Chris Lee & Partners Ltd

Taking Stock 29 February 2024

THE woes of the construction and property sectors have been constantly in the news, yet the industry comment continues to be based on anger.

The wretched Du Val Group model – extreme debt, very little capital, little access to owner’s support, delays, construction over-runs, unconvincing available data – is now in the headlines.

To its credit Du Val in recent years has completed hundreds of houses and for a while it met its financial obligations to the investors who fund the activities.

Today it faces creditor grumpiness and investor revolt, having cancelled interest payments, and having invited investors to what many would see as the Last Chance Saloon, a bar where you are served only if you are prepared to swap your debt and interest payments for equity and the (remote) possibility of dividends one day.

Property developers fail if they are sandwiched by a collision between no access to debt and no ability to complete and sell their creations.

The only solution reverts to the shareholders and/or the investors. Otherwise liquidators or receivers move in.

If the shareholders are just a tiny handful of ordinary people with little or no liquid wealth, the Last Chance Saloon would open the champagne only if instructed by a forgiving group of bankers (most unlikely), if creditors were prepared to be long-time bankers (even more unlikely), or if the largely elderly group of interest payment-dependent investors agreed to convert to equity, a proposition never discussed when they invested originally.

As I noted when discussing Provincia, many investors are wired to believe that a poor business model, managed inadequately, might find that time solves everything, miraculously. Hope is better than no hope, they surmise.

Others are not so easily mollified.

The Du Val property development company will soon find out which of the two sets of differently wired investors is Du Val’s majority set.

In my experience the property developers who can survive, and deserve to survive long, cyclical downturns, are the developers who do not reach for aspirations that can be met only if the tail winds are permanent, and who do have a backstop of personal wealth that would attract banking support. Some might call this skin in the game.

Developers often start out small – a six or twelve house development costing a few million, serviceable from the developer’s own pockets, if need be.

Two or three completed developments create a couple of million of tax-paid profit. The wise developer banks that; no yacht, no bach at Waiheke, no first-class travel to Monaco to fluff around in borrowed Ferraris.

Most developers do not seem to understand that two successful projects might not be proof of genius, or infallibility.

Failed property developers generally end up selling cars or acting as a real estate agent, selling other people's property.

Some head off to Queensland.

It is hard to find sympathy for those who were clueless, reckless, or bought the gold chains on 10% deposit using Buy Now Pay Later.

Du Val will not be in a classroom of one if its business model is to be tested by creditors and investors.

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ON A much bigger scale, we have the Fletcher Building semi-collapse, its share price now fallen so far that the imaginative people in financial markets and the relatively attentive Australian business media are talking of potential vulture takeover offers for the Fletcher Building Group.

That would be an undesired outcome for the NZX - losing a large player - and would demonstrate yet again the low standard of stewardship that has made this company, with a major share of a crucial market, lose its credibility and much of its value.

The values of its founder, James Fletcher, would have been rendered useless by decades of pusillanimous or perhaps venal leadership and governance, egos often bigger than cerebral organs.

What a waste!

Old timers in the sector do not normally have a voice.

The modern managers seem to have their modern priorities and seem to ignore survival or much focus on sustainable revenues and profits.

Those modern managers seem genetically built to ignore the value of knowledge, the wisdom that comes from experience, or the commitment to be measurable and accountable, as well as candid. Social goals seem to rate ahead of sustainability.

The old timers who knew how to produce profits from building things feel scorned, rather like old time golfers who preach the value of course management to people like Bryson DeChambeau (who simply wants to belt the ball 400 metres, find it, and belt it again).

Being of the age group whose knowledge is regarded by many younger people as being no more relevant than mental arithmetic or sentences with a subject and a verb, I find myself gathering up the opinions of construction sector veterans who are frustrated by the new generation’s insistence on using practices that do not achieve any long-term goals.

One honoured veteran recalls how when in power he shifted from the universally disrespected tendering process to a “negotiated” process.

When he entered the sector as a senior executive he moved his company from 80% tender, 20% negotiated, to a complete reversal: 80% negotiated, 20% tender. The company thrived. Tendering was, and is, hazardous.

He has long campaigned for a clean-up of the tendering systems which so often leads to a race to the bottom, a pursuit of immediate cash flow in preference to a pursuit of sustainability and fair margins.

If you have to have tenders then strip out the highest and lowest bidder and negotiate with the others to discover which tenderer is best suited to the task.

A project well designed, well built, within the allocated time, that is fit for purpose and built after being accurately costed, all possible variations discussed, and cost estimated, is a project that rewards risk and effort, a triumph for all parties.

Good design and thorough planning before looking for a contractor is the foundation of any successful project. Design and planning take time.

It prevents outcomes like the MIT project that Mainzeal butchered.

New Zealand prepares for a long list of infrastructure projects, possibly costing tens of billions. Led by someone who does understand risk, reward and execution, the new coalition government will display a valued point of difference if it initiates a new, logical process for appointing contractors.

Let it be said that the old Ministry of Works delivered far better results than Hawkins, Mainzeal, Fletcher's etc have delivered in recent decades. Let us learn from these disasters.

Oh, to have a couple of shrewd, retired contractors and a couple of veteran engineers in our government, before it authorises new projects.

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WHEN Heartland Group Holdings this week reported its half-year profits for the previous year, it did so to a backdrop of a share price that has been savaged, inexplicably.

Heartland has now had nearly 15 years as a registered, monitored, and supervised bank, having merged various loan societies and building societies with Marac Finance after the disastrous 2008 decimation of largely crooked finance companies.

In those 15 years Heartland has moved the dial on all measurements - size, margin, profitability, dividends - with a steady incremental pattern, reaching around $100 million of nett profit after tax, a most impressive performance.

Its share price followed its progress from an initial price of $0.40, reaching above $2.00, a year or so ago, until in recent months it has slumped to around $1.20.

There are explanations for this price fall but none are satisfactory.

The principal reason relates to the impressive growth Heartland has achieved with its profitable, low risk reverse mortgage business, which has grown here and in Australia at a stunning figure of around 20% per annum.

Heartland has also achieved high growth and good nett results with its stock lending to the rural sector.

Its growth in commercial vehicle and general auto lending has been patchier but still helpful.

Surprisingly (to me, anyway) its quick-response business and personal lending has endured only a small increase in bad debts. Wrongly, as it has transpired, I criticised its decision to use matrix lending (decisions by box ticking), believing that the matrix would be gamed by scamsters, petty crooks, and the desperate, when times were tough.

Yet the cost of the losses has been well surpassed by the savings in labour and by extra margin, the reward for instant decision making.

Heartland has had an experienced, cautious group chief executive in Jeff Greenslade, who has held that position for 15 years, and he has had some highly competent chief financial officers, and some other smart lieutenants, as well as high quality advisors.

Its major shareholder (now its chairman) is Greg Tomlinson, undoubtedly one of New Zealand’s most respected business leaders.

So what are the sins that have led to a collapsing share price?

In essence, the “sin” is related to its growth in Australia. NZ banks cannot use NZ bank deposits to fuel growth in Australia.

A New Zealand lender in Australia must find Australian depositors.

It might do this by securitising its assets, effectively regularly selling off its loans, using the sale funds to recycle into more loans. This would be by far the best option and may yet be a solution, when the lending can be securitised in half-billion-dollar parcels.

Heartland would want to fund growth by selling long term bonds in Australia and thus retaining all its loans. The Australian markets are generally not supportive of retail bond issues. This is a pity. The reverse mortgage lending book is a high-quality asset.

Or it might find itself buying an Australian bank and using those funds for its growth.

The last of these options was Heartland’s plan, as its growth compounded to high levels.

Heartland contracted to buy Challenger, a small on-line bank with a useful retail funding base.

The Australian banking supervisors needed to approve this purchase which would cost Heartland tens of millions.

