Newsletter December 2010

December 1, 2010

Financial Advisers Regulation

I wrote last month about the Code of Professional Conduct for Authorised Financial Advisers, and the need for all financial advisers to be authorised by July 2011. The initial deadline was December 2010, and early on I set that as a goal to have all the compliance dealt with. I’m pleased to say I have passed the exam that all financial advisers must sit in order to become authorised. The exam covered the following legislation:

  • The Financial Advisers Act
  •  The Financial Service Providers (Registration & Dispute Resolution) Act
  • The Fair Trading Act
  • The Consumer Guarantees Act
  • The Trustees Act
  • The Code of Professional Conduct for Authorised Financial Advisers
  • Financial Advisers (Disclosure) Regulations

I have also had to submit a 300 page portfolio of evidence to ETITO, the body charged with assessing competence in relation to the authorisation of financial advisers. The final part of that process is a competency interview, which I completed last week with a recommendation from the assessor that I be awarded the standard needed to complete the authorisation process.

Part of the new legislation is the requirement for every financial adviser to belong to an external disputes resolution scheme. The service is free to consumers, and is available if a complaint is not dealt with internally to the satisfaction of a client. I have joined the Insurance and Savings Ombudsman’s disputes resolution scheme( I will give further information about the disputes resolution process in future newsletters, but would encourage investors to visit the Insurance and Savings Ombudsman’s website for some general information.

I have also had to register as a Financial Services Provider with the Companies Office. The register is a public database of financial service providers in New Zealand, and anyone can search the register to check the status of their adviser.

The Code of Professional Conduct for Authorised Financial Advisers

I’ve discussed the Code previously, however I think it’s worth covering the eighteen standards in some detail. The Code contains minimum standards of competence, knowledge and skills, of ethical behaviour, and of client care. It also specifies minimum requirements for continuing professional training. Over the next few months I will comment on each of the Code Standards.

Code Standard 1An AFA must place the interests of the client first, and must act with integrity

No comment needed here really – I think I can comply with that without too much further training!

Code Standard 2 – An AFA must not do anything or make an omission that would bring or would likely bring the financial advisory industry into disrepute

A bit ambiguous in my view – if I back a company that goes broke, am I breaching the standard?

Code Standard 3 – An AFA must not state or imply that the AFA is independent, or that any financial adviser services provided are independent, if a reasonable person in the position of a client would consider that the AFA or the services provided are not independent

I’m not sure why this is deemed necessary really, because all sources of income and how they are paid are required to be disclosed under the new disclosure regulations. I class myself as independent in the sense that I don’t have an obligation to sell certain products, and I have no restriction on the type or number of products I can offer. Under the new legislation, however, I won’t be able to refer to independence due to the fact I receive brokerage from fixed interest issuers such as Auckland Airport and Goodman Fielder, and commissions from the likes of UDC, Marac, and ING. I have no problem, however, complying with this standard.

Code Standard 4 – An AFA must not borrow from or lend to a retail client

No problems with that.

Code Standard 5 – An AFA must not provide financial advice to a retail client in relation to a financial product that is not offered to the public if the AFA is a related person of the product provider of that financial product

If my brother was trying to sell shares in a commercial building (privately) I would not be able to offer the opportunity to my clients. There are conditions that would allow me to do so; however they are particularly strict, and rightly so, are designed to protect the interests of the investor. No problem complying with that one.

Code Standard 6 – An AFA must behave professionally in all dealings with a client, and communicate clearly, concisely, and effectively

Under this standard I can only give advice in areas I have the competence, knowledge and skill to provide. I have to provide my services and perform my obligations in a timely way, and I must transparently manage any conflicts of interest that may arise. “Communicating effectively” requires me to take reasonable steps to ensure clients understand any advice I give. If I pass on advice (research) of another person I must take reasonable care to ensure that person has an appropriate level of competence, knowledge and skill to provide that advice.

Code Standard 7 – An AFA must ensure each retail client has sufficient information to enable the client to make an informed decision about whether to use the AFA’s financial adviser services, and/or to follow any financial advice provided by the AFA

This standard requires me to provide clients with information about any limits on the scope of my services, my qualifications to provide those services, the fees the client must pay, the benefits I may receive, and any conflicts of interest I may have in relation to the advice I am giving. All of this should be satisfied by complying with the disclosure obligations under the Act.

You will notice the code standards sometimes make reference to “retail clients” and it’s important to understand the definition of a retail client, and how that differs from a “wholesale client”, and an “eligible investor.” The abridged definitions from the Financial Advisers Act are as follows:

Retail Client – a client of a financial adviser or broker who is not a wholesale client

Wholesale Client – has a full page definition, however in relation to our clients would be someone whose principal business is the investment of money, or someone with assets exceeding $1 million, or with turnover exceeding $1 million per annum, or someone who certifies that they are an eligible investor

Eligible investor – a client who certifies that they have sufficient knowledge, skills, or experience in financial matters to assess the value and risks of financial products, and the merits of the service to be provided

It is important investors are aware of their status when dealing with a financial adviser. Wholesale clients have the ability (by providing a signed notification) to opt out of having that status, and instead would be treated as a retail client. By doing that, all the code standards in the Code of Professional Conduct for Authorised Financial Advisers would apply to them. Eligible investors can only attain their status by certifying in writing that they have sufficient knowledge, skills, or experience in financial matters to assess the value and risks of financial products, and the merits of the service to be provided. By doing so they are, in effect, limiting the protection afforded to them under the Code.

Vital Healthcare Property Trust

Vital (formerly ING Medical Property Trust – and before that Calan) have issued rights to existing unit holders. They are seeking to raise $150 million to fund the purchase of twelve healthcare properties in Australia. The offer is a renounceable offer; meaning holders are able to sell their rights if they wish. The company has provided stable long-term returns, with a good yield and a steady capital gain. The question investors need to ask however; is “do I want to double my investment?” The offer closes on December 13th, with the rights trading closing on December 7th. Call the office if you would like to discuss your situation.


Infratil has announced an offer of up to $50 million of unsecured, unsubordinated, convertible bonds, with the ability to accept oversubscriptions of $25 million.

  • Maturity Date – June 16th 2016
  • Interest paid quarterly
  • Minimum investment – $5,000
  • Interest rate – 8.50%
  • Closing date – May 2011 (or earlier at the issuer’s discretion)

Holders of Infratil bonds maturing in May, 2011 are being offered the ability to exchange those bonds for these new bonds. The bonds are convertible, which means at maturity Infratil has the ability to issue shares to bondholders, rather than pay them out in cash.

Equitable Mortgages

It was surprising to hear last Friday that Equitable Mortgages had called in the receivers. The directors have decided the business is not sustainable, so have opted out before the tough regulatory regime comes into play on December 1st. The Government Guarantee may have helped keep the company viable, but in the long-run has been a significant factor in their demise. Investors have been reluctant to invest past the December 2011 Government Guarantee, which makes it almost impossible for the company to lend with any confidence. I said in the October newsletter “I think the remaining non-bank deposit takers will need to look at various alternative sources of funding (outside short-term retail deposits) until an adequate level of confidence returns. This might take years, not months.” Equitable clearly weren’t in a position to source their funding elsewhere. Other finance companies are no doubt grappling with the same issues.


Newsletter October 2010

October 1, 2010

Non-Bank Deposit Takers

The finance company sector continues to take a battering, and one wonders who will remain once the financial meltdown is behind us. The collapse of South Canterbury Finance and Allied Nationwide Finance has added a further layer of uncertainty to an already fragile market. The Government Guarantee threw the sector a temporary lifeline, however December 2011 will come soon enough, and it is at that point we will see who remains.

The non-bank sector plays an important role in the New Zealand economy, providing finance for small businesses and those that otherwise may not be able to attract bank funding. Investors, however, need to question whether or not they need to be exposed to the sector at all. In hindsight it’s obvious the finance company rates being paid prior to the global financial crisis were not adequate for the risks investors were taking. The property boom was in full swing, and there was a sense that almost any property investment was “secure” simply because it was property. The simple fact that finance company rates weren’t significantly different from bank rates also created a false sense of security.  Investors assumed a finance company was safer than it actually was because their rates weren’t through the roof. If Bridgecorp or Lombard adequately rewarded investors for the risks they were taking they should have been paying 15% to 20%, and this alone would have prevented many from investing in the first place.

