Chris Lee & Partners Ltd

Taking Stock 27 March 2025

DURING the most stressed times it seems inevitable that investors will be inundated with sales advice, much of it regrettably self-serving.

I am reminded of the Dad’s Army officer causing panic by shouting “Don’t panic!”

Or I recall the health specialist who starts his summary of laboratory results by saying “this is not necessarily as bad as it looks”.

There are some undeniable facts.

1. The globe has created debt at such extreme levels that, absent zero interest rates or harsh new tax revenues, the debt cannot comfortably be serviced. NZ this week acknowledged this problem.

2. The world order has changed. Territorial wars are one matter. Trade wars are a new dimension. Currency wars are inevitable, with both China and the USA wanting to devalue their currency. Civil wars usually follow extreme inequality, such inequality historically solved only by plague, famine or wars.

3. Globally, households have stretched budgets, leading to less consumerism, lower corporate revenues, lower dividends and lower government tax revenue.

It is a messy picture that I draw, clearly signalling a likely reversal of the recent extreme gains of asset prices (housing and financial securities, shares, obviously).

There is nothing new in such a reversal.

Going back to the 18th century, there have been many occasions when the US stockmarkets have lost value for a full decade, sometimes two decades. Between 1965 and 1974, 1929-1939, 1911-1921, 1847-57 or 1832-42, the 10-year losses ranged from 23% to 37%, the losses adjusted for inflation.

The Santa Clara University in California has recently published research identifying these dismal decades. It also revealed that between 1912 and 1932 the US markets lost 13.9%, 1837-1857 lost 8.8%, and 1901-1921 lost 4.1%.

Wars, money printing, and stagnated economies naturally lead to hardships, with pessimism replacing optimism.

Most markets globally reflected the US market performance.

I repeat these numbers in response to the codswallop dished up by our most desperate financial salesmen who are given space in an unthinking media to promote their wares.

In recent days I have heard a former Goldman Sachs salesman, two fund manager chief executives, and even a government agency, offering blanket advice urging people to swallow the lie that losses revert to profits for all patient investors.

The lie would transform to just a careless statement if these salespeople began their spiel with a loud caveat.

The caveat could be, should be, that if you have time to outlast a period where potentially there could be ten years of losses, then history is in your favour; the outcome cannot be guaranteed but rarely will markets take more than 10 years to wash out their excesses. Those of any age where 10 years is an excessive period should review their risk settings.

Lamentably, I never hear this caveat.

I hear these gauche salespeople talking about AI, American exceptionalism, new health treatments leading to longevity, and I hear about how much the likes of Germany might benefit by borrowing trillions to beef up its arsenal of bombs, tanks and jet fighters.

Indeed, the current burst of enthusiasm for European stocks celebrates the news that Germany would borrow more, and that France might provide nuclear “protection” for Europe.

I also cannot avoid observing Trump’s withdrawal from the World Health Organisation, the Paris Climate accord, trade treaties with Canada, commitments to fund poor countries, and Trump’s determination to impose tariffs.

Trump seems to believe that high tariffs would not result in the affected goods losing the enthusiasm of consumers. He expects the tariffs to generate federal revenue that could be used for tax cuts. He has not discussed the possibility that high tariffs would simply reduce consumption. He believes that tariffs will force overseas manufacturers of the goods to move their production to the USA, creating employment, and notes the indications from some overseas companies that they plan to shift to the USA. There has been no formal discussion on those companies who would simply ship their goods to a third party, like Guatemala, where no tariffs exist, allowing Guatemala to on-ship to the USA.

I record this to acknowledge the great uncertainty about the President’s executive orders, and add that many parties are confused about his plans, and his policy switches/reversals.

Given the US GDP – around NZ $50 trillion – is still the world’s largest, the USA behaviour naturally affects global markets.

Trump is undoubtedly correct in recording the cost to the US of its longstanding “peacekeeper” role, the cost of its proactive self-serving “interventionist” role, and he is right to observe that the USA has large trade deficits with many countries, some of which impose high tariffs on US goods.

Especially its auto industry looks threatened by the new era of high-quality, low-cost Chinese vehicles.

Trump and his action man, Elon Musk, seem determined to rid America’s public sector of hundreds of thousands of the nearly six million employed by the federal government. Many anticipate painfully large cuts in the budgets of social welfare, health and education.

At very least these possible actions should put investors on alert.

Equally important will be the trajectory of the US dollar.

In amongst this uncertainty is Wall Street, the home of the world’s biggest share market, of critical importance because of the reliance of its workforce on 401k pension funds, which have extremely high exposure to US stocks.

If these uncertainties led to a much lower US share market value, the globe’s most lauded investor, Warren Buffett, will not be surprised.

He has built a US$350 billion cash fund, to be spent only when he sees value, and in recent days he has sold out of the S&P 500 index tracker that he has previously trumpeted.

Should NZ investors do as the salesmen preach, that is, do nothing, or should they review their risk settings, taking into account their age and their tolerance for potentially extreme long-dated volatility, quite possibly leading to many years of losses?