Australia's government guarantees to a limit of A$250,000 any bank deposit and is quite precious about who it allows to own a bank, quite rightly. Government guarantees carry massive hazards and must be supervised zealously.

Heartland has now been waiting for nearly a year for the Australian regulator to sign off the sale of Challenger bank to a New Zealand company.

That delay has the potential to stifle the impressive growth Heartland has achieved in Australia.

There is no process or timetable provided by the Australian regulator, as it weighs up the uncomfortable thought of a New Zealand bank being guaranteed by Australian taxpayers.

Their approval, or otherwise, happens, or it does not happen, to a timetable that is never signalled.

That delay is the root cause of Heartland’s share price slump.

Heartland’s post-Covid bad debts have been modest, the recent removal of Heartland from a barely relevant index is of no significance, and Heartland’s profitability and dividend programme is satisfactory, albeit lower in the past half-year than in previous years.

For Heartland to resume its impressive growth in lending sectors in Australia, where its progress has been excellent, requires the Aussies to welcome the purchase of one of its small banks by a New Zealand bank.

While the regulators prevaricate, Heartland’s growth in Australia is stymied.

I am fairly sure that I will not be the only observer that sees irony in this reluctance to accept a “foreign” buyer of a domestic bank.

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THE sale by Trustees Executors (TE) of the list of names who allow TE to manage their wealth is a repeat of a modern oddity. The buyer, Perpetual Guardian, is taking a risk.

Selling databases requires client complicity. Clients can vote with their feet.

Perpetual Guardian has made a giant assumption about the willingness of TE’s clients to shift to its own somewhat disrespected brand as the new owner of the Trustees Executors’ brand.

The evolution of Perpetual has been well documented.

Owned by PGC (Marac), Perpetual made any number of blunders years ago, including allowing its Perpetual Mortgage Trust to lend one of the company's owners $20 million, with no heed paid to the rules of the mortgage trust. Those rules were designed to protect retail investors who funded the mortgage trust.

Great work by a QC and the Financial Markets Authority led to the rapid reversal of the related party loan and ultimately led to the PGC director, George Kerr, exiting the group and exiling to Europe. The NZ wailing wall did not experience an increase in mourners.

Kerr was a close acquaintance of an ex-Macquarie British fellow, Andrew Barnes, himself marooned after a bumbling attempt to gain a presence in the Australian capital markets.

Having tried Australia without attracting Mexican waves, Barnes might have seen New Zealand or Fiji as next on his list.

He and Kerr reached a deal that enabled Barnes to acquire NZ citizenship, bringing into NZ the rewards of his previous work at the Macquarie factory, buying Perpetual Trust, with the plan of acquiring others in the sector and then selling off the new larger company via a public listing.

Goldman Sachs was prepared to facilitate this deal.

Other brokers, including me, were not so keen. For example, Jarden demurred.

The trust business is a sunset sector. Perpetual was one of the least admired in the sector, having left its reputation in tatters as the largest participant in the finance company bonfire.

Barnes signalled that the proposed corporate transaction was a buy and sell proposition. He promised to share the spoils of any sale with Kerr. These two ultimately threatened to sue each other. I do not know if they remain friends or business associates.

From my very brief discussions with Barnes, I had no reason to assume that wealth would be achieved for all parties from a slick sale via a public listing of the grouping he proposed. Nor will I know. The public listing has not happened and will not. 

Barnes made an energetic attempt to embroil himself in NZ matters as a new entrant to the country, and soon was describing himself as a philanthropist, a supporter of the burgeoning corporate idea of a four-day week, promoted by his wife, via a charitable trust structure.

Trying to help the public when I was asked, I had had several experiences that led me to believe that Perpetual and its acquisitions would not have a value of anything like the amount Goldman Sachs and Barnes aspired to achieve from a public sale. That sale never occurred. Trade sales have followed. Barnes now owns a share of Perpetual Guardian but has no executive role.

From another lens, I have never seen value-add in the wealth management skills of Perpetual or Guardian Trust, neither of whom would logically attract the smartest talent in funds management, the brand hardly likely to win a fashion contest.

Today Perpetual is planning to grow its database of those who pay Perpetual to manage their wealth. Its purchase of TE’s database carries a risk. Those who were with TE have ample options other than to fall into PG.

My lens has not changed.

If Trustees Executors has done its wealth management adequately and is now exiting the business, the clients on its database have an obvious reason to review their choice of wealth manager.

If they wish to discuss their options with me, they are welcome to ring our office.

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Summerset Group Holdings Bonds

Summerset (SUM) has announced that it is to issue a new 6-year senior bond. The interest rate will be a minimum of 6.35%, with interest paid quarterly. 

Summerset is one of the leading retirement village operators in New Zealand, with 38 villages either completed or in development. Summerset has over $6.9 billion in total assets made up of 6,087 retirement units, 1,284 care units and over 8,000 residents. It has a land bank of another 5,571 retirement units and a further1,338 care units. It made a record $190.3m of underlying profit over the past 12 months.

The presentation document is available on our website under Current Investments.

Summerset will be paying the transactions costs for this offer; accordingly, clients will not be charged brokerage. 

If you would like to request a FIRM allocation of these bonds, please contact us urgently with an amount and the CSN you wish to use. 

This offer closes at 10am Friday, 1 March.

Payment would be due no later than Wednesday, 6 March.

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Travel Dates

Our advisors will be in the following locations on the dates below:

1 March – Whangarei – David Colman

5 March – Lower Hutt – David Colman (FULL)

20 March – Christchurch – Johnny Lee

21 March – Napier – Edward Lee

22 March – Napier – Edward Lee

25 March – Palmerston North – David Colman

10 April – Auckland (Ellerslie) – Edward Lee

11 April – Auckland (Albany) – Edward Lee

12 April – Auckland (CBD) – Edward Lee

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 22 February 2024

ONCE it became clear that the world had created ludicrous amounts of funny money, and maintained ludicrously low interest rates, the certainty of an era of bad debts was apparent.

Taking Stock and client confidential newsletters loudly warned that property trusts and especially single-unit, highly leveraged, unlisted property syndicates would face their bankers, here and everywhere. It followed logically that then, and now, was not a time to invest in global property.

In recent days it has become apparent that even the world’s biggest economies, with their insatiable anxiety about stabilising banks and asset values, cannot push back a tsunami.

China’s property world has been well prodded, poked, and assessed.

Bond defaults, bad bank loans, retail prices and empty buildings are the focus of examiners.

Not even China’s command economy can imagine a solution for empty cities – ghost cities – built with borrowed money in anticipation of internal migration.

The jobs created by those building programmes in effect eat up the availability of future employment, creating a sugar rush that in logic could not be digested. The labour required built the economy at the expense of tomorrow’s economy.

London experienced similar sugar rushes.

The great migration from the city centre left Oxford Street with dozens of empty shops, many thousands of workers moving to Canary Wharf where the wasteful were building elaborately, as though every suburb of London had streets paved with gold.

That trend has now reversed. The streets are paved with pothole mix, not gold. Oxford Street has beggars and the homeless visible everywhere.  Long-time iconic shops have moved.

Buildings face departing tenants. Values have slumped. The fund managers and banks who financed the construction now face loan defaults, debt servicing problems, and a predictably huge loss in value.

Office buildings in London have fallen in value by 13%. In Canary Wharf valuations are down by a much greater figure.

Ample space is available. Tenants are not. Bankers are stressed.

The problem is worse in the US, San Francisco the worst, with property prices down 40% (source MSCI – real assets), Manhattan 17%, Boston 13%, Los Angeles 9%, in the fourth quarter of last year.

The largest American cities have long attracted global managed fund investments in office properties, apparently attractive because of long leases and constantly reviewable rents.

