Fund managers respond to NZX chief criticism

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Fund managers say the poor performance of many recent sharemarket floats has impacted investor appetite for new listings.

They were responding to an opinion piece by stock exchange boss Tim Bennett in today's Herald in which he criticised the investment industry for being unwilling to invest in small Kiwi companies.

In the article, the NZX chief executive said worrying signs were emerging that New Zealand's capital markets were losing momentum.

An example of this was the small number of initial public offerings this year.

"We have had similar market conditions to Australia but will only have four IPOs in 2015 compared to around 40 on ASX," Bennett said.

"Adjusted for market size, New Zealand should have had six to eight this year."

He said this wasn't because of lack of local companies looking for capital.

"One of the issues is that parts of our funds management community seem unwilling to research and invest in smaller New Zealand companies - a position at odds with their Australian counterparts," Bennett said.

"New Zealand fund managers seem in many cases to be content passively managing KiwiSaver funds at high margins."

Paul Glass, principal at Auckland's Devon Funds Management, said the poor performance of many recent IPOs had affected investor appetite.

"While Tim raises some valid points about too much Kiwisaver money being passively managed and the need for all participants to work together to improve the depth of our capital markets, it also needs to be understood that our first duty as fund managers is to our clients and we will not invest in poor quality or inappropriately priced businesses," Glass said.

"Unfortunately, the poor performance of the majority of recent IPOs only reinforces that view. Where we have been able to identify good quality new listings that have been attractively priced, like [cinema software firm] Vista Group, we have been happy to take a significant position. My message is that the New Zealand market is absolutely open for new listings, in fact we actively want and encourage them, but they need to be attractive investment opportunities."

Many of the 12 main board IPOs that took place last year have disappointed investors.

Shares in healthcare software developer Orion Health, for example, have fallen 45 per cent, to $3.11, since they listed in November 2014, while Intueri Education Group shares are trading 77 per cent below their $2.35 listing price of May 2014.

Meanwhile, Bennett also said the poor reception NZX's new NXT market - targeted a fast-growing firms valued at $10 million to $100 million - had received in some quarters of the market highlighted the "disappointing 'glass half empty' approach parts our financial community take to business development and change in New Zealand".

Rickey Ward, New Zealand equity manager at investment firm JBWere, said commentary from market players, including fund managers, could appear to be negative.

"But you've got to put it into context - at the end of the day they're investing someone's money so they've got to justify why they should invest a single dollar into any investment," he said.

Richard Stubbs, of fund manager Castle Point, said firms such as his needed to be skeptical, particularly when it came to new listings.

"Without a doubt you need to have a healthy level of skepticism, especially with IPOs because history will tell you that it's worth being cautious," he said.

"Provided there are quality companies wanting to list on the sharemarket, I'm absolutely certain that there's appetite for them."

Another market source, who requested anonymity, said regulatory risks introduced by the Financial Markets Conduct Act, which came into force last year, were forcing fund managers and advisers to "standardise" their approach through having a bias towards larger, more widely held and researched stocks, as well as bonds.

He said investors were sometimes afraid of going out on a limb and investing in new listings of small and mid-sized firms that hadn't been researched by brokers, or attracted investment from other managers.

"If I'm not holding hands with others - if I haven't got a broker report or other investors in there with me - when the shit hits the fan and they throw me into court it's going to feel very lonely," the source said.

"We all agree that the market had to be tidied up, but in essence what's happening is a massive standardisation of product and output and that is just the nature of what's going on here."

Bennett also wrote that increased compliance costs resulting from the new regulatory environment could force brokers or advisers out of the market, or inhibit the development of smaller fund managers.

The source said the new compliance regime, through which fund managers must obtain a license from the Financial Markets Authority (FMA), was "costly not just in money but also resource".

He agreed with Bennett's comment that it may impact the development of smaller fund managers.

FMA chief executive Rob Everett said the new licensing regime had been "broadly welcomed" by fund managers.

He said it brought New Zealand into line with international standards.

"We don't believe the new regime is leading to standardisation since The FMC Act allows for innovation in products and services, and the licensing regime for fund managers has been created to allow for smaller firms to apply," Everett said.

"Whilst we acknowledge that the bar is being raised and that this creates additional burden for everybody, we are working closely with the industry in order to set and articulate sensible expectations and to consider carefully the impact and burden the requirements would impose on firms."

Another fund manger, who also requested anonymity, said it was "a bit rich" for Bennett to be criticising the investment industry when NZX's own shares had performed so poorly on the stock exchange in recent years.

Bennett, in his Herald piece, criticised the media for publishing anonymous comments from market sources.

"As an important shaper of public opinion, the media can amplify this negativity by allowing unnamed sources to deride business people and ideas, or hide behind anonymous comments, which can be genuinely damaging," he said.