INVestor by Alan Zhu

Issue 174

June 09

$7.50

EQUITY INVESTMENT ADVISERS

Why KiwiSaver is a no-brainer

PLUS: • How to choose a yield share • the charm of philately • nz assets management through the storm

Contents

Issue 174 JUNE 2009

Features

Aussies upbeat, but doubts remain By Jamie Gray

Cover Story – Is KiwiSaver all it’s cracked up to be?

NZ Assets Management finds path in stormy seas

CFDs: Short selling How to profit from falling prices

The wonders of exchange traded funds By Nick O’Boyle

Why haven’t we all been “Squirrel Wise”? By Rob Cochrane

To choose a yield share

Show me the income By Philip King

Bordeaux 2008 – A Good Year? By Puneet Dhall

Watch out for leverage By David McEwen

Is home country bias wrong? By Brent King

The charm of philately By Vaughan Yarwood

Goodbye to Cherished Concepts By David McEwen

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Editorial

News briefs

ShareTalk

Fundsource

Fixed Term Investments

Rates for Tradeable Fixed Term Investments

Equity book shop

New Zealand Investor

Regulars

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Editorial

Last month I ran a cover that posed the question: Is the recent sharp recovery in markets a sucker’s rally, or a real recovery? A couple of weeks later it seemed this recovery is for real, markets kept rising and I told my illustrator to start working on a cover that says: “Yes, it’s for real!” But my confidence ebbed away in subsequent weeks as more and more bad statistics started to emerge, and the rally started to falter. At the time of writing, markets were under selling pressure after an outlook downgrade for the UK’s AAA credit rating made investors wonder if the US was next. Truth is, I simply don’t know which direction we are heading for. The trillion dollar bailout of our global banks is not achieving the one thing that matters: Job stability. Unemployment is rising and very big companies are closing down. In NZ we are also seeing unemployment climb as any firm that was somewhat vulnerable before this recession, now faces the real prospect of toppling over. So, the illustration I ordered for the cover was cancelled and I turned towards the one topic I haven’t covered at all in this magazine, KiwiSaver. This is a very important issue for New Zealanders and I intend to cover it in small bites over several issues. This issue deals simply with the concept of saving through KiwiSaver: Does it stack up as a retirement vehicle? The collectible article that I run every month, deals with stamp collecting this month. Obviously you have to know what you’re doing, but if you do have some expertise, stamps can be a wonderful hobby as well as an effective way of accumulating wealth. One quality about stamp collecting that is less appreciated here, but very evident in unstable countries, is its portability. When I lived in South Africa many years ago, where assets could not be moved overseas, some chose a risky route of Krugerrands to get their wealth abroad, while a few of the smarter ones simply packed a valuable stamp collection in the suitcase. For customs, a stamp was a stamp and these people were never harassed, even though some of these collections were worth a fortune. The month ahead will be an interesting one, and perhaps by next month we will have a clear idea whether the rally is the start of a true bull market recovery, or whether this was a sucker’s rally in a long graph heading downwards. If it is good news I will be able to get that illustration finished for the next cover, to read “Yes, it’s for Real!” Neville Glaser Editor, New Zealand Investor nzinvestor@equity.co.nz

