Newsletter June 2010

June 1, 2010

The World Is Far From Fixed

Events in Europe over recent months highlight the depth of the financial crisis around the world. It was easy to be lulled into thinking we are getting back to normal, however the plight of Greece, Spain and others (United Kingdom?) clearly shows the problem has shifted rather than been removed. The debt hasn’t gone away – it has simply been transferred from individuals and corporations to governments. The massive sovereign bailouts in the U.S, the U.K and Europe provided financial markets with the confidence needed to keep the global monetary system operating; however there is now a realisation that the debt still has to be paid back.

The International Monetary Fund and EU rescue package amounted to US$1 trillion. What is a trillion? I had to Google it to find out, and it can be either one million million, or one million, million, million! Whatever it is, it’s an obscene amount of debt that the Greeks are going to be saddled with for generations. Some question whether a rescue package should have been put in place at all. Why not let a poorly managed company/country fail and suffer the consequences? I guess the politicians have to weigh up the social implications as well as the financial implications of letting a country go bankrupt. You only need to look at what is happening in Zimbabwe to get an idea of where Greece would head if it failed. Already the austerity package has resulted in deaths – a complete failure would result in many more.

One concern I have with the mind boggling debt figures of some countries is the dreaded “I” word – inflation. I know I rabbit on about inflation too much, but I wonder if debt-laden countries are going to be happy to let inflation take care of a good part of their problem. If I was saddled with debt I would be more than happy to see double-digit inflation reducing the real value of my debt. I don’t think it is as big a problem here in New Zealand; however it is still worth keeping in mind. Our public debt as a percentage of Gross Domestic Product is a relatively conservative 14% (but rising) compared to Greece at 120%, Japan at 190% and Zimbabwe at 300%. Public debt is different to “external” debt, which reflects the foreign currency liabilities of the public and private sector. Our external debt is very high, and is predominantly concentrated in the private sector (mainly housing).

Budget

Most of what came out of the Budget was well flagged beforehand and shouldn’t have come as too much of a surprise. The main effect on investors is in the property sector, with the Government removing the ability to claim depreciation on most permanent buildings from April 1^st next year. The listed property trusts have been directly affected and their share prices have dropped accordingly. How much of the decline is a direct result of the Budget, and how much relates to the general malaise in the market is debatable, however there is no question the property trusts have had significant declines over the last two years. The general consensus is that it could have been worse for property investors, with capital gains tax being mooted as a possibility. Some of the negatives will be offset for investors by the reduction in personal income tax rates, and the reduction in the corporate and PIE tax rates. Property is a very cyclical asset, and you can be confident prices will improve as the economy improves.

As I suggested, although I was surprised it was done so soon, the Government has cracked down on the eligibility for benefits. Trusts have been targeted, and will now be included as part of a family’s total income when determining eligibility for benefits such as student allowances and community services cards. Even though it affects me personally (my children are eligible for student allowances) I think the move is fair. Why should I be eligible for a benefit (funded by taxpayers) that someone else is not eligible for simply because I have structured my financial affairs in a certain way? I have a friend who is an assessor for the Government-funded home insulation scheme. He tells me a good portion of those applying for the subsidy own large houses on equally large farms, and many of them have a community services card. In time, will the Government include trust assets when determining the eligibility for rest-home care subsidies?

Despite the Government’s changes, trusts will remain a valid vehicle for protecting your assets for the benefit of others. Not all trusts are set up to rort the welfare system – one of the main reasons is to ensure your assets pass to the people you want them to. Since the passing of the Property Relationship Act the rules relating to marital splits are also applicable to de facto relationships. If you leave your estate through your will, whatever your children receive will be at risk of property claims by their partner in the eventuality of a relationship breakdown. Your lawyer has much more experience than me in the merits of trusts, and I would encourage anyone who is thinking about their estate planning needs to contact their lawyer.

Ron Hay

A big thank you must go to Ron Hay for taking time out of a busy schedule to come and speak to our clients. The main point I think investors should take from his presentation is “volatility.” He has been proved right with sharemarkets around the world taking a hammering over the last month. We are fortunate to have access to a firm like Baillieu’s in Australia, as they are “on site” and have direct access to the executives of the companies they are recommending. They have provided sound research over the years, and have picked some very good stocks for our clients.

I try and encourage most investors to get some of their money out of New Zealand. Our market is tiny in comparison to the main global markets, our liquidity (the ability to buy and sell easily) is lower, and we don’t have access to as many sectors (minerals, emerging markets, healthcare, IT, and banking) as other markets. My main concern, however, would be if New Zealand suffered a major catastrophic event. Think what would happen to your investment portfolio if Wellington or Auckland was levelled by an earthquake, or, heaven forbid, if foot and mouth disease entered New Zealand. You could be assured your share values would halve overnight, regardless of what companies you held. I view my overseas investments as a simple insurance policy against “NZ Inc” performing poorly.

Some of Ron Hay’s recommendations included:

• Banking – Commonwealth Bank of Australia, ANZ, National Australia Bank, and Westpac
• Diversified Resources – BHP and Rio Tinto
• Retail  – Woolworths and Wesfarmers
• Building Materials – CSR, ABC and Brickworks
• Energy – Woodside Petroleum, Origin, Molopo, Orica, and Worley Parsons
• Education and Information Technology – Seek

 

• Computershare – the world’s largest share register
• CSL – pharmaceutical company specialisig in plasma products and vaccines

Short-Selling

Ron Hay was asked a question about short-selling, and the effects it has had on share markets around the world. The practice is illegal in New Zealand, but is common in other markets. Short-selling is a practice whereby you can sell shares you don’t own when you expect prices to fall. A short-seller would typically borrow the shares through a broker, who would be holding the shares for another investor. The investor/broker receives a fee for lending the shares to someone else. The short-seller then sells the shares in the market, waits until their price drops, and then buys them back, returning them to the broker/investor. Their profit is the difference between what they sold them for and what they had to pay to buy them back, minus the fee paid to the broker. It can have a very distortionary effect on markets. Germany has recently banned “naked” short-selling (the seller doesn’t own the shares, and doesn’t borrow them to cover their position) of certain securities.