Every client-focussed fund manager/adviser would be acknowledging the heightened risk, would be aware of similar periods in history, and would be putting aside any focus on the lower fees/bonuses that would follow a switch from growth funds to capital secure funds.

Readers of Taking Stock should be aware that the media never filters out blatant salesmen’s guff. The regular salesmen plea to investors, to stay invested in growth stocks, will continue to appear in the undiscerning media.

Salesmen – fund managers etc – buy advertising space.

_ _ _ _ _ _ _ _ _ _

THE owner of The NZ Herald, radio stations and other advertising platforms, is NZME.

Led by Fletcher Building chairwoman, Barbara Chapman, NZME may be about to see its board of directors overthrown by a group of shareholders who want to see NZME news platforms address a “wider audience”.

For “wider audience”, read a more “centre-right” audience. These will be people willing and able to buy newspapers and advertise on NZME platforms if NZME redirects its current editorial policies away from the public bar, to a less raucous audience that resists any attempt by the media to set the nation’s agenda.

The new group is not intending to build another Fox News, thankfully.

Those who will be impacted by the NZME job losses can hardly claim to be gobsmacked. They have watched:

1. Falling circulation

2. Falling advertising revenues

3. Falling public trust in the mainstream media

4. Falling staff numbers

The new intervention has been initiated by a Canadian, now a citizen of NZ. He wants to see much more focus on news, including real world news, much less space given to the opinions of (largely undistinguished) journalists, and much fewer cheap shots of the type of which both The NZ Herald and Stuff cartoonists seem to specialise.

The journalists who have currently retained their job might take a hint from the approach of The NZ Herald’s Business Desk, which increasingly eliminates silly comment from its reporters in favour of reporting news, and interviewing decision makers; that is directors and chief executives, not reporters’ typewriters. Business Desk still does produce some teenage dross but has definitely moved to higher ground than the non-business reporters.

Sadly, The NZ Herald’s general news pages remain littered with the views of reporters who form their opinion without the experience, accomplishments or accountability that give the gravitas to the views of real leaders, whose knowledge can be respected.

Some such articles are simply banal. Recently one so-called award-winning reporter wrote a piece condemning the concept of public private partnership to build infrastructure, asserting that foreign based companies had a much higher cost of capital than NZ. This was nonsense. He compared NZ 10-year bond rates with NZ corporate borrowing rates. The offshore contenders will be borrowing at cheaper rates than our government pays, by a margin, China as an example providing debt at rates nearer 2%.

There are media people who understand why their opinions are not relevant. Mark Sainsbury, a retired media presenter, displayed wisdom when asked if he would be a candidate for a local body leadership role (replacing a totally unsuitable mayor).

He said he would enjoy the role but has never run a business, never employed people, and had no experience in leadership, so would not be a suitable leader of a council. He was kind enough not to record that the mayor was not much different from him in useful experience.

Sainsbury scored a perfect 10 for his self-analysis.

Frankly, I regard the almost certain changes to NZME’s governance and editorial cleansing as a sign of hope for NZ.

That a wealthy person, supported by institutions, cares about the media is almost a miracle in the era when the opinions of the public bar seem to matter more than a presentation of the facts.

Billionaire Jim Grenon, the Canadian who is leading the push for change, says he believes the media needs to reduce or expunge reporter opinion and replace it with real news. He sees it as the owner’s responsibility to filter out content that is not based on facts.

Perhaps he sees, as I see, that the potential buyers of media content, and potential advertisers, want to see content that attracts adults, and especially adults with the resources to provide the media with revenue.

The low level of public respect for editorial slant is reflected in surveys, newspaper circulation, and television audiences.

It is a cliché to say that if a fading business keeps making the same mistakes, then it will continue to endure the same results.

Unlike Britain, with its dreadful papers like The Sun, NZ does not have the population to provide a sufficient audience by targetting the public bar.

I expect NZME to soon have a refreshed board and the likes of The NZ Herald and The Post (in response) to be searching for reporters with a thirst for the facts, and the intelligence to recognise that their opinions are not the news, and not remotely of interest to most readers.

The new breed will also know that “gotcha” journalism is celebrated at the journalist’s local watering hole but rarely succeeds in eliciting useful information from interviewees.  Even more rarely does it attract an adult audience.

Will NZME adapt in time to take on primacy in our media offering? It has the potential to be our only national paper, bought in all cities, respected by adults, able to pay well those with high standards as reporters.

Does it take a Canadian to deliver such a standard?

_ _ _ _ _ _ _ _ _ _

THE field trip to Cromwell last week to observe and listen to progress with the proposed Bendigo-Ophir mine will have increased the impatience of the investors in the group.

Santana Minerals files its consent application in coming weeks, not months, attaching to the application extensive and widespread technical and practical information relating to its plans to make the project the world’s best example of a modern mining operation.

Cromwell clearly is impatient for the project to begin, judging by the clamour to consult with the information bureau manned by directors at the very recent A&P Show in nearby Wanaka.

The consenting process might take some months, but the quality and depth of the research provided will surely streamline the process.

Our clients will have received a report with much detail of the visit last week by a group of investors, and our analysis of that information.