All of these buildings were built with loans that were all but free of debt-servicing costs when the world was squashing interest rates by printing tens of trillions of dollars, often described as “quantitative easing”.

Many veterans of property markets correctly argued that “free” money never was a basis for good long-term returns, recognising that marginal businesses would not pay their rent when money was properly priced.

The graph of commercial property sales in recent years highlights the slump and highlights the vulnerability of global property funds.

By the fourth quarter of 2021, when money was virtually free, the Americans were enjoying lavish property sales each quarter. So were the Asians.

In the last quarter of 2023 those figures were down by 75% from their 2021 highs. Bankers faint when they see such a cyclical reversal.

Compared to pre-pandemic rates, occupancy rates in the USA were down by 50%, Asia and Europe down by 30%.

Today roughly one-fifth of office space in New York is empty.

The sad Canadian Public Pension fund recently sold its share of a Manhattan office tower for $1.00.

Of course, office space is not the only property category that is terrifying banks and other lenders (private equity, pension funds etc).

Of the $90 billion in loans to bankrupt or highly distressed tenants, some $35 billion is to office building owners, $20 billion to retail buildings, $10 billion to hotels, and $5 billion to apartments, almost none to industrial, the rest to others.

Whereas $90 billion of loans are in obvious distress, another $360 billion are in potential distress (delinquent, late payments).

Distress rewards the cash-rich, who foresaw the almost certainty of a backlash, when money was priced accurately.

San Francisco buildings are being sold at close to half their values of ten years ago, office properties selling at prices similar to the ugly lows after the dot-com devastation in 2001 and the global crisis of 2008.

Banks, private equity funds and pension funds will be in a shiver. So too will be those who were herded into investments in global property funds.

Old-timers will be recalling the 2007-2009 period in America when those who were unable to meet their debt servicing created the “jingle mail”, posting back their front door keys to their lender and fleeing from their homes, foregoing whatever money they had down on deposit (if any).

The banks wore the losses until the government used tax-payers’ money to bail out the banks.

Logically you might respond by observing that commercial building owners have no right to return the keys and flee.

But many such owners, like Trump, structure their debt in shell companies, with no assets to support the loan other than the building.

Dopey bankers, even dopier fund managers, and all-care-no-responsibility private equity funds will fund anything for an apparent price (a higher rate).

Those invested in these funds will soon learn, when delinquent loans lead to default.

Sales at half price might amuse the buyers but not those whose money has blown up.

In NZ the stress will be lower, our banks generally more cautious if only because they are better supervised, have more credible regulations, and exist in a country with a lower appetite for risk.

Yet even here there are bankers who right now are discovering the stress that follows their willingness to lend up to 70% of the purchase price on commercial buildings.

The borrowers that were classified as “premium” by the banks now observe valuation losses that would embarrass the lenders if the loans were not serviced. So far there have been no ugly defaults though players like Du Val are forcing lenders to become shareholders to avoid default. One owner of multiple Wellington properties refuses to have his buildings valued.

In NZ very high construction costs, based on high material and labour costs, high compliance costs, and a regulatory attitude that building owners regard as “over the top”, require tenants able to pay high rentals, often subsidised by taxpayers.

Rental demand in Wellington has usually risen when Labour governments have grown public service numbers, as Ardern and Robertson displayed between 2017 and 2023. Their mistakes have ended.

What we are seeing in China, Britain, America and in many other countries is symptomatic of a changing era, the end of funny money, the end of “free” debt.

New Zealand bankers will be on red alert. Property investors need to be watching carefully.

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PERHAPS the best decision Fletcher Building made in very recent years was to exit the vertical construction sector, having seen the issues faced by the likes of Hawkins, Mainzeal and many unlisted construction companies.

Fletchers had made childish errors under the hapless leadership and governance of the Mark Adamson/Ralph Norris era. 

Adamson, readers may recall, was the unwise Brit whose reckless, and often juvenile, public statements so damaged the credibility of his brief reign at Fletchers.

It was Adamson who told the media that all his executives, paid in millions, were grossly underpaid.

It was Adamson who instructed staff to bid for and win every large-scale tender, often leaving his rival bidders miles behind in his wake.

Constantly warned of risk, Adamson surged on. Others copped the flak when the speed wobbles were apparent.

Norris was Chairman when Adamson was appointed.

Norris had not long left his role as CEO of CBA Bank where his legacy was to be defined by a Royal Commission finding on the culture and behaviour of that bank.

Yet neither Norris nor Adamson were exceptions. There had been decades of remarkably unintelligent governance and leadership at Fletchers.

What Sir James Fletcher had created, using all his practical and political skills, began to fall apart as others sought to diversify from core skills, and pursue empire-building and vanity projects.

Hugh Fletcher, an academic and a poor manager, was haughty and arrogant, seeking to borrow to build assets globally, sometimes without much reference to his board of directors. His era left deep scars.

Did he believe Fletchers was a dynasty, a fiefdom? He will not be recalled for his building of a platform of stability.

One feels some sympathy for those who at that time were seeking to govern a large enterprise, yet having a CEO whose personal agenda did not seem to be controllable by a board.

Fletchers made easy money selling energy assets bought cheaply from the Crown.

It blew up billions through misguided attempts to become dominant in paper.

It evolved from Fletcher Challenge Industries Ltd into Fletcher Energy, Fletcher Paper, Fletcher Forests and Fletcher Building.

Now Fletcher Building retains the name of Sir James Fletcher but is nothing like the tightly-run company that was once a division run by real men like Jack Smith (a legend).

That era had long ended but just seven years ago a number of those real, experienced construction giants who had worked for Sir James Fletcher appealed to Fletchers to hold a meeting with the old-timers who had a long history of completing projects profitably.

They have retired but they still care.

I recall how one attendant at a 2017 meeting told me how they felt patronised and scorned by a modern Fletcher “manager”, on a modern corporate wage, running Fletchers in a “modern” way.

The group left, shaken and stirred, in despair, at the James Bond-like gung-ho response.

Today we have a building company with vertical integration, controlling materials and labour, with apparently fat margins in materials, unable either to tender wisely, and worse, bent on buying at inexplicable prices into other sectors of the market (pipes, as an example) here and in Australia.

Curiously, despite decades of dreadful governance and poor financial performance, and despite damning analysis from the likes of the late Brian Gaynor, we still have Fletchers in the portfolios of our poorer fund managers.

Probably bound by the same rules that saw it buying Synlait Milk shares at $15, one index fund manager confessed that it owned 23 million Fletcher shares, an investment that must have cost its hapless investors many tens of millions.

Some now argue that Fletchers needs a new leader who will restructure the tendering systems and restructure the pricing of materials, abandoning the 30% rebates to builders.

The contract tendering system is broken. The lowest bidder is often not the best suited for the job.

Real cost discovery is not enabled by granting contracts to the lowest bidder.

Major contractors know the system is gamed, and too often transfers unfair risk to sub-contractors.

Building materials are falsely priced, the rebates effectively meaning the retail market is gamed.

But these are not the reasons Fletcher Building has a share price of roughly one-third of what it was in 2006.

Put that down to dreadful governance (with a lack of real, in-depth relevant sector knowledge) and too often a culture of blame and fear, within a framework of greed.

Perhaps Fletchers should look to the old-timers to guide them on the principles that might produce a worthy company.

During my discussions with old-timers and with those who really are working to bring transparency to the building sector, I was repeatedly offered this warning: “Be wary of those who say they are offering to work for free.”

They point to the opaque world of rebates and other kickbacks. These practices preclude transparency.

It may be they lead to unfair assumptions.

But a 30% rebate on a $1 million invoice for materials is $300,000 of revenue that must go somewhere. Who pockets it?

The building company that says it would not add on a margin to materials required might be telling the truth.

There is no need for a margin if the hidden rebate is available.

The old-timers refer to the extraordinary wastage in the construction process, caused by delays in co-ordinating and managing the sub-contractors.