Shares – Risk – Time

I have fielded a number of calls recently about Telecom and GPG. Anyone who has owned these shares for any length of time will be as disappointed as I am with their seemingly interminable price decline. The question I’m asked the most, unfortunately, is a questions I don’t have the answer to – are they going to recover? Too often I see share investors who shouldn’t own shares in the first place. We all accept that share investments carry risk, however risk is not only a function of the fortunes of the company – it is also a function of the time-frame of the investor. One question share investors need to ask is;

• Have I got time to ride out the volatility in prices?

The next question you need to ask is:

• What is the best use of my investment capital from today onwards?

Far too many people refuse to sell a poor-performing investment because they have paid more for it than it is worth today. No matter how hard it is you must take your sunk costs out of the equation. Look at your poor-performing investment and ask if there is something else that will perform better for you.

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.

Barramundi

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

 

DISCLOSURE STATEMENT AVAILABLE ON REQUEST AND FREE OF CHARGE

Newsletter September 2009

September 1, 2009

Deposit Guarantee Scheme

The Government recently announced its intention to extend the Retail Deposit Guarantee Scheme. The current scheme ends on October 12, 2010 and the new scheme will end on December 31, 2011. This is great news for investors and financial institutions alike as it gives time for an orderly exit from the scheme. The rules have changed however, and not all institutions will be eligible for the scheme. Some may even opt not to participate, as it is not without cost. Some of the changes include:

• Bank deposits will be covered up to a maximum of $500,000 per depositor
• Non-bank deposits will be covered up to a maximum of $250,000 per depositor
• To be eligible for the new scheme institutions must have a credit rating of BB or higher
• Finance companies will pay higher fees than banks or building societies

At this stage I would still encourage finance company and building society investors to stay within the Government Guarantee, and I expect the Wairarapa Building Society, South Canterbury, UDC, Marac, and Equitable will all sign up to the new scheme. Whether or not investors support these companies from 2012 onwards may depend largely on the regulation of the non-bank deposit takers currently before parliament. Some of the key proposals being debated at present include:

• All non bank deposit takers to have a credit rating by March 2010
• A requirement for every deposit taker to have a risk management plan
• Each deposit taker to have an emergency source of liquidity
• Restrictions on related-party lending
• Minimum capital requirements

 Hopefully these regulations will be enough to restore confidence in a sector that plays a very important role in our economy.

Sharemarket Terms

I am often asked to explain some of the terms associated with the financial pages in the newspaper. P/E ratios, NTA, imputation credits, and dividend yields can be confusing.

P/E (Price/Earnings) Ratios

The P/E ratio is the company’s share price divided by its earnings per share. It is a ratio used to compare companies. The higher the P/E ratio the more you are paying for each dollar of earnings. All other things remaining equal a company trading on a lower P/E ratio represents better buying. Of course other things never remain equal so you should not base a buying decision on this alone. A high P/E ratio may not mean the company is “expensive,” it may indicate an expectation from investors of higher future earnings.

NTA (Net Tangible Assets)

The NTA figure is a company’s tangible assets minus its liabilities, divided by the number of shares on issue. Intangible assets such as goodwill are not included. Net tangible assets are what should be realised if a company was wound up. We divide it by the number of shares on issue to see whether the company share price is at a premium or a discount to its asset backing. Like P/E ratios NTA cannot be looked at in isolation. Take a service company for example – it may generate strong revenues without much in the way of tangible assets. Its NTA is likely to be significantly less than its share price.

Imputation Credits

Dividend imputation credits are tax credits attached to the dividends you receive. When you receive a dividend from a company you are expected to pay tax on that income. But if the company paying the dividend has already paid tax on that income the Government is getting two bites at the cherry. Therefore companies are able to provide you with a tax credit if they have already paid tax on the income they are distributing. In some circumstances a company will pay a dividend even though they have failed to produce a profit, and have therefore not paid any tax. In this case the dividend will have no imputation credits attached, and you will be expected to pay the tax on the dividend you receive.

Dividend Yield

The dividend yield is the dividend (cents per share) divided by the share price. For example Fletcher Building paid 48.50 cents in dividends in the last year. Their share price is currently $7.82. Their dividend yield is therefore 6.20%. The newspaper will also show the gross yield, which includes the addition of any imputation credits that have been attached to the dividends paid. Remember the yield calculation is based on today’s share price and last year’s dividend, so there is no guarantee the company will continue to generate the same yield.

Babcock & Brown Limited

The administrators of Babcock and Brown have come to the conclusion that the company should be wound up. They have raised the possibility of bondholders funding an investigation into the affairs of BBL “to determine whether any valuable causes of action exist against any third party that might provide a return which would ultimately benefit noteholders and other creditors.” In my opinion these actions benefit the administrators and the lawyers at the expense of the people they are representing, and invariably take years to resolve. Feltex Carpets collapsed three years ago and investors funding legal action in that case have yet to see any resolution. All Babcock & Brown bondholders, regardless of the size of their investment, are being asked to contribute AU$400. I would only consider paying this money if: a) I had a large sum of money invested in BBL, and b) I could be guaranteed that any recoveries would be paid preferentially to those who provided the extra funding. Call the office if you would like to discuss your situation.

Bluestar Print

Bluestar Print is back in the news with an announcement that they are suspending interest payments on their bonds. It was a bizarre announcement to the Stock Exchange, headed “Bluestar Print Group Strengthens Financial Position.” Bluestar has renegotiated terms with its bankers and will have their covenants reset. As part of these new arrangements Bluestar are required to suspend interest payments to bondholders until they have made the required interest payments to their bankers. The penalty for suspending payments to bondholders is an increase in the interest rate from 9.10% to 13.10%. Clearly this is not good news for bondholders – any company in the current environment would be doing everything possible to avoid unnecessary cost. With $105 million of bonds on issue, an extra 4.10% interest could be a big cost, depending on how long interest payments are suspended.

On the positive side, Bluestar’s parent company has been provided with a further $10 million in equity funding. Bondholders will be hoping the company can turn things around within the next three years, when their bonds are due to be repaid. Sales in the secondary market have been going through at approximately $33 per hundred.

 Barramundi Warrants

The Barramundi share price continues to drift below 0.70cents, making the warrants that are due to expire in October virtually worthless. See the June newsletter for an explanation of how these warrants work.