If consent is granted, action follows immediately, but the processing plant will not be extracting gold for around 12 months from the date of consent.

Santana has received more than 800 applications to work at the mine, most of the applicants living within 50 kilometres of the site, but it has yet to begin its search for the roughly 350 people it will employ directly.

Contrary to some poorly researched articles in the media, if the mine proceeds and produces gold at current prices, the overwhelming winners, in order, will be the NZ Government, several hundred staff, Cromwell businesses, and thousands of NZ shareholders.

One contributed article written by a poorly informed lawyer, using research that could most kindly be described as “lazy”, claimed the spoils would all go to Australia. The true breakdown of the spoils would be something like $180m per year to the Crown, $20m via Australian shareholders to the Australian government.

The contributed article was so factually wrong it should not have been published.

Four years ago Santana Minerals, before buying into the project, had a market capitalisation of $11 million. Today that market cap exceeds $400 million, with New Zealanders owning around 40% of the company.

Ultimately a producing mine would have a market cap measurable in billions if it achieved annual gold sales of around 150,000 ounces at the low costs that come from high grades of non-refractory gold.

The two founding explorers/geologists, Warren Batt and Kim Bunting, both New Zealanders, might more deserve knighthoods than some of those issued to much lesser contributors to the country’s welfare.

  _ _ _ _ _ _ _ _ _ _

Travel

Christchurch – 15 April – Fraser Hunter

Ashburton – 16 April – Fraser Hunter

Timaru – 17 April – Fraser Hunter

Tauranga – 15 April – Johnny Lee

Hamilton – 17 April – Johnny Lee

Lower Hutt – 29 April – Fraser Hunter

Auckland – 1 May – Edward Lee

Auckland – 2 May – Edward Lee

Christchurch – 7 May – Johnny Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners

Taking Stock 20 March 2025

WHEN the Reserve Bank Governor Adrian Orr resigned suddenly most people understood that he had lost the wish to battle his opponents every day.

The new Minister of Finance was challenging him on the cost of running the central bank and has for some while challenged him on the misguided policies he had implemented during the reign of Ardern/Robertson and then Treasury head McLeish. All of them favoured social objectives over a dual approach of controlling inflation through monetary policy and underwriting the sustainability of the banking system.

Orr, unsurprisingly, had had enough. He was not absorbing all these indignities because he needed the money.

The media had never loved him. The feeling was reciprocal. It amazes me that Orr tolerated them at all. I am not sure I would have been so gracious.

The media neglected to discuss the greatest indignity Orr endured. That was the imposition on him of a board of RB directors that monetarists would regard as more suited to run a school ball than to oversee monetary policy.

The new board wanted an emphasis on various social issues involving public sector input on employment, banking policies toward Maori leasehold or tribal land, and on social housing. The board reflected a media agenda rather than the agenda of a crucial technically-excellent central bank.

Worse, the then inept Crown leadership wanted a committee of politically chosen people to make committee decisions on monetary policy settings.

It amazed me that Orr accepted this. Previous Governor Don Brash would have walked down his plank, facing this sort of political stuff.

It is certainly difficult to imagine that these burdens made it easier for Orr to enjoy his job.

Nor should we overlook the stress of trying to impose on the RB the new responsibility for taxpayer funds, implicit in the decision to offer Crown guarantees to co-operative financial organisations and to privately-owned second- and third-tier non-bank deposit takers.

I was granted an hour to two to run through the dangers of this latter idea with the current acting governor, Christian Hawkesby, a thoroughly decent and intelligent man.  I cited the lessons of the Clark government’s design errors and the Key government’s buffoonery in overseeing the financial company guarantee which began in 2008.

The dreadful policy decision, the childish and incompetent oversight of the companies combined with the egregious errors of the public sector and the National government led to losses well exceeding a billion dollars. Neither Key, English, Ardern or Robertson took a moral stance to support the victims of this outcome. Their lack of decency is central to their legacy.

They were all guilty of covering up errors that were demonstrated in the High Court. Shame on them all.

Here we go again, with the Crown Deposit Guarantee Version Two.  At least in this new case the Reserve Bank will be led by someone who will be alert to the inevitable abuse of the system.  It seems highly likely Orr would not have relished the role of taking on this perilous policy.

For what it is worth, I wish NZ’s public sector had more leaders like Orr (and Hawkesby), willing to display public disrespect for goofy politicians and “gotcha” reporters.

There will always be contentious discussion, often led by former Reserve Bank officials who of course are not accountable.

In a perfect world, I would like to see Gareth Morgan take on the role.  All will know that is not going to happen, Morgan being in his 70s and totally engaged in his endeavours to make NZ and its environment a better place. But he never lacked courage or decency or intellect. He would have dispatched those who engage in silly stuff.

In his absence, Hawkesby seems a safe option to replace Orr.

Inflation will no doubt be the biggest problem to be addressed.

_ _ _ _ _ _ _ _ _ _ _ _

NZ investors are not the only group that disbelieve the fable of “The Conquering of Inflation”.

The much more significant disbelievers are the global bond markets.

