Brent Sheather: One out of four ain't bad

Once the music stops, the Bankers Association wants KiwiSavers to be forced into buying annuities. Photo / Thinkstock

The first two weeks of May have seen some significant developments in retail investor-land.

First off we've had the Mighty River float and the government has drawn a line in the sand and treated retail investors well by allocating them virtually all the shares they wanted at the expense of institutional investors both local and overseas.

Mums and Dads committed almost a billion dollars to Mighty River which is a huge effort and should give everyone confidence that retail investors can recognise a good deal when they see it - although with the price currently well below the issue price it may take longer for MRP to work out as a good deal.

A cynic might observe that Auckland residential property values are appreciating by this amount each week at the moment but that can change. The downside of the MRP float is, as this column has argued previously, the fact that the less fortunate members of NZ society were the sellers thus they are now more vulnerable to rises in energy prices.

It's also a sad commentary on Treasury that they could have acquiesced to a plan that saw the sale of an asset on a cash flow yield of almost 10 per cent when they could have borrowed long term at around 3 per cent. But we all make mistakes.

We can contrast the availability of Mighty River equity to retail investors with the fact that other SOE's have adopted a short-sighted, low-cost approach to debt sales which have meant that Mum and Dad haven't been able to participate in attractive offers.

Some time ago Transpower was badly advised and sold long dated inflation index bonds at a 4 per cent real yield when secondary market yields were much lower than that. To make matters much worse, in order to minimise compliance costs, the Treasurer of Transpower decided not to make this offer available to retail investors. Thus there was an unnecessarily large transfer of wealth from the public of NZ to institutional investors both here and overseas. Let's hope that the Minister for SOE's Tony Ryall, doesn't let this sort of thing happen again but full credit to the government for the way they allocated shares in Mighty River.

That's the good news and, whilst MRP dominates, there were in early May, a series of less fortunate events which in my view detract from confidence in our investment markets.

First up was an article in the Herald by Kirk Hope, Chief Executive of the NZ Bankers Association (even this title is spin because almost all our banks are Australian) who again rehearsed the finance industry's standard line that we should all be saving more. However Kirk then accidentally let the cat out of the bag when he revealed that the finance industry doesn't actually want us to get our hands on our KiwiSaver funds when we retire but instead be compelled to purchase an annuity. Everybody in the know knows that this was always the ultimate endgame for KiwiSaver and the public once they realise they have been tricked will not be amused, to put it mildly.

The industry's motive is obvious. Once Mum and Dad withdraw their KiwiSaver Fund the music stops and by forcing the purchase of an annuity the good times are extended for another 20 years or so. Of all the unfortunate products inflicted on retail investors, annuities are up there with the worst because their pricing is opaque to the extent that most retail investors can't write an internal rate of return model to actually see that the return they are getting is pathetic.

We will cover annuities in detail soon but note that the regulatory authorities in the UK have just commenced a major probe of bad behaviour by institutions in the annuity market.

Next up in May's "series of unfortunate events" was the Stock Exchange announcement from Kingfish Limited that it had paid another performance fee to its manager Fisher Funds Limited.

The fee of $3m plus GST was for the year ended 31 March 2013. The fee was paid despite KFL underperforming the Midcap Index. Over its life KFL has focused on mid-sized companies so the Midcap Index is arguably the most appropriate equity index against which to compare its performance. In the year ended 31/3/2013 we calculate KFL's NAV return as being around 21 per cent whereas the Midcap Index returned about 33.7 per cent.

The reason Fisher Funds got a performance fee is because its management agreement specifies that its performance is benchmarked against the bank bill rate plus 7 per cent. Whilst the performance fee payment is completely legal in NZ it is very different to common practice in the UK where share funds have a share benchmark for performance determination, bond funds have a bond fund benchmark etc etc.

The payment of performance fees to Fisher Funds also looks inappropriate in light of KFL's long term performance. This graph shows our estimate of the net asset value performance of the Kingfish Fund since inception compared to the Midcap Index.

On these figures it seems that Kingfish has marginally underperformed the index since inception but despite this Fisher Funds has so far been paid a total of some $7m in performance fees plus GST which takes the total to $8m in performance fees, in addition to management fees.

To put this in perspective KFL's initial market capitalization was $100m. Kingfish trades at a narrow discount to NAV but with these sort of fees imposed on shareholders it is arguable that the discount should be much, much wider. The KFL directors have publicly agonised over the level of KFL's discount. With this fee structure a large discount is logical. Fisher Funds should acknowledge overseas best practice and eliminate the performance fee before it is compelled to do so by inevitable changes in local legislation.

In an email to me Carmel Fisher made the point that since inception Kingfish has outperformed the broad NZ stockmarket and highlighted the corresponding growth in net asset value that shareholders have enjoyed.

The last unfortunate event was the inexplicable behaviour of the Institute of Finance Professionals New Zealand Inc (INFINZ is a member based industry body for professionals working in NZ's wholesale finance and capital markets), in awarding equity deal of the year to the Fonterra issue.

Investors will recall that most of the Fonterra issue went overseas to institutional investors despite Fonterra being NZ's largest company by sales. To make matters worse the issue was mis-priced and farmers sold at the low price of $5.50 delivering an immediate 21 per cent gain to overseas investors. Since then, with the price now at $8.00, a bonus issue and a dividend, overseas shareholders have made a short term gain of around 52 per cent at the expense of NZ farmers. Not really a great deal one would think unless of course you were looking at it from an overseas investors' perspective. If I was a farmer I would be throwing a gumboot at somebody.

Disclosure : Brent Sheather owns shares in Mighty River, Transpower Bonds, the Fonterra Shareholders Fund (bought after the IPO unfortunately) and is a member of Infinz.

Brent Sheather is an Authorised Financial Advisor.