Brian Gaynor: Govt and companies keep keen investors in dark

The rise in house prices hasn't been positive for the economy as a whole. Photo / Janna Dixon

The Savings Working Group's final report, which was released this week, is yet another attempt to solve our savings and investment problem.

However, the unwillingness of Finance Minister Bill English to fully embrace its recommendations and a frustrating Tower annual meeting showed we are still a long way from weaning New Zealanders off residential property and encouraging them to invest in listed companies.

The data in the accompanying table illustrate our savings and investment problem.

These figures need to be highlighted again and again because a large number of individuals, many of them influential, continue to believe that it is far more sensible for us to borrow rather than save.

The two left-hand columns show the country's total overseas debt and total household or individual debt.

New Zealand's overseas debt has surged from $75 billion to $253 billion since 1995 and now represents 132 per cent of GDP compared with 81 per cent 15 years ago.

Government offshore debt has risen from $23 billion to $32 billion over this same period while private sector borrowings, mainly by the banks, have surged from $52 billion to $221 billion.

The problem with debt is that it has to be repaid or rolled over and this places borrowers at the mercy of lenders. If something goes wrong, for example a major outbreak of foot and mouth disease or a sharp drop in commodity prices, then overseas lenders may be reluctant to roll over New Zealand's debt, both government and private.

This would place us at the mercy of international lenders as Greece, Portugal and Ireland have been in recent months.

Domestic banks have been the major contributors to New Zealand's escalating offshore debt as they now account for $150 billion, or 59 per cent of the county's total foreign debt, compared with less than 50 per cent in 1995.

The banks essentially borrow overseas and lend to individuals to purchase residential property.

As a result total household debt has swelled from $45 billion to $183 billion since the end of 1995.

This has led to a dramatic increase in the total value of our housing stock, which according to the Reserve Bank has ballooned from $183 billion to $599 billion over the past 15 years.

The housing value increase comprises a 24 per cent growth in the number of houses, from 1.39 million to 1.72 million, and a 164 per cent rise in the average house price.

Existing home owners have benefited from the explosion in house prices but this hasn't been positive for the economy as a whole. There are a number of reasons for this, including:

* Most of the house purchases have been funded from overseas borrowings and we have to pay interest on these borrowings whereas residential property doesn't earn any foreign exchange to compensate for this.

* House price increases, without any additional expenditure on these houses, does not create any additional employment or economic activity whereas long-term increases in the value of listed companies are usually accompanied by higher employment and economic activity levels.

* The sharp increase in residential property values has made housing less affordable for the younger generation. This is an effective wealth transfer from the younger to the older generation.

The two right-hand columns, which reflect our savings and investment record, paint a rather depressing picture. Our managed funds total has grown very modestly, even though $7 billion of KiwiSaver funds is included in the September 2010 figures of $64 billion.

In addition 45 per cent of our managed funds are now invested overseas, compared with only 23 per cent 15 years ago.

This is clearly reflected in the sharemarket, which is now worth only 28 per cent of gross domestic product compared with 53 per cent at the end of 1995.

There is nothing wrong with residential housing and borrowings but the balance between the amount invested in housing and the country's productive economy, as reflected by the NZX, is far too wide in New Zealand.

The Savings Working Group has made some useful recommendations but the problem with its report is the inadequate terms of reference and there is no Government minister willing to take full responsibility for the borrowing, savings and investment issue.

We have had the latest Working Group, Capital Market Development Taskforce, securities markets' review and increased regulatory powers by the Reserve Bank but there is little feeling that the Government is taking a big picture, co-ordinated approach to this issue.

But we shouldn't be totally relying on the Government to solve this problem, particularly as a major contributor to our savings and investment problems is the poor communication between our business leaders and the investing public.

The Tower annual meeting, which was held in Auckland on Wednesday, was a perfect example of this.

Tower has had its ups and downs over the past decade but shareholders have benefited from the spin-off of its Australian operation. Nevertheless, the total number of shareholders has fallen from 138,800 in December 2000 to 68,100 at the end of 2005 and 55,500 last November.

The company is undergoing a major transformation whereby its General Insurance, Life/Health and Investment divisions are being co-ordinated under one umbrella, particularly from a marketing point of view, instead of operating as separate business silos.

In other words, the group is attempting to cross-sell products to customers of the different divisions and one would have thought that 55,000-plus shareholders should be included in this strategy.

Managing director Rob Flannagan commented before the meeting that shareholder turnout was low and it was easy to understand why once the meeting began.

Chairman Tony Gibbs' address was short as were the presentations by Flannagan and the company's chief financial officer, Eric O'Sullivan.

These addresses were not accompanied by power point presentations whereas the December post-2010 year result briefing to broker analysts and institutions was complemented by a 30-page overhead presentation.

Tower's briefings to analysts are informative, friendly and questions are fully answered whereas this week's annual meeting was relatively uninformative, tense and Gibbs was reluctant to give full answers to questions from the floor.

Unfortunately, this is a common occurrence in New Zealand.

Tower also missed an opportunity by not having representatives of its different divisions explaining and attempting to cross-sell products to shareholders.

A further issue from the Tower annual meeting is the increasing age of our boards of directors and the absence of independent directors under 50.

The average age of the Tower board appears to be well over 60, there doesn't appear to be any independent director under 50 and one of the directors re-elected this week is 70 years of age.

Why doesn't Tower have at least one independent director under 50?

Tower has delivered good returns to shareholders in recent years and has adopted a new growth-orientated strategy but the group's board of directors hopelessly undersold these positive points at this week's annual meeting while failing to connect with shareholders.

Therefore it is not surprising that Charlie's, which has only 2500 shareholders, seems to have a bigger turnout at its annual meeting than Tower, which has 55,500 shareholders.

This is because the fruit drinks company makes a big effort to communicate with attendees and it has a good mix of youth and experience at the board table.

How can we expect the Government to rescue our savings and investment sector if some of our major companies make little attempt to promote themselves to the wider investment public?

* Brian Gaynor is an executive director of Milford Asset Management, which has investments in Tower on behalf its clients.