Rights Issues

A number of companies sought more funding from shareholders over the last twelve months, and rights issues have been the main method used. How do rights work?  A right is type of option that allows a shareholder to purchase extra shares in a company. Rights usually have a short time-frame, and are also usually renounceable (the holder can sell the right to someone else). The offer is always at a discounted price because of the dilutionary effect the extra shares has on the price. During the rights trading period (usually two or three weeks) the right should trade at the difference between the current share price and the price at which the new shares are being offered.

Tower has just announced a rights issue, so we can use them as an example. Before the announcement was made Tower’s shares were trading at $1.80. They are offering shareholders the right to buy 5 new shares for every 16 they already hold, at a price of $1.34. Simple maths tells us that Tower’s share price should now be $1.69 (the average of the share you held at $1.80 plus 0.3125 of a new share at $1.34). Sure enough, the day after the announcement Tower’s shares were trading around $1.69. The rights start trading on September 03 and theory should see them trading at 0.35cents (the difference between the underlying share price of $1.69 and the price you are being asked to pay for the new shares – $1.34.

The important thing for investors is to ensure they take up one of the alternatives. Either take up the new shares at the discounted price, or sell the rights to someone else. Doing nothing will mean you are losing the value of the rights assigned to you. On any given day the difference (financially) between paying for the new shares or selling the rights is negligible. Taking up the new shares will be beneficial in the long-term, provided the company performs well in the future. Call the office if you need any guidance on what to do.

Skellerup are also issuing rights to shareholders. They are seeking $21.5million with a two for five renounceable rights issue. Once we have all the details we will be able to advise on the merits for and against.

 

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Newsletter August 2009

August 1, 2009

Adviser Regulation

The Sunday Star Times recently ran an interesting article regarding financial advisers. It appears we are one of the least-trusted professions in the country. It’s hardly surprising given some of the losses experienced by investors over the last couple of years. There has been some truly awful behaviour from advisers (salesmen), particularly around the finance company sector. The Institute of Financial Advisers made the unprecedented move recently of naming and shaming two of its members (insurance salesmen) who funnelled excessive proportions of individual clients’ funds into finance companies. In one case a couple was advised to invest the total proceeds from the sale of their home into Bridgecorp, while they looked for another property to purchase.

There are currently three separate pieces of adviser regulation being considered by the Government. The Ministry of Economic Development is looking at disclosure proposals, and the Securities Commission is looking at adviser competence, and regulation and supervision. By the end of next year all financial advisers will need to be authorised to practice by the Securities Commission. Disclosure may become stricter, and advisers will need to meet yet-to-be-determined levels of experience and qualifications. Under current law anyone can hang their shingle out and begin practice as a financial adviser. I would be more than happy to see the bar being set much higher. The new requirements for disclosure, experience and academic qualifications don’t worry me in the least, however I do worry the Government may take a heavy-handed approach to how advice is delivered. In Hong Kong, for example, apparently advisers are required to establish the risk profile of each investor, and then sign a contract with the investor disclosing the nature of the investment and its risks. Someone has to pay for that added level of complexity, and ultimately it is the investor. My other concern is that regulation may go so far as to convince investors their adviser has taken the risk out of investing. Advisers don’t take the risk out of an investment, however they should be able to explain its characteristics and ensure those characteristics fit the objectives of the investor.

 Commissions Versus Fees

A certain amount of the negativity around financial advisers has been the payment of commissions by product providers. Many are calling for a ban on commission payments, instead charging clients a fee for advice received. Historically finance companies have paid commissions to advisers to sell their debentures to investors. The managed funds industry (Tower, AXA, ING, AMP) pay various commissions to sell their funds. There is no question there is potential for a conflict of interest when commissions are being paid to advisers, sometimes at different rates. This is where the integrity of your adviser comes into play, and a ban on commissions in my opinion is short-sighted. On many occasions I have advised investors to keep their money in the bank because I have been unable to offer them a better return considering the risk they are prepared to take. This is where many advisers (salesmen) have let themselves down recently – greed, and the possibility of short-term gain has got in the way of the interests of their clients, and ultimately the long-term interests of their own business.

Disclosing commissions is perfectly adequate protection for consumers in my opinion, and in some cases removing them would see investors paying for a service they have previously received for free. We have provided our clients with numerous new bond issues over the last year including Fonterra, Contact Energy, South Canterbury Finance, Wellington Airport, Rabobank and the BNZ. No money was paid by investors to acquire these bonds as we were paid directly by the issuing firm. The proposed legislation will go some way toward weeding out the self-interested financial advisers in New Zealand; however I believe investors need to educate themselves on financial matters. Read the likes of Gareth Morgan, ensure your adviser explains all the characteristics of an investment, ask them to disclose any fees or commissions, and don’t be afraid to consult another adviser for a second opinion.

Government Guarantee

The finance company sector continues to struggle in the current environment. South Canterbury Finance have suffered write-downs of $58million, and will post their first loss since 1934. Marac have sold $160million of bad loans to its parent, Pyne Gould Corporation and I believe UDC and Equitable may even have losses on some of their loans. Is there a future for the finance company sector? The Government is currently drafting legislation that will regulate the non-bank deposit takers, including the building societies and credit unions. There will be rules around capital adequacy and each organisation will have to have a credit rating from one of the three main ratings agencies. But will this be enough for the Government to lift the guarantee in October next year? Currently most investors are only depositing money with the non-bank deposit takers within the Government Guarantee. Finance companies are awash with cash that they can’t do anything with. They want to lend the money but are concerned it will all go flooding out in October next year if the Government withdraws the guarantee. Australia has extended their guarantee for another year and our Government needs to state exactly what they intend to do so these companies can plan accordingly.

KiwiSaver

The KiwiSaver anniversary has just passed (June 30) and many investors were scrambling to make payments on the last day. If you have been a member of KiwiSaver for a full year the Government will match your contributions up to a maximum of $1043. This sum is equal to $20 per week. The simplest way to ensure the maximum benefit for members not contributing through their wages is to set up an automatic payment of $90 per month directly to their KiwiSaver provider. Those who are contributing through the PAYE system need to work out how much they have contributed throughout the year and top up to $1043 some time in June.

