Money: Let's hang on to a Kiwi taste

By PHILIP MACALISTER

The New Zealand and Australian Stock Exchanges are busily debating the arguments for and against a merger.

If they do merge and Sydney becomes the focus, can New Zealand still find a niche? Could it become the funds management centre, as Edinburgh has done to London.

Fund managers and private investors are the biggest users of the exchange, a point often overlooked as the debate focuses on sharebrokers or the listed corporates.

A merger, or takeover, of the New Zealand exchange has three key impacts for private investors.

New Zealand shares are one of the most important parts of an investor's portfolio and investors traditionally have what is known as a home-country bias.

A merger could have a significant, and arguably, negative impact on the financial services industry in this country.

The outcome of any merger potentially affects the economic well-being and survival of the country.

Fund managers seem to be leaning towards the anti-merger side of the argument. A survey by consulting actuaries Melville Jessup Weaver says that of the nine managers asked, six were against, two were in favour but had reservations and one wanted more information.

Some would argue that fund manager views are irrelevant because they are not the owners of the exchange. But they are major users of it and they do represent the investment interests of hundreds of thousands of investors.

BT Funds Management chief executive Craig Stobo is one who is keen to make that distinction. As a user, he is quite happy with the current set-up and questions whether a takeover is a good idea.

He says the two exchanges have different corporate objectives. The Australian exchange is keen on expanding and increasing its revenue, while the New Zealand exchange has focused on running a cost-efficient bourse and has been successful.

"I can already buy Aussie shares," he says. "We are already there in terms of transtasman choice."

Armstrong Jones chief investment officer David McClatchy is less committed to passing a verdict. In principle, he says, we should be indifferent to a merger because we can invest in all these capital markets. And any merger would need to ensure that New Zealanders retain some sovereignty.

For instance, while some of the big stocks may be included in the major headline indices such as the ASX100, there should, in a merged entity, also be an NZSE40, 10 and small-cap index.

"Mum and dad investors have the highest level of comfort in investing in their local market," he says. "They will want some barometer [to measure performance by]."

Governance is another issue of fundamental importance to fund managers and private investors. The Government has already done some work here, specifically in the area of insider trading.

Mr McClatchy says there needs to be some governance broadly similar to what New Zealand investors are used to, while Mr Stobo believes we should adopt rules similar to those used in the United States, but police them locally.

Coronet Asset Management director John Phipps, who opposes the merger, takes the governance issue one step further.

He says the poor overall performance of the New Zealand exchange is nothing to do with the bourse itself, but can be blamed on individual company management and corporate governance issues.

His concern is that if the exchanges are merged New Zealand companies will be ranked against Australian ones and they will not stack up very well. Therefore, New Zealand companies will struggle to find investors and, should a takeover occur, share prices for poorly ranked companies could fall.

Mr McClatchy counters that argument by saying that putting the two exchanges together may expand the pool of potential company directors. This could lead to better company governance and management.

Arcus Investment Management head of equities Simon Botherway is also hot on the poor performance of company management and directors.

"Staggeringly, the directors and managers [current and former] of many [poorly performing] companies are still lauded as icons of the business community.

"A fresh approach is required. We would welcome an influx of new talent into the severely limited pool of professional directors in New Zealand, many of whom warm multiple board seats but perform no useful function other than to ensure the boxes are ticked and directors' fees periodically hiked."

One of the biggest issues, from an investment and economic argument viewpoint, revolves around the primary function of a stock exchange. That is, an exchange's role is to provide a mechanism where companies can raise capital to grow and flourish.

On recent performance, Australian investors have shown little inclination to support New Zealand companies. Under a merger exchange scenario, especially one where New Zealand companies rank poorly, a lack of capital will lead to withering economic performance.

Guardian Trust Funds Management head Anthony Quirk not strongly opposes a merger, but he wants to make sure New Zealand develops a strong financial services industry that includes fund managers, share brokers and research analysts.

He says the merger question and the Government's proposed multibillion-dollar superannuation fund are two key catalysts in this area.

"While Sydney is going to be the investment management centre for Australasia and, they hope, for Asia as well, this does not mean New Zealand cannot have a niche funds management industry as well.

"My vision is that New Zealand becomes the Edinburgh of the South Pacific," Mr Quirk says.

Edinburgh has a reasonably large funds management industry despite London being the financial centre of Britain and, increasingly, Europe.



"Edinburgh has continued to thrive as it has the critical mass to justify a niche funds management industry in an increasingly globalised sector.

"It is especially attractive to family-minded or clean-and-green investment management professionals who prefer to work there rather than in the rat race of either London or New York.

"The [Big Cullen] Fund may also help to bring about a similar situation in New Zealand, where investment professionals can stay for lifestyle reasons and still be part of a vibrant and healthy financial investment community."

Mr Quirk points out that an increasing number of New Zealand investors are looking at the Australasian sharemarket as their home, or local market, as opposed to just New Zealand.

Like Mr McClatchy, he says New Zealand company indices could be maintained and enhanced in a merged exchange.

Another recent investment fashion can also be used to argue in favour of a merger and against the continued existence of country-specific exchanges.

Fund managers and institutional investors are embracing the trend for sectorial investing; that is, investing in industries globally, not countries specifically.

The other factor that suggests existing stock exchanges are the stegosaurus of the 21st century is the emergence of electronic commerce networks. New Zealand has its own in the form of iExchange.

Mr Stobo says other options for raising capital include looking overseas and setting up a rival exchange in New Zealand.

These last points reinforce the view that when a decision is made about the future of the New Zealand Stock Exchange more than one option has to be put on the table for discussion.

* Philip Macalister edits online personal finance magazine Good Returns. He can be e-mailed at philip@goodreturns.co.nz