Jenny Ruth: Three ways of showing investment trust

COMMENT

At the heart of the three investment funds which have raised or are aiming to raise money from the public and list on the stock exchange is a deceptively simple proposition.

All are saying: "Trust us with your money."

Of the three, Carmel Fisher, who floated Kingfish in March, is the only one with a track record in funds management in New Zealand.

Kingfish sought up to $75 million and raised $58.5 million.

Trading of Fisher's fund so far is one positive sign - the shares were trading at 91c and the warrants at 15.1c, a total of $1.061 compared with the $1 investors paid.

In recent years, the few listed investment companies on the NZ exchange have tended to trade at a discount to net asset backing.

Brian Gaynor's Colville hasn't got a track record and neither does its management company, Milford, which was founded only last December.

It did have $61 million under management at May 1 and a further $46 million committed. Colville aims to raise up to $75 million.

Gaynor has a high profile as a Herald columnist, shareholder advocate and investment analyst and is also on the board of the UK-based New Zealand Investment Trust.

All this is related, but it isn't funds management.

The other two members of Colville's investment team are Alan More, who has been in funds management 35 years, including with Guardian Trust, ACC and Westpac, and Graeme Thomas with 23 years' experience, including at National Bank and Mercers.

But it is Gaynor's face in the advertisements.

In some ways, Gaynor's high profile is a double-edged sword. He admits he's had little support from stockbrokers - he is mainly promoting Colville through investment advisers.

Partly, that's because stockbrokers have similar competing unlisted products, but they also complain about Gaynor's negative attitude in his columns.

"Maybe in every fourth column I'm negative, or maybe one in every three, but they're the ones that get remembered," he says.

The third company, Salvus, which is seeking to raise up to $50 million, has two experienced fund managers, Andrew Couch and Simon Wilson - although their experience is not in the New Zealand market.

Couch has had 12 years at British institutions, most recently managing pension funds totalling US$2 billion.

Wilson, a New Zealander, spent four years with Edinburgh Fund Managers in Britain.

Couch points out that both he and Wilson have been in New Zealand since 2002 and have been researching the market since then.

But Salvus does have another analyst and newspaper columnist, Roger Armstrong, on its board.

Armstrong has recently been appointed to the New Zealand Exchange's disciplinary panel.

Armstrong is quick to point out he will be only a director, not a manager of the fund, and bristles at suggestions that he is on the board because of his high profile.

"I'm on there because I think I've got a lot of expertise," he says.

I would be the last to deny he has a strong reputation as an analyst, most recently at Deutsche Bank before he went independent.

But it is disingenuous to say his high profile has nothing to do with his presence on Salvus board.

Armstrong says he accepted the position because he was impressed with Couch and by his CV - he hadn't known Couch until he was approached before Christmas.

It seems Salvus will definitely be listing.

Four British and two domestic institutions - all unnamed- have committed funds to it, and with the support of broking firms Forsyth Barr and Direct Broking, the fund has almost raised its minimum $25 million, Armstrong says.

Listing such funds has a major advantage over the many unlisted equity funds already in existence (totalling more than $800 million in New Zealand) in that the managers don't have to keep hefty floats of cash to satisfy investors who want to cash in. The listing means managers can use all the money for the fund's fundamental purpose: investing in equities.

Gaynor has often used his columns to criticise other fund managers for the fees they charge, particularly performance fees.

(Fees can certainly be extremely high in the unlisted arena where investment advisers work on upfront and trail commissions on top of what the fund managers charge.)

But in my view, there's little to choose between the three, except that Colville does not have a performance incentive and the other two do.

If Salvus and Kingfish outperform their targets - in Kingfish's case, the CSFB 90-day bills index plus seven percentage points and in Salvus' case the small companies index - and start collecting their incentive fees, I would be most surprised if their investors aren't delighted.

But it is easy to be too simplistic about comparisons.

Colville is charging 1 per cent and Salvus is charging 1.25 per cent of assets a year. But the Colville figure is gross and the Salvus one is net.

Both funds can borrow up to 20 per cent of gross assets.

Maximum gearing would take Colville's gross assets to about $94 million and 1 per cent of that would be $940,000. Under the same circumstances and with the same amount of money, Salvus' 1.25 per cent management fee would be $937,500 before the incentive kicks in.

In my view, any investor who made a decision to invest or not in any of these funds on the basis of the fees would be nuts.

Of far more relevance will be their tax positions.

Kingfish and Salvus are concentrating on smaller companies with a "buy and hold" philosophy, holding most of their stocks in vehicles which won't be share traders.

Both have tax opinions, but not binding IRD rulings, that they won't therefore have to pay capital gains taxes when they do come to sell.

They will have to pay capital gains tax, 33 per cent of any gains they make in their much smaller actively-managed vehicles.

Colville will be an active manager with no restrictions on the size of companies in which it can invest.

This makes it liable for capital gains tax, but Gaynor says this doesn't mean 33 per cent of the returns will go to the taxman.

Over the past 12 years, the New Zealand Exchange's all ordinaries index has returned an average 13.1 per cent gross a year, he says.

Of that, 7.1 percentage points was in dividends and 6 points was in capital gains.

If his fund mirrors the past 12 years, tax would therefore total only two percentage points or 15 per cent of the total return, reducing it to 11.1 per cent.

A report by Mercer for the Guardians of New Zealand Superannuation showed that the median performing fund manager in New Zealand outperformed the Top 40 index by 5.8 per cent over a six-year period.

That, says Gaynor, more than compensates for any tax bills.

In the end, the proof for all three funds will be in their performance.

One question: given the recent exceptional performance of the New Zealand market, is this a good time for fund managers to be raising money from the "mum and dad" investors these funds are aimed at?

"Twelve months ago, it was a bloody good time," says one wholesale fund manager who agrees it would have been much harder to raise money then.

"That's the perverse thing about retail [funds management]. You only get the money when it's the wrong time for them to give it to you."