Newsletter November 2009
November 3, 2009
South Canterbury Finance
South Canterbury Finance has been in the news recently after a credit rating downgrade from Standard & Poors. The company now has a BB+ credit rating, down from its previous BBB-. This downgrade triggered a review of the $100million private placement facility made available by US private investors. This money is now going to be repaid over the next five months, and negotiations to secure a $75million credit facility with George Kerr have just been finalised. I hope South Canterbury can weather the storm – its owner, Alan Hubbard, has proved on more than one occasion that he puts his investors’ interests ahead of his own. South Canterbury Finance is covered by the Government Guarantee, and has stated their intention to apply for the extended guarantee. They are currently offering a very attractive short-term investment maturing just before the current Government Guarantee expires in October next year.
SPECIAL OFFER MATURES 11/10/2010 8.00%
Auckland Airport
Auckland Airport is issuing $125 million of fixed-rate bonds maturing on November 27, 2014.
The main features of the offer:
- The interest rate has been set at 7.00%.
- Interest will be paid semi-annually in May and November
- “A-” credit rating (Standard & Poors)
- Minimum Investment of $10,000 – thereafter in multiples of $1,000
These securities will be listed on the New Zealand Stock Exchange; so will be able to be freely traded. The full $125million has been allocated to brokers, and there will be no public pool. We have a limited allocation.
CONTACT OUR OFFICE AS SOON AS POSSIBLE IF YOU WOULD LIKE TO TAKE PART IN EITHER OF THESE OFFERS
Asset Allocation and Model Portfolios
Asset allocation is said to be the most important aspect of an investment portfolio. How much risk you are prepared to take will determine what percentage of your investment sum will be allocated to the various asset classes. Someone with a secure income from paid employment is likely to take more risk with their investments than someone relying on Government Superannuation. Your stage in life will also determine how much risk you take, with young people able to endure more risk than retirees. I use five model portfolios as a starting point to allocate a client’s assets when putting together a portfolio.
Conservative
A conservative investor seeks income over growth, and is concerned with the maximum protection of their capital. Returns will be consistent and liquidity will be good. Funds are invested in Government Stock, bank deposits, and investment grade fixed interest securities. Because of the very low risk involved, returns will be lower. Inflation will have a negative effect on such a portfolio.
Balanced-Conservative
A balanced-conservative investor seeks mainly income over growth, but also wants to preserve some of the value of their capital. A small proportion of funds will be invested in higher-yielding shares for this purpose. The negative effects of inflation may not be entirely eliminated.
Balanced
Balanced investors seek income and capital growth. They aim to grow their assets in line with inflation, and will hold a number of growth assets such as shares to achieve this. Volatility in returns will increase; therefore investors in this category need a longer time frame.
Balanced-Growth
Balanced-Growth investors seek growth with some income. They aim to grow their assets at a faster rate than inflation, and are prepared to take more risk to do so. Income is less important than for a Balanced investor. Volatility is higher, and will suit investors with a five-year to ten-year time frame.
Growth
Growth investors are seeking to increase the value of their capital. They don’t require income from their investments, and are prepared to accept a higher level of volatility and a lower level of liquidity. The majority of assets are invested in growth securities such as shares and property, and would suit investors with a long time-frame, and a reliable primary income.
Asset allocation forces us to pigeonhole investors into a pre-determined category. We realise that everyone is different and will require an asset allocation that suits their specific situation; however model portfolios are a good point from which to start the process.
Kathmandu
At the time of writing I am unsure whether or not I can secure an allocation of the Kathmandu IPO. I have a list of people who have expressed interest, and if I do receive an allocation I will be offering it on a first-come, first-served basis. I personally have my reservations about the offer. It’s a great brand, and has performed well, however I can’t help but be cynical about a private equity firm selling out so soon after they have bought the business. News that the original founder, Jan Cameron, intends to compete head-on with Kathmandu would also concern me. I would let the business get some runs on the board as a listed entity before I bought into it. Of course, it will now be a raging success, trebling its share price in the first five years!