Subscriptions: P O Box 1314, Shortland Street, Auckland 1140. Tel: (09) 358 3883 Publisher: Equity Investment Advisers Ltd P O Box 1314, Shortland Street, Auckland 1140. Editor: Neville Glaser Advertising: Mark Richardson Advisers/Research: Equity Investment Advisers Ltd Level 13, 57 Fort Street, Auckland P O Box 1314, Shortland Street, Auckland 1140. Contacts: Investment advice Auckland: Darren Marinovich Sharebroking advice: Sharon Fang. Tel: (09) 304 0235 Dan Stratful, (09) 304 0232, Nick O’Boyle (09) 304 0233, Prospectus requests: Email: info@equity.co.nz Design: Art Tank Ltd info@arttank.co.nz. Phone 07 866 7119 Printing: PMP Maxum. Phone 09 979 3100 ISSN: 1172-451X Registered Publication Information: For information and correspondence on any of the products/investments mentioned in this publication contact: Equity Investment Advisers Ltd P O Box 1314, Shortland Street, Auckland 1140. Freephone: 0800 437 8489, Tel: (09) 304 0230, Fax: (09) 358 3858 Email: info@equity.co.nz Disclosure of Interest Directors and staff of Equity Investment Advisers Ltd may and do from time to time hold investments in shares and investment products reviewed in New Zealand Investor. It is our policy to follow our own advice. New Zealand Investor is the investment magazine of investment analysts and financial advisers Equity Investment Advisers Ltd. Equity is a wholly owned subsidiary of Investment Research Group (IRG). New Zealand Investor is provided free to investor clients who meet qualifying investment criteria. It is also available by subscription and through all good newsagents. Clients of Equity receive additional brochures and information as well as personal advice. To become a client of Equity all that is necessary is that you invest through us. We discount entry fees on almost all investment products to bring our clients a highly comprehensive service. Equity may receive brokerage, commissions or other payments from issuers of investments and advertisers. Disclosure under the Investment Advisers (Disclosure) Act 1996 is available upon request. Investment Risks and Suitability Published material and advertisements are not intended as personal investment advice or recommendations of suitability to any particular person. Articles and advertisements may include reference to investments which have varying levels of risk and return from speculative and risky to very low risk. It is the responsibility of the reader to assess suitability of any investment advertised or referred to having regard to their own objectives, particular circumstances and investment portfolio. If in any doubt, clients and prospective clients of Equity Investment Advisers Ltd should consult with us in order to better assess suitability for their objectives or investment portfolio. Investors should also read the investment statement and/or prospectus or Product Disclosure Statement (PDS) for any investment which by law requires publication of such documents and satisfy themselves that investments referred to are appropriate for their circumstances and portfolio. Disclaimer Equity Investment Advisers Ltd, as publishers of this magazine, believe that the information contained in the New Zealand Investor is correct at the time of publication and that any estimates, opinions, conclusions or general recommendations contained in herein are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions (which may change without notice) or other information contained in this publication and, to the maximum extent permitted by law, Equity Investment Advisers Ltd disclaims all liability and responsibility for any direct or indirect loss or damage which may be suffered by any recipient relying on anything contained in or omitted from this publication. Any action taken by an investor is strictly that investor’s independent decision and sole responsibility. The company declines and disclaims any liability whatsoever in contract and in tort (for negligence) for any direct or indirect consequences from or arising from the information supplied. Copyright No part of the New Zealand Investor may be copied, photocopied, stored in an electronic retrieval system or reproduced in any form without prior permission from the copyright holders. © Equity Investment Advisers Ltd 2008. Disclosure Statement: A disclosure statement can be obtained free of charge by calling Equity 0800 437 8489, or by visiting our website www.equity.co.nz

News briefs

Housing holds, but for how long? By Neville Glaser

Shiller of Yale University, comparing property prices and inflation in Amsterdam over 400 years. He found that property would run away for decades, only to languish for decades thereafter, so that the real, inflation adjusted property prices are quite static. None of this changes the fact that New Zealand’s housing market is no longer falling, and might be rising slightly. The outrageous prices of the past are now so imbedded in our memory that many believe the housing market is delivering bargains with prices 9% lower, and the cost of mortgages cut to historically low levels. 45

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to 4%, much lower in the blue chip suburbs where a landlord can expect 2.5% return on his residential property. It doesn’t seem to make sense that someone would borrow money from a bank at 6% to buy an asset that will return 4% per year. The return is then largely speculative, and the yardstick is the capital gains derived during one of the most out of control housing/credit booms in history, ending in 2007. Long term studies suggest that property prices stay slightly ahead of inflation, but do not run away from it. That’s because our earning power is linked to inflationary wage increases. The most comprehensive study of property prices was done by Robert

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Migration affect on housing reduced National Bank chief economist Cameron Bagrie suspects that the impact of increased migration won’t reach the housing market until 2010. Bagrie says that migration has not been the driving force behind the ups and downs of the property market recently. A disconnect between housing and migration occurred between 2004 and 2007 as other market factors came in to play. “Annual net migration has been below 15,000 since the start of 2005

yet house prices are still 30% higher relative to then – and this includes the fact that real prices have fallen around 11% from their peak,” Bagrie says. “There are other forces at play. We are particularly interested in the effect of a deteriorating labour market, particularly as the housing market turned when the unemployment rate was still at historically low levels. The risk is that the recent pick-up in housing market activity will not be maintained,” Bagrie says.

