It will be interesting to see whether it comes off.Brian Gaynor Investors will learn next week whether they will be able to buy into a Fonterra shareholders' fund, the first time it would be possible to tap into New Zealand's biggest export earner. Colin Williscroft looks at what is likely to be on offer and who it might appeal to.



Fonterra shareholders have until Monday to have their say on what has been described as the biggest decision they have faced in the 11 years the farmer-owned co-operative has been running.



It's a decision that will not only affect farmers, it will also determine if anyone outside the co-op can to invest in a fund associated with it.



If the scheme gains the support of 75 per cent of shareholders, as required by the co-op's constitution, it will lead to the creation of a Fonterra shareholders fund.

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For Fonterra, the fund is a way of dealing with redemption risk. When that occurred in 2008, farmers wanting out of the co-op cost it an estimated $600 million.



The proposed new fund would allow Fonterra suppliers to place shares in it and be paid for rights to dividends, along with any change in market value. They would also retain the voting rights for those shares.



The fund will raise money by selling investment units to non-Fonterra suppliers. Those units will be tradeable on the stock exchange, like any equity investment.



Investors would put money into the fund, not directly into the co-op.



Although sharemilkers and retired farmers are expected to be at the front of the queue for those units, public investors and institutions will also be able to participate.



Financial commentator Bernard Hickey, of interest.co.nz, says the fund might appeal to people wanting to diversify their portfolios.



"Depending on what sort of yield people were after, it might be attractive to some," he says. "If they thought it might be better than what they would get from a bank, people might look at it."



However, anyone who bought into the fund would not have voting rights, which would make it very difficult for them to influence policy, he says. There was also a potential conflict of interest in what Fonterra suppliers wanted and what other investors in the fund would want, Hickey says.

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Farmers were likely to want the highest milk price they could possibly get, he says, which would incur a higher cost of production. Other investors were more likely to want to keep the cost of production down as much as possible, he says.



"Fonterra say they have addressed that by having the milk price set independently," Hickeysays, but there is still some scepticism about that.



Brian Gaynor, executive director of Milford Asset Management, says it is difficult to say who might be interested in putting money into the shareholder fund.



Some people see Fonterra as a company with great prospects, as not only is it New Zealand's biggest export earner, it also operates in an area where the country has a lot of expertise.



However, the way the investment opportunity is structured would not be very attractive to many investors, he says.



Gaynor says that normally with equity risk investments, which was what would be offered if the scheme was backed by farmers, investors want a say in how the company is run.



"Here they'll be asked to take a risk but have no say in running the company," Gaynor says.



He was also unsure whether many would have the appetite for that type of investment in the longer term.



"It will be interesting to see whether it comes off. These types of things are always attractive to people the first time but you need to know what it's going to be like in five, 10 or 15 years.



"We're not used to taking risk without having any say."



Gaynor says that about two years ago there was a lot of interest from outside Fonterra about the possibility of investing in the co-op but that has since died down.



"Most people kind of put it aside because they were sceptical about whether farmers would support it anyway. They decided they'd look at the detail later."



Only time will tell whether that interest would be rekindled, he says.