The risk/return relationship has been turned on its head with the introduction of the Government Guarantee – you now have a situation where investors can achieve returns in excess of bank term deposits without taking any risk at all. That will, however, only be the case until December 2011, and it is then investors will have to decide which companies warrant their support. Unfortunately the remaining non-bank deposit takers now have to overcome the crisis of confidence that dogs their industry. As if collecting loans in such a tough environment is not difficult enough, they must also cope with investors pulling their money out as it falls due. This, along with some poor lending, was a significant contributor to the later finance company collapses. Some of those companies would have survived had it not been for the contagion effect that swept through the industry.

Even the banks can be subject to a crisis of confidence, as Alan Bollard explained in his recent book on events surrounding the global financial crisis, and the introduction of the Government Guarantee Scheme. Depositors were withdrawing their money from the banks and hiding it at home! The very nature of banking means banks can be left exposed to bad publicity. Individuals deposit small sums at call, or for relatively short periods (1-2 years). The bank bundles those deposits together and lends the money to a home buyer or a farmer or a business owner for a long period (10-25 years). What happens when a rumour that the ABC Bank might be in trouble? Everyone lines up at the door to withdraw their money. The bank will have assets that match the value of depositors’ funds, but they can’t access them because the people they have lent the money to don’t have to pay it back on demand. This happened to Northern Rock in England in September, 2007. I think the remaining non-bank deposit takers will need to look at various alternative sources of funding (outside short-term retail deposits) until an adequate level of confidence returns. This might take years, not months.

The Government has recently introduced strict regulations for the sector, to be administered by the Reserve Bank, and in time these could provide the basis for some level of confidence to return. 

  • All non bank deposit takers to have a credit rating by March 2010
  • A requirement for every deposit taker to have a risk management plan
  • Each deposit taker to have an emergency source of liquidity
  • Restrictions on related-party lending
  • Minimum capital requirements

Once the Government Guarantee is withdrawn we will need to get back to some fundamental analysis of the various companies to determine whether or not they offer returns that are attractive enough to gain support. The type of information that will be important includes:

  • Shareholder equity                             
  • Level and type of security                   
  • Reinvestment rates                             
  • Alternative sources of funding                                  
  • Credit rating
  • Related party lending
  • Exposure to a single debtor or group of debtors
  • Bad debts



Trustpower is one of a number of companies looking to soak up some of the South Canterbury Finance money. They have announced an offer of up to $75 million of fixed rate senior bonds, with the ability to accept oversubscriptions of $25 million.

  • Maturity Date – December 15th 2017
  • Interest paid quarterly
  • Minimum investment – $5,000
  • Interest rate – 7.10%
  • Closing date – October 20th


Tauranga City Council

Tauranga City Council is also issuing bonds. They have announced an offer of up to $70 million of fixed rate bonds, with the ability to accept oversubscriptions of $20 million.

  • Maturity Date – April 15th 2016
  • Interest paid semi annually
  • Minimum investment – $10,000
  • Interest rate – 6.25%
  • Closing date – October 12th


Finance Companies

With the South Canterbury Finance money coming back into circulation, there was an expectation the other Government Guaranteed finance companies would soak some of it up. In response, some of the finance companies have dropped their rates – they don’t want an influx of short-term money, preferring to concentrate on attracting funds outside the guarantee. Rates currently on offer include:


Company                                                        Maturity                                 Rate

Equitable Mortgages                                  12 months                               6.50% 

PGG Wrightson Finance                            12 months                               5.70%

Marac Finance                                             12 months                               5.50%

Marac Finance                                               6 months                                5.50%

UDC Finance*                                              12 months                               5.70%


* UDC has not applied for the extension to the Government Guarantee



Some of you will have Barramundi warrants, and it might be timely to explain again how they work.  A warrant is a security that entitles the holder to buy a share in a company at a predetermined price. Barramundi investors received one warrant for every two shares issued in October 2006. These warrants expired last year, and holders of the underlying Barramundi shares were issued new warrants in their place. The important terms of warrants are the exercise price, the underlying share price, and the expiry date.

The Barramundi warrants now have an expiry date of October 27, 2011, and an exercise price of $0.75cents. Each warrant gives the holder the right to buy a Barramundi share for $0.75cents at certain dates up to October 27, 2011. The underlying Barramundi share price is currently at $0.81cents; therefore the warrants are valuable in their own right. All things being equal the warrants usually trade at a price reflecting the difference between the exercise price ($0.75cents) and the underlying share price ($0.81cents). At present the warrants are trading at about $0.07cents. If your intention is to exercise the warrants in order to acquire more shares then I would wait until the last opportunity (October 27, 2011) to do so. There is no point paying for them any earlier than you have to. If your intention is to sell the warrants then your decision when to do so is more difficult, as the warrant price will change with each change (up or down) in the underlying Barramundi share price.


Dorchester Finance

The Dorchester Finance recapitalisation has been completed, and Dorchester debenture holders will now have had various securities issued to them. Of all the finance company collapses this is one that has at least seen a significant return of capital to investors. Half the money has been repaid, and the remaining half has been replaced with units in Dorchester Property Trust holding four hotel properties, interest-bearing (5.00%) notes with Dorchester Pacific Limited, shares in Dorchester Pacific Limited, and options to acquire further shares in Dorchester Pacific Limited. The following table shows the number of newly issued securities in relation to an original $10,000 investment in a Dorchester Finance debenture.


Dorchester Pacific shares                    2,230               Currently trading at 0.10cents           

Dorchester Pacific options                   1,220               Currently trading at 0.028cents

Dorchester Pacific notes                       3,450               No recorded trades

Dorchester Property Trust units           2,020               Not yet listed



Newsletter September 2010

September 3, 2010

South Canterbury Finance

I delayed the September newsletter so I could comment on the fallout from South Canterbury Finance. The Government was between a rock and a hard place when they had to decide whether or not to back South Canterbury. Letting the company go into receivership undermines confidence in the economy, however taking a stake in the company using taxpayers’ money would have been a risky proposition (financially and politically). It will leave a big hole in the South Island economy and I’m certain it was not an easy decision for the Government.

I feel sorry for the Alan Hubbard – it is he who gave me confidence to invest in the company. The ethics he showed in relation to his investors is rare in today’s economic climate, and he should not be remembered in the same light as some of the directors of the early finance company failures. Although I was critical of the Government placing the Hubbards under statutory management at such a crucial time for South Canterbury, ultimately I don’t think it caused the failure of the company. The failure came through poor lending, due largely to control of the company being wrested away from Alan Hubbard. The management of the company moved away from its usual lending practices and moved into the riskier area of property development. It reinforces the comment I made in a recent newsletter where we can do all the analysis under the sun, but our analysis is almost always based on historic information. We can read the prospectus and the annual report; however we don’t know what decisions management are making the day after those documents are published.

Investors should feel relieved their deposits are covered by the Government Guarantee, although you can’t help but sympathise with those who lost money in the earlier collapses. The Government has made the interesting move of repaying all depositors, regardless of eligibility under the Guarantee scheme. They have done this to avoid the high rates of interest South Canterbury were paying. In contrast to previous companies that have failed under the Guarantee, investors will not have to file a claim. The trustee will repay each debt security holder as soon as they have an up to date register. This should take weeks rather than months. If investors have any queries they would like clarified don’t hesitate to contact the office.

Code of Professional Conduct for Financial Advisers

The Code of Professional Conduct for Financial Advisers has been back to the code committee a couple of times since I discussed it in May. It is nearly signed off, with just some minor changes needing to be made. Some of my concerns have been addressed, although the code places a fairly heavy burden of compliance on advisers. Already we are seeing advisers preferring to move on or retire, rather than comply with the new rules. The underlying motive behind the legislation is commendable; however I think they have gone too far in some areas. The code is very prescriptive, and my concern is that advisers will be forced to pass on the costs involved in abiding by the new regulations. Advice that in the past may have been passed on verbally will, in some cases, now have to be provided in writing. That does not come without a cost, and if I have to provide written recommendations I will have to consider charging a fee. The code differentiates between:

  • Investment planning service – a service provided by an AFA under which the AFA designs a plan for an individual that:

a: is based on an analysis of the individual’s current and future overall financial situation, and identification of the individual’s investment goals, and:

b: includes one or more recommendations on how to realise those goals

  • Personalised service – a service provided by an AFA where the AFA has taken into account the client’s particular financial situation or goals
  • Class service – a financial adviser service that is not a personalised service

FIN Numbers

Computershare have recently decided to charge $20 for a replacement FIN number. The FIN is essential if you want to sell any of your shares or bonds. At present, Link Market Services are not charging a fee, however I’m sure they will follow suit if they find, due to Computershare’s decision, they are receiving more requests than normal.

