Investment regrets and ironies

The Govt sold all its Auckland Airport shares in July 1998 for 54 cents. Given the current price of $5.30, the shares are up by 877%. Ouch. Photo / File

Regrets - I've had a few ... Frank Sinatra.

Don't you hate it when you sell shares and the price goes up? I know I do.

In fact, it's probably even worse than buying shares and watching them go down. Next time that happens, spare a thought for the day traders at the NZ Government and the Auckland Council who seriously mistimed substantial sales of their Auckland Airport shares. They must be hating life.

First up, the Government sold all its Auckland Airport shares in July 1998 for a price, adjusted for splits, dividends etc, of just 54 cents. Given the current price of $5.30 the shares are up by 877%. Ouch.

That's a compound return of 14.4% pa that the Government and thus the people of NZ have foregone. Confront the politicians with this information and they will likely blame the opposition, Winston Peters or Kim Dotcom. If the politician is particularly weasel-like he or she might retort that the stock market has done well since that time so its no big deal. Wrong.

As with much of the verbiage that comes out of politicians' mouths that is true but it is not the full story. The full story is that the stockmarket as a whole has returned 8.9% pa in the same period which is not nearly as well as those Auckland Airport shares which were given away.

As an aside, I was a retail stock broker at the time the government gave away those Auckland Airport shares in July 1998 and it was very difficult to get shares for retail clients but a client of mine who also dealt with an overseas branch of US stock broker Merrill Lynch was able to get 200,000 shares through that broker.

Unfortunately, the Government is not alone in blowing the timing of the sale of its airport shares. Also in the dog box are the share trading experts at the Auckland Council who sold half the council's Auckland Airport shareholding back in December 2002.

Since this inspired move, the shares have returned a total of 720% or 18.1% pa versus 9.8% pa for the market as a whole. Looked at another way, the Auckland Council got $191 million for its shares in 2002 that would be worth, including dividends, splits etc, and ignoring tax, about $1.56 billion today.

For some perspective on the significance of that, $1.56 billion is about equivalent to the total Auckland rates bill last year.

Now we are not just drawing attention to the Council's historic disastrous share trades for the fun of it. An examination of the Auckland Council's historical share trading expertise is relevant today because apparently every vested interest in town is urging the council to sell the rest of its Auckland Airport shares.

This is not altogether surprising given the bad luck city councils and the NZ Government seem to have whenever they sell any assets so people are lining up to be on the other side of the deal. Auckland Council has apparently hired a couple of expert investment bankers to advise them on whether they should sell their shares. It wouldn't be appropriate to speculate that the answer was a foregone conclusion or to note that often the investment banks that undertake scoping studies like this frequently are compromised because they are part of institutions with stockbroking arms who may or may not be involved in underwriting the sale of the shares.

Auckland ratepayers and councilors should note that there is frequently another option for Councils looking to fund capital expenditure and the obvious other option to fund new investment is to borrow.

With yields where they are on long dated bonds, borrowing seems the cheaper option obviously. Isn't it ironic that the "experts" always seem to urge companies to leverage up, that debt funding is cheaper than equity and that their balance sheets should be efficient but tell government and councils they need to sell assets.

However, looking at Auckland Council's latest annual report, net debt is $6.1bn and total assets are $40bn so that is a debt to equity ratio of just 15% so it is not obvious that anything needs to be sold. This is confirmed by the debt market where Auckland City Council Bonds are virtually impossible to buy and yield just 4.0%.

This suggests that a long dated bond issue would be well received. The funding cost certainly looks a heck of a lot cheaper than the 18.1% pa that the council has foregone on those Auckland Airport shares it sold back in December 2002.

It is not all doom and gloom however.

Sometimes, local Government does the right thing and ignores the politicians. A client recounted to me the other day of an incident that occurred when he was a senior executive at the Bay of Plenty Regional Council.

He said Council got hassled by the then Minister of Transport, and by local MP's for insisting that the Council continue to hold its shareholding in Port of Tauranga.

At the time, the Council's Port of Tauranga shares were worth about $42 million and today that same shareholding is worth $1.3 billion and the cashflow from Port of Tauranga substantially subsidises regional rate payers.

Given the Government's poor track record in share trading, perhaps National Party politicians need to unburden themselves of their neocon ideology and whenever they feel the need to sell shares they should instead buy them. Certainly the public would be better served. That "do the opposite of what I think I should do" strategy might work elsewhere as well.

The last bit of irony for today is the fact that a large performance fee is payable by the shareholders of global share fund, Marlin, despite the fact that Marlin shares have substantially underperformed the world stockmarket in the period for which the performance fee is payable.

A stock exchange announcement by Marlin stated that a performance fee of $1,179,457 plus GST is payable in the 12 months ended 30 June by Marlin shareholders to Marlin's investment manager, Fisher Funds.

I calculate that Marlin's total net asset value return in the period was 16.4% pre-tax, post-fees. In the same period, the world stockmarket returned 30.5%. The share price total return of Marlin was even worse at 14.3%.

This column has previously argued that performance fees should not be necessary to motivate fund managers and, if they are necessary, the benchmark should reflect the assets invested in.

No surprises that low cost exchange traded funds run by computers which don't require performance fees are hitting new highs daily in terms of funds under management.

Brent Sheather is an Authorised Financial Adviser. A disclosure statement is available upon request. Brent Sheather may have an interest in the companies discussed.