Those members who have reached age 65 since joining KiwiSaver can still receive the matching Government contribution. It will be paid for five years since joining. This is also the period of time an account must be open before the contributions can be paid out. If you want to discuss KiwiSaver in more detail please call the office.

Barramundi Warrants

We continue to monitor the price of these warrants. At present the underlying Barramundi share price is at 0.58 cents, and the warrants are trading at 0.001cents. The share price would have to move significantly closer to $1.00 for these warrants to achieve any value. The warrants expire on October 25^th.

Apology

My sincere apologies to Garry Daniell re the Lotto win. He was clearly set up, and I, along with many others was sucked into believing he had asked the Big Wednesday winners to fund council projects. This was not the case.

Newsletter July 2009

July 1, 2009

Fraud – Could It Happen To You?

I was dismayed to read the story of Warren Pickett, the Waipawa financial adviser who lost millions of dollars of his clients’ money in failed investments. I’m not sure what turns a well-respected member of the community into a person driven by greed and deception, however there are steps investors can take to ensure they are not caught in the fallout. The biggest mistake Pickett’s clients made was to invest money in the adviser, rather than in assets in their own name. Clients would forward funds to Pickett’s “Waipawa Holdings” without knowing what that money was invested in. Pickett told investigators that if anyone asked what their funds were used for “I would be quite vague and just say that it was in a wide range of investments, primarily with people that I’ve come across in my business career that I believed would be in a position to repay the funds.” Two victims lost more than $5million each.

Any investment made through Bramwell Brown Limited is registered in the client’s own name. Shares, debentures, fixed interest, KiwiSaver accounts and Kiwi Bonds are all held by the individual investor. Any security you buy should be traceable by it having a certificate issued, appearing on a registry statement, or a simple letter acknowledging your holding. In some cases overseas shares “might” be held by a nominee rather than in your own name in order to reduce the costs associated with buying them.

Some clients pay Bramwell Brown for the securities they have bought. We bank those funds to a Trust Account, and forward them immediately to the company providing the securities. There is potential for dishonesty in this system, however the client would soon know something was amiss if they didn’t shortly receive a registry statement showing their new holding.  I don’t think you can completely eliminate the possibility of dishonesty in your dealings with money, however I think you can minimise the potential by ensuring you own any investments you make in your own name. You need to be able to trust your financial and legal advisers, but don’t give an adviser a large sum of money that disappears into a pool of investments that lack some sort of accountability.

Infratil Warrants

The warrants that are due to expire on July 10 have had some of their terms altered. Instead of paying the full $1.62 investors have been given the option of paying 0.55 cents now, with a further $1.12 by May 21, 2010. You can still pay the full $1.62 now if you wish, and if so you will be entitled to a 3.75 cent dividend in July. Those who choose the 0.55 cent option will not receive the dividend, and will pay a total of $1.67 instead of $1.62. Infratil have offered this instalment method of paying to ensure as many investors as possible are able to take up the new shares. All other things remaining equal you are slightly better off paying the full price up front, however I would prefer to pay the 0.55 cents and see how Infratil perform over the ensuing year. The instalment option gives you the chance to withhold the final payment if you so desire. The important thing is to make sure you do something. Either take the warrants up and pay for the new shares, or sell the warrants to someone else. The warrants cease trading on July 07, and any  payments need to be to the registry by July 10. You will have the forms to enable you to take up the new shares, and I can sell the warrants for you if that is what you choose. Give me a call if you want to discuss your situation in detail.

 Office

On occasions I am busy with clients when others call into the office. Also, on very rare occasions the office may be closed for short periods. If you are coming to the office please ring and make an appointment. If you are unable to contact me for any reason please don’t hesitate to call me on my cellphone (0274523980), or at home in the evening (3703911). 

Website

We are currently in the process of developing a website for Bramwell Brown Ltd. It should be up and running within a week, so please have a look (www.bramwellbrown.co.nz). I would value any feedback you might have, and would appreciate you referring others to the site.

 Big Wednesday

Congratulations to Masterton’s Big Wednesday winners. I personally feel $36million is an obscene amount of money to give as a prize, and I sincerely hope they are receiving good advice on how best to handle such a sum. There will be plenty of sharks circling, trying their best to get a slice of the action and my only hope is that the family doesn’t end up giving as much away in fees as they give away to worthy charities. I can’t imagine what our mayor was thinking suggesting they might fund council projects.

 

Newsletter June 2009

June 1, 2009

Bonds

Last month’s section on bonds appears to have raised as many questions as it answered – and for my mother it didn’t answer anything at all! My mother is very intelligent, so if she didn’t understand what I was talking about, then chances are others didn’t either. Exaggeration is often the best method to explain a concept so here goes. First of all a quick look at the terms that are important when looking at a bond in the secondary market.

• Coupon – the interest rate received for the term of the bond (does not change)
• Price – how much you pay for the bond when it is issued
• Yield – the return the new buyer will receive, from the time they buy the bond in the secondary market, until maturity

A one year bond is issued today with a coupon of 10%. I invest $100,000 and at maturity I will receive $110,000. The coupon is 10% and my yield will be 10%. The price I have paid for the bond is $100,000. A week after I bought the bond I desperately need my money back, so I decide to sell it to someone else. Unfortunately in the preceding week the company who issued the bond has been sued by a supplier and there is a chance they may go bankrupt. Who is going to give me $100,000 for my bond now? I find someone who likes risk and is prepared to buy my bond so long as they achieve a return (yield) of 50%. The only way they can yield 50% on a bond that is going to pay them back $110,000 in one year is to pay me $73,333 for it.  I’ve lost about $27,000 in one week and the new owner of the bond stands to make a 50% return on their money (or lose the lot if the company defaults). The important thing to remember is that different yields only arise if the bond is resold after it is issued. If you are not forced to sell, and you hold your bond until maturity, you will yield whatever the initial coupon rate was.

Swap Rates

Last month’s explanation of how the perpetual reset securities were faring in the secondary market raised a few queries about swap rates. I will look at swaps in next month’s newsletter.