Compulsory Superannuation

The Government has recently put together a working group to look at our need to increase our rate of saving. Treasury figures show our offshore borrowing was $100 billion in 2000, $170 billion this year, and is predicted to reach $250 billion by 2014. As a country we continue to live beyond our means. New Zealand’s demographics suggest it is only a matter of time before we have some sort of compulsion in retirement savings. When KiwiSaver was introduced I spoke of the eventual need to change the playing-field around Government superannuation. My 2007 KiwiSaver presentations quoted the following figures:

  • The average age of death has increased from 60 to approximately 85 in the last 50 years
  • The numbers in New Zealand’s population over 60 will approximately double by 2050
  • In 2000, there were approximately nine taxpaying workers for each retired pensioner
  • In 2050, there will only be three tax-paying workers for each retired pensioner
  • The Government response is likely to include some of:
    • A decrease in the superannuation benefit
    • An increase in the age of eligibility
    • Means testing
    • Compulsory superannuation

Figures recently released by Treasury suggest by 2060 there will only be 2.5 tax-paying workers for each retired pensioner.  The Government simply cannot afford to keep paying the same amount in superannuation without a means of levying taxpayers. I have said for some time now that once KiwiSaver gains a certain amount of traction the Government will make it compulsory. Of course there is already an element of compulsion due to the fact our taxes have been used to build the Cullen fund.

John Key’s assertion that “changes to NZ Super are off the agenda” is a bit naive in my opinion. The statistics paint a fairly gloomy picture for those of us who are twenty years away from the current age of eligibility for the pension. Changes may well be off the agenda during this term, but rest assured; they will be on the agenda in the future. The age of eligibility will increase, and I believe NZ Super will eventually be means tested.

Personally, I’m not a fan of compulsion, but it may be in the best interests of the country. As soon as I’m forced to put money into a superannuation scheme, my right to invest as I see fit is removed. I would back myself to achieve better long-term returns with my money than the majority of those in the managed funds industry. When I was trying to build my assets through sharemilking I needed all the money I could lay my hands on. Having 4% or 6% or 9% of my income compulsorily transferred to ING or AMP every year would definitely not have been the best use of that money. Many other New Zealanders are saddled with debt – more often than not the best use of any surplus for those people is first and foremost to reduce that debt.

Unfortunately not everyone is good at saving – in fact, New Zealanders are notoriously bad at it. We have huge private sector debt, as we continue to fund our lifestyle through overseas borrowing. And this is where Governments always face a dilemma. How do you legislate to solve a nationwide problem that not everyone is contributing to?  Invariably a good proportion of the population are cheesed off having to abide by laws that have been introduced because their neighbours spend all their money on plasma TVs, new cars, the TAB, cigarettes and alcohol. It’s a debate that will be argued for many years to come. Unfortunately, like most systems of welfare, the right to superannuation is full of inequities. Everyone gets the same amount regardless of what they may have contributed in taxes over the years. The gang member who has been on the dole most of his life is entitled to the same amount as the plumber who has toiled away for forty years, paying hundreds of thousands of dollars in income tax.

My preference would be to have a minimum guaranteed universal pension (at a low level), with tax incentives to contribute to your own scheme. That way we have a choice about when, and how much, we contribute to our own retirement fund. If we decide we have a better use for our money, we are free to make that decision. If we feel the best use for our money is to fund a more comfortable retirement then so be it. The gang member has the same choices as the plumber (albeit with less money) and has no reason to complain at age 65 when the pension is barely enough to live on.

Bill English has told the working group that any recommendations have to be fiscally neutral – the Government isn’t going to be throwing more money at this. If they gradually reduce the pension payment, and use that money to incentivise saving for our own retirement, the onus moves to individuals to make choices for themselves. Unfortunately there will always be those who, for a variety of reasons, can’t or won’t make those choices. And there lies the perpetual dilemma for Government – Nanny State or freedom of choice? I want to be able to make my own choices, although I also don’t want to see superannuitants begging in the streets – there is a compromise to be reached there somewhere.

Greenstone Energy

We have a small amount of our Greenstone Energy bond allocation remaining. There was a bit of negative publicity regarding their lack of a credit rating when the bond was issued. Infratil have historically declined to have their bonds rated, claiming the $100,000-plus per annum fee is not worth it. I think investors can take some comfort from the fact that Infratil and the Guardians of New Zealand Superannuation conducted rigorous due diligence on the Shell assets, before investing $420 million of equity. Banks have provided a further $600 million in core debt and working capital, and the bond will rank equally with that bank debt. They distribute 30% of the fuel in New Zealand, their income is largely based on a margin, and fuel consumption is not affected greatly by price.

Manukau City Council

The Manukau City Council is seeking to raise up to $250 million with an issue of fixed rate secured bonds. The new Auckland City Council will take responsibility for the bonds from November 1st 2010. 

  • Maturity Date – September 29th 2017
  • Interest paid semi-annually
  • Minimum investment – $5,000
  • Interest rate expected to be around 6.50%
  • Final interest rate will be set on September 27th




Other Fixed Interest Opportunities

Company                                                       Maturity                                 Rate

PGG Wrightson Finance                            12 months                               6.15%

Equitable Mortgages                                  12 months                               6.50% 

Marac Finance                                             12 months                               6.25%

UDC Finance*                                             14 months                               5.60%


* UDC has not applied for the extension to the Government Guarantee



Newsletter August 2010

August 1, 2010

Government Guarantee

My attention has been drawn to an issue relating to Government Guaranteed investments made by trusts or estates. The rules around eligibility have always been clear to me – New Zealand tax residents or New Zealand citizens are eligible. Ineligible investors include financial institutions, superannuation schemes, investment advisers, and professional trustees. The question has been raised – what is the definition of a professional trustee? I took it to mean the likes of Guardian Trust or Trustees Executors, firms whose profession is managing the affairs of trusts or estates. What about the family lawyer or accountant? If they are paid to act as trustees, are they considered professional trustees? The simple solution, of course, was to ring Treasury and ask for clarification. Their answer to me was, “we can’t rule on eligibility until a claim has been lodged.”

Further enquiries led me to a very helpful Treasury official who assured me they are not actively looking to exempt people from the scheme. The test for them of a professional trustee is, “is the trustee being paid specifically for their trustee services”? If so they may fall into the category of a financial institution, exempting them from the scheme.

New rules introduced from January 1st 2010 also give the Crown discretion as to whether or not to accept the claim of a trust where one or more of the beneficiaries of the trust are not eligible retail investors. So if your Government Guaranteed investment is made in the name of a trust, and one of the beneficiaries is not a New Zealand resident, your claim in the event of a default “may” not be accepted by the Crown. I spoke again to Treasury on Friday 30th, and they were in the throes of putting together further guidance around this issue. They hope to have that available on their website by Monday August 2nd.

If you are concerned that your Government Guaranteed investment may in fact not be eligible for the Guarantee, please call the office and we can offer some guidance. If there are any doubts I would recommend transferring the investment into the names of eligible retail investors. Treasury told me there is nothing in the Guarantee scheme that prevents the transfer of securities, and doing so will not exempt an eligible retail depositor from the scheme.


More scams have been circulating recently with Stock & Share Trading Company again offering Dorchester investors five cents in the dollar to buy their debentures. Another company, Share Buyers Proprietary, is offering AMP shareholders AU$2.29 for their shares. The shares are currently trading at $5.33 so the offer is ridiculously low. Unfortunately some vulnerable, mainly elderly, and inexperienced investors accept these types of offers. Also, I have heard of more local people fielding unsolicited calls from brokers overseas offering shares in companies that are about to hit the jackpot. These people can be very persuasive, and often have websites that appear legitimate; however rest assured if you send money to them it is the last you will see of it.