Horror stories abound. Big companies insist on using specified electricians and plumbers. When those skilled people are needed, but not available, time delays cost money. Sites might be idle for weeks.

The contracts often do not allow the use of those electricians and plumbers who are available on the day they are needed.

The old-timers refer to cost escalation. Concrete, asphalt, cedar, gib board . . .  they talk of price increases that seem, at retail level, nonsensical.

Is the Fletcher story the right catalyst for a Royal Commission into construction and building materials, led by engineers and old-timers?

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Wellington Airport

Wellington Airport (WIAL) has announced details of its new issue of 6.5-year fixed rate bonds, maturing on 4 September 2030.

The interest rate will be no less than 5.80% per annum but might be higher based on the indicative margin range and underlying rates.

These bonds have a credit rating of BBB.

Minimum investment is 10,000 bonds.

WIAL is not expected to pay the transaction costs for this offer so clients will be charged brokerage.

The bonds will be listed on the NZX debt exchange.  An investment presentation for the issue is available on our website here:

https://www.chrislee.co.nz/uploads//currentinvestments/WIA100.pdf

If you would like a firm allocation of these bonds, please contact us by 9am tomorrow, Friday 23 February. Payment will be required by Thursday 29 February.

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Summerset Group Holdings

Summerset (SUM) has announced that it plans to issue a new 6-year senior bond and expects to release full details of the bond offer next week.

Summerset is one of the leading retirement village operators in New Zealand, with 38 villages either completed or in development.

The initial interest rate has not been announced, but based on current market conditions we are expecting a rate of approximately 6.25%.

At this stage it is likely SUM will be paying the transactions costs for this offer, so it is likely that clients will not be charged brokerage. This will be confirmed next week.

The bonds will likely be listed on the NZX.

If you would like to be pencilled on the list for these bonds, please contact us promptly with an amount and the CSN you wish to use.

We will be sending a follow-up email next week to anyone who has been pencilled on our list once the interest rate and terms have been confirmed.

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Travel Dates

Our advisors will be in the following locations, on the dates below:

29 February – Kerikeri –David

1 March – Whangarei – David

5 March – Lower Hutt – David

20 March – Christchurch – Johnny

21 March – Napier – Edward

22 March – Napier - Edward

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 15 February 2024

ANY time soon, the insurers and directors of the ill-fated, some would say cynically-managed, now liquidated, CBL insurance company will cough up tens of millions to compensate creditors and shareholders for their collective errors.

The same will happen with Mainzeal, though in that case the shareholders will not see anything, the creditors being owed $100 million plus.

Soon I expect the misguided investors who fell for the Intueri story might read of compensation payments.

All of these recoveries will be thanks to the litigation funder LPF, part thanks, in the case of CBL, to the fund manager Harbour Asset Management.

The cases that achieved accountability from the duffers who governed and managed the companies were all organised and funded by LPF, which seems to be on a mission to lift NZ’s governance standards.

Curiously LPF also has a social mission, as without much interest in gaining a share of the loot it has been instrumental in bringing justice to the Dilworth school pupils who in previous decades were victims of despicable actions.

(Sadly, there has not been much progress in supporting victims from previous eras who suffered in other schools.)

With LPF’s help, financial compensation is being achieved in or out of court.

In rare cases the shareholders will benefit. Creditors have first claim.

If shares were held by fund managers, or KiwiSaver managers, the compensation cheques (sorry, internet transfers) will arrive at the fund managers’ portals.

In the case of CBL, Harbour Asset Management, an honourable organisation, will receive a good-sized compensation sum on behalf of its investing clients.

Whichever of its various funds held CBL shares would have endured horrid wipeouts from their CBL investment, damaging the returns in the years that the losses were recognised.

CBL self-immolated and ceased to function in 2018.

Since then, some of the Harbour investors will have died; some will have been sufficiently disenchanted that they walked off Harbour’s plank; some will have kept their faith in the fund manager.

New investors, perhaps arriving yesterday, will have appeared, and might now be invested in the very funds that were affected by these CBL losses, written off years ago.

So what does the likes of Harbour do with the money that arrives from the CBL compensation?

Does Harbour trace back to the investors who lost some money and then forward to them their share of the compensation?

Does it pay out the appropriate amount to any estates of those who lost, and have since died?

Or does it credit the fund - call it NZ Equities fund - meaning that all who are in the fund today receive the benefit of the CBL compensation, whether or not they ever endured the loss?

Harbour, I repeat, has higher standards than any of its competitors, in my opinion.

There are no phoney bonuses there, it is genuinely research-based, and it does employ skilled people performing quantitative analysis and qualitative research.

I respect Andrew Bascand who heads his team of bright people.

Yet it will be tested by this new phenomenon of receiving compensation for ancient investment errors.

The pure response would be to locate all those who were in the fund when it endured the loss, and to pro-rata the compensation.

Another retired fund manager, who would be held nationally in high regard, wondered if a 50/50 split would satisfy those with an opinion.

Another fund manager suggests to me that the question was just too hard, and the incoming compensation would simply head into the revenues of the fund this year.

I hope not.

Last week I discussed the subject of fund managers who exercised the voting rights of the shares they hold on behalf of investors.

Unless the investor has specifically assigned their voting rights to the fund manager this practice is far from pure, and is at risk of leading to corruption.

I recall instances where companies have asked investors to accept a change in covenants. In return for voting “yes” an incentive payment was made.

The honourable manager would credit that to the pool.

Last week I wrote of how two decades ago Money Managers freely disclosed in court that its voting on behalf of clients was determined by the commission it was paid for its vote.

My distaste for these sort of organisations is not relevant, Money Managers now living only through its link with NZ Funds Management and even that link may have expired.

Voting is often mundane, “Yes, I vote to retain the auditors and accept the re-election of Mabel and Herbert”.

Yet often voting is meaningful. Voting on takeover offers would be an obvious example.

Fund managers vary greatly in quality. Their bonus claims, such as Fisher Funds has with its Kingfish, Barramundi, and Marlin offshoots, can be revolting; self-focused and unfair.

Some claim bonuses for occasional windfall gains in high-risk short-term punting, as NZ Funds did with its cryptocurrency trading.

Some do not repay their bonuses when subsequent years reverse the windfall gain.

Many pay their executives with Donald Trump extravagance. Many travel the globe at the front of the plane, with the cost borne by the investors, but the cost hidden in amongst expenses deducted from revenues.

The increasing willingness of those with money to hand over their money to fund managers is irreversible.

The odd phenomenon of people's willingness to allow index fund managers to charge with no or microscopic value-add is a suggestion that would have been noted by those who centuries ago correctly forecast the crumbling of the Roman Empire.

These trends are leading to unintended consequences.

The voting issue is an obvious connundrum.

The treatment of compensation is another.

The fine print allowing fund managers to spend whatever they like on their own “education” or “travel” or, most obnoxiously, on nonsensical “bonuses”, are all issues yet to be addressed, adequately. Disclosure may not be the whole answer.

My guess is that the regulators will not prioritise these issues.

So investors must look after themselves.

If any casual reader of this client newsletter has invested in a fund that owned CBL shares, that reader should today or tomorrow contact the fund manager and express his view on how the compensation will be allocated.

At the same time he should discover whether he has the right to vote on the securities held on his behalf.

_ _ _ _ _ _ _ _ _ _

SLIGHTLY lower interest rates should have a small but helpful impact on property funds.

The listed property trusts, in most cases (but not all) well managed, will have a slightly lower dead cost, paying a little less interest on existing debt, and the capitalisation rates of properties (the multiple of rental income) will rise a little, reflecting slightly greater nett value of rents.

The property trusts with retail properties in most cases needs this little bonus, as retail spending nationally is down, perhaps by 3%, meaning retail tenants are stretched, less likely to accept high rents.

