Taking Stock 23 November 2023

THERE will be at least 100,000 New Zealanders who will have displayed interest in the appointment of Simon Power as the new head of Fisher Funds, a private company.

Fisher Funds is the fund manager that followed the play book of Doug (Somers) Edgar’s Money Managers in the 1990s and 2000s. It now has control of a six-figure number of those people who have enrolled in KiwiSaver and collects hundreds of millions each year in fees.

It also collects fees from a probably dwindling number of people who use its various other managed funds.

One must acknowledge its founder Carmel Fisher who, like Edgar, is now retired, enjoying a fortune she created through her personal selling, her hefty use of advertising, her impressive energy, and her development of a personal brand.

Unlike Edgar’s, her empire has survived, now given a new level of respectability by its acquisition from Kiwibank of a bank KiwiSaver database (Kiwi Wealth) and by its link with the TSB, its major shareholder, though TSB is more of a figurehead owner then an active owner. The American group TA is now responsible for strategy and culture, despite its minority shareholding.

When Fisher had finished and cashed up, Fisher Funds (surely in need of a name change) came under the leadership of Bruce McLachlan, relatively a banking journeyman, having emerged from Westpac to take the helm of the old PSIS bank, now called Cooperative Bank. He left Coop bank to head Fisher Funds.

It was McLachlan who integrated Kiwi Wealth with Fisher Funds, paying a king’s ransom for the acquisition, but such is the value of the long-term licence to manage other people's KiwiSaver money there seems little doubt Fisher Funds will recoup the $310 million it paid to take over these captive clients.

McLachlan would not have seen himself as a fund manager and probably displays decency by recognising the need for Fisher Funds to transform now that it is an industry leader. It must have an appropriate culture, modern investment standards, and long-term sustainability.

It is now NZ’s second largest KiwiSaver manager, behind the ANZ bank, implying a level of respectability and devotion to best practice that comes with being a giant.

So along comes the former politician Power to bring about necessary change.

Simon Power, but for a massive error in 2010 when he was in Key’s National cabinet, might today be Prime Minister, instead of running a cobbled-together fund manager.

He was Key’s logical successor, a young lawyer who impressed many, including me, by making much needed changes as soon as he achieved Cabinet status 15 years ago.

He became Justice and Commerce Minister, earning admiration for the way he regulated financial salesmen many of whom were hiding behind the title of “financial adviser” without evidence of knowledge, experience, or long-term commitment. 

Some 22,000 so-called advisers were selling investments during the reign of his predecessor, Lianne Dalziel, who in Clark’s government had been an utterly inept Minister of Commerce, ignoring all the evidence of the rotten practices in property management, contributory mortgage trusts and finance companies.

Perhaps she was preoccupied with much lesser issues but under her reign, some hundreds of the 22,000 advisers around the country pillaged investor money.

We know the number of those who were inept because when Power rapidly introduced the Financial Advisers Act requiring advisers to pass relevant exams and commit to a code of ethics, some 20,000 of the 22,000 simply vanished, unwilling or unable to achieve relevant standards.

For his singular achievement in executing this plan Power emerged as an intelligent action man, able to cut through all the blockages that intimidated lesser politicians. His political destiny seemed predetermined.

Sadly, Power undermined his achievement in just one weekend in 2010.

You could argue that it was not all his fault, but he took the blame and unexpectedly retired from politics.

The error related to the late Allan Hubbard, the founder and CEO of the giant South Island finance company, South Canterbury Finance. 

Hubbard was a stubborn old timer. For years he had irritated Wellington public servants by behaving as though he had more respect for a greater authority than for the laws created by parliament.

Hubbard believed his guide was the Lord and believed that his morality and commitment to underwrite his clients with his extreme wealth, meant that Wellington’s laws were aimed at lesser people, not him. Effectively he declared he had no respect for laws.

Ironically, left alone, he might have had an argument. He really did foster his investors.

But Wellington discovered the multiple laws he broke. Off was sent public sector and private sector officials to examine a fund he was managing and to discover whether he was adhering to the investment laws.