I personally received a very friendly email last week from a poor Nigerian woman who had sadly lost her husband in a plane crash, and wanted my help to invest five million US dollars. Based on my striking resemblance to her good Pakistani friend, Mr Khalid, I was lucky enough to be chosen to help Mrs Bamali invest her millions. I would receive 10% for my troubles. The last sentence of her email said “Please do not be scared of anything as it is 100% legal, so take my word.”

You would be surprised how many people fall for these scams. What tends to happen if you agree to help poor Mrs Bamali is she then sends a request for money to “unlock” the funds to be remitted. It might typically start with $1,000, but if you are foolish enough to send this amount, chances are you will send more when the next request comes in. There will always be “one more” hurdle to overcome, requiring a further $1,000. I heard a case of one woman who sent in excess of $100,000 overseas in such a scam. The Securities Commission posts alerts on their website (, when scams are doing the rounds. If you are in any doubt ring the office and I can make enquires.

Portfolio Administration Service

In contrast to most financial planning firms Bramwell Brown offers a very competitive portfolio administration service. We offer a service where we receive all your investment communications, advise on any issues that need your attention, report on your portfolio, and liaise with your accountant at the end of the year. We also have a facility at the National Bank that allows us to open call accounts in your name where interest and dividend payments from your investments can be made. If you travel frequently, find your end-of-year accounting records are always missing, or tire of handling all the mail from your investments, call the office to discuss what we can offer.

Fixed Interest

New issues of fixed interest have been few and far between so far this year, and the secondary market is struggling to draw money out of the trading banks. Most banks are offering 2-5 year rates of between 5.50% and 6.75%. Strong corporates such as Fonterra, Genesis, Contact Energy, and Auckland Airport have bonds with varying maturities trading in the secondary market at yields between 5.50% and 6.50%. These yields would need to improve by a further one percent if investors are going to be enticed away from the banks. At these rates the only reason you might consider the bond market was if you had a strong need for liquidity.


Bond                                       Coupon Rate             Maturity                                 Yield

Auckland Airport                         6.83%                     July 2012                                 5.58%

BNZ                                              7.50%                     September 2012                    5.16%

Wellington Airport                      7.50%                     November 2013                     7.00%

Tauranga City Council               7.05%                    December 2013                     5.39%

Auckland City Council                6.42%                    March 2014                             5.80%

Contact Energy                            8.00%                    May 2014                                 6.36%

Fletcher Building                         9.00%                    May 2014                                 7.45%

Vector                                           7.80%                     June 2014                               6.34%

Trustpower                                   7.60%                    December 2014                     6.75%

Fonterra                                        7.75%                     March 2015                             6.04%

Goodman Property                     7.75%                     June 2015                               7.00%

Warehouse                                  7.37%                     June 2015                               6.82%

Powerco                                       6.53%                     June 2015                               7.03%


The Government Guaranteed finance companies often have special rates to smooth out their maturities. Some of these are listed here:


Company                                                       Maturity                                 Rate

South Canterbury Finance                            Various                                  8.00%

PGG Wrightson Finance                               12 months                             6.15%

PGG Wrightson Finance                               16 months                             6.25%

Equitable Mortgages                                     15 months                             6.50% 

Marac Finance                                                12 months                             6.00%

UDC Finance*                                                14 months                             5.60%


* UDC has not applied for the extension to the Government Guarantee


With interest rates so low, the question of selling some of your fixed interest becomes an option. Anyone who invested $10,000 in Contact Energy or Fonterra in March 2009 would receive approximately $10,600 after brokerage for it now in the secondary market. Don’t forget any profit made on trading fixed interest is taxable. The next question, of course, is where to invest the proceeds? Similar risk fixed interest is trading at the same yields as the securities you have just sold, so there’s not much point in selling one to buy another. With the recent drop in our sharemarket (10% since April) some of the yield shares are starting to look attractive, however remember share ownership carries more risk than bond ownership.


Company                                                       Share Price                            Gross Yield

AMP NZ Office Trust                                             0.71                                         9.37%

Auckland International Airport                           1.96                                         6.01%

Briscoes Group                                                    1.24                                         8.43%

Cavalier Carpets                                                  2.56                                         8.75%

Contact Energy                                                     5.60                                         7.46%

Freightways                                                           2.68                                        8.47%

Goodman Property Trust                                   0.93                                         9.40%

ING Medical Properties Trust                            1.22                                         7.35%

Sky City Entertainment                                       2.98                                         6.95%

Steel & Tube                                                        2.15                                         8.68%


Don’t forget the yields are based on the “current” share price, and the dividend paid in the “previous” twelve months. That could change at any time.


Greenstone Energy

The proposed bond offer from the Infratil/NZ Super Fund consortium to fund the purchase of the Shell assets is still going ahead. We expect to have the details by the first week in August.


Manukau City Council

The Manukau City Council is discussing the possibility of issuing long-term bonds. We should know the details this week.





Newsletter May 2010

May 3, 2010

Infratil Warrants

Many Infratil shareholders will hold the warrants that expire on May 21st. You may remember the terms of these warrants were altered last July to allow investors to take up the new shares in two instalments. If you still hold these warrants you would have paid an instalment of 0.55cents in July last year, leaving $1.12 outstanding. Currently, the Infratil share price is at $1.74, so if you pay the remaining $1.12 you will have received your extra Infratil shares at a slight discount. I would encourage investors to take up the shares. Infratil is a well run company with stable infrastructure assets. If you don’t want to pay the remaining instalment please note the warrants themselves have value. They are trading at 0.61cents at the moment. Ring the office if you would like to discuss your situation.

Barramundi Warrants

Holders of Barramundi warrants will have received an exercise form in the mail recently. Holders are entitled to take up extra Barramundi shares at 0.75cents on set dates between now and October 27th, 2011. Currently, the Barramundi share price is at 0.73cents, so there is no point yet in exercising those warrants. Like Infratil, the Barramundi warrants have value, so investors should be keeping an eye on prices over the next eighteen months.


The KiwiSaver anniversary (July 1st) is approaching, and participants should be aware of how much they have contributed throughout the year. To gain the maximum benefit from the scheme you should be contributing at least $1,043 per annum. This is the amount (based on a figure of $20 per week) at which the Government will match your contributions. Self-employed or non-employed (retired) people should set up an automatic payment to their provider of $90 per month to ensure they reach the threshold each year. Employees who have their contributions deducted from their wages should make a lump-sum payment to their provider if they have contributed less than $1,043 for the full year. Ring the office if you would like to discuss the KiwiSaver scheme.

Code of Professional Conduct for Financial Advisers

The draft code for the regulation of financial advisers has finally arrived, and I spent a good part of my week off coming to grips with it. The underlying aim of the new legislation is “to promote the sound and efficient delivery of financial advice, and to encourage public confidence in the professionalism and integrity of financial advisers.” The Code contains minimum standards of competence, knowledge and skills, of ethical behaviour, and of client care, and requires advisers to provide for continuing professional training. There are 21 Code Standards that I must satisfy before I can practice as an Authorised Financial Adviser. I have until July next year to comply; otherwise I will have to shut up shop.

Code Standard 1 – When providing financial adviser services, an AFA must place the interests of the client first, and must act with integrity.  Call me old-fashioned but I take it as given. In contrast there will still be plenty of advisers out there who won’t act with any integrity whatsoever – writing it down isn’t going to change that.

Code Standard 3 – An AFA must not imply they are independent if, in the circumstances, it would be reasonable for a client to consider that the AFA is not independent. I personally don’t have a problem with not being able to claim I am independent. The issue revolves around the payment of commissions and brokerage on products we promote. For example KiwiBank paid me brokerage when we sold their perpetual preference share to clients recently. That takes away my “independence” because I am apparently incentivised to sell.

Code Standard 9 – Any financial advice given to a client, and any financial planning service provided for a client, must be accompanied by an explanation of the basis for any advice provided, the risks involved in following the advice and the potential benefits of following the advice.

Code Standard 10 – In providing personalised financial advice an AFA must:

(a)   Take reasonable steps to determine that the AFA’s services are suitable for the client; and

(b)   Give an explanation of the basis for any financial advice provided

Code Standards 9 and 10 differentiate between financial advice and personalised financial advice. An example of financial advice would be if someone asked me “should they exercise their Barramundi warrants this month?” I could offer my view without analysing the client’s financial position – it would be generic advice based on the facts at the time and would probably be applicable to most clients. Personalised financial advice, however, requires me to consider the client’s financial situation, needs, goals, and tolerance for risk. Now for the interesting part. Both Code Standards require me to provide this advice in writing. I have no problem whatsoever in providing written recommendations when I’m putting together an investment plan for someone – I do it as a matter of course. However it seems ridiculous to have to write to a client who is thinking of taking up their Barramundi warrants, explaining “the basis for any advice provided, the risks involved in following the advice and the potential benefits of following the advice.”

