Brian Gaynor 's Opinion

Investment columnist for the NZ Herald

Brian Gaynor: Wrong decisions send our savings overseas

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Fonterra, Commerce Commission helping fuel exodus of Kiwi cash.

The Fonterra issue allocated 42 per cent of the units to investors from outside New Zealand. Photo / NZPA
The Fonterra issue allocated 42 per cent of the units to investors from outside New Zealand. Photo / NZPA

The latest fund manager statistics show KiwiSaver investors are sending an increasing percentage of their savings overseas.

This is because of the small size of domestic capital markets and negative decisions regarding our largest companies.

The Fonterra IPO allocation and the Commerce Commission decision on Chorus are the most recent examples of this.

Why do we urge individuals to increase their savings and then make decisions that encourage them to invest overseas?

The managed funds statistics, compiled by the Reserve Bank, show that New Zealanders have 49.8 per cent of their KiwiSaver money invested overseas, compared with 46.4 per cent at the end of 2009 .

These managed fund figures include capital contributions, capital gains and losses and dividends and interest received.

Comparisons are made with December 2009 because that is the first date on which the Reserve Bank subdivided overseas investments into fixed interest securities, equities and other.

Overseas investments have increased by $4.614 billion over the past 33 months compared with a rise in domestic investments of $4.297 billion.

Thus, 51.8 per cent of the increase in KiwiSaver funds since December 2009 has been in the form of foreign assets.

The largest KiwiSaver asset class is overseas equities at $4.327 billion, or 30.7 per cent of total assets, whereas New Zealand equities are just $1.355 billion, or 9.6 per cent of KiwiSaver assets.

Australian superannuation funds have nearly 40 per cent of their total assets invested in domestic equities.

Compulsory superannuation has given a huge boost to the Australian economy while more and more of our KiwiSaver funds are going overseas and making only a limited contribution to the domestic economy.

New Zealanders are not averse to growth assets because overseas equities are KiwiSaver's largest class.

But we continue to make decisions that discourage New Zealanders from investing in the NZX and the domestic economy.

This is why the Fonterra IPO allocation and the Commerce Commission's decision on Chorus are important issues as far as KiwiSaver investment options and the performance of the domestic economy are concerned.

The Fonterra Shareholders Fund issued 95.45 million units at $5.50 each, raising $525 million.

These units were allocated to New Zealand resident clients of NZX firms, supplier shareholders of Bonlac Supply Company in Australia, New Zealand and foreign institutions and current Fonterra shareholders, employees and sharemilkers.

The only specific allocation announcement said: "A total 58 per cent of units has been allocated to New Zealand retail and institutional investors as well as Friends of Fonterra (including Bonlac). The remainder has been allocated to institutions based offshore."

Thus 42 per cent, or 40 million units, were allocated to foreign investors although this figure is probably understated because the allocation to Bonlac's supplier shareholders is included in the 58 per cent allocation to New Zealand interests.

It appears that overseas institutions received the biggest allocation. Unconfirmed market reports indicate that 50 to 60 such institutions received allocations but most were small.

Thus the heavy trading over the first week, with a phenomenal 33.4 million units traded on the NZX and ASX on the opening day, suggests a large number of overseas institutions sold out because their allocations were undersized while other foreign institutions increased their holdings.

This suggests that the number of overseas institutional unit holders may have fallen from around 50 to 60, to 10 to 20.

The main beneficiaries of the frenzied trading - 56.1 million of the 95.45 million units were traded in the first week - have been stockbrokers who must have generated more than $3 million in brokerage from Fonterra's first week of trading.

It is difficult to understand why Fonterra has gone down the same route as Telecom, TranzRail, Contact Energy and Auckland International Airport by giving large IPO allocations to foreign shareholders when there was substantial unsatisfied domestic demand.

Why are we so generous to overseas buyers when domestic investors are clamouring to be involved?

Is it because the investment bankers convince New Zealand issuers to allocate a large percentage overseas because they know it will generate substantial post-listing brokerage for financial institutions?

Whatever the reason Fonterra got it wrong.

The country's largest company gave away huge value to foreign interests when domestic investors, including KiwiSaver funds, should have been given priority.

Chorus' share price was hammered once again by the Commerce Commission through its draft determination on the price the company can charge for unbundled bitstream access used to provide broadband.

In May Chorus' share price plunged 13.6 per cent, from $3.52 to $3.04, when the commission issued a draft review of the company's unbundled copper local loop.

This time it dived 18.2 per cent, from $3.40 to $2.78.

The commission has crushed Chorus' share price by 21 per cent, from $3.52 in early May to $2.78, while the NZX50 Gross Index has risen 12.5 per cent over the same period.

Chorus' poor share price performance has been softened by the payment of a fully imputed 14.6c a share dividend in October.

The commission plays an extremely important role because many of our largest listed companies have monopolistic characteristics and are subject to its oversight.

These include Fonterra and Mighty River Power, which is expected to be the next major IPO.

Domestic investors, including KiwiSaver members, should have a strong incentive to invest in New Zealand enterprises yet the Fonterra IPO allocations and Chorus regulatory issues will probably have a far greater negative effect than the Ross Asset Management debacle on our capital markets.

In simple terms New Zealand investors have three main choices - they can invest in residential property, overseas financial assets or domestic financial assets.

The Fonterra and Chorus issues encourage them to avoid investing at home.

This is a wasted opportunity for New Zealand because KiwiSaver should give the economy a major boost, just as compulsory superannuation has done across the Tasman.

Compulsory superannuation was introduced for a limited number of employees in 1986, and coverage was expanded to most of the Australian workforce in 1992.

As a result total superannuation assets have risen from A$142 billion in mid-1992 to A$1.41 trillion today, with A$1.193 trillion, or 84.6 per cent is invested in Australian assets.

This has been a huge boost to the Australian economy in terms of investment, company formations, job creation and the ability of the country to take advantage of the booming Chinese economy.

It can also be argued that the investment of a huge proportion of compulsory superannuation in the domestic economy was the main reason Australia was the only OECD country to avoid recession during the global financial crisis.

KiwiSaver funds, which are expected to increase from $14 billion to $60 billion by 2020, should give the New Zealand economy a major boost.

But the full benefits will be achieved only if KiwiSaver members are attracted by domestic investment opportunities.

The trend is going in the opposite direction as 57.8 per cent of the increase in total KiwiSaver assets over the past twelve months are in the form of foreign assets.

If our major companies allocate a large proportion of their IPOs overseas and the Commerce Commission continues to hammer our large listed companies, we can expect an ever-increasing percentage of KiwiSaver money will go to other countries to benefit their economies.


Brian Gaynor is an executive director of Milford Asset Management which holds Fonterra units and Chorus shares on behalf of clients.

- NZ Herald

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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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