Taking Stock 17 June 2021

Chris Lee writes (as his recuperation progresses well):

 

NEW KiwiSaver investors can relax, putting aside any fears that the default provider Booster is running amok, investing unwisely in an improbable, new, unlisted, and poorly credit-rated company.

It is true that Booster has used a large sum of other people's money to enable various original shareholders in Lifetime Retirement to exit the struggling company that aspires to be a provider of low-yielding and fee-heavy insured annuities.

But Booster investors should take comfort that the small, privately-owned fund manager simply could never use investor money in a manner that the investors would not have authorised.

We all know that it is not possible for Booster to break its own rules.

Just as finance companies in the mid-2000s were compelled to behave in accordance with their trust deed promises, so are fund managers today compelled to adhere to their promises.

Just as there were efficient trustees in the finance company era who diligently authorised and oversaw the terms of a trust deed, and then agreed to constrain any breach of those terms, so, too, do KiwiSaver fund managers squirm under the oversight of statutory supervisors, licensed because of their expertise, just as insolvency practitioners are licensed.

Booster is certain to be permitted to invest in high-risk, unlisted start-ups, and its various KiwiSaver funds – presumably the aggressive funds – must be allowed to put investor money into the Booster fund that manages these high-risk choices.  Booster clearly has great internal expertise with sector-leading analytical skills, to make such unlisted investments.

Indeed, far from being fearful, investors might applaud Booster's decision to top up its 1.5% holding in Lifetime Retirement, paying out other investors to boost the holding to nearer 16% of this company.

Presumably had Booster not provided this liquidity then the Lifetime Retirement shares, from which various shareholders wanted to exit, might have had to find a lower exit price, undermining Booster's 1.6% holding. Booster has thus spent up big to enhance its previously tiny holding.

Protected by a statutory supervisor, ensuring the trust deed-proscribed investment procedures would necessarily be followed stringently, investors are entitled to relax.

This strange, I would say foolish, investment decision has followed a process that is kosher, to use a word the late Allan Hubbard often used.

Whether it is a wise decision will be determined in the future.  The decision may be from the same logic that applied to the decision of NZ Funds Management, with the fund it used to buy Bitcoin, a decision that seems to me to be not unlike the choice four hundred years ago of buying tulip bulbs in Holland.

Bitcoin has risen dramatically and, measured at a point in time, allowed the fund manager with its origins connected to Money Managers (NZ Funds), to report a 120% return on one of its small high-risk funds over that defined period when Bitcoin traded at a price many thousands of multiples greater than its price of just a few years ago.

That Bitcoin has fallen by about half from its earlier highs is relevant only to those who have not cashed up, or more inexplicably, those who bought into the fund when Bitcoin was at its peak.

In both cases – Booster and NZ Funds – the decisions to speculate were authorised, supervised by a level of skill and vigour that investors are accustomed to assessing, and presumably ultimately overseen by the market regulator, the Financial Markets Authority.

Whatever comfort one takes from these protection points should make investors rest easy knowing that what they signed up to when they invested is what is now being delivered to them.

Every investor, of course, would have had expert independent advice and would have read the trust deed before choosing Booster as its KiwiSaver manager, or choosing to invest in the particular fund that Booster has used for this foray into a currently struggling annuity provider.

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AT the risk of being contrary and offending those who make their living by assertive protection of the rights of rugby players, and perhaps offending some respected and some third-tier capital market proponents, may I express the view that an NZX listing of the NZ Rugby Union would signal a new era of madness.

This view may differ from those of my colleagues.  We are all entitled to an opinion.

Here we have a co-operative which in most years makes a loss and, like Fonterra, is committed to serve its primary suppliers (players), trying to raise a few hundred million to preserve its stability, and nurture its grass roots.

It needs this money to subsidise the losses caused by paying players and administration for what used to be voluntary work.

Its costs have and would always far exceed income, without ever-greater broadcasting revenue and generous corporate sponsorship.

Its playing numbers, at adult age, fall every year, though currently the participation loss is hidden by the recent phenomenon of women who choose to indulge in what many regard as brutal sports, like rugby league, rugby, boxing, and cage fighting.  (May my granddaughters be immune to this urge.)

Extremely wealthy Russian moguls, and others absurdly over-endowed with money, buy sports clubs overseas and then grossly overpay for the best players, hoping to feed the moguls' egos by winning titles, despite the pitifully small financial rewards, and to assist clubs to sell merchandise at prices that fans will regard as irrelevantly exorbitant.

So in summary we have a disastrous business model striving to recreate the glories of the past, needing cash to preserve the status quo rather than return to the amateur past.

Along comes a skilled, experienced American fund manager which believes it can find new ways to achieve greater box office revenues.  It offers an enormous lump sum to buy a small share of rugby's future nett profits, which it believes it can increase through its connections and expertise.

The logic of this endeavour is that the fund manager believes it can add enough new revenue, and thus nett profit, to benefit itself from its capital investment.  It had to convince the relatively skilled governors of rugby that its plans were feasible.  It succeeded.  The rugby governors saw potential gains from an expert newcomer, and some life-saving injection of cash.

The NZ Rugby Players Association, which is to investment banking what an oil drum and bamboo stick is to a professional drummer, has engaged with the chairman of a small fund manager/ sharebroker in Dunedin, by any measure a dwarf on an Australasian scale let alone on an international scale, a company which would never claim to have any expertise in growing NZ Rugby's international audience.