Office properties in some cases are finding their tenants need a little less space, given the willingness in the public sector to tolerate their staff working from home.

Industrial properties, and medical properties, do not seem to be as affected, off-site workers being much less prevalent.

In general, property trusts may have a mild tail breeze, thanks to lower interest rates.

Sadly, that is unlikely to help most of the unlisted property syndicates, which need a roaring gale to get behind them to offset their problems.

A tiny fall in interest rates will not be the key issue.

Last year I wrote of those hapless investors who had declared themselves eligible to invest as professional investors, without the protection of the regulations aimed at helping retail investors.

These investors were attracted by high “forecast” returns and the lure of “highly skilled” operators. Unlisted syndicates grew rapidly when deposit rates in bond rates were heading to zero.

I discussed last year a fund that was set up to buy small industrial properties, mostly around Auckland, aiming to deliver 6% cash returns in to provide capital gains.

The fund I described was Provincia, which set out with good intentions, went through an ownership change of its management, and was hobbled by Covid, resulting in the absurd boost of public spending that led to inflation, and then to much higher interest rates.

To be fair to Provincia, it had probably felt entitled to believe the then Minister of Finance when he talked about very low interest rates for many years, and the possibility of negative interest rates. (There is no need to discuss his credentials.)

Had Provincia been able to borrow freely at 3% forever, it might, just might, have been able to deliver 6% returns and capital gains.

My uncertainty is related to its structure and its management. Even with 1% interest rates, there would be doubt about this.

Its structure enabled it to grow by issuing shares that were at fanciful prices and to borrow, from vendors of the properties it was buying and, if permitted, borrow from the banks.

The risk of this structure was obvious.

Imagine a vendor of a small industrial property seeks $10 million.

The market says “no”. The property is unsold.

Along comes a fund manager who says “yes” but negotiates that the vendor accepts, say, $3 million of the $10 million in shares in the fund, priced not at a market price but at a “valuer’s” estimate of what this year's shares might be worth. Some vendors would like this form of structured offer.

It would enable the vendor, perhaps another property syndicator, to display that it succeeded in selling for $10 million, perhaps bolstering its own mana with its own investors.

The manufactured sale price in turn empowers the valuer to make any future valuations, based on the evidence of that $10 million figure.

Without the inflated price from the share issuance, the vendor might have received only $9 million, or received no satisfactory offer at all.

From such methodology transactions can lead to an unhelpful lack of true price discovery.

So, in my opinion the Provincia structure was wrong.

Worse, the fund managers were incentivised to perform these transactions, using the structure.

They received a bonus of 6% of the gross purchase price for arranging this highly priced purchase, regardless of how the price was arranged.

The bonus topped up the already totally adequate fees paid to the fund manager.

When interest rates rose, cap rates fell, so the valuer’s estimate of Provincia’s underlying nett asset value was even more out of tune with reality.

In Provincia’s case the valuer’s estimate of the whole portfolio was something like $1.70 per share.

Yet there were no share trades at anything like this figure, in fact a rights issue at $1.10 was declined by most of the older investors and had to be underwritten via a “kind” anonymous person.

While this happened returns were miserably low - 1% - and investors were unable to escape the fund, despite having been offered the improbable hope that “oversubscribed” future rights issues would enable the fund manager to repay those who had always wanted to be repaid, needing the money for other commitments.

(They were most unwise to believe there would ever be any liquidity.)

So here we have a fund based on the capital of investors in some cases not committed to remaining investors, based on bank debt at variable rates, and based on over-paying for assets, the overpayment offset by a doubtful strike price for the shares issued to the vendor.

We know this to be a fair summary as the fund managers themselves refuse to sell buildings in the fund, noting the buildings are not worth anything like the balance sheet “valuations”.

Indeed the valuations might be close to double the price that a forced sale would achieve.

What troubles me is that many of the victims - the investors - are unlikely to be of the status (eligible, professional, wholesale) that enabled the fund to be established.

Anecdotally, many seem to be some distance from that status.

Doubtless, they all signed off a certificate stating they were eligible. Unless they signed, they could not invest in the 6% fund.

I do not know the circumstances in which they signed.

But many investors in similar funds signed the certificate in the fund manager’s offices, the certificates then corroborated by an accountant directly or indirectly employed by the fund manager.

In the South Island one particularly poor offering, made by an inappropriate manager, paid a professional intermediary to sign off such certification. Virtually every investor’s certificate was signed by the same intermediary.

Heaven help the hundreds of misguided investors who became embroiled in this rats’ nest.

Investors with a pot of money do not help themselves by pretending to have a comprehensive knowledge of any investment proposal that is not supported by intensive regulatory supervision.

I suspect unlisted syndicators have had their day in the sun.

Lower cap rates, higher interest rates, lack of liquidity, lack of regulatory supervision, and a changing market, is likely to undermine the future of such investments. The market regulator is now watching carefully.

Perhaps we need better supervision of all fund managers, better disclosure (“smoking kills” on the front page) and heavier enforcement, punishing those who certify investor eligibility without full professional interrogation of each client. Might the threat of jail put the brakes on these clowns.

The farmer who sells for a few million and heads off to invest may, or may not, be a skilled, experienced investor.

The question of his skill in investing is not addressed by the quantum of his wealth.

Every syndicate must have a credible source of liquidity.

Bonuses should not be the reward for doing the job for which the manager gets a guaranteed annual management fee.

Those investors involved, as is the case with the compensation cheques discussed in the first item, should now be proactive in demanding an equitable resolution.

Do not be bluffed by those seeking to maintain the status quo.

Footnote: the Provincia investors held a special general meeting seeking to ask investors to sell properties to create liquidity. An option was to close the fund; Sell everything. The fund manager charmed the investors who voted for the status quo. That, I guess, is democracy.

New Bond Offer

SBS Bank has announced its interest rate for its new issue of subordinated bonds. It has set the interest rate at 7.62% per annum, with interest paid quarterly.

The bonds will have a set maturity date of 10.5 years; however, SBS Bank will have the option of repaying these bonds under certain conditions after 5.5 years.

SBS will cover the transaction costs for this offer. Therefore, clients will not be charged brokerage fees.

Please contact us if you are interested in an allocation of these bonds.

Travel Dates

Our advisors will be in the following locations, on the dates below:

29 February – Kerikeri –David

1 March – Whangarei – David

5 March – Lower Hutt – David

20 March – Christchurch - Johnny21 March – Napier – Edward

22 March – Napier - Edward

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 8 February 2024

The decision of our new commerce minister to untie some of the untidy work of his predecessor has an obvious implication for investors.

The new minister, Andrew Bayly, correctly identifies that the process of granting loans kneecapped plausible lenders, like banks, as well as the intended target of the legislation, the lower-ranked lenders.

One obvious error was the focus on the process-driven banks, whose all-consuming mission is to protect their huge capital base. As a result, banks generally behave responsibly. They have too much to lose by lending recklessly. Already they have unwanted liability for processing money transfers for clients who have been scammed.

The lending law required banks to treat their clients suspiciously. The result was more loan refusals and more time and expense for mainstream lenders.

The law was intended to force the finance companies and back street lenders to offer their high-cost loans only to those who had a credible repayment plan. The banks were entangled by sloppy law making.

In essence, a bottom tier lender could not enforce the security for a loan if it simply approved the loan, priced it (at 25% p.a.?) and took a saleable security to enforce if the desperate borrower (inevitably) defaulted, lent without ensuring the borrower had the means to repay.

Think back a decade or two to the likes of the lenders whose clients might owe a drug dealer $1000 and feared sore kneecaps if the loan deadline was not meet.

A mongrel lender would take security over the fridge, the stove, the beds, and grandad's electric wheelchair, and would repossess and sell those chattels to recoup the $1000 if default occurred.