Their focus today is on inflation-adjusted bonds, a financial product that re-sets its rate annually, over a long, stated term, by paying to the holders of the bond an agreed margin over the inflation rate. It is an insurance product to protect the investor from rising inflation.

Imagine two distinct bonds - one pays 5% fixed rate, half-yearly interest, for 10 years; the other pays 1.5% on top of whatever the inflation rate might be (based on mythical inflation calculations), reset annually.

If inflation were 3%, the investor with inflation-adjusted bonds would receive 4.5%. If the following year inflation was 5%, the investor would receive 6.5%.

The global bond market is choosing the inflation-adjusted bond, not the stable 5% bond.

Obviously if the markets believed inflation would remain around 2% the bond market would choose the set rate of 5%.

In the US the Federal Reserve Bank of Philadelphia warns that the risks of inflation are rising.

Giant fund manager, Bridgewater, noted inflation-adjusted bonds are “a great option” while Bank of America expects strong retail interest in inflation-protected securities.

Investors with no appetite for uncertainty, here and everywhere, will be asking their financial adviser/sharebroker about the wisdom of including inflation-adjusted bonds in their fixed interest portfolio.

For some, the IFT perpetual bond, reset annually at 1.5% over the bank one-year swap rate might be an option.

The bond sells for a tad less than 66 cents, meaning that if it sets its rate at 5% (on the $1 bond) the investor who buys at 66c receives a real return of 7.5% (on his 66c cost).

If bank swap rates rose to 4.5%, the bond would re-set at 6%, the real yield going to 9%.

Those who are convinced that inflation is low, going lower, would be better to buy set-rate bonds.

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AS WELL as the Reserve Bank, the Financial Markets Authority is another Crown entity that is a target for malcontents.

If compared to the dreadful behaviour of the Securities Commission in the years leading up to the 2008 crisis, the FMA seems to have achieved a status close to that of a saint.

The latest action to assist investors is exemplary.

It is tackling the contentious subject of how to protect “wholesale” or “habitual” investors from those, who we can politely say, stretch the intention of the law when accepting, even begging for, money from inexperienced investors.

The FMA will ask the High Court to interpret the law to enable the FMA to define clearly what it expects from promoters of “wholesale” investment offers.

Effectively, the FMA asks what is the “duty of care” of both advisers and promoters, when selecting funds for those schemes not subject to all the normal retail investor protection.

There are many examples of exploitation.  Some promoters of wholesale property syndication provide a solicitor or accounting firm to certify that a potential investor is “eligible” under the wholesale definition. This often leads to anybody with a large sum of money – inherited, or from a valuable asset sale, or from a lotto win – being “certified” as eligible to forego the normal protection in law, aimed at helping the investor.

In one case an accountant who was aligned with the promoter signed the eligibility of clearly unsuitable investors, claiming a fee for each certification, paid for by the promoter, a hapless goof who should not be collecting public subscriptions, in my opinion.

The obvious issue is what experience and knowledge does the investor require to make a sensible informed decision, not protected by the sort of evidence required of a retail offer.

Who owes the duty of care?

Is it the person certifying? What sanctions will be taken for careless or false certifying? Is false certification the equivalent of fraud?

Does the promoter owe a duty of care? Should he take steps to validate the certifier? That is, should the promoter perform a second level of enquiry?

I am delighted by the FMA’s request of the High Court.

Our business long ago took the view that we should not provide advice AND certify eligibility. We ask buyers to obtain certification independently. We provide independent advice.

We think it is preposterous that a certifier should charge $100 to certify and perform no due diligence.

We are certain that wealth is not conclusive proof of knowledge or experience.

The seller of a family farm will have a wealth of knowledge and experience, but maybe none at all at understanding the risks of property syndication.

The court finding will be highly relevant.

_ _ _ _ _ _ _ _ _ _

OUR discussion recently about the relevance of the current basket of goods used to measure “average consumer spending” led to a flurry of responses.

I argued that electricity costs are much more than 3% of the average senior person’s spending, as reflected in the range of goods and services measured in the inflation basket.

Many replies proudly disclosed how they minimise their power bills, some with solar installations, some who turn off or turn down the hot water cylinder.

One respondent, self-described as mid-80s, has kept a record of his (and his wife’s) spending.

They recorded for the last 12 months:

$4238 – electricity

$7020 – rates

$3115 – insurance

$19,236 – food (excluding wine)

$18,994 – health

$5307 – transport

Total: $58,410

Note: electricity was 7.25% of spending, NOT 3.1% as used by the computer of the NZ Consumer Price Index.

My parting comment is that none of these categories is likely to enjoy 2-3% inflation.

The CPI is a fraud!

_ _ _ _ _ _ _ _ _

TRUMP’S idiosyncratic leadership has cranked up new trouble spots in many places, not just in Canada, China etc.

Taking Stock is not the platform to forecast outcomes but it is very clear, possibly to everyone, that global markets are unable to cope with what currently seems like chaos.

In times of chaos, index funds will be staunch, remaining invested as per their promises.

As James Lee wrote in Taking Stock last week, those who invest passively cannot respond to chaos by withdrawing money from specific stocks that might be under strain.