Barramundi
Barramundi shareholders have been sent a prospectus and investment statement for the new warrants the company has issued. Many investors have been confused with regard to what action they need to take. As I understand it, shareholders need take no action at present. Warrants will be issued to you based on your shareholding at October 23, 2009. There was a suggestion in the prospectus that holders of the existing warrants could exercise those warrants in order to increase their shareholding before October 23, and therefore be issued more new warrants as a result. This would have been a pointless, and expensive, exercise, as you could have simply bought more shares in the market at less than the cost of exercising the warrants (0.80cents versus $1.00). The important thing now is for warrant holders to keep an eye on the share and warrant prices. Your warrants give you the right to buy Barramundi shares at 0.75cents on certain days up to October next year. If you don’t want to own more Barramundi shares, you may want to sell the warrants. Today they are trading at 0.12cents. Call the office if you want to discuss your situation.
Portfolio Service
Bramwell Brown offers what I believe to be a very competitive portfolio service. We can manage the administration of your investments for you at one-third of the cost of most financial planners. We receive all the paper-work associated with your investments (annual reports, interest and dividend advices, rights issues, and other company mail) and liaise with your accountant at the end of the year. If you travel regularly, or would simply like to hand over the administration of your portfolio to someone else, call the office to discuss.
DISCLOSURE STATEMENT AVAILABLE ON REQUEST AND FREE OF CHARGE
Newsletter November 2008
November 3, 2008
The Global Bailout
Volatility, fear, panic, (and Government intervention) – all the things financial markets don’t like, and we have seen them all in the space of two months. Governments around the world clearly had to do something to restore confidence in the markets. Banks were too scared to lend to each other and there was the potential for a real meltdown amongst financial institutions. The problem with Government intervention is; often it sends all the wrong signals. We are seeing it now in New Zealand, as the Government guarantee of financial institutions unfolds. It was always going to be fraught with anomalies – who is included and who is excluded? Investment funds are flooding out of mortgage and managed funds in favour of banks and finance companies. AXA has just frozen a $225 million mortgage fund, pre-empting mass withdrawals. This is exactly what the Government was trying to avoid by including finance companies and building societies in the scheme. It seems the more the Government intervenes, the more they have to intervene. What would have been simpler in my view (I’m a recognised expert on economic policy!) was to guarantee people’s deposits at a specific date, and any investments made after that date carry the risk associated with individual institutions.
What effect will the massive global Government intervention have on us? My knowledge of economics is limited to a couple of introductory papers at university, and some practical experience following the crash in 1987. The theory tells me that central banks pumping billions of dollars into an economy causes inflation, and most financial shocks have been followed by periods of high inflation. The practical experience tells me high inflation is very beneficial for those who borrow money to invest in assets that grow in value, but very damaging for those with most of their wealth in cash. We may be entering a period of low interest rates coupled with a (relatively) high rate of inflation, and investors need to be aware of what effect this will have on their wealth. If all your assets are in fixed interest, and you spend all the income it generates, your wealth can be severely eroded by inflation.
Fixed Interest
Yields are falling in line with expectations, after the Reserve Bank dropped the Official Cash Rate to 6.50% on October 23. Unfortunately there have been no really startling fixed interest opportunities in the last couple of months. The Auckland Airport bond issue paying 8% for eight years was filled before we even received the hard copy of the investment statement. What that tells me is there is a large amount of cash in the banks looking for a slightly better return. The banks themselves have started issuing more debt, with the BNZ and the ANZ National Bank seeking to raise $50 million and $100 million respectively. However, instead of issuing new bonds they reopen an existing bond issue and investors buy them as if they were buying on the secondary market. For example, the BNZ reopened their 27 May 2015 8.675% bond. Anyone buying it now will receive the 8.675% coupon payment semi-annually until maturity in 2015, but they have to pay approximately $105 per 100 to get it. This gives you a yield of 8.00%. The banks are not paying brokerage to us so we must charge clients secondary market brokerage rates of 1% if they want to buy these bonds.
GPG Capital Notes
The 2003 GPG Capital Notes are due to mature in December, and GPG have offered investors the opportunity to either have the notes repaid in cash, or roll them over at a new rate of 9.00% for five years. GPG doesn’t need the money, hence the low rate. Their 2012 capital notes are trading on the secondary market at 10.50%, and there are a number of similar securities trading at those levels, so my advice would be to redeem the notes and look for somewhere else to put the money. A small selection of other opportunities includes:
Security Maturity Rating Yield Price/$100
Kiwi Bonds All terms AAA 5.25%
UDC Telephone Call A/C At Call AA 7.65%
Sky City Entertainment 15 May 2010 10.40%
BNZ Income Securities (PIE) Perpetual A+ $106.80
ANZ Perpetual Bonds Perpetual A+ $104.75
Trustpower
Just as this newsletter was being finalised we were informed that Trustpower intends to make a bond offer. Indications are the issue will be $100 million of unsecured, subordinated bonds paying quarterly interest of 8.40% per annum. Please let our office now as soon as possible if you are interested in this issue.