Warrants

Some of you will have Infratil or Barramundi warrants, so it might be timely to explain how they work.  A warrant is a security that entitles the holder to buy a share in a company at a predetermined price. Barramundi investors received one warrant for every two shares issued under the Initial Public offering in October 2006. Infratil issued warrants to shareholders in July, 2004 at no cost, and issued a second series in June, 2007. The important terms of warrants are the exercise price, the underlying share price, and the expiry date.

Infratil (IFTWB)

These warrants have an expiry date of July 10, 2009, with an exercise price of $1.62. The underlying Infratil (IFT) share price is currently at $1.66. These warrants give the holder the right to buy Infratil shares for $1.62 any time up until July 10th. If the underlying share price is above $1.62 the warrants are said to be “in the money.” If the underlying share price falls below $1.62 the warrants are worthless, and are said to be “out of the money.” Holders have two options. They can exercise their warrants and take up new Infratil shares for $1.62 or they can sell their warrants to someone else. With the Infratil share price hovering just above the exercise price recently, the warrants have some value (0.05 cents at present). Whether you sell your warrants or take them up will depend on your individual circumstances, however you should be doing one or the other. Ring the office if you would like to discuss this further.

Barramundi (BRMWA)

These warrants have an expiry date of October 25, 2009, and an exercise price of $1.00. The underlying Barramundi (BRM) share price is currently at $0.57. It is hard to see the Barramundi share price reaching $1.00 before October, so it is likely these warrants will remain out of the money. Any holders of these warrants should keep an eye on the price leading up to the expiry date. I will comment again in the September newsletter.

KiwiSaver
The KiwiSaver anniversary (July 01) is almost upon us again. Any members who have been in the scheme since last July should ensure they have deposited at least $1,043 with their provider before July. This is the most the Government will provide as a matching contribution to your KiwiSaver account. Depositing more than $1,043 per annum is OK, however you won’t receive any more from the Government. For those of you who are under 65, and not in KiwiSaver, call the office to discuss the opportunities. The Government will give you $1,000 to join and then match your contributions to $1,043 per annum, so you may as well take advantage of that.

Shares
Are we seeing the start of the recovery in the sharemarket, or is it a suckers’ rally? There are commentators with far more experience than me making varying claims, however the fact is nobody knows with any certainty where the bottom of the market is. There seems to be less bad news flowing through, however some of the unemployment data out of the US and UK is staggering. I do like to see most portfolios having an exposure to shares, in order to provide some insulation against the effects of inflation. My views on inflation have been well documented in the monthly newsletter and I think this will be a big issue over the next decade. My advice to clients seeking exposure to the sharemarket remains the same – buy in stages through 2009 and 2010 to achieve a low average price.

So what do we buy? Below are some shares that are currently favoured by the brokers that conduct our research. Any allocation made to shares needs to be weighed up with the other assets you own, the goals you are trying to achieve, and the risk you are able to take.

Income Shares
AMP Office Trust, Goodman Property Trust, Kiwi Income Property Trust
The property trusts have all suffered significant depreciation in share price, and at current levels provide very attractive yields.
Cavalier Carpets, Fletcher Building, Methven, Sky City, Telecom, Steel & Tube
These are all traditional yield stocks, however the recession is bound to affect future payments.

Growth Shares
Opus International Consultants, BHP, Leighton Holdings
Resource and infrastructure companies should benefit from world Governments spending their way out of recession.
Fisher & Paykel Healthcare, CSL, Ansell, Sonic Healthcare
Healthcare is seen as a defensive investment (it shouldn’t be affected by a recession). Often healthcare companies are selling to Government-funded organisations so a recession has less effect than if those sales were made to consumers.
Ryman Healthcare
Ryman should benefit from the huge number of people due to retire over the next thirty years.
Caledonia Investments, Foreign & Colonial Investments
The UK investment trusts are a good way to gain exposure to overseas markets. Both these trusts are listed on the New Zealand stock exchange.

Budget
The budget was released this afternoon, and by all accounts paints a fairly bleak picture. To me the Government’s books are a reflection of the average New Zealand household – too much debt. The alarm bells should be ringing for anyone retiring from 2020 onwards, as it is unlikely we can continue to afford current levels of superannuation. (In 2000, there were approximately nine taxpaying workers for each retired pensioner. In 2050, there will be only three tax-paying workers for each retired pensioner). KiwiSaver, and the Government Superannuation Fund were set up to address this problem, however it is clear to me that we are going to have to take more responsibility for our own retirement needs. The age of eligibility will increase; the entitlement will decrease, and at some stage they will bring back asset testing.

Fixed Interest
BNZ Income Securities has issued a prospectus seeking to raise $250 million. The offer is for perpetual shares, and has a similar structure to the recent Rabobank issue. The rate is reset every five years at 4.09% above the five-year swap rate.

•     Initial dividend rate of 9.10%                        First rate reset date – 28 June 2014
•     Dividends paid quarterly                               Minimum investment of $5,000
•     Standard & Poors credit rating of A+          Closing date 23 June, 2009

Works Finance has issued a prospectus seeking to raise $100 million (with $50 million of oversubscriptions). They are offering a three-year unsubordinated bond based on the three-year swap rate, plus a margin to be determined on June 02. The minimum rate has been set at 8.75%.

•     Minimum interest rate of 8.75%                  Maturity date – 15 September 2012
•     Interest paid quarterly                                   Minimum investment of $3,000
•     Standard & Poors credit rating of BBB-     Closing date 24 June, 2009

The finance companies all offer special rates at various times. Most are based around the Government Guarantee and most offer better returns than those available at the banks. UDC is currently offering 4.70% for 14 months.

Newsletter May 2009

May 1, 2009

Education

I have just spent a most enjoyable week with my family in Dunedin and Christchurch where my two eldest children are at university. On the recommendation of a family friend we booked at a restaurant called “A Cow Called Berta” in Dunedin. To me the name of the restaurant indicated a steak and chips type meal, however it was far more upmarket with $40 mains. Earlier in the day we had been discussing the meaning of “equity” with our eldest son who is studying commerce at Otago University. My youngest did the maths through the course of the meal and expressed his concern on what effect our dinner was having on the family’s equity! The discussion reminded me of a number of clients who have asked me to explain certain aspects of investments in the monthly newsletter. Some people are reluctant to ask questions for fear of appearing ignorant – Eleanor Roosevelt once said “there are no stupid questions; the only stupid question is the question not asked.” I receive a number of questions about the bond market and how bonds behave in the secondary market, so I thought that would be a good place to start.

