Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: The winners and losers in a tough year

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Photo / Thinkstock
Photo / Thinkstock

This year was not a great year for equity investors. The NZX-50 Gross Index, which includes dividends as well as capital movements, was down 1.0 per cent, while the ASX All Ordinaries Index, which includes capital movements only, was off 15.2 per cent in Australian-dollar terms.

This follows a 2.4 per cent increase in the NZX-50 Gross Index in 2010 and an 18.9 per cent rise in 2009.

Although the NZX had a disappointing year it did much better than most other sharemarkets.

It was the third-best-performing developed market behind only Ireland and Wall St in United States-dollar based gross returns, according to the MSCI indices.

In addition, a number of NZX-listed companies delivered excellent returns as illustrated by the accompanying table.

These figures demonstrate the importance of stock selection, as the three best performing NZX-50 Gross Index companies - NZX, Port of Tauranga, and Mainfreight - had an average gross return of 36.1 per cent, while the three worst performing companies - Goodman Fielder, Pumpkin Patch, and Rakon - had an average negative return of 62.8 per cent.

The retail sector performed particularly poorly, while the listed property entities performed particularly well.

All six property entities in the NZX-50 Gross Index had positive returns, with Argosy Property the best on 8.2 per cent and Kiwi Income Property the worst on 0.5 per cent.

The utilities and infrastructure companies also performed better than average and showed once again that they are good defensive investments in difficult economic conditions.

Port of Tauranga, Telstra, Telecom, Auckland International Airport, Vector, TrustPower, and Infratil were all in the top half, with only Contact Energy in the bottom half of the list.

Five Australian companies - AMP, ANZ Bank, Goodman Fielder, Telstra, and Westpac - are included in the NZX benchmark index.

These had an average negative return in excess of 18 per cent, with Goodman Fielder, an Australian company, having the worst return of all the NZX-50 index companies.

Chorus and Heartland New Zealand were not listed for the full year and as a consequence do not have a performance figure.

The 2011 performance figures are interesting in light of the recent debate at the corporate governance conference in Washington DC sponsored by the European Corporate Governance Institute and Columbia Law School.

The debate centred on the difference between the United States corporate governance model and the European model, particularly in Scandinavia.

A number of attendees argued that a huge gap had developed between owners and management in the United States and this was having a negative impact on sharemarket returns.

Mats Andersson, chief executive of the Fourth Swedish National Pension Fund (AP4), told the International Herald Tribune after his conference address that "in the US you can more or less do whatever you want without having the support of owners. If I could decide on my own salary, I would certainly love that system".

The central point of Andersson's argument is that owner engagement is very important for a company to be successful, as is clearly evident with Amazon, Apple, Berkshire Hathaway, Facebook, Google, Microsoft, Oracle, Wal-Mart, and other companies.

American capitalism thrived on the owner engagement model, particularly in the 1800s, but there has been less and less engagement between owners and management as institutional investors have become more dominant.

European corporate governance experts argue that their model is more successful because the descendants of the original founders maintain significant shareholdings and continue to have a say in the running of these companies.

If the ownership engagement model is superior then one would expect a number of NZX-listed companies to perform much better than they have, particularly Pumpkin Patch, Rakon, Cavalier, and the two Fisher & Paykel companies.

Pumpkin Patch and Rakon have been particularly poor performers, although changes have been made at the top of the children's clothing retail group.

Rakon, however, refuses to admit it has any problems and continues to make optimistic statements that are rarely achieved.

Cavalier has been adversely affected by the downturn in the building industry, while the two Fisher & Paykel companies have disappointed in recent years.

The shareholdings of the two founding Fisher & Paykel families are widely dispersed and most family interest in the two listed companies seems to have waned.

The two top performing companies in 2011, NZX and Port of Tauranga, do not have any family involvements and are run by professional managers. Both companies have substantially outperformed the NZX benchmark index in recent years.

The NZX was a strong performer this year even though chief executive Mark Weldon announced he would be leaving in the first half of next year.

This performance is in stark contrast to the general consensus a few years ago that NZX's share price would plunge when Weldon announced he was leaving.

Port of Tauranga's success has been due to strong governance and an excellent management team.

The company has shown the benefits of a stock exchange listing as its main competitor, Ports of Auckland, has performed poorly since it was acquired by Auckland City.

Mainfreight and Ryman Healthcare reflect the best features of ownership engagement.

Mainfreight chairman Bruce Plested, who owns 17.4 per cent of the company, makes an extremely positive ownership contribution. He has played a huge role in the success of the company, including his willingness to give full management control to managing director Don Braid.

Ryman Healthcare founder Kevin Hickman, who owns 7.2 per cent of the company, continues to play an important role as a director.

Ryman also makes a huge effort to engage with shareholders, unlike a large number of NZX-listed companies.

The Warehouse, which is a classic example of owner disengagement, has been one of the most disappointing sharemarket performers.

The discount retailer would surely benefit if founder Stephen Tindall re-engaged with the company or sold his shareholding to a more engaged owner.

Historical performance figures are a useful tool for investors because the best ranked companies rarely maintain their high position year after year and the worst performing companies often recover, particularly if they don't have deep-rooted structural problems.

Nevertheless, investors and brokers tend to prefer companies that have performed well in the past and shun those that have underperformed.

For example, in Wednesday's Business Herald, 10 of the brokers' picks were from the top of the 2011 performers list. These were Ryman Healthcare, which was picked five times, Mainfreight twice, and Telecom, Skellerup, and Auckland International Airport once each.

Only three of the 10 worst performing 2011 companies are included in the 2012 brokers' picks. These are Fisher & Paykel Appliances, Pumpkin Patch, and Nuplex.

There is a strong chance that at least one of the 10 worst performing stocks this year will be in the top 10 next year.

It is difficult to pick which ones, but the important issues to look for are corporate governance, whether the poor 2011 performance was due to structural or cyclical issues, and which companies will benefit from an improvement in their industry conditions.

There are no easy gains in the current environment but investors who identify successful turnaround stories should do particularly well. For those with a more cautious approach, then the utilities and infrastructure companies are a safer bet.

This group of companies accounted for seven of the 2012 brokers' picks, not including Mighty River Power or any of the other partially privatised companies that may list in 2012.

The clear message from brokers seems to be that unless you have the time and knowledge to identify turnaround companies then utilities and infrastructure companies may be the best way to go in 2012.

* Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management, which holds shares in most NZX50 Index companies on behalf of clients.
bgaynor@milfordasset.com

- NZ Herald

Brian Gaynor

Investment columnist for the NZ Herald

Brian Gaynor has written a weekly investment column for the Weekend Herald since April 1997. He has a particular passion for the NZX and its regulation. He has experienced - and suffered through - the non-regulated period prior to the establishment of the Securities Commission in 1978 and the Commission’s weak stewardship until it was replaced by the FMA in 2011. He is also a Portfolio Manager at Milford Asset Management.

Read more by Brian Gaynor

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