There is the ability under the Code for a client to direct the adviser not to provide a written explanation for financial advice, but the adviser is not allowed to direct or influence the client to decline that explanation. I am, however, allowed to quote a fee for providing my explanation. This might be a typical conversation in our office shortly:

Client – Brett do you think I should take up my Barramundi warrants?

Brett – I’ll give it some thought and will have something in the post to you tonight. It will cost you $100 for my advice.

Client – Can’t you simply give me your opinion now?

Brett – Only if you instruct me that an explanation under Code Standard 9 is not required!

Whatever the Code Committee finally settles on, rest assured there will be more paperwork involved when you visit our office in the future. I have made submissions to the Code Committee; however I am not holding my breath.

Code Standard 17 – Before providing a financial adviser service, an AFA must be satisfied that the AFA has the competence, knowledge, and skills to provide that service.

There are very specific rules on the qualifications required to become authorised. Luckily for me I already have the qualifications, although I will still be subject to a workplace assessment that will cost me $1,000, and I need to pass an exam on the yet-to-be finalised Code which will cost me another $300. We will endeavour to keep operating our business as we have in the past; however it’s fair to say the landscape has changed considerably, and we may have to change with it.

Visit from Ronald Hay

As I indicated in last month’s newsletter, Ron Hay from E L & C Baillieu in Australia will be visiting New Zealand in May. He has offered to give a presentation on the Australian sharemarket to our clients, and we will be having an afternoon function starting at 3pm at the Masterton Club on Wednesday May 19th. All clients are invited; however we must have numbers for catering, so please ring the office if you would like to attend.

South Canterbury Finance

Soon after last month’s newsletter went out, South Canterbury Finance was awarded the extension to the Government Guarantee. This is great news for the company, and for investors whose securities mature after October this year. Your bonds and debentures are now risk-free through to December 31st, 2011. The 2012 bonds have improved slightly on the news, moving from 66 cents in the dollar to 75 cents in the dollar. Holders of these bonds will need to take a keen interest in the company’s fortunes over the next year, and make a decision at some stage on whether they see South Canterbury trading profitably past 2011, without the Guarantee. The company is offering a very attractive 8.00% on Government Guaranteed investments maturing between April 2011 and December 2011. Call the office if you would like to take advantage of this opportunity.

St Laurence

It almost seemed inevitable that St Laurence would follow Strategic into receivership. The company is yet another example of a property-lending finance company that has been unable to satisfy the conditions of its moratorium. The owner, Kevin Podmore, was suggesting a debt for equity swap, however the Hanover deal with Allied Farmers is an indication that such a deal is no guarantee of recovery. The KPMG 2007 analysis of the main finance companies showed St Laurence with well-above average equity, and the second-lowest ratio of bad debts behind Equitable Mortgages. However, this wasn’t enough to prevent it becoming subject to the contagion that affected all finance companies following the early collapses.

There is plenty of debate on who is to blame for the finance company collapses at present, as the Government moves to create a “super-regulator,” called the Financial Markets Authority. The finance company trustees come in for considerable criticism, and the new laws may go some way toward improving standards in that area. This, of course, will be cold comfort for those investors who have suffered considerable losses over the last four years.


Newsletter April 2010

April 1, 2010

Daniel Bensaude

We were all shocked to hear of the accidental death of Daniel Bensaude recently. Daniel worked at Bramwell Brown for a number of years, and was still a regular visitor to the office. He was great company on the golf course, and he will be sadly missed by many. Sue and I will miss his regular visits to bank his Friday/Sunday golf takings. The respect the wider community had for Daniel was evident at a packed memorial service last week. Paddy – your tribute to Daniel was exceptional. We extend our sincere sympathies to Liz, Oliver, Louisa and their families.

Strategic Finance

Strategic Finance has been placed in receivership after failing to convince its trustee, Perpetual Trust, the moratorium was in investors’ best interests. The value of Strategic’s loans fell below 75% of the money owed to investors which forced the receiver to review the conditions of the moratorium. They clearly feel Strategic has had enough time to pursue options to recover money it is owed, and now believe receivership is in investors’ best interests. We will never know, of course, which the best course of events is; however few of the current finance company moratoriums appear to be offering much satisfaction to investors. It is disturbing to see the chief executive, Kerry Finnigan, has been paid $550,000 per annum throughout the moratorium. Obviously you can’t expect him to do the job for nothing but is $10,000 per week acceptable for presiding over a failed company?

Since the receivership yet another offer has been made to Strategic investors to buy their debentures. Stock and Share Trading Pty are offering twenty cents in the dollar, double the figure offered in January by Marchmont Securities. I would reiterate my earlier advice suggesting there is more than twenty cents in the dollar left in the Strategic debentures, and these people are simply looking for an opportunity to make money at the expense of investors who are already under pressure. The receivers are expected to report on the state of Strategic’s loan book shortly, and should be able to provide guidance on what level of recovery may be achieved.

South Canterbury Finance

Is South Canterbury Finance the next finance company to hit the wall? It seems an interminable wait to see how the company is going to restructure its balance sheet. There is no question Alan Hubbard puts investors’ interests ahead of his own, however ethics alone may not be enough to save the company. Hubbard has injected over $150 million of equity into the company through the sale of Helicopters (NZ) Limited, and part of Scales Corporation, however it’s cash the company needs. As with other Government Guaranteed finance companies, South Canterbury Finance has a disproportionate amount of debentures falling due in October, and without achieving the extension to the guarantee they will struggle to cope with such a huge outflow of cash. I believe South Canterbury Finance will be granted the extension to the Government Guarantee. I think the Government is well aware of the importance of South Canterbury Finance to the economy, and to overall confidence in the economy. Up until last year it was regarded as our premier finance company, with an owner whose standard of ethics are unmatched in the industry. I hope for Alan Hubbard’s sake, and for the sake of the thousands of investors who have put money with the company (myself included), that they can trade their way through the current difficulties.

The Guarantee offers many investors assurance, regardless of what happens to South Canterbury Finance. Many investors have their funds maturing in early October, before the Guarantee expires. But what about the bonds maturing in June 2011 and December 2012? The irony is that if South Canterbury were to fail prior to October, these bonds would actually be covered by the Guarantee. If South Canterbury trades past October, and is not awarded the extension to the Guarantee, then the fate of those bonds is solely reliant on the company’s performance from that point forward. The 2012 bonds have been trading recently at yields of 28.50% (around 66 cents in the dollar).

Visit from Ronald Hay

Our Australian share dealing is conducted through a Melbourne broker, EL & C Baillieu. Over the years they have provided very good advice for our clients. Ron Hay, one of Baillieu’s directors, will be in the country in May and has offered to give a presentation on the Australian sharemarket to our clients. We will be having an afternoon function at the Masterton Club on Wednesday May 19th. All clients are invited; however we must have numbers for catering, so please ring the office if you would like to attend. Further details will follow in next month’s newsletter.

Perpetual Reset Securities

In May 2009 I wrote about the perpetual securities on the market, trying to explain their various characteristics, and why some were trading at such heavy discounts. With KiwiBank bringing a perpetual preference share to the market I thought it was worth revisiting the subject. Most of the perpetuals have similar characteristics in that they don’t have a set maturity date, and they have their interest/dividend rates reset at various intervals. The rate resets are based on a benchmark rate plus a margin. Here are some examples.

