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.

Scams

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 (http://www.sec-com.govt.nz/invest/scam-alerts.shtml), 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

Shares

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.

 

CALL THE OFFICE TO REGISTER YOUR INTEREST IN THESE BONDS

 

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