Bonds

There are a vast number of debt securities on the market, many with differing characteristics. For the purpose of this exercise we will look at plain “vanilla” bonds (those with a set term, paying a fixed rate of interest, with repayment at maturity). The most important point to remember when looking at prices of bonds on the secondary market is the inverse relationship between price and yield. All other things remaining equal, as yields (the interest rate a buyer or seller demands) increase, bond prices will fall, and vice versa. Also, the coupon payment (initial rate of interest paid) doesn’t change throughout the life of the bond.

Example: Fonterra’s six-year bond issued in March paying a coupon of 7.75%.
Currently there are buyers in the secondary market prepared to buy this bond at a yield of 7.35%. How does the new owner of the bond yield 7.35% until maturity if the bond keeps paying its same coupon of 7.75%? The answer is that the new buyer must pay more than the face value for the bond (remember the inverse relationship between price and yield). If I want 10,000 Fonterra bonds, at a yield of 7.35% I would have to pay $10,190. At maturity I would be repaid $10,000.
Example: GPG’s capital note maturing in November, 2012, paying a coupon of 8.30%.
Recent trades in this bond have been at yields of 11.75%. If I wanted 10,000 GPG capital notes I would only have to pay $9,010. I would continue to receive interest payments of 8.30% on $10,000, and at maturity I would be paid back the full $10,000.

The other important thing with bonds is their time until maturity. Yields generally tend to match the coupon the closer the bond is to maturity (unless the company has a chance of defaulting). If you owned a bond that was due to mature in one month, you are highly unlikely to sell it for any less than its par value.

Perpetual Reset Securities

Over the past couple of years there have been a number of perpetual debt securities issued, all with differing features. Examples include Rabobank, Infratil, Quayside Holdings, Origin Energy, ANZ, and BNZ. The one common feature of these securities is that in order to get your money out before the company decides to make repayment they must be sold on the secondary market. As an adviser obviously I want to offer products to clients that meet the needs of diversification, liquidity, and a fair return for the risk involved. Liquidity is not a problem with any of these securities as they are all listed on the secondary market of the NZ Stock Exchange; all have good depth (plenty of buyers and sellers), and can be sold instantly. Liquidity is necessary of course, but is of limited use if the security you want to sell is trading at half the price you paid for it. We are seeing some large discounts in the prices of some of these perpetual securities and I thought it might be worthwhile trying to explain why this is.

The first point to bear in mind is there has been a flight to quality over the last year due to the global financial crisis. As a result there are fewer buyers in the market for lower-rated securities. If you were looking to sell your Infratil perpetual bonds for example you would have to accept a heavy discount ($60 per hundred). These discounts were very large immediately following the global meltdown, however have been reducing recently as confidence returns to the markets. The other factor affecting these securities is their reset characteristics. Most have their interest rate reset after one, three or five years. The interest rate paid is based on a benchmark rate plus a margin, and it is the “margin” that is leading to some of the discounted prices we are seeing.

Rabobank issued their first perpetual security in 2007 and we promoted it as offering a very good return for its risk. It paid 9.48% for the first year, and then had annual resets at 0.76% (the margin) over the one-year swap rate. At the time I thought that whatever the movement in interest rates this instrument would pay a return that remained relative to the interest rates of the day. However, with the global financial crisis we are seeing companies raising money being forced to offer higher margins over benchmark interest rates to gain any support. We are seeing it now with Rabobank’s latest offering at 3.75% over the five-year swap rate. Rabobank’s 2007 perpetual security is currently trading at $80 per hundred. Origin Energy is a similar security also trading at a heavy discount ($63 per hundred) – its rate is reset each year at 1.50% over the one-year swap rate.

The perpetuals are not all doom and gloom however. The ANZ and BNZ securities have reset margins of 2.00% and 2.20% respectively over the five-year swap rate, and have traded as high as $109 per hundred in the secondary market. They are currently trading between $100 and $102. Quayside Holding’s perpetual is paying 10.00% and will have its rate reset in March 2011 at 1.70% over the three-year swap rate. It is currently trading in the secondary market at $102 per hundred. I think the lesson we need to take from the variation in prices of these securities is that we need to spread our money, not only across different companies, but across different types of security. If funds are needed, for whatever reason, it is nice to have a range of securities to choose from to sell in order to raise the funds. We also need to be mindful of not allocating too much money to any single security. The large discounts on the likes of Infratil, Rabobank and Origin need not cause concern provided you are not forced to sell them. They will eventually be repaid and are currently paying interest of 6.95% (Infratil), 7.449% (Rabobank), and 8.04% (Origin).

Warrants

Next month I will explain the features of warrants. Some of you will have Infratil or Barramundi warrants and it is important you are aware of your choices leading up to their expiry dates. Infratil has two series of warrants; the first of which expire on 10th July this year, and Barramundi warrants expire on 26th October. Those of you with the July Infratil warrants should be keeping a close eye on prices leading up to the expiry date. If you want to discuss this further please phone the office at any time.

Portfolio Reviews

My main source of communication with clients is through this newsletter. I rely on you to contact me if I can help in any way. A number of you have taken the opportunity to have your investments reviewed, and the offer still stands. If you would like me to look at your investments and offer an unbiased view of risk, diversification, and liquidity, please phone the office and make an appointment. I don’t charge anything for this service and it is a good opportunity for me to get to know clients better. I am happy to come to you if necessary (I like scones and pikelets).

Rabobank

Rabobank Capital Securities Limited is making an offer of up to $200 million of PIE Capital Securities to the public, with the ability to accept unlimited oversubscriptions. The PIE Capital Securities are perpetual preference shares paying quarterly dividends at a fixed rate until 18 June 2014. The interest rate paid will be based on the five-year swap rate, plus a margin (3.75%), and will be no lower than 8.00%. The rate will be set on May 25th. On 18 June 2014 the dividend rate will be reset for a further 5 years until 18 June 2019 at the benchmark five year swap rate plus the issue margin. Thereafter the gross dividend rate will be reset quarterly at the 3-month bank bill rate plus the issue margin. As Rabo Capital Securities Limited will be a Portfolio Investment Entity (“PIE”), investors will have their tax on dividends capped at 30%. The resulting tax benefits may be appealing for investors on 33% and 38% tax rates. The minimum investment will be $5,000, and will carry a Standard & Poors credit rating of AA-.

