Newsletter September 2010

September 3, 2010

South Canterbury Finance

I delayed the September newsletter so I could comment on the fallout from South Canterbury Finance. The Government was between a rock and a hard place when they had to decide whether or not to back South Canterbury. Letting the company go into receivership undermines confidence in the economy, however taking a stake in the company using taxpayers’ money would have been a risky proposition (financially and politically). It will leave a big hole in the South Island economy and I’m certain it was not an easy decision for the Government.

I feel sorry for the Alan Hubbard – it is he who gave me confidence to invest in the company. The ethics he showed in relation to his investors is rare in today’s economic climate, and he should not be remembered in the same light as some of the directors of the early finance company failures. Although I was critical of the Government placing the Hubbards under statutory management at such a crucial time for South Canterbury, ultimately I don’t think it caused the failure of the company. The failure came through poor lending, due largely to control of the company being wrested away from Alan Hubbard. The management of the company moved away from its usual lending practices and moved into the riskier area of property development. It reinforces the comment I made in a recent newsletter where we can do all the analysis under the sun, but our analysis is almost always based on historic information. We can read the prospectus and the annual report; however we don’t know what decisions management are making the day after those documents are published.

Investors should feel relieved their deposits are covered by the Government Guarantee, although you can’t help but sympathise with those who lost money in the earlier collapses. The Government has made the interesting move of repaying all depositors, regardless of eligibility under the Guarantee scheme. They have done this to avoid the high rates of interest South Canterbury were paying. In contrast to previous companies that have failed under the Guarantee, investors will not have to file a claim. The trustee will repay each debt security holder as soon as they have an up to date register. This should take weeks rather than months. If investors have any queries they would like clarified don’t hesitate to contact the office.

Code of Professional Conduct for Financial Advisers

The Code of Professional Conduct for Financial Advisers has been back to the code committee a couple of times since I discussed it in May. It is nearly signed off, with just some minor changes needing to be made. Some of my concerns have been addressed, although the code places a fairly heavy burden of compliance on advisers. Already we are seeing advisers preferring to move on or retire, rather than comply with the new rules. The underlying motive behind the legislation is commendable; however I think they have gone too far in some areas. The code is very prescriptive, and my concern is that advisers will be forced to pass on the costs involved in abiding by the new regulations. Advice that in the past may have been passed on verbally will, in some cases, now have to be provided in writing. That does not come without a cost, and if I have to provide written recommendations I will have to consider charging a fee. The code differentiates between:

  • Investment planning service – a service provided by an AFA under which the AFA designs a plan for an individual that:

a: is based on an analysis of the individual’s current and future overall financial situation, and identification of the individual’s investment goals, and:

b: includes one or more recommendations on how to realise those goals

  • Personalised service – a service provided by an AFA where the AFA has taken into account the client’s particular financial situation or goals
  • Class service – a financial adviser service that is not a personalised service

FIN Numbers

Computershare have recently decided to charge $20 for a replacement FIN number. The FIN is essential if you want to sell any of your shares or bonds. At present, Link Market Services are not charging a fee, however I’m sure they will follow suit if they find, due to Computershare’s decision, they are receiving more requests than normal.

Compulsory Superannuation

The Government has recently put together a working group to look at our need to increase our rate of saving. Treasury figures show our offshore borrowing was $100 billion in 2000, $170 billion this year, and is predicted to reach $250 billion by 2014. As a country we continue to live beyond our means. New Zealand’s demographics suggest it is only a matter of time before we have some sort of compulsion in retirement savings. When KiwiSaver was introduced I spoke of the eventual need to change the playing-field around Government superannuation. My 2007 KiwiSaver presentations quoted the following figures:

  • The average age of death has increased from 60 to approximately 85 in the last 50 years
  • The numbers in New Zealand’s population over 60 will approximately double by 2050
  • In 2000, there were approximately nine taxpaying workers for each retired pensioner
  • In 2050, there will only be three tax-paying workers for each retired pensioner
  • The Government response is likely to include some of:
    • A decrease in the superannuation benefit
    • An increase in the age of eligibility
    • Means testing
    • Compulsory superannuation

Figures recently released by Treasury suggest by 2060 there will only be 2.5 tax-paying workers for each retired pensioner.  The Government simply cannot afford to keep paying the same amount in superannuation without a means of levying taxpayers. I have said for some time now that once KiwiSaver gains a certain amount of traction the Government will make it compulsory. Of course there is already an element of compulsion due to the fact our taxes have been used to build the Cullen fund.

