Newsletter March 2009

March 2, 2009

I am often asked if my brokerage and commission rates are negotiable. Whilst nothing is ever set in stone I think it is helpful if clients understand how the majority of “financial planners” in New Zealand earn their income. My wife and I have always used the services of a sharebroker to invest our money – partly because I was exposed to shares at any early age, and partly due to a desire to manage our investments ourselves. When we sold our cows in 2001 we thought we would seek outside advice on investing the proceeds. We were amazed at the fees demanded by the financial planning chains, and the major banks. Their models are based on “funds under management.” The adviser will invest your money and charge a fee to have those investments under their control.  This model is an absolute goldmine for the adviser – regardless of how your portfolio performs or how much activity occurs they can send you an invoice each year for “managing” your money. It is not uncommon for independent financial planners to generate fee income in excess of $250,000 per annum. I had the opportunity to join this gravy train when I graduated from university; however I felt I couldn’t sell a concept to the public that I didn’t believe in myself.

I browsed the Internet for financial advisers recently and came across a typical financial planning firm using the “OneAnswer” portfolio management service, which is popular amongst a large number of financial services providers. Their fees were listed as follows:

Investment Amount            Adviser Fee            Administration Fee              Total Fee

First $500,000               1.10% per annum          0.35% per annum         1.45% per annum

$500K to $1m                1.00% per annum          0.30% per annum         1.38% per annum

$1m to $2m                    0.80% per annum          0.25% per annum        1.21% per annum

There is also a charge of 1.00% for each trade in equities or fixed interest. If you had $500,000 invested with this firm you would pay $7,250 per annum in fees, plus brokerage for the trades conducted throughout the year. These fees must come from tax-paid income; therefore the investor is giving up the first 1.80% to 2.40% of returns depending on their marginal tax rate. This level of fees is common amongst the major financial planning chains, and they justify the charges by providing reams of reports. I’ve spoken to a number of accountants about the financial reporting provided by these firms, and they all suggest the reports do not significantly reduce the accountants’ end of year bill. Accountants tell me all they require as far as investments are concerned is the payment advice you receive from the company when they pay their interest or dividends, the registry statements showing your holdings, and your bank statements.

I am extremely cynical about the services provided by the financial planning firms. In most cases there is very little management required once shares or bonds are bought. Presumably we are buying good quality shares that we want to hold for a long time and bonds we want to hold until maturity. What is there to manage? The recent bond issues are a good example. Why would you pay someone 1.45% each year to tell you still owned Fonterra or Auckland Airport bonds? What is the adviser doing to earn this fee? Admittedly with the collapse in the finance company sector and the failure of various other companies, financial advisers have had an immense amount of material to read, understand, and pass on to their clients. Unfortunately the information they are passing on is invariably after the event. I would have been happy to have paid an adviser 1.45% if I’d been advised to get out of Feltex Carpets “before” it collapsed.

Most clients of Bramwell Brown Ltd manage their own investments. However we do offer a portfolio management service where we handle all the paperwork relating to a client’s investments. We receive all communications from individual companies including interest and dividend notices, annual reports, offers of securities, and voting papers. Interest and dividends can be banked to your own account or can be processed through our trust account to call accounts we hold at the National Bank in your own name. We liase with your accountant at balance date and we report on your portfolio at a cost of 0.25% per report. Under normal circumstances this would be twice a year, however can be more or less often if you wish. We cap the fees at a level depending on the number of securities in the portfolio and the number of reports required throughout the year.  This service is ideal for those people who are away from home for long periods of time, or those who simply don’t want to attend to the paperwork that goes with the investments they hold.

Fixed Interest

We are seeing a wide spread of yields in the secondary bond market as investors seek safety over return. Any companies with more than average debt on their books are seeing their share and bond prices hammered. Even companies with an insignificant amount of debt, such as GPG, are seeing their bonds trading at discounts. Infratil has most of their bonds trading at yields between 10.00% and 11.00% –  a reflection of the amount of debt the company is carrying. If anyone is concerned about the current value of their bond portfolio please phone the office and I can calculate values for you.

Babcock and Brown

Investors in the Babcock and Brown subordinated notes would have received offer documents in the mail last week. The suspension of Babcock and Brown shares triggered an offer from the company to either repay your notes for cash or have them converted into shares. This is a pointless exercise as the company does not have the money to repay the notes. My advice is to fax the exit notice to the registry asking for repayment – you have nothing to lose by doing this. Further documents are asking investors to vote on a restructure of the notes to prevent Babcock and Brown going into administration. If the vote is approved they will offer to pay investors one dollar per thousand for their notes. I suggest investors vote against the resolution with the consequence that Babcock and Brown are put into receivership. The banks don’t want to see this happen and this “may” prompt a better offer for the notes. Whatever happens the Babcock and Brown story is a debacle and investors can expect to see little if any of their capital returned.

Bluestar Print

Bluestar Print announced to the Stock Exchange last week that they may shortly be in breach of their banking covenants. They have subsequently announced an injection of capital from their shareholders which will see them avoid this breach. Any announcement such as this has an immediate effect on the price of the company’s bonds with bids currently in the market at yields of 45.00%. Our sources suggest Bluestar is no “Babcock and Brown” and although the company is likely to be impacted by the recession, is still trading profitably. Yet again the problem is one of debt – too much of it in a difficult market.

The key point for investors to take from these and previous finance company receiverships is to reassess the exposure they have to individual companies. This latest recession will undoubtedly see further company failures so I recommend all investors look at their portfolios and ensure they are not exposed significantly to any one company. Ring the office any time if you would like me to check your investments and offer an opinion.

Contact Energy

Contact Energy has issued a prospectus for an offer of $300 million (plus unlimited oversubscriptions) of unsecured, unsubordinated, fixed-rate bonds. 

  • Interest rate of 8.00%                                       Maturity date – May 2014
  • Interest paid quarterly                                      Minimum investment of $5,000
  • Standard & Poors credit rating of BBB         Closing date 31 March, 2009

Tower

Tower Capital Ltd has issued a prospectus for an offer of $80 million (plus oversubscriptions of $20 million) of unsecured, unsubordinated, fixed-rate bonds. 

  • Interest rate of 8.50%                                       Maturity date – April 2014
  • Interest paid quarterly                                      Minimum investment of $5,000
  • A.M. Best credit rating of BBB-                       Closing date 20 March, 2009 

  

PLEASE CONTACT OUR OFFICE AS SOON AS POSSIBLE IF YOU WOULD LIKE TO RESERVE AN ALLOCATION OF THESE BONDS

NZ Post

We expect NZ Post to issue a bond some time in March. NZ Post has a Standard & Poors credit rating off AA-, therefore we expect the rate to be lower than Fonterra and Contact Energy.

BNZ

The bond offer we were expecting from the BNZ has been put off, however there is talk it may be issued later in the year.

Auckland City Council

Unfortunately the Auckland City Council offer was heavily scaled and favoured the institutional buyers. We were only able to satisfy the very few clients who expressed early interest in this bond. We can buy this security on the secondary market (from March 20th) however brokerage of 1% will have to be paid.

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