If the rate was set today it would be 8.53% (five-year swap rate of 4.78% plus the margin of 3.75%). I expect this issue to trade in the secondary market at higher yields than its predecessor due to the better margin on offer.

PLEASE CONTACT OUR OFFICE AS SOON AS POSSIBLE IF THIS OFFER IS OF INTEREST TO YOU (CLOSES MAY 22nd)

Vector

Vector have indicated they may issue a five-year bond, with a rate expected to be around 7.50%. I think they will need to pay closer to 8.00% to gain support as their 2012 bond with a coupon of 8.00% is trading in the secondary market at close to par value.

South Canterbury Finance

SCF are offering 5.50% for 12 months, so falls within the Government Guarantee.

Fletcher Building

Fletcher Building shareholders have been offered the opportunity to take up new shares in the company at no more than $5.35 per share. The issue of new shares will have a dilutionary effect on the share price; however at their current price of $6.30 I would recommend investors take the opportunity to increase their holding.

Newsletter April 2009

April 1, 2009

We have had a wealth of fixed interest opportunities to choose from over the last nine months. I have no concerns about their quality, however I would caution all investors to think about the proportion of their funds allocated to what may be considered very similar securities. Here is a summary of the bonds we have had available recently:

 Bond                                              Interest Rate                                    Maturity

Marac Finance                                 10.50%                                           July 2013

Auckland Airport                                8.00%                                            November 2016

Tauranga City Council                     7.05%                                            December 2013

PGG Wrightson Finance                  8.25%                                           October 2010

South Canterbury Finance              8.00%                                            October 2010

Trustpower                                        8.40%                                             December 2015

Fletcher Building                              9.00%                                             May 2014

Fletcher Building                              9.00%                                             May 2016

Wellington Airport                             7.50%                                            November 2013

Fonterra                                              7.75%                                            March 2015

Tower                                                  8.50%                                            April 2014

Auckland City Council                     6.00%                                             March 2014

Contact                                               8.00%                                            May 2014

For most retired investors fixed interest is the primary source of income, outside any superannuation payments. Theory tells us we are more averse to risk as we age, and that we seek lower risk investments in retirement. I agree with this in part, however I won’t bore you again here with my views on the evils of inflation. The point I want to make here is that you should look at the maturities of your fixed interest investments when you are considering the various offers. Try to avoid having a large proportion of your fixed interest maturing at the same time as this can expose you to the risk of sudden changes in interest rates. In an ideal world you would aim to have investments maturing every four or six months to smooth out any such changes.

Babcock and Brown

The attempt by Babcock and Brown to restructure their subordinated notes failed, and the company has subsequently appointed an administrator. I don’t receive documentation directly from the administrator, however I can access it from their website so I will endeavour to stay informed about what is happening. The Babcock and Brown collapse has had an inevitable effect on the debt securities of its subsidiary BBI Networks. They have two securities listed, BBN010 (Sparcs) and BBN020, which are trading between $20 and $35 per hundred. Whether they can sell enough assets to repay these bonds is yet to be seen. The sale of 58% of Powerco for $423 million is a good start.

Bluestar Print

Very few sales of Bluestar Print bonds have occurred since the company injected more cash. Currently buyers are offering $35 per hundred for the bonds. Bluestar’s half-year results showed revenues of $304 million with after-tax profit of $25.8 million.

Nuplex

Nuplex shareholders would be extremely disappointed with the dilutionary effect the recent capital-raising has had on their share price. Holders of Nuplex capital notes, however, should be happy to see extra equity ranking behind their debt. The last sale of notes went through at $65 per hundred, a heavy discount, however no “Babcock and Brown.”

Difficulties such as these are always reflected instantly in the price of a company’s securities. The dilemma for investors is whether or not to sell out at such discounted prices. Hindsight is a wonderful thing, and Babcock & Brown investors would have happily sold last year at $50 per hundred now that their notes are worthless. Selling at a loss is one of the hardest investment decisions to make, however you must take the “sunk costs” (what you paid) out of the equation. Your question should be, “What is the best use of this money from today onwards?” Is it best left where it is? (hoping for a recovery in the price) or is it best cutting my losses and salvaging what I can? Unfortunately hindsight alone answers these questions fully, however not selling a security simply because its value is less than you paid for it is irrational.

 ING

I am fielding a large number of enquiries regarding ING. They have been in the news recently because of two fixed interest funds that have failed resulting in losses to investors. These funds were sold through ING and ANZ advisor networks as low risk investments, however turned out to be anything but. You should note that these funds have no connection (other than the manager) to the ING Property Trust listed on the stock exchange. 

UDC

UDC Finance is offering a special debenture rate of 5.00% for 18 months. This is valid until April 12, therefore falls within the Government Guarantee. The rate compares favourably with the trading banks who are offering 18 month rates of between 3.00% and 4.50%. UDC has a Standard & Poors credit rating of AA.

PLEASE CONTACT OUR OFFICE AS SOON AS POSSIBLE IF THIS OFFER IS OF INTEREST TO YOU (CLOSES APRIL 12)

NZ Post

NZ Post Group Finance has issued a prospectus seeking to raise $150 million of unsecured, subordinated notes (with the right to accept $50 million in oversubscriptions).

• Initial interest rate of 7.50%                                          Maturity date – November 2039
• Interest paid semi-annually                                            Minimum investment of $5,000
• Standard & Poors credit rating of A                             Closing date 22 April, 2009

The 7.50% return is the benchmark rate (5 year swap rate – 4.70%) plus the margin (2.80%). The very long term (30 years) is an obvious cause for concern, however NZ Post will conduct a remarketing process every five years that affords holders certain options. I will attempt to explain it simply here:

In 2014 (and five-yearly from then until maturity) NZ Post will offer new terms for the notes. Note holders will be given the opportunity to:

(a)    ask for repayment

(b)   stay invested regardless of the new terms of the notes

(c)    stay invested only if the new terms meet criteria you set

For the remarketing process to be successful, NZ Post must receive at least 25% responses under categories b and/or c, above. If the remarketing process is unsuccessful, holders are forced to continue holding their notes. If this happens the margin paid above the benchmark rate will be increased by 1.00% for the next five year period. There is clearly potential for this to become a long-term investment, however every five years you can ask for your money back, or be compensated by a further 1.00%.