Unless Trump changes direction, global equity market investors need to ensure that the volatility they are seeing fits with their tolerance for turmoil. Age will be a factor in such tolerance.

Who ever thought that investors would watch Germany planning to borrow $2 trillion to the accompaniment of delighted investors while Trump plans to borrow a similar sum, every year, to the horror of investors?

We indeed live in interesting times.

 _ _ _ _ _ _ _ _ _ _

Investment Opportunity

Wellington International Airport (WIA) has announced plans to issue a new senior bond with a maturity of 6 years.

The interest rate has not yet been confirmed, however, based on WIA’s BBB credit rating, we anticipate it will be approximately 5.00%.

The expected minimum investment will be 10,000 bonds.

WIA is unlikely to cover transaction costs, meaning brokerage charges may apply. This will be confirmed next week.

To register preliminary interest, please reply with your indicative amount and CSN. We will contact you next week with additional details.

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Travel

Lower Hutt – 25 March – David ColmanChristchurch – 15 April – Fraser HunterAshburton – 16 April – Fraser Hunter

Timaru – 17 April – Fraser HunterTauranga – 15 April – Johnny LeeHamilton – 17 April – Johnny Lee

Lower Hutt – 29 April – Fraser HunterAuckland – 1 May – Edward LeeAuckland – 2 May – Edward LeeChristchurch – 7 May – Johnny Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners Ltd

Taking Stock 13 March 2025

James Lee writes (he becomes chairman of Chris Lee & Partners in April):

“If nothing changes, either one of you will go, or you both will go, because your shareholders are so unhappy.”

I was presenting to a board on the current disconnect between the board’s view of value and the share price. To the horror of the banker who had invited me, I had pointed out the CEO and Chair.

Sure enough, within months the Chair removed the CEO, and the shareholders removed the Chair until finally the company was out looking for new shareholders.

Unfortunately that is all too common because alignment is hard - and I mean really hard. Getting shareholders, execs and boards to all agree on the journey forward requires discipline and transparency which is difficult, in my opinion, for listed companies because of the rules.

Today, markets are volatile and, while the index is down 4% for the year, the variance is wide. A2 Milk is up 40%, Spark is down 25%, Heartland down 17%, Ryman down 30%, Warehouse down 13%.  To me it is this entire concept of volatility that many use as an excuse to passively invest as opposed to acknowledge they need to make only a handful of good decisions to invest to add value.

Today I want to talk about one of the most important criteria that investors need to consider when looking to add value - the concept of governance.

Governance is front and centre in people’s minds right now because investors are making noises from the sidelines, whether they are calling for board change via social media, calling votes to remove boards, or launching takeover bids. The number of companies facing increased scrutiny has never been higher. By my reckoning 20% of NZX50 companies have faced some sort of governance challenge in the past two years.

The issue in my mind is that this challenge is often just misdirected anger at share prices. It’s easy to snipe from the sidelines.  Governance is such an odd concept, so what do I mean by governance? I don’t mean the board itself - my view is that governance is really a fancy word for risk management, which is the combined job of the board and executive as a team.

Governance matters because business is hard. I read a statistic once that 50% of companies will retract 70% from their highs and never recover. The Harvard Business review believes 70% plus of all mergers and acquisitions fail and McKinsey once wrote that 70% of all organisation changes fail.  Getting the industry thematic right is a good first step, but long term how a company manages risk and decision making is what matters. Look at Summerset vs Ryman, Warehouse vs Briscoes or Fonterra vs Synlait.

Making consistently good decisions, changing course when you are wrong, and managing risk in case of a bad day is how a business goes from good to great.

A quick history lesson

Historically, boards were chosen by businesses to help them succeed. It was normal for executives from one company be on the board of another, investment bankers (whose job is risk) were commonly on boards and they became clubs of really strong business-oriented technical people. Unfortunately a small group of people (as always is the case) abused their position, awarded their firms contracts, and poor-performing companies surrounded themselves with friends and family to protect them from scrutiny.

Over time the rules changed to force a public company to have rigour in its appointment process and eventually companies mandated change, to the point today that many companies are accused of hiring for a matrix not a skill set.

That accusation I think misses the point, because in my experience the people being hired actually have very strong skills regardless of background. It is the combination of the role of a board that is the problem to solve, not any one director. In my view people misunderstand that the dynamic of a well-functioning board embraces the concept of “challenge everything in private, commit publicly”.

I do not believe you can use a skills matrix alone to build a well-functioning board.  A board that dines together as best friends is not a reflection of a good board. A board where everyone is an expert in their field but doesn’t understand their role or the business in which they are supposed to be gatekeepers is no better. A great board is one which has a deep business knowledge across multiple industries and real mutual respect, so members can have a violent disagreement but the next day ask about each other’s family as if nothing happened.

Boards require alignment and transparency but, most of all, mutual respect from executives and shareholders.

In my mind a perfect board is a blend of all stakeholders’ interests, where conflict of interests are embraced and managed, not avoided. To paraphrase Goldmans, they are in the business of managing conflicts, not eliminating them.

To see this in action, so we know it’s not just theoretical, we have only to look at private companies.