John Key’s assertion that “changes to NZ Super are off the agenda” is a bit naive in my opinion. The statistics paint a fairly gloomy picture for those of us who are twenty years away from the current age of eligibility for the pension. Changes may well be off the agenda during this term, but rest assured; they will be on the agenda in the future. The age of eligibility will increase, and I believe NZ Super will eventually be means tested.

Personally, I’m not a fan of compulsion, but it may be in the best interests of the country. As soon as I’m forced to put money into a superannuation scheme, my right to invest as I see fit is removed. I would back myself to achieve better long-term returns with my money than the majority of those in the managed funds industry. When I was trying to build my assets through sharemilking I needed all the money I could lay my hands on. Having 4% or 6% or 9% of my income compulsorily transferred to ING or AMP every year would definitely not have been the best use of that money. Many other New Zealanders are saddled with debt – more often than not the best use of any surplus for those people is first and foremost to reduce that debt.

Unfortunately not everyone is good at saving – in fact, New Zealanders are notoriously bad at it. We have huge private sector debt, as we continue to fund our lifestyle through overseas borrowing. And this is where Governments always face a dilemma. How do you legislate to solve a nationwide problem that not everyone is contributing to?  Invariably a good proportion of the population are cheesed off having to abide by laws that have been introduced because their neighbours spend all their money on plasma TVs, new cars, the TAB, cigarettes and alcohol. It’s a debate that will be argued for many years to come. Unfortunately, like most systems of welfare, the right to superannuation is full of inequities. Everyone gets the same amount regardless of what they may have contributed in taxes over the years. The gang member who has been on the dole most of his life is entitled to the same amount as the plumber who has toiled away for forty years, paying hundreds of thousands of dollars in income tax.

My preference would be to have a minimum guaranteed universal pension (at a low level), with tax incentives to contribute to your own scheme. That way we have a choice about when, and how much, we contribute to our own retirement fund. If we decide we have a better use for our money, we are free to make that decision. If we feel the best use for our money is to fund a more comfortable retirement then so be it. The gang member has the same choices as the plumber (albeit with less money) and has no reason to complain at age 65 when the pension is barely enough to live on.

Bill English has told the working group that any recommendations have to be fiscally neutral – the Government isn’t going to be throwing more money at this. If they gradually reduce the pension payment, and use that money to incentivise saving for our own retirement, the onus moves to individuals to make choices for themselves. Unfortunately there will always be those who, for a variety of reasons, can’t or won’t make those choices. And there lies the perpetual dilemma for Government – Nanny State or freedom of choice? I want to be able to make my own choices, although I also don’t want to see superannuitants begging in the streets – there is a compromise to be reached there somewhere.

Greenstone Energy

We have a small amount of our Greenstone Energy bond allocation remaining. There was a bit of negative publicity regarding their lack of a credit rating when the bond was issued. Infratil have historically declined to have their bonds rated, claiming the $100,000-plus per annum fee is not worth it. I think investors can take some comfort from the fact that Infratil and the Guardians of New Zealand Superannuation conducted rigorous due diligence on the Shell assets, before investing $420 million of equity. Banks have provided a further $600 million in core debt and working capital, and the bond will rank equally with that bank debt. They distribute 30% of the fuel in New Zealand, their income is largely based on a margin, and fuel consumption is not affected greatly by price.

Manukau City Council

The Manukau City Council is seeking to raise up to $250 million with an issue of fixed rate secured bonds. The new Auckland City Council will take responsibility for the bonds from November 1st 2010. 

  • Maturity Date – September 29th 2017
  • Interest paid semi-annually
  • Minimum investment – $5,000
  • Interest rate expected to be around 6.50%
  • Final interest rate will be set on September 27th




Other Fixed Interest Opportunities

Company                                                       Maturity                                 Rate

PGG Wrightson Finance                            12 months                               6.15%

Equitable Mortgages                                  12 months                               6.50% 

Marac Finance                                             12 months                               6.25%

UDC Finance*                                             14 months                               5.60%


* UDC has not applied for the extension to the Government Guarantee




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