He further opined that if you took a truly global portfolio view of investing, then New Zealand might get an allocation to a house in Queenstown, but not too much more.
These are very concerning comments from one of our leading market participants, but sadly probably reflect the overall view of a large part of the investment community towards investing in most listed New Zealand companies.
How has it come to this?
Structural changes – brokers and wealth management.
One of the reasons for the dwindling support for the New Zealand sharemarket has been bought about by a fundamental change in the structure of sharebrokers/stockbrokers, which now largely call themselves wealth management companies.
The very nature of this not-so-subtle branding change and shift in focus has seen most of these companies move to a ‘funds under management’ (FUM) model where clients are directed towards a select number of approved shares and/or portfolios, which in most cases here, only includes shares in the top 50 NZX stocks.
This has concentrated the bulk of investor money into a limited number of listed New Zealand companies, stretching valuations and leaving a significant number of listed companies out in the cold, devoid of broker research and support.
While through online avenues, such as ASB Securities and platforms such as Sharesies, investors can spread the net wider, the balance of power lies heavily weighted to the key wealth management firms.
KiwiSaver and the fund managers
The success of KiwiSaver has seen continuous funds flow into the investment management community, which includes the likes of the New Zealand Superannuation Fund, ACC, Milford Asset Management and Fisher Funds, to name but a few.
Some wealth managers also have their own investment funds.
Unfortunately, the success of KiwiSaver has not resulted in a broadening of investment in New Zealand-listed shares.
The size of most of the key funds has driven them to only invest in large capitalisation, liquid stocks, which means in a lot of cases, anything outside the top 20 does not even get on the radar.
A few fund managers look and invest in a wider range of listed stocks, but as with the wealth managers, the balance of power lies with the weight of money in the big funds.
Small doesn’t pay
There are some common threads on why the wealth managers and investment funds justify not investing in the wider sharemarket, and these include:
- There is not enough liquidity (daily trading volumes/free float);
- In the context of the total amounts under management, an investment generally won’t have any meaningful effect on performance;
- It takes as much time to research a small company as a big one;
- Research costs can’t be recouped through client and/or investment banking fees;
- Better opportunities exist in offshore markets.
Unlisted investments
Given the above justifications for not investing in smaller listed equities, it seems paradoxical that a lot of these same investors are happy to allocate substantial funds to early-stage and/or unlisted investments.
While it could be argued they cannot get exposure to certain sectors or industries through the NZX-listed market, by not supporting our wider listed market, they are ensuring there is not an attractive platform to encourage emerging companies to enter the public domain, especially if they are looking for growth capital, increased profile and to expand their equity and investor base.
Surely there is room to do both.
What about ESG?
The investment community is now placing a real emphasis on ESG (environmental, social and governance) when evaluating investments to measure, among other things, the social impact companies are having on their communities and the planet as a whole.
ESG also brings in an ethical component to establish whether companies are doing what is right, as opposed to what they are allowed to do.
Maybe it is time our local investment community (fund and investment managers) applied this ESG filter to their own operational parameters and included in their social and ethical responsibility charter the need to support and grow our listed capital markets.
They derive substantial revenues out of the New Zealand capital markets, and it is time they did their bit to ensure the NZX not only survives, but grows and thrives.
Tim Preston is a partner in the Auckland-based advisery firm CM Partners Ltd. He has over 42 years’ experience working in the New Zealand capital markets.