Worse, the mongrel would add on storage fees, penalty interest and repossession fees. Worse still, they might sell the chattels to a friend, cheaply. (Some might argue they were the backstreet example of those mainstream people who flogged off South Canterbury Finance’s assets at absurd prices.)

The new Credit Contract and Consumer Finance Act (Triple CCCFA) was aimed at cleaning up the process so the poor were not lent money they could not repay.

The politicians perhaps believed such desperate people should be helped by social welfare or charitable groups, not by backstreet lenders.

The poorly-designed law imposed the same processes on banks and mainstream lenders, requiring them to examine micro details of personal spending, an insulting practice for many of those, for example, who were simply borrowing to buy a house.

I recall one household couple, collectively earning nearly a million a year, complaining to me that their bank was advising them to cut back on their restaurant and movie spending.

So now we have Bayly winding back those rules, motivated by a desire to hasten bank lending decisions, and sidestep the more idiotic consequences of typically heavy-handed micro focused laws.

The likely outcome is a decrease in time wasting, which will be welcomed, but also an increase in the lending of the middle and bottom tier lenders, principally finance companies.

We are likely to see more newspaper advertising from non-banks, chasing the funds to lend more readily to the desperate.

At the same time the Reserve Bank and Treasury will be finalising their thoughts on how the Government can honour its pledge to provide investors with a Crown guarantee when they deposit money with any finance provider which is licensed, and is monitored and regulated, by the Reserve Bank.

Combine softer lending laws with easier access to public funding through guaranteed deposits and you may find rapid growth in lower tier lending.

My view is that this risks reproducing an awful cycle, of gratification, hardship, tears, and tax payer losses, unless there are new heavily enforced terms and conditions.

The most effective such new condition would be regulations that are enforced and supported by new laws.

They would be new laws that so disincentivise poor shareholder, director, and executive misbehaviour that the laws would rarely be required to be applied.

I would want the law to stipulate full compensation by shareholders, directors, and executives who wilfully lie about the financial strength of their deposit taking company, who breach the covenants that ought to be approved independently, and who mislead investors, duping auditors and regulators with their accounting information and management practices.

I would want the compensation pathway to circumnavigate any barriers that shield the wealth of those rotten people.

I would want mandatory jail sentences for those who do not compensate investors when required to do so; that is, the cheats lose their own money.

In practical terms this might mean the “trustees” of a family trust would be “encouraged” to consider making a “grant” to facilitate the compensation to investors, rather than have the settlor or beneficiary of the trust head to Rangipo prison.

The cheats would have no easy escape; pay up or destroy your career and endure the “stocks”.

New Zealand’s commercial law would be immeasurably more effective if those who invest or lend other people's money had to have capital to cover reasonable mistakes, and were personally liable to cover deliberately misleading or dishonest behaviour.

My sense is that complete personal accountability - no ifs, no buts - would ensure much better disclosure, much more responsible behaviour and, ultimately, much more investor confidence in financial intermediaries.

We certainly do not want a return to that era when bad loans were rolled over, when cash flows were displayed dishonestly, when loans were cynically mis-coded to fool investors, when covenants were deliberately ambiguous, when related party loans were disguised, when trustees were just paid accomplices with no skills, when auditors were just youngsters completing an apprenticeship, when regulators spent more time at their hairdressers than at a desk, and when the Minister of Commerce thought a commercial bill was shorthand for a commercial William.

Grrr.

Let us get it right. Binary compensation or jail would be a useful disincentive for those chasing fast bucks with other people's money.

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You get what you pay for is an old adage that is half right.

Sadly, you often do not get what you pay for - you get less.

Investors have contacted me complaining about the absence of product knowledge and useful customer service from sharebroking platforms that try to build a database with loss leaders, such as a trading platform that costs next to nothing.

There is nothing illegal or immoral in offering loss leaders.

Investors exploiting such an offer need to understand that knowledge, customer service, and valuable advice all must be funded from revenue. There is no such combination, as dirt cheap with comprehensive services.

No revenue leads to bankruptcy, constant calls for more capital, or, perhaps, the need for patience, granting the ambitious people time to learn what investors expect.

One investor noted that if he went to a dentist, he did not expect them to use a chisel, a hammer, and papier mâché for fillings.

My thought, unexpressed, was that if you pay this dentist ten cents only, then what else can you expect!

The finance sector will bifurcate, as the truism of getting what you paid for becomes apparent to all.

Perhaps it is all about choice. Low-cost platforms have their place on a menu.

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Last week the publicity hungry passive KiwiSaver fund Simplicity put up its view that New Zealand needed more opportunities for managers to invest in long-term, illiquid investments in the country’s infrastructure.

Its point was that KiwiSaver managers know that most of the funds which they hand on to others to invest are funds that will not be required by the depositor/saver for decades.

Therefore, that money can be used to invest in very long-term projects, just as was displayed by the Auckland Harbour Bridge. The bridge tolls took decades for the daily toll income to cover the cost and provide a decent return to the financier of the bridge. Eventually the bridge was free-holded.

Modern water pipes in Wellington, repairable internally and with modern technology monitoring maintenance issues, would be just such a long-term asset, requiring long-term income to service the debt involved in building the network of pipes.

Simplicity, which intermediates money (hands on to others to invest) has zero ability to select individual investments. It employs no analysts with obvious comparative advantage. It is simple, cheap, and very adept at using the media to perform free marketing, its thesis being lower fees will build scale. The thesis works, even if some would argue that you get what you pay for.

So, what on earth was Simplicity trying to say when it announced it had dumped its tiny holding in Briscoes and The Warehouse shares, because they were “not liquid enough” for Simplicity.

The reason fund managers in KiwiSaver believe they can obtain superior returns is because they believe they eliminate the lower returns you accept when you, the investor, demand liquidity.

KiwiSaver managers should require minimal liquidity, perhaps none given even the tiddlers, like Simplicity, are collecting tens of millions of new savings every month.

If Briscoes and The Warehouse offer good long term returns a KiwiSaver fund should be able to ignore the relatively low daily turnover in the stock.

One more question might be why Simplicity, an admin and marketing platform, thinks it can make its own decisions on what it buys and sells. It is an intermediator of funds. That is why it is cheap.

If it wishes to posit as a research-based selector of individual assets, pray tell us which of its largely low paid staff has any expertise in choosing stocks and other investment products?

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Fund managers already face a dilemma that one might say is an unintended consequence of the public acceptance of index funds.

The dilemma is how to exercise the shareholder voting rights that come with money belonging to a disparate, and sometimes uncaring, bunch of people whose money actually owns the individual shares.

The only ethical methodology would be to refer the voting issue to investors, and vote as directed by the owners. If 20% voted yes to a proposal, 30% voted no, and 50% were silent, then the ethical manager would vote on investor behalf, along those lines.

Instead of that many fund managers make a unilateral decision and vote with all the shares as they see fit.

Some indulge in a cop out, asking an independent company how to vote, and vote as the independent company recommends.

Regard this as an example:

Imagine EBOS proposes that it sell its medical supplies division and focus on its premium pet food which henceforth would be based only on animal meats, if shareholders approved the new strategy.

Many would dislike the exit from the medical supplies sector.

Some owners of the shares in the managed fund might believe the pet food should be plant-based.

Feelings might be strong.

Should EBOS receive a message representing the various viewpoints, or should the incumbent fund manager chief executive decide how to vote, or should the vote be dictated by some independent adviser.

The pure response is obvious: the votes should be referred to the underlying owners of EBOS shares.

In these days of electronic mail, the exercise would be relatively easy to arrange, as would collation of the votes.

The grim truth is that a high percentage of investors would refrain from voting at all. Don’t know, don’t care.

If the fund manager insists they want to determine the voting power on all shares the intelligent step would be to have every investor, before handing over money, to sign a sentence handing over the voting power to the manager.