In a private company the shareholder and the executives pick board members that complement the business. Everyone is aligned to creating value, protecting their capital, which means managing their employees and their social licence to create value. They do not manage to a set of rules or the whims of a capital market.  They don’t discuss their share price or manage their board papers for compliance with exchange rules.  They do their job, which is to manage the risks of the business towards a long-term goal.

We will cover this another time but if you asked me honestly if a private or public company was better - I would happily give my money to most private equity firms, but I would trust only a select group of listed companies. 

The impact of passive investing on governance 

So why aren’t investors actively doing this with boards? Historically, investors would vote with their feet, as most were active. They bought companies they liked and just didn’t own some, and natural selection took hold - people sold, activists bought.  When I started as a junior it was commonly said the best way to beat the index was just to not own Carter Holt or Brierleys.

Today, however, investors are predominately passive or passive plus with significant deviation from the index left to a handful of investors. The problem with that is they literally can’t sell if they are unhappy. All they can do is complain on social media and write nasty letters, which means share prices don’t get hammered and natural selection stops happening.

This is equally true in the opposite way. Let’s say companies have a great idea that would double the value of the company and put it into a large index. A passive investor will buy the stock only after it goes into the index.

Passive investors therefore really communicate loudly only when things have gone wrong, which is pointless.

Blaming Ryman or Spark for today’s share price is intellectually dishonest if you declined the opportunity to say something five years ago. Today the focus should be on what we do about it.

I would back Justine (at Spark) and Dean (at Ryman) to make the right decisions from today every day of the week. The historical decisions have been made. All that matters are the future ones.

What this means is, at its extreme, if a board can just manage to do an okay job it will never hear from its shareholders. There is no incentive to take risk to get new passive holders, and once they have them they really don’t have to listen.

Theodore Roosevelt once said complaining without a solution is just whining.

It’s clear from the noise levels that governance isn’t working perfectly, so what can be done?

In my experience there are four stakeholders in every business - clients, employees, shareholders and your social license (read brand/ culture/ compliance).

The goal of good governance (remember I view that as the combined responsibility of the board and exec) is to balance those four stakeholders over time, so good decision-making and risk management are key.

Think of these as a rubber band - you can pull something in a direction for a short period of time (ie burn your employees, not reward your shareholders, under-invest in systems or cut investment into compliance) but if you do that for an extended period (say two years) it will snap and then you get change, like it or not!

My view is that the NZX needs to find a way to differentiate itself. I would start with leadership in governance to encourage listed companies to be better. If we want to encourage better leadership how do we encourage more business expertise? Should we encourage the CEO of Spark to join the board of Contact? Should boards be required every five years to publish a board effectiveness review? Should shareholders get the right to appoint two directors in the same way a 20% shareholder could do, in order to represent their interests? I would equally weight a board towards the four stakeholders and embrace conflict, for instance.

Blaming the people isn’t the solution. I promise you no director sees value in compliance-based board meetings. Most want to spend their time talking about the actual business.  These people devote countless hours and take personal risk to try to do a good job.

Complaining about poor outcomes is just whining. Replacing a single person makes no difference. Resetting the system where shareholders can be instrumental in selecting boards based around making a company great should be the goal.

As investors need to base their investment decisions not just on the pretty powerpoint presentations but the quality of risk management of the company, a good starting point for any investment is how do the Chair and CEO interact? Are they an aligned team, do they have material risk in the game, do they have the same vision, how do they deal with conflict.

Investing may start with the industry but the next choice is who do you trust more. You can’t do that passively.

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Travel

Wellington – 19 March – Edward LeeLower Hutt – 25 March – David ColmanAuckland – 28 March – Edward LeeChristchurch – 15 April – Fraser HunterAshburton – 16 April – Fraser Hunter

Timaru – 17 April – Fraser HunterTauranga – 15 April – Johnny LeeHamilton – 17 April – Johnny LeeAuckland – 1 May – Edward LeeAuckland – 2 May – Edward LeeChristchurch – 7 May – Johnny Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee & Partners Ltd

Taking Stock 6 March 2025

AT a time when the new 2025 season for fixed interest investors kicks off with a bond issued by Property For Industry (PFI), those investors might be considering two issues.

Before they travel too far down the line, they might be well served by first talking to my wife. I will get back to that in a tick.

The two issues are PFI’s credit status (default risk) and the fairness of its planned coupon (probably around 5.25%).

The issue closed today.

My view is that PFI’s default risk is unusually low and that its interest rate is fair, given that the Reserve Bank has signalled more cuts to the overnight cash rate (OCR). 

But it is here that you should consult with my wife. Interest rate cuts pre-suppose a fall in the true inflation rate. The inflation rate is assessed on a basket of goods and services on which the “average” person (38 years of age) spends money.  The basket has a weighting for each of its components and makes its calculation within 12 working days of each quarter. The basket includes: food, alcohol and tobacco, clothing and footwear, housing and household utilities, health, transport, communication, recreation and culture, education, miscellaneous goods and services.