Security          Benchmark                Margin           Current Rate             Current Price/100

Infratil              1 Year Swap                1.50%                 4.97%                               $66.00

Origin              1 Year Swap               1.50%                 4.95%                               $72.30

Rabobank        90 Day Bill                  0.76%                 4.12%                               $82.30

Quayside         3 Year Swap               1.70%                10.00%                             $101.40

ANZ                  5 Year Swap               2.00%                 9.66%                               $106.90

BNZ                  5 Year Swap               2.20%                 9.89%                               $104.00

Rabobank       5 Year Swap               3.75%                 8.78%                               $106.25

BNZ                  5 Year Swap               4.09%                 9.10%                               $105.50 

Anyone who invested in the early perpetuals can rightly feel a bit grumpy – the rates of return are considerably lower than when they were issued, and they are selling at a discount in the secondary market. These securities were issued well before the global financial crisis, and the margins offered at the reset dates didn’t raise any questions due to the fact the benchmark rates were at high levels at the time. The later perpetuals had higher reset margins due to the extra perceived risk following the global financial crisis. Investors in the later securities should be pleased with their choices – not only have they received high interest rates, but they would receive a premium if they were to sell them in the secondary market now. As interest rates rise the earlier perpetuals will pay higher rates of return, and should also increase in value.


I will be taking a weeks holiday after Easter and will be away from April 2nd to the 11th. Sue will be in the office each day from 10am and will be able to place orders for you. If you need to speak to me I am happy to be contacted by cellphone on 0274523980. I will also be away attending my daughter’s graduation in Christchurch from April 20th to April 22nd.


The Warehouse Group is seeking to raise up to $100 million in unsecured, unsubordinated, fixed-rate bonds. The main features of the offer:

  • Maturity date – 15th June 2015
  • Minimum interest rate of 7.30%
  •  Interest will be paid semi-annually
  • Minimum investment of $5,000 – thereafter in multiples of $1,000
  • Closing date – April 23rd


A related company of Kiwibank, to be called Kiwi Capital Securities Limited, is making an offer of up to NZ$100 million (with the option to accept oversubscriptions of up to $50 million) of perpetual, callable, non-cumulative preference shares. The proceeds from the issue of the shares are to be ultimately used to provide tier 1 capital to Kiwibank Limited.

The shares are not shares in Kiwibank, but are shares in Kiwi Capital Securities. Kiwi Capital Securities’ ultimate parent company is New Zealand Post Limited. The shares will have no maturity date. However, the shares may be called on the fifth and tenth anniversary of their issue date, and quarterly thereafter (and in certain other circumstances).

The dividend rate applying to the shares will be fixed for the initial five years and then reset for subsequent 5 yearly periods at the margin plus the swap rate applying at the time. Dividends are scheduled to be paid on a quarterly basis. Dividends are non -cumulative. An announcement of the margin and minimum dividend rate for the shares is expected to be made on or around the opening of the offer which is anticipated to be in early April 2010.

  • Indicative rate for the first five years of 8.00% to 8.50%
  • BBB Standard & Poors credit rating
  • Closing Date – April 30th



Newsletter March 2010

March 1, 2010


I attended a Wairarapa Chamber of Commerce presentation earlier this month, where Cameron Bagrie, the ANZ National Bank chief economist, spoke. He painted a fairly gloomy picture of the year ahead, and I think what he had to say is very pertinent for those invested in property, and maybe even shares. His underlying message was that asset prices need to come back to a value that recognises their ability to produce income. He spoke of the excesses that caused the global financial crisis (the easy access to credit), and how this has distorted asset prices. U.S banks were lending money on property under the premise that values could not and would not fall. At the height of the boom it seemed anyone could gain a loan to buy property – even those who could ill afford to make the repayments. The term “NINJA” loan was coined – no income, no job, and no ability to make repayments. Never mind, the loan is secured over property and we know that can’t go down in value!

He had some sobering statistics for New Zealand. Average household debt has increased from 60% of net income to 160% of net income between 1990 and 2008. New Zealand is now one of the most indebted nations in the world, up there with Hungary, Iceland, Greece and Portugal. It’s fine using debt to fund assets that grow in value, however price corrections coupled with job losses can send the deck of cards crashing down. Our younger generation are going to have to learn to live within their means, and recognise the relationships between job security, working hard, saving a proportion of their income, and their desired standard of living.

The next couple of years are predicted to be fairly lean in the investment world, as Governments around the globe unwind the stimulus packages that have been put in place, and companies and individuals unwind their high debt positions. Cameron Bagrie suggests property (housing, farmland) will come down to a value that reflects its earning ability, rather than its ability to grow in value. The message I received for share investors is that we shouldn’t be surprised to see markets subdued for quite some time as the stimulus packages put in place around the world are gradually withdrawn.


The Victoria University Tax Working Group issued its report earlier this month, and it is clear there will be changes to our current tax system. The group suggests the current tax laws, while introduced with good intentions, have undermined the coherence and integrity of the tax system and created a system that is unfair and inequitable. What they are after is a system that “minimises impediments to people working, saving, investing and innovating; minimises distortions to investment allocation decisions; and maximises the integrity and fairness of the taxation system so that there is widespread trust in it, and that taxes paid reflect the ability to pay and not the opportunity to avoid.” If this is the aim of the Government we may see measures that are more pervasive than simply tinkering with changes to tax rates. The benefit system in New Zealand is full of loopholes that allow wealthy individuals to take advantage of Government benefits that were never intended to be available to such people. Don’t be surprised to see laws around trusts on the Government’s agenda before too long.

Whatever the Government does is probably going to have to be fairly neutral overall. They need as much tax revenue as they can get at present, so they can’t afford to offer tax cuts without picking up the lost revenue elsewhere. They also want to win the next election, so they can’t afford to irritate a large sector of society. The Tax Working Group made a number of suggestions around aligning personal, corporate and trustee tax rates, and around broadening the tax base. What might we see in the next Budget?

  • We may see the trustee, top PIE and top personal tax rates aligned
  • The corporate tax rate might be lowered in line with Australia

How is the shortfall funded if some of these tax rates are reduced? Recommendations include:

  • Raising GST to 15%
  • Imposing more tax on the property sector
    • Removing the depreciation allowance on some buildings
    • Capital gains tax
    • Land tax
    • Taxing residential property investment (other than the family home)

There are screeds of statistics touted in the media regarding who is shouldering the tax burden in New Zealand. A survey of one hundred of New Zealand’s wealthiest people showed only half of them pays the top tax rate. In contrast, Cameron Bagrie told me 46,000 New Zealanders pay the same amount of tax as 58% of the population (1.915 million people). The Government has an unenviable task trying to overhaul the tax system and stay in power. We all have our own opinion on what the best course of action is. I’m a firm believer in encouraging individuals to become wealthy, and I don’t think they should be penalised by paying proportionately higher rates of tax. I’m a fan of a flat tax rate that encourages individuals to work harder and better themselves, and I would personally be happy to be the highest tax-payer in the country. Because of our historically high top marginal tax rate (66% in the 1980’s) many wealthy individuals used trusts and companies (legitimately) as a means to avoid tax. I believe if the Government is going to further lower the top personal tax rate it will tighten the rules around trusts and the eligibility for welfare benefits.

I think the major changes we will see will be around property, as many leading economists have commented for years on how unproductive (for the country as a whole) some of New Zealand’s property investment is. Many residential property investors have their affairs structured as LAQCs (Loss Attributing Qualifying Companies). The LAQC allows them to offset losses from their property investment against other income they have. Between 2003 and 2007 (the height of the property boom) losses declared through LAQCs doubled to just under $2 billion per year. If the Government wants to extract a fair amount of tax from this sector of society it will need to implement some of the recommendations from the Tax Working Group.

If you are a direct property investor any changes the Government makes are going to affect you. Sharemarket investors will be affected also depending on the companies you hold. We saw all the listed property trusts lose value as soon as the Tax Working Group report was released and they have remained weak since. Our researchers produced some figures on the effect of removing the deductibility of depreciation on commercial buildings. By their reckoning the main property trusts would suffer decreases in dividends of between 6% and 10%. Hardest hit would be those with most of their assets in buildings (AMP Office, ING and Property for Industry). Goodman and Kiwi Income are less affected due to their higher weighting in land and chattels. Other companies that may be affected would include Auckland Airport, Ryman Healthcare and Sky City Entertainment. We will need to wait for the Budget in May to see which of the recommendations the Government implements.


As expected Fonterra issued their new bond via the institutions, so retail investors were not able to participate. The only way we can access it for clients now is through a secondary market purchase, which incurs brokerage of 1.00%. The new bond is a six-year bond paying 6.83%. This compares favourably with their March 2015 bond (7.75%) which is trading in the secondary market at around 6.70%.

