Come all ye faithful and buy

Sir Ron's fans just love GPG. But is the company really that good? BRENT SHEATHER takes an analytical look at GPG and its returns.

They are not affiliated with al Qaeda, but many Guinness Peat Group (GPG) shareholders are no less fanatical.

In New Zealand alone, they number in the tens of thousands - 25,717 as of December 10.

So committed are these hard-core shareholders, often men aged 55 and over, that they frequently put aside basic diversification theory and instead run portfolios highly concentrated on GPG, the investment vehicle of their supreme leader, Sir Ronald Brierley.

Many view diversification as nonsense, and proudly point out that not only do they own GPG shares, they own the company's capital notes as well.

Woe betide the nitwit adviser who suggests that having 40 per cent or so of your investments in Sir Ronald's hands might not be consistent with modern portfolio theory.

You will inevitably be reminded that "since I bought the shares they've doubled", that there have been numerous free bonus issues, and reminded of the many and varied triumphs of the old master himself.

Typically, any defence of GPG is heavy on emotion and short on facts. One has to have one's wits about one just to calculate the return on the shares properly, adjusting for the many share issues which have occurred over the years (I used the NZ Stock Exchange to do the sums).

But in the almost 10 years that Sir Ron has been doing his own thing after Brierley Investments, albeit with many of his former cohorts, and after adjusting for those cash and bonus issues, how does GPG stack up as an investment?

Does the fact that many individual GPG shareholders tend also to have had a high weighting in New Zealand shares generally cloud their perspective? Certainly the local sharemarket has provided the means to do substantially worse than GPG over the last 10 years. We know that one way of looking tall is to stand by a short person, and compared with the NZSE gross index just about any developed country's sharemarket looks good.

The question is, does GPG's performance still shine relative to a diversified portfolio of global shares? After all, GPG invests much of its money overseas and has thus benefited from the enormous depreciation of the kiwi dollar over the past 10 years.

The comparison is also valid because with the advent of the AMP Winz Fund, unit trusts and the local listing of several UK investment trusts, New Zealand investors can buy a portfolio of global shares just as easily as they can buy New Zealand shares.

Measuring GPG against the New Zealand Stock Exchange index (see graphic) perhaps explains why GPG aficionados feel so strongly about their stock.

GPG has returned an average of about 15 per cent a year since it listed, versus 11.5 per cent a year for local shares.

But although such a local comparison may have been all well and good when you were unable to buy overseas currency easily and were forced to invest in local shares, things are quite different today. Now we need to consider GPG relative to the entire universe of global shares.

Comparing GPG's performance since it listed in 1991 with that of global sharemarkets, as measured by the MSCI global index, shows that again, GPG outperforms, although not to the same extent.

Over the period, GPG produced returns averaging 15 per cent a year, compared with 12.9 per cent a year for the world sharemarket index.

This is a very creditable performance, as most fund managers find comparison with the MSCI index rather embarrassing.

But before we rush off and swap our Winz shares for GPG, we need to appreciate that GPG is more risky than the world sharemarket - while its returns have been higher, they have also been much more volatile.

This is because GPG borrows to invest and Sir Ronald runs a far more highly concentrated portfolio than the world sharemarket.

Although the long-term track record has been good, there have been a few bad investments, Otter Gold for example.

There are other risks associated with GPG. For example, knowing what shares it owns and how much they are worth at any point in time.

GPG publishes its book value only twice a year, whereas most investment trusts and unit trusts disclose their net asset value, using market prices, daily.

Various stockbroking firms try to calculate GPG's asset value from time to time, but these values are highly uncertain as GPG doesn't like disclosing what its portfolio looks like to all and sundry.

Related to this is the potential for GPG shares to trade at a premium or discount to their asset value. This presents an extra dimension of risk, or, to look at it in a more positive light, an element of opportunity, for the retail share investor.

V ARIOUS stockbroker reports say GPG's shareprice is 25 per cent or so below the value of the assets it owns. In the UK, investment trusts typically trade at discounts to net asset value reflecting the cost of liquidating the portfolio (liquidity risk) and the management fees associated with managing the portfolio.

Many investment trusts with a smaller company orientation - like GPG - trade at discounts of 20 per cent or more, perhaps because the market believes that if they sold out it would push down the market prices of the companies the trusts own.

GPG would no doubt counter that by arguing that its strategic stakes merit premiums to market price rather than discounts, so, depending on one's point of view, one can argue either that the GPG discount represents a genuine bargain or the workings of an efficient market.

There's another risk associated with investing in one company as opposed to a broad selection of shares; if Sir Ronald or a few of his lieutenants were taken out would GPG survive and prosper?

Despite the various bullish broker newsletters emanating at the time, GPG's $250 million issue of capital notes paying 9 per cent last year can be viewed as a threat to returns on GPG shares.

Luminaries such as Warren Buffett and commentators from the Economist have forecast that the average return from shares in the next 20 years is likely to be 7 or 8 per cent a year. Thus the 9 per cent coupon rate that GPG has to pay on the capital notes looks rather expensive.

My conclusion is that although GPG's long-term performance has been good, one would struggle to justify having more than 10 per cent of a client's international share portfolio in GPG shares, because of the various risks specific to GPG and the fact that there are a few more conventional low-cost, tax-effective share funds which have done as well or better than GPG over the past 10 years while incurring a lower level of risk.

No doubt GPG fans will argue that the bull market just ended provided the worst possible backdrop for performance comparison and the execution of GPG's investment strategy and, further, that the growth in GPG's net asset value has been well in excess of share price growth.

Fair enough, but the share price nevertheless represents what you can sell the shares for.

Many shareholders will be content to reflect that long-term ownership of GPG shares permits them the thrill of sharetrading, takeovers and such like without the attendant losses suffered by most day-traders.

Beating the MSCI index into the bargain is the icing on the cake.

* Brent Sheather is a Whakatane sharebroker and investment adviser.

* Disclosure of interest: Brent Sheather owns GPG shares.