the dark, then few would be alarmed.

But a company that makes tens of millions of dollars profit, has access to capital markets, and dozens of villages around the country, should be able to provide whatever funds are necessary to staff its various villages.

Obviously Arvida will have tried to solve the problem.

Presumably, no amount of money can solve it.

Where does such a desperate shortage of nursing leave New Zealand?

What will such a shortage do to the whole retirement village model?

Will the rules change, so homecare people without nursing qualifications are forced to operate without nursing supervision?

Will our immigration people sharpen their thinking, and allow nurses from overseas to have a fast passage to citizenship?

Will the Crown immediately wipe out the cost of training nurses and revert to free education, with a bonded period at the end of training?

Will our education system be dramatically overhauled, focusing on the link between education and vocation, with curriculum changes that will address those whose careers might be in forklift-driving, truck-driving, operating a bus, working in trades, or in the horticulture, silviculture, aquaculture, agriculture, or viticulture sectors, or in nursing? Will this change provide the pathway to the goal of getting teenagers to attend school regularly?

Will our schools focus on reading, writing, arithmetic, and subjects relevant to vocation?

Or will this problem magically disappear? Or lead to ever more central government blundering into a sector that bears the cost of dreadful public sector interference and ignorance.

The health sector is in disarray. Hospitals cannot cope. That problem is already countrywide.

Are we watching the beginning of huge changes for the aged care sector?

Investors should form their judgements when they review their exposure to the sector.

Arvida’s grim news in Timaru is unlikely to be caused by management or governance failure. The change being faced may thus be secular, not cyclical.

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ALSO under a media spotlight has been the construction sector, and in particular the conflating problems of gib board shortages and property development distress.

Even in provinces like Southland, construction firms are falling into the hands of liquidators. Heaven knows how busy these ticket-clippers will be in Auckland.

There are many causes of the distress, most notably a shortage of labour, massive supply chain problems, and highly questionable costs of regulation and compliance.

The shortage of gib board is high on the list of problems.

More than 90% of plaster board in NZ is supplied by Fletcher Building.

Fletchers export gib board, must have supply contracts with their biggest NZ clients, and have long planned to expand production to enable them to exploit the margins created by excessive sustainable demand over supply.

There is nothing in the above sentence that is surprising or unreasonable.

If criticism is to be aimed the critics would surely argue that potential competing importers have missed a golden opportunity, or that other suppliers should have seen the available margins and attacked Fletcher’s market share years ago.

Last week Fletchers Chairman, Bruce Hassall and Chief Executive, Ross Taylor, displayed admirable courtesy by meeting with a relatively minor, attention-seeking, shareholder (Simplicity) and the NZX Shareholders Association to explain why Fletchers cannot meet the surging domestic demand.

These visitors may also have demanded to know why it is getting colder in winter.

The Fletcher response was so obvious that one had to wonder what it was that Simplicity and the NZSA expected from the meeting.

Fletcher is not the regulator of plaster board.

Its only obligation is to make a safe product as profitably as possible, in as large a quantity as it can.

It has no obligation to meet changing domestic demand, let alone the demand of a very small user of plaster board, like Simplicity Living, a new division of a tiny index-based KiwiSaver fund.

There is nothing to prevent domestic competition or importers from providing supplies, and presumably providing alternatives at lower margins, if supply exceeds demand. Fletchers, quite rightly, does its best to be the dominant supplier.

For the NZSA this argument seemed like silly grandstanding, exploiting a topical issue, bringing attention to its very worthy aspiration of representing investors.

It was grandstanding as no investor in Fletchers would dislike the contribution that the sale of gib board is making to Fletcher’s revenues, profits, or dividends. The NZSA is disingenuous in saying its members were demanding the NZSA become embroiled in this spat. I do not expect the NZSA to be disingenuous.

Simplicity has a track record of grandstanding, exploiting young media people who listen to the loudest belch in church. The wiser people in the media assess the issue before granting space to the belchers. Competent members of the media, like peahens, know the difference between an old crow and preening peacock.

As a Fletcher shareholder, Simplicity had forfeited any credibility to use its one percent of Fletcher shares as a bargaining tool, when it constructed its low-cost, index-based model. It neither has a mandate to select the companies in which it invests, nor any skillset to judge company performance.

Index funds are usually denied the right to exclude stocks, except in pre-defined areas. Simplicity will buy and hold Fletcher shares unless it somehow alters its promise to new investors. Its threat to sell out is a little hollow, for many reasons.

Its mandate is to select index funds. And not pretend its opinions are even remotely relevant, let alone newsworthy.

The construction sector is in disarray, as NZ seeks to build far more spec houses, perhaps too late, given the change in immigration and the rising cost of mortgage debt.

Indeed you could argue that Fletchers has been protecting the shareholders by scaling its business to sustainable levels.

Fletchers, under Hugh Fletcher and Ralph Norris/Mark Adamson was an easy target for critics, none of those people earning any admiration for their leadership or governance. They cost their shareholders huge sums, Adamson being a particularly poor choice, as a chief executive.

But Fletchers’ exploitation of its dominant position in gib board hardly leaves the company vulnerable to criticism, except from people perhaps motivated by their own agenda.

I admired the courtesy of Hassall and Taylor in tolerating what looked like childish grandstanding, using the media to focus on a meeting that Fletchers had no obligation to attend.