Auckland City Council

Auckland City Council has issued an investment statement for an issue of $350 million in secured, fixed-rate, five-year bonds. The main features of the offer:

  • Maturity date – 24th March 2015
  • Indicative minimum interest rate between 6.20% and 6.60%
  •  Interest will be paid semi-annually
  • Minimum investment of $5,000 – thereafter in multiples of $1,000
  • Standard & Poors credit rating – AA-
  • Closing date – March 19th

Council bonds such as this offer good diversification for those holding most of their fixed interest in bank deposits. The security is excellent (the council’s ability to levy its ratepayers) and the rate offered is similar to the five-year money currently offered by the major trading banks.




Portfolio Reviews

Over time we make many recommendations on shares and fixed interest investments. Unless you subscribe to our portfolio management service we are not actively monitoring your investments. Investment portfolios should be reviewed regularly, and I am happy to do this at no cost. Ring the office any time if you would like to take advantage of this service.



Newsletter February 2010

February 1, 2010

Strategic Finance

Some Strategic Finance debenture holders may have received an offer from Marchmont Securities to buy their debenture stock for 0.10 cents for each $1.00. They cite the fact that Strategic have missed their first repayment under the moratorium, have increased their bad debt provisions by a further $106 million, and that receivership may be looming.  Whilst all this is true, the offer is clearly aiming to take advantage of vulnerable investors who fear they may not receive any money back from Strategic. Jane Diplock from the Securities Commission has warned against accepting such offers, and others have labelled it a scam. There is nothing illegal in what these people are doing, but rest assured, they are not being charitable – their aim is to make as much money for themselves as they can. They are willing to buy your debenture for 0.10 cents in the hope they will receive 0.80 cents from Strategic over the next five or so years. It is worth noting that the latest bad debt provisioning has reduced Strategic’s loan book value to below 75% of the money owed to debenture and note holders. It seems to me that Strategic has a long way to go before their value falls to 10% of money owed, and investors would be better off to let the moratorium (or receivership) run its course, rather than accept such a low offer.

The Allied Farmers purchase of the Hanover loan book has been mooted as a possibility for Strategic Finance. Hanover debenture holders selling their Allied Farmers shares today would be exiting their original investment with Hanover at approximately 0.45 cents in the dollar. Those willing to wait for a recovery in the Allied share price might achieve a better result in time. It has at least given Hanover investors some options.     

Auckland Airport

Auckland Airport is seeking to raise $126 million in order to buy into the Cairns and McKay airports. Shareholders will be offered one new share for every sixteen currently held at a cost of $1.65 per share. The offer is non-renounceable which means you cannot sell your rights to someone else. It’s a relatively small capital-raising in relation to the overall size of the company, so mathematically it will have little impact on the share price. The main driver of the share price will be opinion on whether or not buying Australian airports is a worthwhile strategy. At $1.65 I would recommend investors take up their entitlement.

Bonus Bonds

I am often asked whether or not Bonus Bonds are a good investment. Bonus Bonds started in 1970 and is a fund where investors’ money is grouped together and invested in low-risk debt securities such as Government and Local Authority bonds. The income earned from investing all bondholders’ funds is placed in a prize pool, and paid out as tax-paid prizes in each monthly prize draw. The Herald ran an article recently explaining the odds of winning money with Bonus Bonds.  If you own $6 worth of Bonus Bonds, your chance of winning the $1 million prize is eleven times worse than your chance of winning first division Lotto using a $6 ticket. Your odds of winning any prize are never greater than 1 in 9,600, so I would prefer to see people investing their money at least in low-risk securities that are going to pay a regular return. However if they bring a certain level of enjoyment I see no harm in investing small sums.


Fonterra is looking to raise $250 million in senior, unsecured bonds over February and March. My understanding is that this bond offer, unlike their 2009 offer, will be distributed through institutional buyers. We will have access to the stock; however buyers would have to pay brokerage of 1% if they wanted to purchase it. Please let me know if you are interested. We should know what rate they are offering in early February, and we will be able to draw a comparison with their 2015 bond which is currently selling at a yield of 6.75% (6.50% after brokerage).

Auckland City Council

Auckland City Council is considering making an offer of up to $150 million of retail bonds. The offer is expected to open in late February, and should prove attractive to those investors who are averse to risk, but are looking for slightly better returns than those being offered by the banks. The Auckland City Council has an “AA” credit rating from Standard and Poors, and the security is by way of the council’s ability to levy its ratepayers. Their 2009 bond maturing in March 2014 is paying 6.42%, and I would expect the rate on the new bond to be slightly higher than that. Other city council bonds have been very popular so please contact the office as soon as possible if you would like to reserve part of our allocation.

Meridian Energy

Meridian Energy has registered an offer document for an issue of $150 million in “Renewable Energy” bonds to the public. The bonds are offered in two tranches – a five year bond and a seven year bond. There is provision for oversubscriptions of up to $50 million to be accepted.

The main features of the offer:

  • Two maturity dates (March 16, 2015 and March 16, 2017)
  • Indicative interest rates are between 7.15% and 7.65%
  •  Interest will be paid semi-annually
  • Minimum Investment of $5,000 – thereafter in multiples of $1,000
  • Standard & Poors credit rating – BBB+
  • Closing date – February 23rd

 Meridian Energy is the largest state-owned electricity generator in New Zealand, operating hydro stations in the South Island, and wind farms in Palmerston North, Southland and Makara.

 Finance Companies

At this stage no companies have applied for the extension to the Government Guarantee. The current guarantee is in place until October 12th, 2010, and the extension runs until December 31st, 2011. We would expect to see most of the main players with the extension in place over the next two to three months. Some companies are quick to advertise the fact they are covered under the Government Guarantee, and then offer attractive reinvestment rates with maturities outside the guarantee. If you are renewing a finance company debenture, and are not sure about the guarantee, don’t hesitate to ring the office and check. Guaranteed rates currently available:


Company                                                       Maturity                                             Rate

South Canterbury Finance                      October 12, 2010                                8.00%

South Canterbury Finance                         5 months                                           7.00%

Equitable Mortgages                                   6 months                                           5.50%             

Marac Finance                                             6  months                                           5.00%

UDC Finance                                               7 months                                            4.80%



Newsletter Christmas 2009

December 23, 2009

Government Regulation

Much has been written in the newspaper recently about the standard of financial advice in New Zealand, and the imminent Government regulation of the advice industry. I expressed my views in the August newsletter, and feel it is worthwhile touching on the subject again. It’s an issue investors should keep abreast of because it has the potential to change the way investment advice is delivered and paid for.

There have been more calls for the banning of commission payments to financial advisers recently. The Sunday Star Times ran an article explaining how the Capital Markets Development Taskforce is poised to recommend law changes preventing financial advisers from taking commissions. The U.K has already committed to banning commissions, and Australia is considering similar moves. As I said in the August newsletter I believe banning commissions is short-sighted, and feel investors should be able to choose for themselves how their adviser is remunerated. Disclosure is paramount however, and investors need to be able to assess if there is a potential conflict of interest in the advice they are receiving. There are different rates paid by the various companies, and arguably there is the potential for advisers to let self-interest override the needs of their clients. The Capital Markets Development Taskforce has said the new law will impose a clear fiduciary duty requiring advisers to act in the best interests of their clients. Call me old fashioned but I wouldn’t have thought we need a law to stipulate that. I plan to own this business for the next 15-20 years and the only way I’m going to make money from it is to put investors’ interests ahead of my own each and every day.

The negativity around commissions has arisen from the managed funds industry and the meltdown of the finance company sector. For a number of years inexperienced advisers (largely insurance salesmen) have been selling their “ABC Super-Dooper International Growth Fund” or their “ABC Diversified Income Fund” and receiving ongoing commissions for as long as the money remains invested. More often than not these funds have performed poorly, however the adviser continues to benefit regardless. More recently the finance company failures have highlighted some ugly practices, with advisers clearly funnelling investors’ funds into an area that generates the greatest return for the adviser. Removing commissions isn’t going to solve these problems – there will always be dishonest and incompetent advisers and there will always be poor investment products. We also receive commissions from new issues of shares and bonds, yet this doesn’t seem to generate any negative publicity whatsoever. Maybe it’s because the companies involved (Rabobank, ANZ, Contact Energy, BNZ, Fonterra, Auckland Airport etc) have a much higher standing in the investment community than the finance companies. Nevertheless the method is identical – “sell this product to your clients and we will pay you a commission.” My job is to assess the merits of all these types of offerings (shares, bonds, finance company debentures, Government bonds, KiwiSaver, etc) and determine whether or not they fit the needs of our clients. To me the commission issue is irrelevant – first and foremost I want products that benefit my clients – if I do that on a consistent basis, I stay in business.

