KEY POINTS:
"Window dressing", "mark to close", "manufacturing performance", call it what you like, the practice by which fund managers pad the value of their portfolios at the end of each quarter is pretty widespread in New Zealand if a number of sources are to be believed.
It works like
this: say you hold a million shares in company that are trading at $1. If you can, arrange to buy a small additional parcel of the stock at a steep premium, say $1.20, shortly before the market closes at the end of the quarterly period when your performance is measured. Assuming the stock doesn't trade again at a lower price, your stake is now worth $1.2 million on paper.
Your investors are happy with your masterful stock picking abilities and so are you because you've secured your performance fees for the period.
"I would be completely unsurprised to find that all fund managers indulge in window dressing," says outspoken broker and financial adviser Chris Lee who has written about this in newspaper columns.
"It is the most common game in town in the last few days before the end of the quarter. It's of no novelty in the market but that doesn't mean it's right."
One stock pointed to by a couple of market watchers as being subject to manipulation in this way is Michael Hill.
A quick look at the company's share price graph over the past year does reveal a tendency for the stock to rise in price towards the end of each quarter and fall away shortly afterward.
New Zealand Exchange head of markets Geoff Brown says the exchange monitors stocks on a "minute by minute, day by day" basis.
"Anything that looks untoward in regards to that we will follow up on."
While NZX has a policy of neither confirming or denying it is investigating suspicious share price movements, word is that it is taking a look at Michael Hill.
Under its rules, NZX can and has pinged brokers for executing orders to facilitate window dressing, but the fund managers who place these orders have walked away untouched.
While one local fund manager described the practice as "criminal", it's not but will be at the end of this month when amendments to the Securities Markets Act come into force.
SOMETHING SMELLS FISHY
Fisher Funds Management has been getting unwelcome attention of late, firstly because of the woeful performance of some of its funds, particularly its Barramundi Australian fund, but also because of the resignation, under mysterious circumstances, of chief investment officer Warren Couillault last week.
Eyebrows were raised last Thursday when Fisher Funds circulated a message to brokers instructing them not to accept orders on the firm's behalf from Couillault.
The next day it released a brief statement announcing Couillault's resignation as a director but suggesting he would remain with the company, in which he still holds a substantial stake.
Carmel Fisher yesterday said a further announcement would be released shortly. "We're working through some joint wording with Warren."
Stock Takes would not be surprised to see Couillault's remaining ties with Fisher Funds severed completely before too long.
THINGS CAN ONLY GET BETTER
Meanwhile Fisher is urging investors in the firm's listed funds, including Barramundi Australian fund, to hold tight. Barramundi originally listed at $1 a share in October 2006 and peaked at $1.66 in May last year. Yesterday it closed at 68c, 7c up on the life low it hit on Tuesday.
As detailed in Stock Takes last week, much of its misfortunes are related to key investment Credit Corp whose shares have plummeted following two profit downgrades in the past four months.
"We've had one other experience like this in our 10-year history and that was with Baycorp in 2003," says Fisher.
"In a month its share price fell 50 per cent, we had a large stake and we were impacted more than most. It took us six months to come back to square, but within 12 months we were ahead 16 per cent, so it felt awful at the time, a year later it was okay.
"I'm not saying history is going to repeat but we have been there once before but it wasn't as horrid as it might be feeling right now in the eye of the storm."
BACK DOOR CLOSED?
The demise of flat fee real estate company The Joneses just as it was on the brink of a back-door sharemarket listing has fuelled concerns that reverse listings are allowing companies with a distinctly canine cast on to the market.
NZX head of markets Geoff Brown confirmed this week that the market operator is to take a look at the reverse listing mechanism.
"We have become increasingly concerned about the levels of information that are disclosed as a consequence of that relative to a normal IPO process.
It's fair to say that with a couple of exceptions, the performance of companies that have come to market using that mechanism could be described as uninspiring.
"We are in the process of reviewing where we are in regards to back-door listings. We'd expect to make some more public statements with regards to that by the end of March."
That sounds like it could be bad news for broker Brett Wilkinson who's made a business out of supplying shell companies for back-door listings. Apart from the abortive Joneses listing, his greatest hits include Plus SMS and MFS New Zealand.
FLIPPING THE BIRD: KIWI COULD GO EITHER WAY
Where to now for the New Zealand dollar?
Some currency strategists, the Bank of New Zealand's Danica Hampton and Deutsche Bank's John Horner believe the kiwi is riding for a fall, courtesy of the softening housing market and increasingly desiccated farms' effect on the wider economy.
Others, including the ANZ head of markets John Body and Westpac's Michael Gordon, believe that unless our Reserve Bank takes a less hawkish view on interest rates, the kiwi will follow its Australian counterpart to fresh highs against the American dollar.
Coverage of the currency's movements tend to focus on its relationship to the US dollar and the impact on the export sector.
However, to get a clearer picture of what the currency's gyrations mean to exporters, it's probably better to look at the trade weighted index, a composite measure against the currencies of our top five trading trading partners.
While the kiwi was last night up at about US80c and a cent off the post float high it hit in July last year, on the TWI it was 73.35, against its peak of 77.17.
Still, on either measure it's not far off the levels at which the Reserve Bank intervened last year in a bid to take the top off its peak.
But Body sees the chances of further RBNZ intervention any time soon as faint. It's always going to be a risky business, as the bank is effectively wielding a pea shooter against the array of heavy artillery big currency market players possess. Furthermore, the recent volatility in most financial markets resulting from the credit crunch only makes intervention that much more fraught with danger.
POWER CUT
Gas and electricity distributor Vector's half year result last week was disappointing to some in that its net profit fell 18 per cent on the same period a year earlier.
With the generally softer market, the result pushed Vector's shares down to a lifetime low of $1.93 last Friday as investors worried about the prospects for a lucrative sale of its Wellington lines business and the impending refinancing of its debt.
Goldman Sachs JBWere analyst Matt Henry raised another reason for worry - the prospect that the company's ongoing difficulties with the Commerce Commission may bite further into profits.
"The key factor in the year ahead is the electricity thresholds reset [regulatory pricing decision for Vector's electricity distribution for the five years from April 1 2009]."
This all sounds a bit complicated for Vector's chairman Michael Stiassny to sort out with the type of "behind the bike shed" discussions with the Commerce Commission that he used to defuse a spat over gas distribution charges a year ago.
