Mary Holm: Corporate raiders at the gate

My partner and I are trying to be financially prudent, while being very conscious that we have little financial expertise.

We invest into a couple of funds (managed and indexed), have a spread across NZ and international shares and some money in fixed interest. We've avoided direct property investment as our main asset is already our home and for many of the reasons you outline in this column regularly.

It all feels like a bit of a minefield, and with work and family commitments, the lack of time to spend investigating strategies is the biggest frustration.

We've also invested in some IPOs (initial public offerings of shares) as they've come up. We've had mixed success but, overall, we are ahead and have taken a long-term view on all these shareholdings, with the objective of building a retirement fund over 20 years.

Capital Properties has been one such investment and we've been happy with its performance, but mainly optimistic about its long-term growth potential.

So it was with absolute shock and frustration that we discovered in recent months that this investment will likely now be compulsorily acquired by AMP Properties as they achieve a 90 per cent shareholding in their takeover bid.

Apparently, we now have to take the price offered and go and try and find another investment. To encourage people to sell, the lovely people at AMP say if we sell now we'll be paid promptly, but if the shares are compulsorily acquired, payment will take much longer (around 40 days). How charming.

I know this scenario must be in the issue prospectus somewhere but who has the time or patience to read these tomes? Could this potentially happen to all our other successful investments? Is this an unusual occurrence?

It all feels unfair, as if something we bought in good faith, that we like and still want, has been repossessed because someone else also thought it would be nice to have.

When the Government and institutions like the NZ Stock Exchange are trying to encourage "ordinary" people to save and invest, this seems to give the message that the sharemarket is complex, has hidden hooks and unless you know what you are doing, you'll potentially be taken for a schmuck.

Perhaps I'm being over-sensitive. Is this the reality of the hard world of corporate finance and I should just toughen up? It's just that no one likes to feel ripped off or forced into anything.

Property investment now starts to sound a bit more straightforward and appealing. At least it's pretty unlikely that someone will make you sell them your house, just because it looks like a good investment. 

How to respond? I could say:

Yes, toughen up. You should have known that whenever you buy shares, the company might be taken over.

* Many shareholders love it when someone offers to take over the company. If the offer is good, they make lots of money. And the Takeover Code doesn't force anyone to sell unless the acquirer gets 90 per cent. Arguably, if that many shareholders accept an offer, most people think it is reasonably generous.

* What are you complaining about? You've had an annual return of 11.7 per cent, if you reinvested net dividends, since the company listed in late 1998, according to ABN Amro Craigs analyst Mark Lister.

"The first two years of operations were pretty tough - as they were for much of the commercial property sector - with returns going backwards, about negative 7 per cent a year," says Lister. "But the last five years have been brilliant, with Capital Properties providing returns in excess of 20 per cent per annum."

You've done really well. And no company keeps on earning returns that high forever. Lister is optimistic about the company's prospects, but the positive outlook is publicly available info, so presumably AMP's price takes that into account. Nobody can ever be sure with shares. You may end up glad that you sold now.

* You poor things. As you say, who reads a whole prospectus? And who likes being forced to sell anything, especially when it is doing that well?

Actually, so far you haven't been forced. AMP hasn't yet reached the 90 per cent level and Lister reckons that "although it will be close, I expect them to fail to get to 90 per cent".

Unlike some other analysts, he's recommending that shareholders don't sell. "In the independent directors' target company statement - which included an independent adviser's report - they valued Capital Properties in a range of $1.48 to $1.72 a share, with a mid-point valuation of $1.60," says Lister. This compares with the offer price of $1.48 and Lister notes that the share price, at the time of writing, is also higher than that.

If you hold on, and AMP doesn't reach 90 per cent in the present offer, "there may well be a higher offer in future, just like there has been in the Carter Holt Harvey situation recently".

Your situation is certainly better than that of another couple who wrote to say they recently sold their CHH shares in the Rank Group takeover. Over the 10 years they owned the shares, they lost $843 on the $6300 they invested.

"If we had put our $6300 into a bank term deposit for the 10 years we could have received about $3000 in net compounded interest (based on a net 4 per cent) on top of our original capital," says the correspondent. "Quite a big difference, don't you think?"

Another person also wrote recently to say that he is making much more on a term deposit than he would have if he had bought Vector shares last year.

All of which leads me to a couple of key points about concentrating on the performance of a single share:

* There will always be shares that perform worse than term deposits. On average, shares perform way better. But share investors get that higher average long-term return to reward them for taking the risk that some shares - and during some periods most shares - will do badly.

If you invest in only a single share, there's quite a chance the performance will be worse than term deposits.

* Any listed company can be taken over, leaving investors to find another investment. It could quite easily happen again to another of the shares you hold.

If you don't like that prospect, perhaps you would be better to put your Capital Properties proceeds, and all future investments, into the index fund you already invest in. One of the beauties of such investments is that you don't have to worry about takeovers or other administrative chores, nor do you need to spend time you don't have investigating investments.

I would make the same suggestion to the former CHH shareholders and the man who is glad he's not in Vector. In any share fund - and I recommend low-fee index funds - the bad performers are more than offset by the good performers over the long run.

As for your comparison with investment property, read on.

* * * 

You commented recently that sharemarket investors are not so forthcoming about success.

I do not know our portfolio rates, but it may give others some encouragement (or not).

We have invested in the NZX market progressively since early 1999. We have 19 stocks at a cost of $271,790, now worth $449,573 at today's "buy" prices. In addition, we have received dividends of $57,825, which carry significant tax credits.

The gross gain is $235,608, which doesn't seem too bad to us.

Our portfolio includes two share funds, Tortis Ozzy and Kingfish, but everything else is directly held shares bought on the basis of "where there's muck there's money".

We are incidentally now completely cashed up and out of the rental market after many years and life is a lot less stressful. 

You've done well. And most other readers will relate more easily to your numbers than those of our $3 million man of a couple of weeks ago.

We should note that seven years is rather too short a time to judge a portfolio's performance. The local sharemarket has performed pretty well in the period and may not continue at the same pace. But as long as you hang in if things get tough, you should be happy in the long term.

One thing I really like about your strategy is that you have 19 stocks. That gives you great diversification and protection from the single share problems mentioned above.

And I note your comment about rentals. While it's true, as our previous correspondent says, that it's rare to be forced to sell a rental property, that type of investment is certainly not trouble free.