New Zealand Investor

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The Reserve Bank’s latest stability report shows New Zealand house prices were around 9% lower in the final quarter of 2008 compared with their peak a year earlier – “the largest annual drop in property values since comprehensive records began in the 1960s”, says the Reserve Bank. But this is nothing compared to the decline in most other countries, as shown in the bar chart. NZ’s housing slump has to be seen in context of the 30% collapse in the US and 20% in the UK, with most other countries also higher than NZ. New Zealanders are hugely dependent on residential property as this asset class represents over 90% of our household wealth, much higher 9 than in other countries. No country 8 is economically so vulnerable to a 7 housing fall as we6 are. For that reason5 we need to keep our housing values up. 4 And the Reserve Bank is certainly 3doing its bit, by 2 cutting interest rates to the bone as a 1 signal to mortgage rates. But danger 0 lurks in the Reserve Bank graph shown below, where the yawning gap between house prices and our disposable income has never been worse. In theory your house prices cannot run so far ahead of disposal income for ever, because that prices first home owners out of the market, and prevents second home owners trading upwards in the property ladder. Rental yields versus mortgage interest is also out of kilter, even though the gap has closed since interest rates were cut. It is the rental equation that makes no sense. The average rental yield is 4% on NZ housing. It used to be 10% when no one would touch property in the wake of the 1987 crash. Property rose steadily until the average rental yield stood at 7%. The property bubble pushed up prices and lowered the yield

News briefs

Xero takes off

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You have to hand it to Xero, the accounting software firm that listed on the NZX in 2007. It has just reported a $6.75m loss for the year ended March, far worse than the previous year. Annual revenue from subscriptions was $959,000 – while operating expenses to earn that meagre revenue jumped to $8.36m from $5.48m. But the share price is rocketing, from 70c in March to $1.50 now. If there’s one thing Xero knows, it’s how to tell a good story. The story goes as follows: Xero was established in July 2006 by Rod Drury, an experienced technology entrepreneur with a record of building successful software businesses, and Hamish Edwards, the owner of a SME accounting business. Xero, based in Wellington, provides an online accounting system for small and medium sized enterprises (SMEs), which typically have less than 20 employees. In May 2007 the company made an offer of $15m worth of shares at $1 each, which ended up over-subscribed. On 7 April 2009 XRO announced that it had raised an additional $23.2m from a share placement (at 90c per share), to fund the company’s expansion into Britain, Australia and the United States. The main risk that was identified initially is that it is taking on MYOB, a formidable presence in accounting software. Unlike MYOB, Xero’s system is online which raised questions about whether a client will be satisfied to have its confidential records held on someone else’s web site.

Xero, based in Wellington, provides an online accounting system for small and medium sized enterprises

It is a subscriber based system, and these have been climbing steadily to 7000, about half of what is needed to break even. Despite Xero carrying all the risks that surround any technology start up, the momentum signals in this share are tremendously strong. Momentum is what you look for in speculative investments where there are no fundamentals, such as a steady profit trend, to go on. First signal: Customer acceptance. It has signed on blue chip clients, like British Telecom, which will promote Xero’s software to the telco’s 1.7m small business customers. Xero has signed similar deals with Telecom in New Zealand and Telstra in Australia. These giants do not take on partners on a whim, and we can be certain they conducted due diligence on Xero’s product and found it good enough to promote. Second momentum signal, smart money is buying into the Xero shares, and in a big way. This month Craig Winkler, who sold his stake in rival software firm MYOB last year, made an

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$18m investment in Xero, giving him 24% of Xero. Explaining his decision to buy, Winkler said Xero had proved it could deliver services over the internet effectively. “That’s a difficult job to do but there’s a very large market for it. There’s a great opportunity to service small businesses by delivering tools to them over the internet,” he added. Momentum signal number three is the share price itself, which broke through its $1 listing price recently, after a weak post float performance. It has been rising every since. The risks remain high because cash flow counts at the end of the day, and Xero has still to prove it can convert all this positive momentum into real cash and wealth for investors. Nevertheless, it is a very interesting speculative investment right now.