Its discussions led to a proposal to sell shares and list the shares, raising nearly $200 million from New Zealand rugby enthusiasts.  If money was the sole objective, perhaps the proposal might be worth considering.  But money and expert input were the two objectives of the NZ Rugby Union.

The new proposal naturally appeals to the fund manager/ broker who would derive multi millions in fees, and to a new share platform, Sharesies, which has 250,000 nouveau investors.  If each of Sharesies investors pledged $800, Sharesies would raise $200 million, a little more than half of what the foreign investor pledges.  Nouveau investors are hardly likely to be selected to contribute to the second objective of growing the box office receipts.

But the shares would then be listed and would probably trade amongst the people who buy the merchandise and proudly claim the title of diehard supporters (but not players) of a sport approaching its twilight years, if one judges by player and crowd numbers.

I accept that my view will not appeal to the players' association, to the small broker touting the scheme, or to diehards, who do not accept the trajectory of participation, crowd numbers, and even television audiences.

If rugby has an outside chance of adapting to the new world it must accept that it needs to find the expertise to access large fee-paying audiences in much bigger parts of the world, like China, Japan, the USA, and even the richer OECD countries.  To do this it needs a motivated partner, with aligned interests.

Its alternative is to revert to amateurism, when club rugby was the hub of communities, when the sport was based on evasion rather than collision, and when schoolboys kept their boots when they left college.  I wish.

Sadly, that sounds far-fetched, a forlorn hat tip to the past.

So the entertainment organisers might be the last hope, if we are to pay players and have them play most weeks of the year.

An NZX listing is a solution covered in tinsel, in my opinion, a daft idea, unlikely ever to provide retail investors with any reward other than the brief glow of ''owning'' the All Blacks.

Disclosure: I write this with some sadness, as a former player, referee, coach, and a current spectator.

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Johnny Lee writes:

CONCERNS regarding inflation are rising globally, as investors ponder the likely trajectory of consumer prices and the response by Reserve Banks to this data.

Conventional wisdom suggests that any response – which often translates to rises in interest rates – will be introduced slowly, allowing any impact to be fully absorbed, while reserving the right to react further if data changes.

Adrian Orr's reign has been marked by his tendency to take long-term positions, making small changes to the OCR and observing long-term impacts without overreacting.  Globally, this has become the norm for Reserve Banks.  Newly introduced tools also allow more flexibility to avoid unintended consequences from such a blunt instrument.

In 2017, the Official Cash Rate was not changed throughout the entire year.  It did not change in 2018.  Two changes (down) were made in 2019, and a single reduction was made in 2020.  We have not yet had any movement in 2021.

Further abroad, the US Federal Funds rate has also been static for some time.  Previous attempts to lift interest rates in the US have been met with a very negative response, prompting immediate reversals to lower levels.  Quantitative Easing has filled the gap, allowing the Federal Reserve to inject temporary liquidity into the market.

However, inflation cannot simply be ignored.  Spiralling increases in the difference between the price of goods and the price of labour causes an array of problems for society, especially for those on fixed incomes.

Some commodity price movements seen this year will be undeniably inflationary.  The oil price has almost doubled in the past six months, and still represents a significant spend for most households.  The wild swings in the price of lumber – which doubled from January to May before crashing over the last month - will produce short-term inflationary pressures in the construction sector.  Food costs are rising, and council rates bills are rising.

The cost of labour, exacerbated by the sudden restrictions on freedom of movement, is rising globally.  Closed borders means that the potential pool of labour is much smaller.  Many industries are now reporting staff shortages.  This issue is particularly pronounced in the hospitality sector, although locally we are also seeing persistent issues around the supply of labour in the primary industries space.

Part of this is being spurred by changing habits in the workforce.  Surveys conducted around the world – predominantly in the US – show work preferences are changing.  With most Americans having spent the past year working remotely, many are now stating a preference to continue this behaviour, a preference particularly pronounced among women.  Some roles are simply unsuited to such preferences, which distorts the labour market further.

Inflation is not the only concern the Reserve Bank must consider, of course.  It is now asked to factor in effect on house prices and employment.  These factors can often pull in opposite directions – reducing interest rates may fuel an increase in house prices, while simultaneously incentivising businesses to hire more staff.  However, these growing mandates for the Reserve Bank have been accompanied by new levers.

Newly announced tools regarding debt to income ratios will allow the Reserve Bank to have more precision in mitigating unintended impacts.  By placing restrictions on the amount people can borrow relative their income, the Reserve Bank can attempt to manipulate the outcome of financial stimulus.

The question facing investors now is whether these pressures will be structural or transitory.  It was always expected that, following a sustained lockdown around the world, consumers would delay spending in the face of rising uncertainty.  With the global rollout of vaccines, confidence is returning and wallets are re-opening.  Some consumer spending – global travel, for instance – has been curbed for the foreseeable future.  These factors will, presumably, be temporary and support the argument that Reserve Banks around the world can afford to be patient.

The counter argument is that this change represents a more structural, sustained shift in consumer prices.

Investors can expect this topic to dominate economic headlines for some time.

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TRAVEL

Chris now expects to be travelling again in August. He will advise dates when he has clearance.

Edward will be in Napier on 24 June and 25 June and in Nelson on 8 July and 9 July.

Edward will also be in Auckland on 21 July (North Shore), 22 July (Remuera) & 23 July (CBD)

Kevin will be in Christchurch on 6 July.

David Colman will be in Palmerston North on 30 June.

If you would like to make an appointment, please contact our office.

Chris Lee & Partners