Brian Gaynor: Phobia of local investment holding us back

Carmakers were among the wave of greenfield investors in NZ between the 1930s and 80s. Photo / APN

The latest managed funds statistics reveal a great deal about our saving habits, the impact of KiwiSaver and why there is such a heated debate about overseas investment, particularly from China.

New Zealanders had $67.9 billion of managed funds at the end of March, a 3.5 per cent increase over the same period in 2007 (see table). These figures are based on market values, not the amount invested.

By comparison Australians had managed funds of A$1452.5 billion ($1900 billion) at the end of March, a 16.2 per cent rise over the same period four years earlier.

When looking at these figures it is important to note that between March 2007 and March 2011 the NZX-50 Gross Index declined by 16.2 per cent, the S&P/ASX 200 Accumulation Index fell 4.0 per cent, the MSCI World Gross Index, in US dollars, was off 1.8 per cent and the NZ dollar appreciated by 7.0 per cent against the greenback.

Managed funds statistics are a good barometer of savings because they represent an estimated 61 per cent of New Zealand household financial assets, excluding bank and non-bank deposits, compared with 74 per cent in Australia.

Australians have a higher percentage of financial assets in managed funds because of compulsory superannuation whereas New Zealanders have had a stronger bias towards the DIY approach. This is mainly because managed funds were punitively taxed until the introduction of the portfolio investment entity (PIE) regime in October 2007.

There is a yawning gap between New Zealand and Australia, with managed funds representing 34.9 per cent of GDP in New Zealand compared with 106.3 per cent across the Tasman.

A number of additional figures demonstrate the huge difference between New Zealand and Australia. These include:

* New Zealanders have $15,400 of managed funds on a per capita basis compared with A$64,200 per capita in Australia.

* The total value of New Zealand residential property is estimated to be $599 billion or 8.8 times total managed funds whereas it is only 2.8 times in Australia.

* We have 49.3 per cent of total household financial assets in the form of bank and non-bank deposits, compared with 24.9 per cent in Australia.

* New Zealanders have only 12.1 per cent of their managed funds invested in domestic equities compared with 30.3 per cent in Australia.

* We have a massive 45.8 per cent of our managed funds invested offshore compared with only 16.4 per cent in Australia.

Thus New Zealanders have a strong bias towards residential property, bank deposits and overseas investing with only a tiny proportion of our total wealth invested in domestic equities.

According to Reserve Bank statistics around $24 billion, or 3.0 per cent, of total New Zealand household assets are in the form of domestic equities, compared with 73.8 per cent in residential housing.

But the most interesting issue is what has happened since KiwiSaver was launched in July 2007 and began investing three months later.

As at March 31, 2011, there was $8.7 billion in KiwiSaver compared with nothing four years earlier. Thus non-KiwiSaver managed funds have fallen from $65.6 billion to $59.2 billion since March 2007. Most of this decline has occurred in the life insurance sector and funds operating under the Unit Trust Act.

The decline in non-KiwiSaver managed funds is disappointing because the new PIE regime has made them far more attractive from a tax point of view. In addition the Crown has contributed $3.3 billion to KiwiSaver and employers, $1.6 billion, yet total managed funds have grown by only $2.6 billion over the four-year period.

When the Crown and employers' contributions are taken into account it is difficult to argue that we have added to our meagre pool of savings although it is highly likely that savings would have been seriously depleted if KiwiSaver had not been introduced.

The other feature of KiwiSaver is that members have even less confidence in New Zealand than other managed fund investors, as 49.1 per cent of KiwiSaver money is invested offshore compared with 45.3 per cent of non-KiwiSaver funds. In addition only 10.0 per cent of member funds are invested in domestic equities compared with 12.3 per cent of non-KiwiSaver funds.

By comparison 43.1 per cent of Australian superannuation funds are invested in domestic equities and only 14.3 per cent offshore.

The lack of confidence in domestic equities is disturbing, particularly as the trend away from this asset class is accelerating. In addition, KiwiSaver members shouldn't have 9.7 per cent in cash when they are attempting to maximise long-term returns.

The debate over foreign investment has to be looked at in terms of New Zealand's low savings rate, love affair with residential housing, limited interest in domestic equities and strong preference for offshore investments.

Unfortunately most of the foreign investment debate has been generic, with little attempt to discriminate between the main types of investments. These are as follows:

* Investment in fixed-interest securities, mainly Government bonds.

* Greenfield equity investments or the creation of new activities.

* Brownfield equity portfolio investments.

* Brownfield control equity investments or the acquisition of existing assets or companies.

There should be no opposition to offshore parties acquiring fixed- interest securities, including Government bonds, as these are loans that will be repaid and there is no control associated with these investments. Finance Minister Bill English should be encouraging offshore interests, particularly the Chinese, to purchase Government bonds because this should help keep a lid on the Crown's interest costs.

Foreign equity investment in New Zealand has had three major cycles, the first two were mainly greenfield with the present cycle mainly brownfield, both portfolio and full control.

The first cycle, which lasted from 1840 to the late 1930s, was dominated by international investors' establishing new productive facilities in New Zealand. The meat processing sector, which was mainly funded by UK capital, is an example of this.

The second cycle, which went from the late 1930s to 1984, saw multinational producers establish facilities in New Zealand under our import substitution policies. Motor assembly plants were built by Ford, Holden, Nissan and Toyota during this era. Finally brownfield portfolio investment or the acquisition of state-owned enterprises and private-owned companies has been the dominant foreign investment theme since 1984.

We do not have a priority for greenfield investment, unfortunately, mainly because the Treasury has a negative view of the multi-national greenfield investments during the 1930s to 1984 import substitution era.

Clearly New Zealand continues to have a savings crisis and the latest managed funds statistics show that KiwiSaver will take a long, long time to solve this problem.

In the meantime New Zealand will have to rely on foreign investment but the Government should be emphasising Government bond, greenfield and brownfield portfolio investment instead of brownfield control investors.

The disadvantage of brownfield control investment is that it further shrinks the size of the NZX, encourages NZ managed fund investors to put more of their money offshore and brownfield control investors usually use their New Zealand investments as cash cows rather than growth vehicles.

In addition, opposition to the Key Government's partial privatisation programme - and a more liberal capital structure for Fonterra - is mainly based on the fear of overseas control. A clear emphasis on greenfield and brownfield portfolio foreign investment, with a foreign shareholder cap on important industries as the Australians have, would generate more support for partial privatisation and Fonterra's proposed capital reforms.

* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.

bgaynor@milfordasset.com