What are the alternatives? The most common method of remuneration in the financial planning industry is based on “funds under management.” Investors pay their adviser a fee based on the value of their investment portfolio. This is fine as long as the adviser is providing you with “value.” They should be actively managing your portfolio for you if you are paying them an ongoing fee. What tends to happen, however, is that as advisers build their business they cull out the clients with less money to focus on those that can generate the most return. Advisers would be reluctant to take on clients with small sums of money – possibly the very people that need financial advice the most. A second alternative that seems to be gaining traction is simply charging for the time spent advising a client, much the same as a lawyer or an accountant does. My concern with this is the amount of time I spend on things other than directly dealing with clients. Much of my day is spent reading and researching, and that time would need to be charged accordingly. I might take a call, for example, for advice on whether or not to take up the PGG Wrightsons’ rights offer. That call might last five minutes, but what about the hour I have spent reading the prospectus and monitoring the prices of the rights and the underlying shares?  In my opinion this method of charging would restrict many people from seeking financial advice – again the very people that need advice the most.

I prefer the transaction-based model where investors pay brokerage (or we receive a commission) based on each transaction entered into. I feel it offers the best value for investors. Whatever method is used there will always be one group that subsidises others. Wealthy investors would prefer to be charged an hourly rate; investors with small sums would prefer the transactional model. What I need to do is ensure I am offering investors value, whilst at the same time earning a fair income – I’m not doing it for nothing! I would be interested in your views on how best to pay for financial advice – please let me know.

Expensive Shares?                           

I often hear people suggest they couldn’t possibly buy a share valued at, for example, $50, because it is too expensive. Their rationale is that you don’t get as many shares for your money when buying higher priced shares; or a 10cent share has a far greater chance of doubling in value than a $50 share. This is a commonly held view, however is completely irrational. The important factors that determine share price are the number of shares on issue, company earnings, dividends paid, and the future prospects of the company. If we look at two different shares as an example we can draw some comparisons.


                                                                        Price               Dividend Paid            P/E Ratio

Fisher & Paykel Healthcare                      $3.33                 17.71 cents                 23.90

Westpac Bank                                             $28.95               145.94 cents               18.10


Let’s assume we have $20,000 to invest. We would receive 6006 shares in Fisher & Paykel Healthcare, or 690 shares in Westpac. If Fisher & Paykel Healthcare continues to pay a dividend of 17.71 cents we would receive income of $1,063 – a yield of 5.32%. If Westpac continues to pay a dividend of 145.94 cents we would receive income of $1,006 – a yield of 5.03%. As you can see there isn’t much between the two companies in relation to their ability to generate income; even though their share prices are so far apart. Warren Buffett’s “Berkshire Hathaway” shares are currently trading on the New York Stock Exchange for $1,000 each! “Apple” shares were trading at $70 in 2006, and peaked at $195 in December 2007.

Office Hours

We will be closing over the Christmas and New Year Period. The office will close on December 23rd at 12.30 and will reopen on January 11th. I will be in the office briefly each morning to clear mail so please don’t hesitate to ring if you need something done. Leave a message on the answer phone if necessary – I will clear these each day. Also don’t hesitate to ring me at home or on my mobile phone at any time.

I sincerely hope you all have an enjoyable break over the Christmas and New Year period. I plan to relax at home with family, and will be working desperately to stay ahead of my boys in the back-yard cricket standings.


Newsletter December 2009

December 1, 2009

Government Guarantee

The Government recently announced changes to the deposit guarantee scheme, none of which will affect investments that are currently protected by the guarantee. Institutions that are currently participating in the Retail Deposit Guarantee Scheme have until December 4th to accept the revised deed, which will come into effect on January 1st. If an institution declines to accept the changes to the scheme, any deposits taken after January 1st will not be guaranteed. Deposits already covered by the scheme will not be affected. These changes are separate from the extension to the scheme announced in August. The main change is that participating institutions will be able to offer guaranteed and non-guaranteed deposits. Presumably the extra rate offered for a non-guaranteed deposit will equal the fee that does not have to be paid to the Government, plus a margin for the extra risk.

Offering both guaranteed and non-guaranteed investments is an essential step in removing the guarantee altogether. At some stage the Non-Bank Deposit-Takers have to be able to stand on their merits, without the behaviour-altering backstop of the Government Guarantee. The new laws that impose stricter requirements on the non-bank sector should help restore confidence, however I think it will be years before that confidence is completely restored. I would liken the finance company collapse to the sharemarket crash in 1987. There are investors who will never own a share again after 1987, and I’m sure there will be investors who will never again consider a finance company, regardless of its strength in the future. Having the word “finance” in a company name now only seems to invoke negative sentiment.

Depositors will need to think very carefully about investing in non-guaranteed deposits in the early stages of the withdrawal of the Government Guarantee. There is a huge amount of money due to flow out of the finance companies in October next year, and we need proof that companies have the strength and investor support to cope with that. The obligations the Government is now imposing on the non-bank sector should go some way to toward helping investors (and advisers) analyse the merits of continuing to support these companies.

Asset Allocation and Model Portfolios

Last month I looked at some model portfolios, and suggested the percentage of an investor’s funds that might be allocated to each asset class.

Individual Investments

How far you diversify your portfolio is something that can be debated infinitely. Most people would recognise the need to spread their investments to reduce risk; however you can take that theory to the extreme, and diversify your portfolio into mediocrity. The administration can also become quite a burden if you have a large number of individual investments. With the exception of Government Guaranteed investments, bank deposits, and highly-rated fixed interest investments I suggest you don’t have more than 5% of your portfolio invested in a single security.

Bank Deposits

I recommend splitting your bank deposits between at least two banks. I have no reservations about the main trading banks, so your choice will be based on the rates offered, together with your historic relationship with the bank. Aim to split your bank deposits into different sums with varying maturities, so that you have money falling due at different times throughout the year. Always keep some cash at call – the online or phone accounts offered by the likes of Rabobank, Kiwibank and UDC are good for this purpose.

Fixed Interest

As with bank deposits, aim to divide your bond portfolio into varying maturities. Try to avoid having all your bonds maturing at the same time so you are not exposed to reinvesting all your funds at the bottom of the interest rate cycle.


The choice of shares to include in a portfolio will be based on your objectives, (growth versus income) and your tolerance to risk. We usually look overseas for growth and here in New Zealand for income. New Zealand companies historically pay more of their profits in dividends than overseas companies. Although I advocate buying and holding shares (rather than actively trading) you should always be prepared to regularly review your holdings and make changes if necessary. Far too many people refuse to sell a poor-performing share simply because it is trading at less than they paid for it.

Fixed Interest

Goodman Property Trust

We still have a small amount of the Goodman Property Trust bond available.

  • 5-year term (June 19, 2015)
  • Senior ranking and secured against $1.14 billion of property assets
  • Minimum interest rate of 7.75%


Trustpower is issuing $125 million of five-year and seven-year fixed-rate bonds, with the provision to accept oversubscriptions of up to $50 million.

The main features of the offer: 

  • Two maturity dates (December 15, 2014 and December 15, 2016)
  • Interest rates are 7.60% for the 2014 bonds and 8.00% for the 2016 bonds
  •  Interest will be paid quarterly
  • Minimum Investment of $5,000 – thereafter in multiples of $1,000
  • Closing date – December 18th




Debate is raging about commission payments to financial advisers, and the potential for conflicts of interest. I have touched briefly on this topic in the August newsletter, and will revisit the subject next month. We are paid commissions by the finance companies and the various bond and share offerors (for example Goodman will pay 1.50% commission on their bond, of which we receive half). In the past the finance companies have paid advisers a commission on a maturing debenture that is reinvested with their company. It appears now, however, they will only pay that commission if it bears our stamp. If you are renewing a debenture with South Canterbury Finance, UDC, Marac, or Equitable, and you believe we should be paid a commission (perhaps we have advised on the merits for or against, or have raised an issue in the newsletter), please bring the application into our office to process.



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