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 The original “Standstill Loan Agreement” has been replaced by a “Secured Debt Arrangement” proposal; however the company needs investor approval for this to proceed.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.

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