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

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 20^th) however brokerage of 1% will have to be paid.

Newsletter February 2009

February 2, 2009

I have spent time since returning from the Christmas break working on recommendations for a number of clients with money to invest. It is clear that the next year is going to be one of compromise. We are now in an environment of low interest rates, relatively high inflation, and a volatile sharemarket. This is making it difficult for investors to:

• Generate the income they require
• Keep pace with inflation
• Stay within their risk profile

Satisfying two out of the three requirements is generally easy enough, however satisfying all three is now becoming harder and harder. A year ago we were enjoying interest rates of 8.00% to 10.00% without taking undue risk. The Official Cash Rate has been cut to 3.50% and this has significantly affected bank deposit rates and yields on corporate bonds. Those who took advantage of fixing longer-term rates last year will be pleased with that decision; however those with money falling due now will struggle to generate the income they have enjoyed previously.

Inflation has just dropped from an eighteen-year high of 5.10% to its current rate of 3.40% and this compounds the problem faced by fixed-interest investors. Once you have paid your tax on a 5.00% term deposit you are left with very little income if you want your capital to grow in line with the cost of living. I expect inflation to fall in the medium-term as the recession takes hold in New Zealand; however longer-term inflation could pose problems as our Government attempts to stimulate the economy.

Low returns force investors to seek out other opportunities, and this generally involves taking more risk. The sharemarket is offering very good yields at present; however there is no certainty around those yields. Corporate earnings are probably going to be impacted across most sectors through this year and that is likely to result in reduced dividend payouts.

How investors reconcile these factors needs to be decided on an individual basis. The options are:

• Spend less
• Mine your capital for a period
• Take more risk

Spending less is not particularly palatable but is at least something we have direct control over. Human nature dictates we usually spend at least what we earn (and as events of the last few years have shown some spend significantly more than they earn). How many people actually keep accurate records of their spending? You may be surprised if you did.

Mining your capital can be likened to mining the fertility of a farm. How important is it that your capital increases in value each year? Can you spend some of your capital and still maintain the long-term standard of living you desire? Unfortunately the hardest part of this decision is the fact we don’t know when we are going to die. If we did know it would be a simple case of doing the maths and spending your last dollar on D-Day. Something I find disturbing is the number of people I see of my parents’ generation who feel an obligation to leave their wealth to their children. These people have worked hard all their lives and are now going without in order to leave a legacy for their kids. Why is that? In my opinion we owe a debt to our parents, not the other way around. We enjoy a far better standard of living than our parents and grandparents ever did and that will continue ad finitum. Ensuring your capital keeps pace with inflation is a worthy goal, however make sure you are doing it for the right reasons.

Your aversion to risk is not something you can turn off and on – it’s something that should be reasonably constant, with less risk being taken as you age. Theory suggests we take more risk when we are younger because we have more time to ride out the volatility of riskier investments. In my opinion sharemarket investments require at least a five-year time frame, so don’t tie money up in shares that you may require in the short-term.

Fixed Interest

As we mentioned in our last newsletter we expect to see a number of good quality fixed interest opportunities come to the market in the early part of this year. Corporates are seeking money from the public in preference to more expensive bank funding.

Fonterra

Fonterra have issued a prospectus for an offer of $300 million (plus unlimited oversubscriptions) of unsecured, unsubordinated, fixed rate bonds. 

• Minimum interest rate of 7.75%
• Maturity date – 10 March, 2015
• Interest paid quarterly
• Minimum investment of $5,000
• Standard & Poors credit rating of A+
• Closing date – 09 March, 2009

The Standard & Poors rating report for this issue notes the fact that interest payments to bondholders have precedence over payments to suppliers of milk. “Core to the ratings is Fonterra’s co-operative structure, which means creditors benefit from the protection of priority payment, with milk payments to supplier-shareholders determined after expenses.” This bond issue will be very popular – Fonterra is New Zealand’s largest company and 7.75% represents a good rate in the current environment.

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

 We expect further issues though February and March from:

• Contact Energy
• BNZ
• Auckland City Council

Rates for these bonds are yet to be determined, however if you are interested in these please let me know so we can ensure an adequate allocation.

Shares

The sharemarket has posted a modest gain since reopening in 2009 – up 2.00%. The volatility is not as pronounced as it was through the latter half of 2008, although volumes still remain low. We are seeing interest being shown in the traditionally higher yielding stocks as investors look outside bank deposits for a return on their money. Yields of some shares on our market are listed below:

Company                                                Price         Dividend (Cents/Share)        Gross Yield

AMP Office Trust                                       0.95                       7.67                                  8.84%

Auckland Airport                                       1.85                       8.20                                  6.54%

Cavalier                                                      1.92                     20.00                               15.39%

Contact Energy                                          6.73                     28.00                                  6.21%

Fisher & Paykel Appliances                   1.27                      14.00                                12.40%

Fletcher Building                                      5.52                      48.50                                12.95%

Freightways                                               2.85                       18.75                                  9.82%

Goodman Property Trust                        0.95                        9.99                                 10.64%

Hallenstein                                               2.19                       27.00                               18.32%

Michael Hill                                               0.52                         3.20                                 9.18%

Opus International                                  1.08                          7.10                                 9.93%

Pumpkin Patch                                        0.92                          7.50                              12.30%

Restaurant Brands                                0.64                            6.50                              14.45%

Sky City Entertainment                          3.02                          21.50                            10.40%

Steel & Tube                                            2.80                          19.00                              9.95%

Telecom                                                   2.64                           28.00                           14.60%

Vector                                                       2.17                           13.25                              8.79%

These yields are based on today’s share price, and the dividends paid in the previous year. The gross yield is calculated after any imputation credits are added to dividend payments. Obviously these yields cannot be guaranteed as dividend payments fluctuate with market conditions.

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