Equities
At some stage the equity markets will stabilise and there will be a return to normality. With interest rates dropping and predictions of further falls, the sharemarket becomes a very real alternative for investing a proportion of your funds. I may be sounding like a broken record but I can’t emphasise enough how much you need to be aware of the effects of inflation. In twenty years time $1 million may only buy an average three-bedroom home. We are retiring earlier and living longer so we need our retirement funds to last much longer than in the past. Having some money in equities over the long-term “should” help your investments keep pace with inflation. I read an interesting article recently by Warren Buffett, probably histories most successful value investor. Here is a small part of that article.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now. Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
We receive daily research on New Zealand and Australian companies and will provide this to you on an individual basis. Current “BUY” recommendations include Fletcher Building, Contact Energy, Trustpower, Sky TV, Fisher & Paykel Healthcare, Sky City Entertainment, Rakon, Monadelphous, Nufarm, Woolworths, BHP. CSL and AGL Energy.
Please note that any recommendations made in this newsletter are fairly generic, and I recommend you ring and discuss your own situation if you are thinking of investing in any securities mentioned in the newsletter.
Capital Guaranteed Investments
Man Investments (OM-IP) and Liontamer are two companies offering equities-based investment products with capital guarantees. Liontamer tends to base their offerings on themes such as energy or emerging markets, whereas Man Investments follow the same investment strategy they started using in 1997. Their first fund launched in August 1997 has generated a compound return of 17.50% per annum, with claims that most of their funds have returned between 10% and 20% per annum since inception.
How do they offer a capital guarantee, especially if they are investing in equities? They invest a proportion of your funds in a secure bond (usually with a large bank) for the term of the investment. Let’s say the investment runs for eight years, you put in $10,000, and the company can buy an eight-year bank bond paying 8.00%. They would invest $5,402 in the bank bond which would grow to $10,000 with compounding interest by the end of the eight-year period. So from day one they know they can pay you back your initial investment. The remaining $4,598 is invested in shares and higher risk securities such as futures and options. The hope is that the amount invested in the high-risk part of the fund generates returns in the order of 20% to 30% per annum to bring the overall return up to an acceptable level. These funds can perform well regardless of market direction depending on the types of securities they buy. For example, share options allow you to make money if you predict there will be a drop in the price.
Liontamer uses the Belgian KBC Bank for its guarantee and Man Investments uses the Commonwealth Bank of Australia. In some cases a rising guarantee is employed, whereby once unit prices reach a certain level, a certain percentage over and above your initial investment is also guaranteed. Although getting your capital back at the end of an investment period is reassuring, if that’s all you get it’s actually a very poor return. This is something that seems to be glossed over by those pushing this type of product. If your $10,000 was invested in the bank bond at 8% you would have $18,509 at the end of eight years. The other point to note is any guarantee is only ever as good as the company offering it. However, Man Investments and Liontamer have both performed well since these funds were launched, and do provide opportunities when markets are volatile as they are at present. They would suit investors seeking growth over income, and those with a long-term view.
Both these companies pay high levels of brokerage to advisers. We rebate any brokerage over 2.00% on these products back to the client.
Newsletter September 2008
September 1, 2008
Unfortunately the finance company sector has again been the main talking point through August with Strategic and Hanover joining the list of those now working on plans to restructure. Some finance companies will suffer heavy losses, whereas others are likely to make substantial, if not full, recoveries. My recommendations to clients were limited to UDC, Marac, South Canterbury, Strategic and St Laurence; however I am trying to keep up to date with all finance company events in order to answer any queries you may have.
MFS Pacific (Now OPI Pacific)
All investors should have received a notice of meeting together with proxy forms regarding the proposed restructuring. The original “Standstill Loan Agreement” has been replaced by a “Secured Debt Arrangement” proposal; however the company needs investor approval for this to proceed. Without investor approval Octaviar is likely to be liquidated. Whether liquidation offers investors better value than a moratorium is debatable. On the one hand you have the expense associated with liquidators, together with the sale of assets at distressed prices. On the other hand you are putting your faith in the company management (that has previously failed) to realise better value on your behalf over a longer time-frame.
If the Secured Debt Arrangement proceeds your investment will have a maturity date of June 30 2011. You will not receive interest on your investment. It is important that you vote if you want the Secured Debt Arrangement to proceed, as a 75% majority is required.
