Newsletter October 2009

October 1, 2009

Are We Through The Recession?

New Zealand is technically out of recession after GDP rose 0.1% in the June quarter. This follows five quarters of negative economic growth. Judging by our sharemarket’s performance over the last six months you might think we have turned the corner. The NZSX50 has increased by just under 30% since March, but is it sustainable? There are a number of commentators predicting a W-shaped recovery, where we give up some of the gains we have made recently before we truly emerge from the recession. The housing market is said to be going ahead again, but is it the type of recovery New Zealand needs? Hopefully the banks won’t be lulled back into the loose lending practices that saw Kiwis with some of the highest debt per capita in the world.

Last month’s newsletter had a section on sharemarket terms and the P/E ratio was one I covered. The P/E ratio is a measure of how much you are paying for each dollar of a company’s earnings. The long-run average P/E for New Zealand shares (using the NZSX50) is 13. In June, 2007 it had reached 17, and in December 2008 it was sitting just under 12. Right now it is hovering at about its long-term average of 13. So is it a good time to be buying shares? I’m in the “W-shaped” recovery camp and I wonder if the sharemarket rally has been overdone. My advice to share investors throughout the turmoil of the last eighteen months has been to buy in stages rather than try and time the market. This advice still holds even if you think the market may ease back (remember I could be wrong). If you think you can time the market, that’s fine, but history tells us very few people have successfully been able to do it. Buying in stages will average the price you pay for shares over a longer period of time and will take out some of the volatility in prices. It has a flash name in the investment literature (dollar cost averaging). I’ll just call it common sense.

The G20 summit in Pittsburgh has been nutting out ways to avoid a repeat of the recession, and leaders have reached an agreement on limiting the payment of bonuses to executives. This will go some way to restoring confidence in markets, and perhaps the Contact Energy directors should read through the G20’s statement before they set next year’s fees.

What Have We Learnt From The Financial Crisis?

My biggest hope for investors is there is a greater appreciation of the relationship between risk and return, together with an appreciation of the fundamental benefit of diversifying investments. On the adviser side I hope the new legislation weeds out some of the sales-based advisers who have put their own interests ahead of their clients’. I had a dear 95 year old lady in the office recently showing me her portfolio of investments held by a locally represented financial planning chain. The majority of her funds were invested in the planner’s house branded products – most of which are in receivership. I’m not going to criticise individual choices of investment because all advisers at some stage have chosen a lemon (for me personally it’s Feltex Carpets and Strategic Finance, and professionally it’s Strategic Finance and St Laurence). But what I struggle not to get very cynical about is the complete lack of diversification some of these large selling chains exercise. Their sole purpose seems to be to act as a funnel for funds to related parties to their business. High quality independent investments are ignored presumably because there’s nothing in it for the adviser. At the age of 95, an investment portfolio should be mainly bank deposits and government bonds.

I sincerely hope investors can see through the rort that is the managed funds industry in New Zealand. In my opinion a managed fund generally benefits the manager first and the investor second (if they are lucky). I have lost count of the number of people I have had in my office who bought units in a managed fund back in 1980-something that isn’t worth any more than they initially contributed. Of course the manager has taken 1% to 2% of the value of those funds every year for the past 25 years so has done very nicely. I looked at the ING Property Securities Fund recently for a client. Approximately 80% of the fund’s investments are in the four main property trusts listed on the New Zealand Stock Exchange (ING, Goodman, Kiwi and AMP Property Trusts). There is a 5% entry fee to buy this fund and management fees are 1.75% per annum. Why on earth would anyone buy this fund when you can simply buy the companies individually in your own name on the stock exchange? It would cost you 1.50% brokerage (not 5%) to buy them through Bramwell Brown, and once you own them you are not paying someone else 1.75% per annum simply to tell you that you still own them!

I would only recommend managed funds for those investors with small sums of money looking to achieve adequate diversification. The NZX passive “smart” funds such as smartTENZ and smartMOZZY are good for this purpose and have relatively low management fees (0.60% for smartTENZ).

Fixed Interest

After a glut of fixed interest opportunities up until June this year, we have seen no new issues come to the market since. Secondary market yields remain low and some commentators are suggesting now is a good time to exit the bond market.  Many bonds are trading at premiums to their issue price, so if you were considering selling any of these bonds you will get back more than you paid for them. Take the Fonterra bond as an example. It pays a regular interest payment of 7.75% for the life of the bond. Buyers in the secondary market are happy with a yield of only 6.62%, which means they are happy to pay more for the bond than when it was issued. Refer back to the explanation of bond pricing in the May and June newsletters if you are struggling to see the mechanics of how this works.


The Barramundi share price has had an impressive run over the last six months from its low of 0.34cents in March to its current price of 0.75cents. It appears highly unlikely the price will reach $1.00 by October 25 however; therefore the warrants will remain worthless. Barramundi shareholders will be pleased to know the company will issue new warrants on October 23 with revised terms. The new exercise price will be 0.75cents, with an expiry date of 27 October 2011. See the June newsletter for an explanation of how warrants work. The company did consider extending the expiry date of the original warrants, or allowing warrant holders to participate in the new issue, however have decided that would not be equitable to current shareholders. So, unfortunately those investors who bought warrants as a means of getting into Barramundi at reduced prices will remain very disappointed.

Client Identification

New rules are forever evolving around how financial institutions conduct business. The global financial crisis has seen a raft of new anti money laundering laws passed in many countries, and we are obliged to abide by those new laws. Unfortunately each country (and each business within those countries) may have a slightly different interpretation of what is required. The main law we have to comply with is the Financial Transactions Reporting Act which requires us to formally identify our clients. Even if you have been a client of Bramwell Brown for twenty years, we still have to keep these records on file. The information we require is:

  • Full name
  • Date of birth
  • Address
  • IRD Number
  • Copy of drivers licence or passport
  • Bank encoded deposit slip or bank statement in the name of the account holder
  • Proof of address (power account/phone account)
  • Common shareholder number (if applicable)
  • Certified copy of probate for estate applicants
  • Title page and signatures page of trust deed for trust applicants




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