Ebos looks for growth Medical supply distributor, Ebos Group, is on the hunt for acquisitions throughout Australasia as the recession forces smaller players in medical supplies to look to merge. This places Ebos, with revenue well over $1 billion and with a strong balance sheet, in a good position to bolt on acquisitions. Ebos managing director Mark Waller said the Christchurch firm could spend up to $100m on new assets. Ebos was in discussions about acquisitions and joint ventures on both sides of the Tasman. In the nature of wholesale distribution, margins tend to be thin and scale is needed to be successful. Ebos

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has been an aggressive acquirer of assets, having acquired pharmaceuticals distributor PRNZ for $86.3m in 2007, and MedBio Scientific in 2008, among others. Its main division distributes medical supplies and pharmaceuticals on behalf of multinational companies like GlaxoSmithKline to pharmacies and district health boards. The share has held up very well amid the carnage of the share market fall, largely because a business model predicated on medical supplies has never seemed more attractive. Ebos also has a track record for paying attractive dividends.

News briefs

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News briefs

Managed investment schemes hit a wall

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By Neville Glaser

In Australia a Senate inquiry will investigate managed investment schemes, after the latest collapse of Great Southern Limited. Great Southern, the nation’s biggest agribusiness managed investment scheme company, has followed rival Timbercorp into administration, raising serious questions about the future of the industry. It went into voluntary administration at the weekend with debts of up to A$700 million. About 43,000 investors are awaiting news about how much can be salvaged. Like other managed investment schemes, Great Southern was set up so people would receive a tax break when they invested. It is less than a month since the collapse of Timbercorp which also offered managed investments in forests and horticulture. Tax concessions for agricultural projects have seen major companies set up to help investors take advantage of the financial benefits. These schemes are blamed for having distorted the market in Australia for water and for food. In New Zealand some tax driven schemes have involved the forestry industry, the legitimacy of which was challenged in a recent court case. Well known tax driven funds that had their tax advantages stripped away included Blue Chip and Money Managers’ First Step fund. Financier Doug Somers-Edgar’s First Step was closed in November 2006 with investor funds totalling $457m. First Step was launched in 2000, providing investors with tax-free returns through a loophole in Australian and New Zealand tax law. It grew rapidly to $500m. However, changes in tax legislation introduced

by Finance Minister Michael Cullen in 2004 stopped the product’s growth in its tracks and it closed in November 2006. With most of the clever, structured investments you don’t really know what you are getting into, and so you should avoid them.

Never invest in a structured product that derives most of its returns from tax breaks An investment should be tax affective, while also delivering most of its returns in a legitimate earnings stream and capital growth. Tax should be the cherry on top. Never invest solely on the basis of the tax benefits. These tax breaks are often devised to compensate for a second grade investment strategy and for high fees that are being sucked out of the fund. In other words, the fund managers rely on Inland revenue to subsidise their low returns. Many of these schemes are eventually challenged by tax authorities, with their investors having to stump up with back taxes. The reason it happens is that most tax codes include a blanket clause that you cannot enter into any scheme designed to avoid tax. It is not clear cut and years can pass while you claim tax benefits before Inland Revenue suddenly reviews your file and takes action to claim back all the tax benefits you had, plus interest and penalties. Many have seen their wealth destroyed in such a tax review, so don’t take the chance. It comes down to your intention at the time of making the investment. Were you investing for income or for tax breaks? Sometimes intention is not hard to prove. Take a forestry syndicate that pays no dividends but delivers huge tax benefits to its investors. How is it going

to argue in court that while its investors were watching the trees grow, deriving no income, they were still investing for income and not for tax reasons? Steer clear of tax driven products. The tax benefit is often designed to make up for the serious deficiencies in the product. What makes the appeal of the tax driven schemes more puzzling is that in NZ we live in one of the most tax friendly environments in the world. In NZ, we don’t pay tax on capital gains in shares, and pay virtually no tax on the dividends on those shares because of imputation. The tax benefits from direct investment in investment property is virtually unequalled anywhere. So why take the risk of penalties from tax avoidance, or pay a layer of fees when you can derive all the benefits directly? It is hard to understand investors love for complex structured investments, both here and across the Tasman. Structured products are devised by smart investment bankers to lure investors with a seemingly low cost investment, in the form of units, usually. But the fees and other costs are usually high and these have to come from somewhere, usually the returns meant for investors. Simple is best in investment, whether it is direct investment in a property, or direct investment in the shares of a company, bestowing real ownership of part of that business.