Is this important?

Well, a long-time financial market peer and friend quietly mouths the word “corruption”, after contemplating this subject.

Given the unexpected flood of passive investors moving into simple index funds, the majority of votes in many companies may soon be cast by the fund managers, or worse still, by invisible advisers.

In many cases the index fund managers are just salesmen, without useful knowledge or experience.

As my mate asks, how long before backhanders determine a voting outcome? 

Does anyone recall how in the gloomy past a financial intermediary, in the High Court, told how it controlled the votes of investors when deciding whether the investors would agree to rollover, for one more year, a mortgage bond. The intermediary had sold the risky bonds to clients but retained the voting rights.

The intermediary asked the court why it would vote for a rollover if it was not given a helping of extra commission to encourage it to authorise the rollover. Its vote would naturally be determined by self-interest, it confessed. The voting decision had no connection with risk/return for investors.

The intermediator was Money Managers. The mortgage bond was a National Mortgages company, at the time managed by a character who went on to be chief executive of another (failed) financial intermediary, before heading to jail.

Self-interest gets into the main building through the tiniest cracks around window panes. Corruption, not always but sometimes, follows the opportunity for self-interest.

_ _ _ _ _ _ _ _ _ _

Next week I will discuss another dilemma for fund managers.

What does a fund manager do with a compensation cheque it receives many years after one of its funds loses money in a failed company?

The new power of litigation funding is starting to win compensation for investors and fund managers.

Does the fund manager allocate the money to those who were in the fund when the losses occurred?

Or does it bank the money to the current fund, providing a bonus for the current fund investors? I would see the latter strategy as a cop-out, a gift to the current investors that should have gone to those who lost years ago.

One of NZ’s best-ever fund managers wonders if a 50/50 split might be a soothing compromise.

Surely the responsible fund manager needs to find the wise solution.

The way not to behave responsibly has been determined by High Courts and incompetent liquidators/statutory managers, who prefer the easy, cheap, unfair way of simply pooling rather than carefully providing individual allocation to those who suffered the loss, now being compensated.

Next week I will discuss how the statutory manager of Hubbard Funds Management showed us how NOT to behave.

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New Bond Offer

SBS Bank has announced a new issue of subordinated bonds, with the offer expected to open on 12 February and close on 15 February.

While the interest rate is not yet known, based on current market conditions, we expect it to offer approximately 7.00% per annum.

The bonds will have a set maturity date of 10.5 years; however, SBS Bank will have the option of repaying these bonds under certain conditions after 5.5 years.

The bonds will be quoted on the NZX Debt Market under the ticker code: SBS1T2.

SBS will cover the transaction costs for this offer. Therefore, clients will not be charged brokerage fees.

If you are interested in an allocation of these bonds, please contact us with an indicative amount and the CSN you would use. We will send further information to those on this list next week. Please note that requesting more information does not commit you to invest.

If you have any questions regarding this offer, please feel free to contact our office.

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Travel Dates

Our advisors will be in the following locations, on the dates below:

- 12 February – Tauranga (PM) – Chris (FULL)

- 13 February – Tauranga (AM) – Chris (FULL)

- 14 February – Auckland (North Shore) – Chris

- 15 February – The Wairarapa – Fraser

- 15 February – Auckland (Ellerslie) – Chris

- 21 February – Christchurch (Russley Golf Club) – Fraser

- 29 February – Kerikeri –David

- 1 March – Whangarei – David

- 5 March – Lower Hutt - David

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd

Taking Stock 1 February 2024

FOR those investors with an optimistic view of mankind’s future, it is relatively simple to cite developments that justify optimism.

As I spell out below, the speed of medical technology breakthrough is astonishing, implying imminent progress that would change the world for people with access to first-world health treatment.

Such optimism has created unimaginable wealth for some investors who backed the successful companies.

Last week in Taking Stock Fraser Hunter discussed artificial intelligence and the potential for good (and bad) that it promises.

Breakthroughs in health are at least as exciting.

Such hope is needed.

We all have been immersed in the warnings of planet and government collapses, caused by mindless pollution, idiotic devastation of natural carbon sinks, dangerous science (biological weapons), political leadership failures, printing money to feed gluttons, energy wars, biggest bicep wars, and crass competitions amongst the powerful to have the glossiest personal assets.

As I have discussed at seminars in recent years the real thinkers in our business world believe inequality is an even greater threat to society than climate change, debt, political idiots wanting to spend other people’s money on personal agendas, or selfish “legacy” ambitions of goofy mayors.

All that stuff is negative and ought to keep those in charge of investing other people’s money most cautious about buying crypto currencies or making covenant-weak loans to the ambitious. Good leadership might spark optimism.

The positive news in health technology is genuinely exciting.

One company has recently produced a drug that would reverse diabetes and help those, as I might quietly mumble, whose girth is more generous than any physician prescribes.

That company has attracted so much excitement that its share price has almost reached the galaxy, certainly far beyond our moon. Eli Lilly and Novo Nordisk are companies making such breakthroughs.

Another company believes it will successfully reverse memory loss and addictions with targeted ultra-sound that reopens vessels to the brain.

The closure of those vessels is deemed to be a cause of addiction and memory loss. Opening the vessels leads to a cure.

Another company claims it can halt the ageing process, enabling people to choose whether to live much longer.

Remarkably the common drug Metformin, costing a few cents a pill and used to mitigate type two diabetes, is now cited as a credible anti-ageing drug.

Yet another company (Crispr) is performing mind-boggling research and gene therapy, seeking to repair genes such as the mutation that causes cystic fibrosis.

Crispr must be one of the most exciting companies in its field.

Better health, enabling fuller lives, sounds like a highly desirable objective that should generate optimism.

How does one invest a little in such developing technologies?

One of our clients regularly invests in exciting pre-IPOs in US technology companies. In effect he takes the risk that the vision of a solution will be realised and bring commercial success.

When the vision fails, he loses his money.

When it succeeds (a rare event) the investment value soars. He has done well, overall.

Lower-risk investors wait till the visionary has made measurable progress and had his IPO (a listing of the stock). At that point the future would be more assessable.

For those like me, who have other priorities, an investment in a managed health technology fund which has many “hopefuls” in its portfolio, is a logical strategy, as it is when one tries to invest in artificial intelligence, as Fraser discussed last week.

An alternative strategy is to assume that Apple, Alphabet or Microsoft or Amazon ends up owning every great idea because of the absolute power of their own bank balances.

I buy into each of their shares, or buy into the Beta Fang ETF listed in Australia, which focuses on the giants. The Beta Nasdaq fund is another alternative.

Inequality, absurd debt, dreadful political leadership, pollution - these sap one’s energy.

Progress in technology should re-energise us.

_ _ _ _ _ _ _ _ _ _

AS a measure of record I list here the weighting of the top technology shares in the US major index - the S&P500:- Microsoft 7.32%, Apple 6.91%, Nvidia 3.70%, Amazon 3.49%, Alphabet 4.05%, Meta 1.86%.

These six stocks comprise 25.47% of the index that measures 500 companies. What this means is that if all these stocks rise in value on a given day by 4%, and all the other 494 companies do not gain or lose a cent, the index would rise by 1%.

Would you rather own the index, or the six companies?

_ _ _ _ _ _ _ _ _ _

PROGRESS is not always linear and often has unintended consequences.

In Singapore, its government limits traffic congestion by limiting the number of car registrations to exactly one million cars. (New Zealand, with a similar population, has 4m vehicles.)

To buy the right to register a car for 10 years cost the intending buyer an upfront sum well north of $100,000.

Then sales tax disincentivises the average citizen. A reasonably standard Toyota costs the new buyer rather more than $200,000.

One unintended consequence is that the “average” citizen can never afford a car and therefore uses the excellent public transport system, or walks.