In the US, energy inflation is 9% of the CPI. According to one of our very best independent economists, the percentage of the basket in NZ ascribed to energy inflation is 3.1%. Cameron Bagrie recorded this weighting in a recent client newsletter. Bagrie is a gem, a rare economist who is apolitical and who gets around the provinces to learn what is their reality.

Here is where Mrs Lee has expertise. She pays the household bills and meticulously records each payment. Believe me, her knowledge of these matters is Biblical and never to be challenged.

She says our household (a couple in their mid-70s) spends around $6000 per year on electricity. If the index believes that is 3.1% of an average household spend, then the average household must be spending in total around 33 times $6000, or $198,000 a year.

If the average household spends $198,000 a year, then its nett income is presumably $198,000, or around $250,000 gross per annum.

If all that were true, NZ would be a remarkably affluent country.

The truth is that the 3.1% weighting is not even remotely close to being relevant for Mr and Mrs Lee, or most in our age group. Add in our rates, insurances, travel, food, petrol and health and the combined weighting gross cost per annum is close to 86% of household spending.

Obviously this is anecdotal only but I guarantee that the prices of these goods and services rise inexorably, probably by around 10% per annum. 

Curiously, 10% is the expected rise of Mercury’s power prices in April.

If 80% of a retired couple’s spend rises 10%, then the other 20% would have to fall by 30% to achieve an average “rise” of 2%.

Please accept my view that this proposition is bunkum.

The index is bunkum. It has no relevance to my household or to the households of our senior citizens, unless their anecdotal comments are poorly-based. Inflation is nowhere near 2%. Interest rate cuts are based on comparative, but false, data (for my age group).

Forty years ago, the Reserve Bank had two baskets, one for younger people, and one for senior citizens.

Presumably it led to discomfort for those who increased the national pension by the figures relevant to senior citizens. Politicians do not enjoy putting aside more money for pensioners.

The politicians reacted, surprise surprise, by abolishing the second basket and increasing pensions by whatever the figure that was produced by the young person’s index.

Why is the index so skewed?

Well, very few senior citizens benefit from the fall in mortgage rates, nor the falling cost of services enabled by technology, resulting in lower prices for all the gadgets and services now available.

Yet we are asked to believe that “inflation” is near enough to 2%, meaning interest rates will fall, producing lower bank deposit rates and lower bond rates.

Is the PFI bond priced fairly at around 5.25%? Given the dubious data, the coupon is fair.

We might accept that if bank deposit rates are around 3.5% to 4.0% and welcome the PFI rate if we are going to be asked to accept that inflation is still “falling”, bringing interest rates for savers to even lower levels.

I suspect Mrs Lee’s records will show that inflation in our household is nothing like 2% and never has been. It is well past the time to review the methodology of calculating the CPI.

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WHEN Ryman produced a heavily discounted “not renounceable” rights issue, that meant that existing shareholders could not sell their rights as an alternative to coughing up more money to avoid dilution.

As expected, a small, shrill chorus went up, describing the issue as unfair, “penalising” those who did not have the money, or desire, to buy the discounted shares.

As usual, their noise would have meant more if the facts matched the argument.

The truth is that the shares fell well below the discounted offer, meaning anyone could buy the shares more cheaply than those who took up the issue or those who had underwritten it. The rights were worth about the same as the shell of a salted peanut.

Graciously, the NZ Shareholders Association spokesman, Oliver Mander, pointed this out when the facts became known.

A similar chorus had hollered last year when Santana Minerals had a wholesale placement at 61 cents.  Within days the share price fell to 51 cents, meaning those who shrieked about not having access to a wholesale offer were able to buy as many as they liked at a much lower price.

Sometimes it is better to yell after you are hurt, not before.

Companies seeking large sums of money in a hurry have to consider many factors when deciding on the details of an offer.

For example, if a Ukrainian rare metal exporter was planning an issue, he might have been wise to get it done before the catastrophic meeting between Trump, Vance, a hand-picked selection of US media and Zelensky in the Oval Office.

Ryman paid $30m in costs, much of that in an underwriting agreement, to be guaranteed to receive the $1 billion it needed. It was fairly obvious that Ryman was feeling pressured by banking covenants and was facing heat from its bankers, so it designed an offer that slam-dunked any bankers’ conversation. The company designed its rights issue to meet its needs.

It will now have comfortable conversations with bankers, but if I were its adviser (I am not) I would urge Ryman to issue retail debentures for terms of three to 10 years, raising enough money to farewell its bankers, getting rid of nervous nellies who fret during periods of slow sales.

Currently, sales are slow, in keeping with the housing market. Conversely, building costs keep rising.

My bet is that Ryman, Oceania and Summerset will find willing buyers for their property and services, but not in a time frame that is predictable by analysts. These retirement villages sell their concept by talking loudly about a secure, amiable community with good communal services, smart facilities and (absolutely fabulous) care staff. All of this is true.

But little is mentioned of their real comparative advantage, that being the provision of geriatric care facilities not available through the public health sector.

By buying into Ryman, Summerset or Oceania, those with the money can buy a certainty about future care needs that will not be available to the aging population that relies on the budget of future governments.