HANDCRAFTED 1967

Australia

Aussies upbeat, but doubts remain By Jamie Gray

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f Australia’s officialdom is to be believed, the economic climate across the Tasman is improving. Reserve Bank of Australia (RBA) governor Glenn Stevens thinks the Australian economy is in a good position to benefit from a global recovery later this year. He, like many other officials and economists, cite an improving Chinese economy as grounds for optimism. Stevens, in a post-budget business briefing, said there had been a “significant” pick-up in economic activity in resource-hungry China in the past four or five months. And the RBA board, in releasing background notes on its decision to leave its official rate unchanged at 3.0%, said a range of economic data pointed to some improvement in the global economy. The strongest signs are in Asia, with production in China rebounding particularly quickly, the RBA said. Australia looks towards China for signs

of its own future health, because China is such a voracious consumer of the stuff Australia digs out of its earth: Steel, coal, minerals etc. While it is too early to be confident about the durability of this trend, evidence is accumulating that the maximum rate of global economic contraction may have passed, the RBA notes said. Board members noted the much better tone in financial markets -share prices have risen strongly in all countries in recent weeks and credit spreads are declining noticeably. Businesses have been able to raise more debt in capital markets and banks, including those in Australia, have been able to issue some non-guaranteed debt in their home markets. Sentiment nevertheless remains fragile and could easily be disturbed by bad news. In the case of the Australian economy, RBA board members say there are signs that the economic

stimulus that had been applied was supporting demand. Nonetheless, substantial growth is not expected to resume until around the end of 2009. Australia faces rising unemployment and falling inflation this year, although the earlier depreciation of the exchange rate would slow the decline in prices for some time. “Overall, the Australian economy is likely to record better outcomes than most other advanced economies in 2009 and 2010, reflecting the healthy state of the domestic banking system and effectiveness of the macroeconomic policy stimulus to date,” the RBA notes said. Monetary policy has been eased significantly already. Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt‑servicing burdens considerably. In assessing whether further reductions in the cash rate are required over the period ahead, the board said it will monitor how economic and financial conditions unfold. The long and the short of it is that the RBA board, and its governor, are feeling better about economy’s prospects. So is the Treasury. Treasury Secretary Dr Ken Henry defended the government’s latest budget, which had drawn criticism in the media for being overly optimistic. Henry backed the budget’s positive assessment of Australia’s prospects and said the nation would come out of this period of global economic crisis in much better shape than most other developed countries. He reiterated the oft-repeated line

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Australia

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“Now, as the recession entrenches itself in our trading partners, we are feeling the effects of their lower demand for our exports,” Henry said.

that the Australian banking sector remained strong. “Households have not been vulnerable here. In particular, housing has, to date at least, looked to be on a much stronger foundation,” Henry said. “The strength of the financial system, underpinned by extensive public guarantees, has provided our economy with a measure of protection as the global financial crisis has morphed into the global recession,” he said. He conceded though that the financial crisis had already put considerable downward pressure on demand, including by sapping consumer and business confidence, and slashing the value of household wealth. “Now, as the recession entrenches itself in our trading partners, we are feeling the effects of their lower demand for our exports,” Henry said. The Treasury expects exports to fall by 4% in 2009-10, consistent with a drop in world trade. But so far Australia has not been as badly affected as other countries. Australia’s export volumes contracted by one percent in the second half of 2008 while the U.S., Canada and New Zealand experienced 6% contractions over the same period. The Treasury forecasts zero growth in 2008-9, negative growth of half a percent 2009-10 and growth of 2.25% in 2010-11. After that, the Treasury has projected two years of 4.25% growth, which its detractors have attacked as being wishful thinking. While it remains early days, Australians do have cause to feel more optimistic. Australian retail sales surged 2.2% in March from the previous month, which was well in excess of market expectations.

There are also grounds for optimism about the all-important Chinese economy. Xinhua, the official government news agency, said China expects to meet the target of achieving 8% economic growth in 2009. The agency said there had been consolidation in the recovery’s momentum. Xulin, head of the China’s Department of Fiscal and Financial Affairs of the National Development and Reform Commission, told a briefing in Hong Kong that there had been a consolidation in the recovery’s momentum after a minor slowdown in April. China’s economic planners are prepared to put in place additional stimulatory measures if necessary. China could sustain heavy government investment to stimulate the economy for several years, Xu said. Commodities markets have focused on a surge in Chinese imports of late. Chinese iron ore imports hit 57m tonnes in April – up 33% on a year earlier. Chinese coal imports have also risen to 5.72m tonnes, up 67.3% on a year earlier. While Stevens and Henry appear to have “warm fuzzies” about a late 2009 recovery, those at the coal face have different ideas. Don Argus, chairman of Australia’s biggest company, mining giant BHP Billiton, said he was pessimistic about the prospects of a recovery in the short term. “(Henry and Stevens) have got the levers of the economy,” Argus said. “I’ve got a balance sheet, I’ve got revenue statements, I deal with customers, I’m a contributor to the Australian economy … I’m just calling it from where I see it,” the Sydney Morning Herald