Hubbard had a fund comprising other people's money, known as Aorangi Securities. It was imperfectly structured and occasionally made lending or investment decisions with other people’s money that seemed more in keeping with Hubbard’s charity than with commercial standards.

Hubbard compensated for these indulgences by committing to use his own funds to underwrite all of the commitments he had made to his investors, to pay 10% interest and to return capital.

Eventually he had to front up. He did so. He injected into Aorangi some $60 million of value he held personally in various farms. He did this to meet his promise to underwrite the fund and to avoid any losses for investors.

His injection worked. 

Ultimately, no investor lost.

But Hubbard’s unique Christian moral commitment to “put things right” did not alter the fact that the fund was operated illegally, in its final years.

So Wellington sent to Timaru the team of people to investigate.

Within hours they reached a totally false conclusion.

They thought that Hubbard was illegally lending Aorangi’s publicly-funded money to himself, to buy into farms. That would have been fraudulent.

The reverse was true. The error was inexplicable, oafish, in fact.

Hubbard was injecting his interest in some farms into the fund so that his bad lending practices would hurt nobody except himself and his wife Jean.

The Wellington party scurried back to Wellington with their clunky conclusion.

The message was passed up to the Minister, Power, that Hubbard was defrauding investors. The group recommendation was that Hubbard be placed into statutory management by government decree, thus labelling him a thief and alerting all the parties trying to solve Hubbard’s troubled South Canterbury Finance that he was, in effect, a common crook, his empire implicitly founded on jelly.

Power, a lawyer, had to call together a group of cabinet ministers and consider the group view before recommending that the Governor General accept a proposal to appoint a statutory manager (akin to a liquidator).

So Power recommended Hubbard be placed into statutory management, a state similar to home detention, effectively isolating and stigmatising Hubbard and denying him access to his own money and to any involvement in his companies.

Egregiously, Power made no effort to consult relevant people before committing to this drastic action, wrongfully judging Hubbard.

Power did not check the facts with the directors of Aorangi, he did not ask Hubbard, and he did not ask competent people to review the accounting transactions that so clearly were misconstrued by the group who visited Hubbard’s office, with what seemed a predetermined conclusion.

Power took his decision in haste, an odd error for a trained lawyer.

Hubbard was banished, astonished by the error.

There was thereafter no possibility of accepting the offers to buy out South Canterbury Finance. The error cut off any hope of a solution.

Indeed a stupidly managed liquidation of SCF and its various lending and investing entities, and a greedily-managed statutory management of Aorangi (and others) left investors unnecessarily shortchanged. The value of some of those flogged-off assets have matured, with values sometimes 50 times the fire sale price, the Xero shares an obvious example.

Worse, the taxpayers who had guaranteed SCF lost more than a billion dollars. This was a dreadful and unnecessary outcome, Key dismissing the loss as Hubbard’s fault, when the loss in fact was caused by the public sector and political errors.

An ugly by-play was that some dozens of wide boys were able to buy Hubbard’s and SCF’s assets for barely a shilling in the pound, effectively a transfer of taxpayers money to a range of opportunists and wide boys.

All of this stemmed from Power’s failure to interrogate the hasty and ultimately discredited allegations of a Wellington group, which exercised insufficient care, and reached a conclusion that third form accounting students might have corrected.

How do we know these conclusions were utterly false?

Because Justice Helen Cull heard evidence in a subsequent court case where the errors were acknowledged.

One of the errant inspectors of Aorangi was Graham McGlinn. He became the statutory manager, days after Power’s error. Within a week he discovered the journal errors that had been so misunderstood by the group of which he was one.

In a report on the statutory management, a few days after his appointment, McGlinn identified the transactions that had been so carelessly interpreted.

Hubbard's career ended in disgrace.

Taxpayers lost a billion.

Power, for whatever reason, retired from politics.

SCF preference share holders lost $120 million, unnecessarily.

The vultures moved in and feasted.

Yet the National Party, and later Ardern and Robertson, steadfastly declined to put right the extreme injustice served on those investors who suffered write-offs because of the crass error. The politicians carry that legacy of having pretended that the error never occurred, leading to huge financial injustices, especially for the taxpayers.