For that reason alone, the three excellent providers that are listed on the NZX are more likely to be bought out by private equity companies than to remain pilloried by airheads seeking media time with oafish claims that the big three are ripping off their residents.

My suggestion to Ryman, Oceania and Summerset is that they meet the needs of their residents by offering a retail debenture issue to replace the bank debt. The cost might be greater but the freedom from silly, stressed bankers seeking short-term solutions might be worth that cost. Perhaps they should talk to the outstanding, but retired, chief executive of the Parkwood Retirement Village, Mark Rouse. He executed that strategy 30 years ago. It worked brilliantly.

Meanwhile, the constant focus on renounceable, or non-renounceable rights issues seems pointless.  Behind boardroom doors companies will make their decision after consulting market participants, underwriters and bankers.

It seems fairly unlikely that they will be interested in the opinions of those not equipped with all the facts.

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THE planned Central Otago gold mine at Bendigo has this week released important new data, but much more important will be the milestones to be reached in coming weeks.

This week it released a new assessment of the discovery after an independent specialist analysed its most recent drilling.

This Mineral Resource Estimate (MRE) calculated that the discovery now has a higher level of “indicated” gold, resulting from more infill drilling of what was “inferred” gold.

Crucially, it concluded the average grade of gold will be some 10% higher than previously calculated. Grade is important. There is no additional cost created by a high grade but there is a proportionate rise in sales revenue. Higher grades convert straight to nett revenue.

Australian Stock Exchange rules are prescriptive, almost unrealistically harsh, so the announcements of quantum and quality of resource are so understated they are arguably misleading. Inferred gold at Bendigo converts to indicated gold at around 70% but the ASX rules require explorers to pretend the conversion rate is nil.

Yet it is not the MRE that will capture attention.

Before May, the miner (Santana Minerals) will be releasing a feasibility study which will be based on the detailed work that is being done in matters like roading, the mine path, the capital costs and the current (elevated) price of gold. It will also acknowledge that the success of the options issue (98% take-up) will reduce the immediate need for capital.

If the plan now is to move toward early production and to minimise the need for debt, the project will de-risk, even more quickly than the earlier feasibility studies indicated.

Yet the earlier calculations had led to a pay-back term never seen by the veteran geologists/ executives Warren Batt and Kim Bunting, whose genius led to the discovery and its subsequent development.

Current indications are that the mine would produce around 145,000 ounces (four tonnes) of gold per annum, at a margin of around NZ$3000. This would produce a profit before tax of around $435m. The higher yields now confirmed will enhance this figure by 10%.

Such a prospect probably explains the Crown’s unusual decision to forego a 3% royalty on gross sales, in preference for a 10% share of nett profits, as is the Crown’s right.

If Santana’s feasibility figures became reality the Crown would make an additional $20m per annum by exercising its option to choose a profit share. Add to the profit share (say, $43m) the corporate tax and the PAYE tax and it is clear this project would enrich Crown coffers by around $150m per year.

Even more critical than the Feasibility Study will be the release of the consent application, expected in April. This will reflect the extensive work performed in many environmental areas, like visual pollution, air pollution, water usage, slurry treatment and slurry isolation, noise pollution, the effect (if any) on flora and fauna (including moths, skinks and maybe rabbits) and the proposed remedial work, the latter to meet the requirements of the private landowner.

If the consent application were to be published, it would make compulsory reading for shareholders and the public, including those who oppose any mining.

The Bendigo/Ophir mine should be an exemplary test of the Fast Track legislation, given Santana and its chief executive Damian Spring have prepared the application to the most demanding standards of the various Acts that preceded the Fast Track law. No doubt the application will have some focus on the economic outcomes which will mean long-term employment at unusually high remuneration rates, a great opportunity for local iwi, a windfall for the Crown, and a real return for the shareholder, 42% of whom are New Zealanders, who will have put up more than $100m to advance the concept of a mine, and then fund it.

I retain the hope that more New Zealanders, including those representing iwi, will invest in the project before it proceeds, as I hope it does.

Obviously, until the project is consented, it is just a potential project. Equally apparent is that the gold price is an unknown and has a so far beneficial effect on royalties, profits and dividend potential.

Nothing alters the fact that the project, if it proceeds, would grow Cromwell and surrounding towns, as several hundred staff headed to work each day. My guess is that the mine would also attract tourists as it is accessible only a few kilometres from public view.

The next steps are the completion of the Feasibility Study and the filing of the consent application.

Those who support the project will be humming impatiently!

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Travel

Christchurch – 12 March – Johnny Lee (full)Wellington – 19 March – Edward LeeLower Hutt – 25 March – David ColmanAuckland – 28 March – Edward LeeChristchurch – 15 April – Fraser HunterAshburton – 16 April – Fraser Hunter

Timaru – 17 April – Fraser HunterTauranga – 15 April – Johnny LeeHamilton – 17 April – Johnny LeeAuckland – 1 May – Edward LeeAuckland – 2 May – Edward LeeChristchurch – 7 May – Johnny Lee

Please contact us if you would like to make an appointment to see any of our advisers.

Chris Lee

Chris Lee & Partners Ltd