Octaviar has also made a cash offer to investors of 22.5cents in the dollar for their debentures. This is separate to the restructuring proposal requiring investor approval, and should be considered carefully by investors depending on their own situation.
Hanover, Strategic, Dorchester and St Laurence are all in the process of restructuring, and we should know the details some time this month.
UDC, Marac, and South Canterbury continue to trade profitably, have substantial cash holdings and diverse sources of funding, and have healthy debenture reinvestment rates. UDC continues to repay debenture funds early if requested (at reduced interest rates).
Portfolios
A number of you have taken up the offer to have your investments assessed. The large majority of people have sound share and fixed-interest investments, however I will reiterate some of the fundamental considerations you should be aware of when investing.
Diversification – Ideally, you should diversify across markets (cash, fixed interest, shares), across industries (property, infrastructure, utilities, retail), and across countries (New Zealand, Australia, UK ,US). Spreading your money across five banks, five finance companies, or five property trusts is not diversification. Also be cautious about putting too much money in any one security.
Liquidity – the ability to cash up some part of your portfolio is important. Often unexpected events occur, so you should have part of your investments that are able to be cashed up quickly.
Risk/Return – understand the relationship between risk and return. Often it takes a loss of capital before people realise their aversion to risk wasn’t what they thought it was. Very rarely does an investors’ aversion to “loss” match their aversion to “risk.”
At Bramwell Brown we don’t actively monitor or manage individual portfolios unless you specifically request this service. If you travel regularly, or simply don’t enjoy administering the paperwork associated with your investments, ring and discuss what service we can offer.
Babcock & Brown
Some clients hold Babcock & Brown bonds, and you are probably aware the company is under severe financial stress. The bonds are tradeable on the Stock Exchange, however are trading at severely discounted prices. A syndicate of banks has indicated they are prepared to support Babcock & Brown, however their share price continues to drift downwards. The Subordinated Notes (BNB010 – 9.01%) are trading at yields of 75.00%, and the BBI Networks (BBN010 – 8.50%) are trading at yields of 27.50%. If you want to know what price you could expect if you sold these bonds, ring me and I can work it out for you. Hopefully the company can sell enough assets at good prices to allow it to trade through its difficulties.
KiwiSaver
If you are considering KiwiSaver for yourself, children, or grandchildren please ring and discuss some of the implications. If you are thinking of joining, the sooner the better. The Government’s matching contribution of up to $1043 per annum is based on when you join the scheme. The anniversary is July 01, so each week you put it off you are missing out on $20 from the Government. I will discuss KiwiSaver in more detail next month.
Shares
Shares should form some part of an investment portfolio due to their ability to grow in value. A portfolio based solely on fixed interest runs the risk of being severely eroded over time by inflation. One of the hardest parts of financial planning is the fact we don’t know how long we are going to live, therefore we don’t know how long our investments need to support us. If your portfolio is solely fixed interest, and you consume all the income it generates, its purchasing power is being reduced each year by inflation. If inflation is running at 3.5%, a sum of $100,000 today would have the purchasing power of $49,000 in twenty years time. In order to retain the purchasing power of your money, you need to have assets that are growing in line with inflation, or limit your spending to a level that allows your capital to grow in line with inflation.
Any investor in shares, however, needs to be able to handle market volatility. The NZX50 Index has dropped 20% since November 2007, and the ASX All Ords has dropped by 23.50%. Seeing 20% of the value of an asset you own disappear can be very discouraging. However, history tells us that sharemarkets recover, and when they do they generally recover to a point past where they were when they dropped. The main question you need to ask is, “Is my investment time-frame such that I can ride out the market downturn?” There is not much comfort in knowing the sharemarket will recover if you need the money right now! You need to always be assessing your stage in life, and how the makeup of your assets fits into those various stages.
There are a vast number of companies and investment vehicles to choose from when investing in equities, and we rely on analysts to help us narrow down the options. Investors looking for income would choose New Zealand shares as they typically pay higher dividends than overseas companies. Examples include Cavalier, Hallenstein Glassons, PGG Wrightson, Fisher & Paykel, Telecom, Fletcher Building, and the listed property trusts. Growth investors might still choose New Zealand stocks such as GPG, Contact Energy, Auckland Airport and Infratil, but could also look overseas to the likes of BHP, Apple, Diageo, GlaxoSmithKline, or some of the UK investment trusts.