How many New Zealand-listed companies have outperformed Berkshire Hathaway, Warren Buffett's incredibly successful investment company?
This appears to be a silly question as most investors would not expect an NZX-listed company to outperform Buffett, who is widely regarded as the one of the world's most astute investors.
In addition, the recent collapse of Pumpkin Patch and Wynyard Group has tarnished the NZX's image with numerous social media contributors gleefully announcing that this confirms why they won't invest in the domestic sharemarket. They proudly boast that they prefer the domestic residential property market because it offers superior returns to the NZX.
In light of this, it will be a major surprise to many that a number of NZX companies have delivered fantastic long-term returns with at least five outperforming Berkshire Hathaway since listing in the 1990s. These are Auckland International Airport, Mainfreight, Port of Tauranga, Ryman Healthcare and Trustpower.
The accompanying table shows the annual return of the five companies since their NZX listing and Berkshire Hathaway's returns over the same period.
The highlights of these figures include:
Ryman Healthcare has been the best performing stock since listing with an annual return of 23.1 per cent.
Ryman Healthcare has outperformed Buffett by an amazing 16.3 per cent per annum over the 17.3 year period.
Auckland Airport has outperformed Berkshire Hathaway by 9.0 per cent per annum and Mainfreight by 7.7 per cent since the two companies listed in July 1998 and June 1996 respectively.
The average annual performance of the five NZX companies since listing has been 17.7 per cent compared with 9.8 per cent for Berkshire Hathaway, an impressive 7.9 per cent per annum outperformance.
When we compare all five companies over the same 15-year-plus period -- from December 31, 1999 to October 31, 2016 -- we get the following annual returns; Ryman Healthcare 20.5 per cent, Mainfreight 15.9 per cent, Auckland Airport 14.3 per cent, Port of Tauranga 13.5 per cent, Trustpower 11.1 per cent and Berkshire Hathaway 8.7 per cent.
It is important to note that these fantastic returns have been achieved during a period that includes the global financial crisis when the NZX50 Gross Index plunged 41 per cent from peak to trough.
It would be easy to argue that a number of these companies, particularly Auckland Airport and Port of Tauranga, have had it easy because of their monopolistic characteristics. However, that is not the way it looked in mid-1992 when the Mount Maunganui port company launched its IPO at the same time as supermarket operator Progressive Enterprises. The latter was relisting after five years as a privately owned company.
The clear consensus at the time was that Progressive Enterprises offered fantastic investment opportunities while Port of Tauranga was a small, insignificant Bay of Plenty company with limited growth prospects and investment appeal.
The supermarket group, which was acquired by Australian interests in 1999, was a huge disappointment while the port company has been an absolute star. The Mount Maunganui company also clearly outperformed Ports of Auckland, which was listed on the NZX between October 1993 and July 2005.
The secret of its success has been a clear and realistic long-term growth strategy that has been effectively implemented by its senior management team with strong board oversight. This has also been the recipe for success of the four other NZX companies that have outperformed Berkshire Hathaway.
Port of Tauranga has had a large number of directors with considerable experience and two extremely effective chief executives.
Ryman Healthcare has had a clear growth strategy and a mix of directors with considerable experience. Chairman David Kerr has been a Ryman director for nearly 22 years and co-founder Kevin Hickman for over 30 years. Managing director Simon Challies joined Ryman in 1999.
Mainfreight's directors have an average tenure of 21 years, which breaches most best-practice corporate governance guidelines, but they have been extremely effective under co-founder Bruce Plested. Managing director Don Braid, who joined Mainfreight in 1994, is arguably one of the NZX's most passionate chief executives.
Auckland Airport and Trustpower also have clear long-term growth strategies. They have also had effective boards and management teams.
One of the key features of these five companies is that they do not have a heavy reliance on public relations releases, particularly light-weight self-promotional releases to the stock exchange. These companies can be judged by their performance rather than by press releases.
The latter was one of the main characteristics of the failed Wynyard Group.
Wynyard made 27 announcements to the NZX regarding new contracts but 17 of these contained no financial details.
The NZX releases usually contained exceptionally positive quotes from Wynyard managing director Craig Richardson, one of which was: "We have a world-leading Financial Crime team experienced in developing solutions for complex corporate fraud, money laundering and countering funding of terrorism investigations which give Wynyard clients access to the best global knowledge, skills and experience for supporting local, national and trans-national financial crime detection and prevention." Only two of the 10 contracts with financial figures named the counter party.
Why does the NZX allow companies to release unsubstantiated statements through its facilities which are clearly aimed at boosting investor confidence, particularly when released immediately prior to capital raisings?
Surely the NZX has some responsibility to ensure that does not happen.
If we assume that the 17 Wynyard NZX contract announcements that contained no financial details were worth $1 million each and we add the $25m worth of disclosed unconditional contracts then we have a total contract figure of $42m. As it turned out the company's annual revenue fell well short of $42m.
This column received a depressing email from a redundant European-based Wynyard employee during the week. The former employee argued that the company decided to focus on the Middle East when experienced software salespeople strongly advised against this approach.
The person wrote: "The Middle East is an extremely difficult market to sell software into as all of the big vendors and competitors of Wynyard would attest. Not only do you need Arabic speakers (Wynyard had none when entering the market), you also need an Arabic product (Wynyard didn't have one when entering the market) and given the sales cycles are typically 3 years or more you need deep pockets and other significant revenue streams before dipping a toe in the sandy countries. The Wynyard board bet heavily on cracking the Middle East market faster than any of their competitors had done before, with an immature product and limited references."
Wynyard's strategy should have been to focus on Australasia followed by the UK, US and Canada with the Middle East left to a later date.
The software company blew more than $170m of shareholders equity on a flawed and poorly executed strategy.
The collapse of Pumpkin Patch and Wynyard Group has been a huge disappointment but the fantastic performances of Auckland Airport, Mainfreight, Port of Tauranga, Ryman Healthcare and Trustpower demonstrates that the NZX offers plenty of investment opportunities.