reported Argus as saying. Argus warned it would be a “pretty tough” 2009 and 2010 and said companies should be prepared for further pain. While some would call his comments pessimism, “I prefer to call it caution that 50 years in corporate life engenders”. He predicted that Australians who had so far been shielded from the impact of the crisis would start to be affected, as the Government was forced to pay back the debt it had incurred with its economic stimulus packages. “They can’t do that without budget cuts and increasing taxation,” the Herald report said. Argus based his analysis on an International Monetary Fund report, his own analysis of the 1987 crash, and business conditions BHP is experiencing. “The IMF report makes it easy to conclude that the road to economic recovery will be slow, hence my cautious response to the recent political rhetoric.” The IMF has sharply downgraded its outlook for the Australian economy, and is forecasting only a slight recovery in 2010 based on an expected pick up in key export markets. For 2009, the IMF expects Australian GDP to contract 1.4% compared to previous forecast of a 0.2% contraction. There are other doubters. ANZ Bank, in a market commentary, said: “With difficult times ahead, there is still room for the RBA to be disappointed about their view for the Australian economic recovery. As such, we retain the view that the cash rate will fall further by the end of the year.” But for the moment, market sentiment seems to be favouring the positive rather than the negative. Australian share prices have gained ground over the last month, although they have been very volatile. While Australia’s top tier bureaucrats are keen to draw a positive picture of the Australian economy, few would suggest the economy is out of the woods just yet.

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Cover

Is KiwiSaver all it’s made out to be? Neville Glaser starts the first in a three part series on KiwiSaver, an investment topic that is extremely important to every New Zealander, but so vast in scope it has to be digested in small bites, starting with this first instalment

’ve had my doubts about KiwiSaver. Not because the initial performance of those funds was actually quite poor, prompting an article in the NZ Herald in 2008 which began: “KiwiSaver has so far been a KiwiLoser, eroding more wealth than it is creating”. Such comments based on poor returns at the beginning of a share market slump are meaningless, as a portfolio can only be judged through an entire cycle of say 7 years. The reason I’ve had my doubts is because every adviser and commentator thinks it’s the best thing since sliced bread. Some wealth management companies and insurance companies are literally selling the KiwiSaver products door to door. The pitch is always along the lines that you cannot go wrong with a scheme where the Government is subsidising your own contributions, and your kids get $1,000 free before they even enter the job market. I baulk at any investment scheme that is universally adored because experience meitpopularity is an inverse KiwiSaver is a vast topic and I intendtells to present to readers in readable bites over three issues, starting with this issue. the more popular the scheme the barometer in investments: more trouble is heading for. In the real world, people make GRAPH SOURCE:itBOUCHER CONSULTING money are entering losingintoit.KiwiSaver If everyone istogetting This graphbecause the benefitsothers of an employee as opposed paying off a

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mortgage – as noted at the meeting the graph worksheet is very illuminating

This graph shows the benefits of an employee entering into KiwiSaver as opposed to paying off a mortgage © Baucher Consulting Ltd/Nicholas Associates Ltd 2007

wealthy, where is the wealth coming from? But of course, kiwiSaver is something quite different. It is a pension fund based on drip-feed that is badly needed in a country that has a weak savings culture. The US has its 401 K plan for employees, Australia has its superannuation, we now have KiwiSaver, using the classic incentives that such a scheme has to have - subsidised by Government and employer. All the research I have seen on this subject up to now seems to stack up. Even a mediocre return from a mediocre fund will produce reasonable returns over a lifetime because of the Government’s contribution. In fact, you would be hard pressed to find an investment giving a higher return that can compete with your KiwiSaver account, after it has received its initial $1,000 Government kick-start grant three months after joining, and up to $1043 per year dollar for dollar matching Government contribution there after. But of course you have to show some care in choosing a KiwiSaver provider. I have no doubt that a very weak investment strategy by a weak fund manager will still fail to get you near your retirement goal, even when the subsidies are added in. However, as a concept it is very attractive. On this page is a graph prepared by Baucher Consulting /Nicholas Associates. This graph shows the benefits of an employee entering into KiwiSaver as opposed to paying off a mortgage. I am not sure of the underlying assumptions but it does seem credible and very illuminating. KiwiSaver is a vast topic and I intend to present it to readers in readable bites over three issues, starting with this issue.