You see, at least one credible buyer undertook to pay out an amount to the Crown that would have largely offset the Crown guarantee. He offered to pay interest while he was paying that money in instalments. He would have shared his gain with the Crown. The gain would have been in billions.

There would have been no destruction of public or investor money.

The most credible potential buyer offered to protect the investors.

Cruelly, flogged off by incompetent liquidators, the assets of SCF and Hubbard within a few years were shown to be worth far far more than was needed to repay the Crown and the investors.

All that was needed was time and intelligence.

Precious little of the latter was ever evident.

New Zealand bonfired a billion plus, unnecessarily.

NZ lost a man who might have been a good Prime Minister.

Power is now an experienced corporate manager, having worked for Westpac and TVNZ in senior roles, since his political retirement.

He will now have the experience to sharpen up Fisher Funds.

I would bet he will never make the 2010 mistake again.

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One of life’s greatest mysteries stems from the question of why television and/or film producers have neglected to create a film or even a drama series based on the life of the late Allan Hubbard.

He was unique. Are those creative people asleep or just tired? Surely they cannot be unaware of Hubbard’s extraordinary life.

Those who read The Billion Dollar Bonfire, of which only a handful remain unsold, will have read of a man who began life in the most dysfunctional setting and was heading down the path to a life of petty crime and misery.

Thanks to the Boy Scouts and a mere handful of good people he traversed the tracks and based on some improbable events became an immensely wealthy and powerful man whose influence on South Island commerce was extraordinary.

A workaholic (and thus a pretty average father of six girls), an accountant, an entrepreneur and later a philanthropist, Hubbard ultimately ruined his legacy, perhaps unbalanced by health issues and by his error in surrounding himself with goofy advisers and people whose own wealth depended on Hubbard retaining control of his fiefdom but exercising that control with minimal interest in the input of others. He thought it was cheaper to surround himself with goofs, with only rare exceptions.

He believed he talked with God while on the operating table with cancer, and believed God told him to follow his principles and ignore the selfish and often stupid expectations of politicians, bureaucrats, and regulators.

He was unique in that he was the only fund manager, probably ever, who fabricated high returns for his investors BUT then used his own assets and income to deliver the falsely high returns.

He preferred to pay extreme amounts to mostly distinctly average people - directors, executives and advisers - exercising the right to ignore them, rather than broaden his horizon and learn from the much better qualified support he could have hired.

He helped large numbers of people exercising his Christian principles. He saved lives, literally preventing suicides.

He was a hopeless driver. Local panel beaters bought spare parts in multiple numbers. He rarely used a seat belt. 

Hubbard annoyed all the process driven people in Wellington, breaking laws at will, but genuinely underwriting all his mistakes so that no investor had reason to complain.

That worked till his underlings exploited his decay and left losses that were beyond his underwriting capacity.

Then, his cheating emerged, panic setting in.

Finally, on the day the receiver moved in and the locks were changed, he went for a drive with his wife, who was driving. Parked on the side of the highway, the Hubbard car was wiped out, Hubbard dying hours later, on the day the company was closed down.

No filmwriter or TV series producer could imagine such a man so conflicted, with such a contrast of strengths and frailties. To imagine his life, and create a script, would need genius. The script just has to trace his real life.

Yet none have sought to tell the story, with a full-length film, or a TV series.

Within another few years memories will have faded.

I could imagine Timaru’s movie theatre having a queue all the way to Winchester if the film was ever on show in Caroline Bay.

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NEXT week I will describe the issues around Provincia, a $100 million property syndicate which owns several small industrial properties around Auckland.

The fund is at crossroads, not delivering credible returns, yet amply rewarding its fund managers.

My analysis suggests the fund should be liquidated, proceeds returned to investors. It has not come near to achieving its original sales pitch (6% returns).

The investors will vote at a special general meeting on December 12, on several issues, including a liquidation of the fund.

I will explain next week why I think the fund is not structured suitably, why it should be liquidated, and why changes are needed to ensure any future such fund needs to offer better protection for investors.

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Travel

I will be in Christchurch and Timaru on December 5 and 6 with a single appointment left available in each city.

Our advisers have no other travel planned for 2023.

Chris Lee

Chris Lee & Partners Ltd