Footnote

 

A media-announced letter, subsequent to the pointless meeting, advised that Simplicity and the NZSA were calling for Hassall’s and Taylor’s resignation and labelled Fletcher’s response as arrogant.

One wonders through what lens a darkly-coloured pot is dazzled by its own reflection from a more silver-coloured kettle.

Do Simplicity and the NZSA really believe that the media is the right channel through which to call for change? Really? They should read Successful Strategies for Adults, 101.

Is this not just an extension of look-at-me behaviour, perhaps confirming that tiny fund managers carry no gravitas with heavyweight corporates?

The Fletcher financial update this week, confirming rising profits and volumes, was what shareholders would be seeking.

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THE brittle state of global markets was evident for all to see in 2021, and earlier, inflation being an obvious outcome of the funny money printed, and the new debt incurred, as politicians sought to sidestep the inevitable financial, social and political costs of the pandemic.

Yet as recently as seven months ago trading banks were opining that inflation was but a cloud passing by in a stiff westerly, rather than a bank of clouds disguising a long line of imminent storms. It would be transitory, they forecast. Here today, gone tomorrow. Even in November last year the banks were forecasting very modest rises in interest rates.

Barely 15 months ago, the Reserve Bank and our public sector-trained Finance Minister (Robertson) were contemplating negative interest rates, so unconcerned were they about the inflation they were brewing.

Recall that collectively the trading banks spent hundreds of millions at that time creating software that would accommodate negative interest rates, a concept that now seems absurd.

Yet, the best of our leaders in our productive sector instinctively knew that inflation, fuelled by labour shortages, was an inevitable outcome. They were right.

In this environment one wonders how differently a trained, skilled, minister and cabinet might have responded to the fund managers who were pushing the Crown to capture more investor money with which to feed asset prices (and fund manager fees). Those self-focussed people wanted Kiwisaver default funds to move to a higher fee-earning fund comprising share investments.

Self-interest played no role in this lobbying. Of course it did not.

The result could not have been worse for investors, but better for fund managers.

In February this year, those who manage default KiwiSaver funds were permitted, indeed required, by new regulations to shift default funds out of cash and bonds and into equity funds.

In practice that meant that the market, forewarned of a bond sell-off, and a subsequent forced charge into equities, was able to game the software driven index funds, granted a KiwiSaver default fund licence. The timing of this initiative was as dreadful, as the concept.

Liquidity in bond markets had been terrible for two years.

Even a subdued imagination would have pondered by how much the default managers would be gamed at the expense, of course, of the hapless investors. Active fund managers adore shooting any sitting ducks. Recall how Synlait shares hit $14 four years ago, or how Meridian and Contact Energy reached towards $10, as index funds were gamed.

Since February this year equity markets have been in free-fall, down by 20% or more. The secondary market in bonds remains illiquid. KiwiSaver customers bear the cost.

Those fund managers who encouraged these changes, from low-risk to high-risk KiwiSaver settings, and those politicians who legislated the changes, might have moved on, humming the refrain that all things will again, one day, be bright and beautiful, and anyway, who wants to be a millionaire.

Well may they hum.

Not so impressed are KiwiSavers who now apply to extract cash to buy a house.

My opinion, loudly expressed but unsurprisingly ignored, was that the fund managers in charge of default funds should have been instructed to keep communicating with the investors who refused to select a fund manager or a type of fund. The savers needed to make their own decision. Default funds were for some a legitimate decision. A blanket instruction ignored every rule that wise financial advisers regards as unbreakable. Advice must be tailored to each individual.

Instead, the cabinet, to my knowledge comprising not a single person with even a hint of investment knowledge, succumbed to fund manager pressure and made the decision for each and every investor in a default fund.

Those who were in default funds will be reviewing statements in July showing unnecessary and painful losses. They have every right to be unimpressed.

Indeed, one wonders how many, observing such losses, will continue to invest at all.

Of course their most logical response would be:

1.Stay put, praying that market changes are cyclical, not secular, meaning time might restore values one day or

2. Instruct their fund manager to switch the investor’s funds into a cash fund. Either response is logical, depending on each individual.

Of course, self-focused fund managers and ignorant commentators will urge investors to believe that falling values are very temporary. They display their own naivety.

Secular change is not impossible. Even cyclical changes may affect prices for many years.

Will tomorrow look like 2019? Many will hope so. I am not convinced.

Whatever, the decision, urged on by fund managers, was at very least poorly timed and arguably led to an unwise political burst of pandering to fund managers, already, amply rewarded.

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The ANZ has announced the intention to offer a subordinated perpetual preference share, with an interest rate for six years that is likely to be more than seven percent.

The new perpetual will have a call (repayment) option after six years.

Generally banks repay on call dates if the instrument loses its equity credit, valuable to meet capital requirements and to impress credit rating authorities.

There are not yet enough details available to know that this instrument will replicate those of the past. Of course the Reserve Bank has previously acted, in times of distress, to defer the right of banks to exercise their call option.

Investors interested in this issue should notify our office now.

Expressing an interest, defining a possible amount, and providing a CSN is NOT a commitment to invest in this offer.

Travel

Chris will be in Christchurch on Tuesday and Wednesday July 5 (pm) and 6 (am) at the Airport Gateway and welcomes requests for appointments.

He plans a trip to Auckland in July, dates to be confirmed.

 

Michael plans to visit Auckland on 30 June, Tauranga on 11 July and Hamilton on 12 July.

Please contact our office if you would like an appointment.

Chris Lee