Another unintended consequence is that the wealthy, having to pay $100,000 plus just to register a car, buy really expensive cars only. Singapore's car fleet contains a large share of beautiful cars.

Another unintended consequence is that used cars have very little value (there is no market), so countries like Malaysia, and maybe New Zealand, are offered the used cars at modest prices. Why would you pay $100,000 to run around in a $10,000 car?

The US has an example of an unintended consequence.

Hertz bought tens of thousands of electric cars to hire out. Users did not like the recharging process, so Hertz is now selling 25,000 used electric cars. The consequence is that second hand electric cars are now more affordable in the USA, the market having been boosted by Hertz.

The visionary who provided momentum for electric cars was Elon Musk, Tesla being his product.

Musk is a brilliantly creative person with a real energy for finding solutions through technology but in a social sense his behaviour is as erratic and unwise as the man likely to be the US president after the next election, Donald Trump.

Musk’s governance behaviour, his emotional decision to buy Twitter, his use of Twitter (and destruction of its value), and his social behaviour, adds substance to the thought that it is a rare genius whose emotional intelligence equates with his IQ.

Yet one should listen to Musk. He warns that the excellence and scale of Chinese automotive manufacturing is now so dominant that in his assessment China might soon destroy all other countries’ car manufacturing business unless, Musk says, political barriers such as import tariffs block China's progress.

Meanwhile the growth in internal combustion engines continues with countries now deferring the notion of cancelling the production of such cars, not wanting to build coal mines to provide the electricity for an EV.

Technology is required to make electric cars travel for long distances, be rechargeable in a few minutes, deal responsibly with old batteries, and gradually evolve into autonomously driven vehicles.

That will take time. So too will it take time for major countries to develop renewable electricity sources to power up EVs (and data processing plants).

That technology seems to be progressing more slowly than anticipated. Hybrids far outsell electric cars, here and elsewhere, and may continue to do so for more than another decade.

_ _ _ _ _ _ _ _ _ _

OPTIMISTS should also have enjoyed reading last weekend's newspapers, which correctly noted that New Zealand is on the verge of some more gold mining activity. Federation, a small Australian private company, has bought the right to re-enter the tunnelled mines at Reefton, to extract gold.

It paid around $47million to the owners of the licence (OceanaGold) to buy the right to mine what could be a billion or two of gold, presumably exploiting the current gold price, which has risen gently for many years. The cost of mining will be high, but so would the returns be high if the gold price continues to rise.

This would be great reason for cheering in Reefton, now a small town, built on mining, but rejuvenated by a level of investment in the town, brought in by a developer who had moved to the town.

The media also noted the hopes of the mining minnow New Talisman, which for years has wanted to mine in the Thames area.

It has an undoubtedly rich resource underground but has not succeeded in attracting investment, though the strong gold price should be encouraging its board. It would become a miner if it raised tens of millions.  It will not get there by social media spruiking.

Of course, OceanaGold, through its mines at Macraes (near Palmerston) and around Waihi, is our major producer of gold. It is listed in Canada. Macraes is likely to be its best asset. Macraes will produce around 130,000 ounces a year, with a value of nearly $450m.

NZ sells around NZ$700 million of gold each year to Australia, where it is stored, making gold one of New Zealand’s largest export products to Australia.

As the media people correctly noted, the elephant in the wilderness is Santana, whose operation in Bendigo, near Cromwell, aims to be by far New Zealand’s biggest producer of gold, far surpassing Macraes.

If it mined and exported 220,000 ounces per annum, NZ’s gold exports would double, and would provide a crucial source of tax and royalty revenue to underwrite the coalition Government’s spending plans.

This week Santana announced a one-for-five issue of options, exercisable by February 28 next year, at a price well discounted from the current price. The options will be given to all those who own Santana shares as at February 28 this year.

What does this announcement tell us?

It could be a signal that Santana will soon need a small temporary banking overdraft, repayment in February next year, if required, by the exercise of the options, that would bring in around A$38 million of new capital.

It could be a signal to the whole market that SMI would rather favour its existing shareholders than be gamed by fund managers whenever it needed money.

This would be a recognition that in the past two years, whenever Santana was going to need money from a share placement, its share price mysteriously would collapse for a few days before the new shares could be priced for the offer. The Australian institutions and brokers manipulated the price.

Or it could be just exactly what has been described by Santana, a thank you present to its original and existing shareholders, offering what is effectively a bonus to them, the bonus currently worth around six cents a share given the offer (one-for-five) and the 30-cent discount prevailing today.

Curiously the offer has been timed to be just days or weeks before the independent calculation on the status of Santana’s resources, an announcement that will reveal much about the certainty of the gold discovery.

If the report lifts the certainty of much of the resource from inferred to indicated, and lifts the quantum of the resource, current shareholders would be delighted.

Gold mining in NZ is indeed on a new trajectory, as the media has now noticed, underpinned by the global demand for gold.

Russia, China, and India currently buy the total global production of gold (2000 tonnes, roughly) and have done so for years.

Some believe these purchases indicate the likelihood of a new global currency, aside from the constantly demeaned US dollar, whose value is not trusted by those watching the US simply “photocopy” their money as often as they like.

A currency backed by oil and gold could not be so easily undermined by political goofs.

Perhaps this demand for gold, also used in electronics and jewellery, explains the stable, slowly rising price, from around NZ$1600 an ounce in 2016, to NZ$3200 today.

If NZ miners are able to make a decent margin at current prices, then many areas where gold was previously mined uneconomically might provide an opportunity, as Federation anticipates.

The last gold rush I recall was in the 1980s when the likes of Crusader Minerals set off a number of hopefuls, including the clowns who listed Sovereign Gold.

This time, with gold at its new price, the prospects are favourable, strengthened by the much better regulations that chase away the spruikers.

If the media is alert, expect to read much more about the rebuilding of the industry in coming months.

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GOLD investors in NZ will have been mystified by a NZ Herald mining article suggesting guileless NZ investors were being let down by lack of information on those NZ gold mines listed on the ASX.

The reporter noted that Kiwi “clods” were trying to buy Santana shares without the benefit of Australian research, which forecast that Santana shares were worth 15% more than the current market price.

The stupid Kiwis, without the help of these forecasts, were therefore buying at a 15% discount to the “real” value. How foolish can you be? Buying cheaply is foolish? Luckily for the Aussies, they can read the research in Australia and buy later at a higher price (if the forecasts are realised).

I might surmise that the right response to this oafish article would be to relax.

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New Bond Offer

SBS Bank has announced plans to issue a new subordinated bond, with further details to be announced next week. While the interest rate is not yet known, based on current market conditions, we expect it to offer more than 6.50% per annum.

The bonds will have a set maturity date of 10.5 years; however, SBS Bank will have the option of repaying these bonds under certain conditions after 5.5 years.

SBS will cover the transaction costs for this offer. Therefore, clients will not be charged brokerage fees.

If you are interested in an allocation of these bonds, please contact us with an indicative amount and the CSN you would use. We will send further information to those on this list next week. Please note that requesting more information does not commit you to invest.

If you have any questions regarding this offer, please feel free to contact our office.

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Travel Dates

Our advisors will be in the following locations, on the dates below:

7 February – Christchurch – Chris

8/9 February – Ashburton (FULL)/Timaru – Chris

7 February - Blenheim – Edward

8 February - Nelson (PM) – Edward

9 February - Nelson – Edward

12 February – Tauranga (PM) – Chris

13 February – Tauranga (AM) – Chris

14 February – Auckland (North Shore) – Chris

15 February – The Wairarapa – Fraser

15 February – Auckland (Ellerslie) – Chris

21 February – Christchurch (Russley) – Fraser

29 February – Kerikeri –David

1 March – Whangarei – David

Clients and non-clients are welcome to contact us to arrange an appointment.

Chris Lee & Partners Ltd