Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: KiwiSaver investors miss NZ market gains

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Data reveals low growth of market and continuing fall of overseas ownership

The biggest problem with the NZX is its lack of growth. Photo / Richard Robinson
The biggest problem with the NZX is its lack of growth. Photo / Richard Robinson

The evolving ownership of NZX-listed companies has been highlighted in the recently released Crown Ownership Monitoring Unit annual report and Morningstar's Quarterly KiwiSaver performance survey.

These show that Government agencies now own 6.3 per cent of the NZX's total market cap and most KiwiSaver investors, who own only 1.9 per cent of the domestic sharemarket, have missed out on the market's strong performance in 2012.

Additional figures compiled by Goldman Sachs show that overseas ownership of NZX-listed companies continues to fall.

The NZX ownership data, which goes back to 1989, illustrate a number of trends including the low growth of the domestic market, the rise and fall of offshore ownership and the reduced holdings by retail investors.

The biggest problem with the NZX is its lack of growth, with total market capitalisation increasing from $48.2 billion in October 1987 to just $55.5 billion in June 2012 and $66.1 billion at the end of 2012.

By comparison the total value of the ASX has risen from A$257 billion in October 1987 to A$1186 billion in mid-2012 and A$1336 billion at the end of the year.

It was quite frightening to hear a leading investment industry executive arguing this week that the NZX was heading into bubble territory when it has had so little growth over the past 25 years. The following figures illustrate this:

The total market value of the NZX was equal to 90 per cent of New Zealand's GDP before the 1987 crash but it now represents only 32 per cent of GDP. By contrast, the ASX's total market cap represents 90 per cent of Australia's GDP.

The NZX50 Capital Index stood at just 2311 at the end of 2012 compared with an all-time high of 3969 in September 1987. The Australian All Ordinaries Index, another capital index, has risen from its pre-1987 crash high of 2306 to 4659 at the end of 2012.

Finally, the total value of New Zealand's residential property has soared from $100 billion in 1987 to $630 billion at present, according to the Reserve Bank, whereas total market value of the NZX has risen from $48.2 billion to just $66.1 billion over the same period.If the NZX is overvalued then it is a terrible indictment of the lack of ambition of the New Zealand business community and/or the unwillingness of the investment sector to fund growth-orientated companies.

The figures also demonstrate our complete infatuation with residential property, with the banks playing a major role in encouraging this addiction.

The change in foreign ownership is another characteristic of the NZX. The domestic market was more than 90 per cent New Zealand-owned in the mid-1980s but overseas ownership increased dramatically in the 1990s, mainly because a number of former state-owned enterprises had large overseas shareholders.

These included Telecom, TranzRail and Air New Zealand.

Offshore ownership peaked at 60 per cent at the end of 1997, an exceptionally high percentage by international standards.

Foreign ownership has fallen steadily in recent years as overseas corporates have sold their stakes in former Government-owned assets and a number of companies with large overseas shareholders, including breweries and media companies, have been fully acquired by these majority shareholders.

Goldman Sachs estimates overseas investors owned 35.1 per cent of NZX companies, by sharemarket value, in June 2012.

An estimated 13 per cent was held by offshore corporates, including stakes in Contact Energy and Sky TV, with the remaining 22.1 per cent mostly owned by offshore fund managers. The latter figure incorporates large positions in a number of NZX listings, including Michael Hill International and the Fonterra Shareholders' Fund.

Another feature of the NZX is the decline in individual ownership from 44 per cent at the end of 1989 to 23.3 per cent in mid-2012.

The latest Goldman Sachs NZX ownership survey shows that NZ managed funds now own a higher percentage of the market (23.5 per cent) than individuals (23.3 per cent) for the first time.

The 2012 Crown Ownership Monitoring Unit annual report shows that the five Crown Financial Institutions own 6.3 per cent of the NZX's total market cap compared with 4.9 per cent three years ago.

These are Accident Compensation Corporation, with $20.4 billion of total investments, Earthquake Commission ($3.1 billion), Government Superannuation Fund ($3 billion), National Provident Fund ($2 billion) and New Zealand Superannuation Fund ($18.7 billion).

These investment funds own 15.6 per cent of Skellerup, Auckland International Airport (14.4 per cent), NPT (13.9 per cent), Restaurant Brands (13.6 per cent), Ebos (13.2 per cent), Kathmandu (11.6 per cent) and Precinct Properties (11.2 per cent).

The Monitoring Unit's annual report notes that these five investment funds have grown much faster than the domestic sharemarket. This is a drawback for these organisations because they have generally achieved higher returns in New Zealand in recent years.

The report notes that because of the small size of the NZX "both ACC and NZSF are near the upper limit of their capacity for investment in New Zealand equities given their respective investment strategies".

This comment reinforces the criticism that Fonterra should have allocated a far higher per cent of its Shareholders' Fund units to domestic investors because there is a major shortage of listed equity opportunities in New Zealand.

KiwiSaver's share of the NZX is still extremely small even though it has risen from 0.5 per cent to 1.9 per cent over the past three years. KiwiSavers' low ownership is because just 11.7 per cent of total KiwiSaver funds are allocated to NZ shares, according to Morningstar.

One of the major issues with KiwiSaver is that $4.3 billion, or 31.9 per cent of total member funds, are invested through six overly conservative default funds. The country's largest KiwiSaver fund, which is a conservative default fund, has 25 per cent allocated to cash, 25 per cent to New Zealand fixed interest, 30 per cent to global fixed interest and only 20 per cent to growth assets, 9 per cent to Australasian shares and 11 per cent to global equities.

These defensive default funds were appropriate during the global financial crisis but they have underperformed over the past one-year and three-year periods.

For example 114, or 86 per cent, of the 133 other funds covered by Morningstar beat the largest default fund, many by a very wide margin, in the 12 months ended December 2012.

Over the past three years 75, or 60 per cent, of the other 126 KiwiSaver funds have outperformed the largest default fund.

The latest figures clearly show that the six conservative default KiwiSaver funds will substantially under-perform growth-oriented funds when sharemarkets perform reasonably well.

KiwiSaver members, particularly those under 40, should have a strong bias towards growth assets if they want to take full advantage of the hugely popular KiwiSaver scheme.

Another issue is the influence of ownership groups on corporate governance, particularly the appointment of directors.

The main influencers in this area are New Zealand managed funds, which represent 23.5 per cent of the NZX, New Zealand strategic stakes (18 per cent) and offshore strategic holdings (13 per cent).

A number of investment industry participants argue that KiwiSaver funds will play a major role in corporate governance issues.

This may be true in the longer term but Crown Agencies and other New Zealand-managed funds will have a much greater influence in the short to medium term.

The role of New Zealand-managed funds has become more and more important as far as the appointment of directors is concerned as overseas corporates and domestic retail investors have reduced their exposures to the NZX.


Brian Gaynor is an executive director of Milford Asset Management and manages a growth KiwiSaver fund.

- 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.

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