ASB remarks just sour grapes, say finance companies

Finance companies have come out fighting after one of the country's largest fund managers warned their debentures were "seductive" and posed unnecessary risk to small investors.

Yesterday, many labelled the comments by ASB Group Investments "sour grapes".

Elders Finance and Hanover Group executive chairman Mark Hotchin said the comments "smacked of desperation" as fund managers were losing money and market share to finance companies.

"And so they should be because the returns are better and they are safer."

He was angry finance company debentures had been called "seductive".

"It's seductive because it's real. You're the first cab off the rank so you get paid first."

Finance companies committed to paying a certain rate of return, whereas investors did not have that commitment from fund managers.

On Tuesday, ASB Group Investments head Rob de Luca said investors put their money with finance companies seduced by the phrase "first ranking secured deposits" but, in many cases, their money was anything but safe.

After analysing the financial reports of its competitor finance companies - guardians of more than $8 billion of hard-earned cash - ASB said many were earning weighted average interest margins of between 15 to 40 per cent, but were paying investors well below that at between 9 to 10 per cent.

De Luca said a lot of that money was lent out to highly geared property developers and those returns were not appropriate returns for that risk.

Although finance companies have had a dream run in recent years on the back of a rising property market, De Luca expected returns on the property market and investment in general to be more subdued going forward. This meant investors were not getting the security they would expect. Many finance companies felt ASB was painting the industry with too broad a brush.

St Laurence Group managing director Kevin Podmore agreed investors were not getting appropriate returns for their risk in some instances.

"But not everyone is charging 40 per cent interest rates."

He suggested an independent rating process was needed to help investors gauge the level or return against the risk.

Western Bay Finance chairman Jim Smylie said banks created a great opportunity for finance companies 10 years ago when they "wouldn't help the average man in the street".

"Now they've realised what they have missed out on and are fighting for market share and trying to get back into the market we're in."

While it was valid to urge investors to be cautious about where they put their money, it was up to the market to decide whether the returns on their risk was appropriate.

Smylie did not think there was cause for alarm about an industry meltdown if the property cycle took a turn for the worse.

"I think there's going to be a correction and I think some finance companies will find it difficult but they will just be absorbed by bigger players like ourselves."

North South Finance managing director Darryl Eastgate was surprised at ASB's criticism.

"North South has an $8 million overdraft from ASB, so the bank's security ranks pari passu with our investors."

ASB Group Investments is New Zealand's third-largest fund manager with more than $5.3 billion under management.

Asked if the statement by its investment arm was as strong as the bank anticipated, ASB head of corporate affairs Linley Wood said the aim was to urge caution and to remind investors of the message the greater the return, the higher the risk.

"We know there are a lot of substantial well-governed finance companies out there and we do not want to disparage them or infer that investor deposits were not safe."