Cover

KiwiSaver Cracks 1 Million

Why should you join KiwiSaver? Aside from the realisation that the current Government pension of $239.19 per week (if married) is unlikely to maintain your lifestyle into retirement, quite simply, the incentives speak for themselves: • Everyone who joins KiwiSaver receives a $1,000 “kickstart” from the Government just for joining. No strings attached. • The Government matches your contributions dollar for dollar up to $20 per week ($1,042.86 per annum) if you aged 18 and over. When did the Government last give you this kind of money for anything? • If you are employed, your employer is obligated to match your contributions up

KiwiSaver has been successful because it makes it easy for anyone to save for their retirement to 2% of you gross income. Employer contributions up to 2% are tax free. Always nice to get one over the taxman I’m sure you’ll agree. • First home assistance programs. After 3 years of membership you can withdraw you and your employer’s contributions to put towards a home deposit. You may also be eligible (subject to conditions) to receive a subsidy from the Government of up to $5,000 to put towards your home. The recent changes brought in by National have further widened KiwiSaver’s appeal. The lowering of the minimum compulsory employee contribution to 2% means that the scheme is now affordable for more people and that has to be a good thing. If you don’t contribute you don’t get to enjoy the incentives and benefits of KiwiSaver and why should people miss out because they couldn’t afford 4%?

Who can join KiwiSaver? Anyone aged under 65 can join KiwiSaver – employees, the self employed, those not working, even kids.

The Choice is Yours One of the great features of KiwiSaver is that you can choose your KiwiSaver provider. We think that everyone should exercise that right. With over 30 providers to choose from it can be hard to know where to start but we reckon sticking to the basics is a step in the right direction. So what are the basics to consider? Track record – whilst past performance is no predictor of future performance it does help to gauge the investment ability of the people you are selecting to manage your money and at the end of the day, returns do matter. As the graph below shows, even a 2% difference in return will make a significant difference to the retirement lifestyle you can afford. Transparency and communication – it’s your money so you deserve to know where it is invested and why. Do you understand your provider’s investment philosophy? How do they keep you informed of the progress of your savings? Do you really have a sense of what is going on with your KiwiSaver savings? Investment strategy – the majority of KiwiSaver money

New Zealand Investor

n April the one millionth New Zealander signed up to KiwiSaver, a significant milestone achieved within two years of the scheme’s launch that was initially forecast not to be reached for many years. The uptake of KiwiSaver has surpassed all expectations. But should we really be surprised at the momentum the scheme has gathered? Not at all. KiwiSaver has been successful because it makes it easy for anyone to save for their retirement, it has benefited from frequent, broad and generally positive media exposure and not least because of the attractive package of incentives for those who participate. In fact, the combination of incentives leaves you wondering why the other 2.8 million eligible Kiwis haven’t joined KiwiSaver yet.

By Carmel Fisher, Managing Director Fisher Funds.

Cover

WHAT IS KIWISAVER? KiwiSaver is a voluntary savings scheme aimed at encouraging New Zealanders to save for their retirement. Money saved in KiwiSaver accounts is locked in until you are eligible to receive New Zealand Superannuation (currently 65) or 5 years after you joined a KiwiSaver scheme (whichever is the later). You can choose your own KiwiSaver provider, and change your provider at anytime. Your contribution is subsidised by an annual Government contribution to your KiwiSaver account. New employees are automatically enrolled in KiwiSaver by their employer and have up to 8 weeks to opt-out. Other employees and people who are self-employed or not employed can opt-in to KiwiSaver. Once a person has opted-in to KiwiSaver, they cannot opt out. KiwiSavers who are employees must contribute either 2%, 4% or 8% of their gross salary or wages. If you change employment your membership in a KiwiSaver scheme is not affected - your KiwiSaver account follows you wherever you are employed in New Zealand. After contributing for 12 months, employees can apply to the Commissioner Inlandis that you can choose your KiwiSaver provider. One of the great features ofof KiwiSaver We think that everyone exercise that right. With over 30 providers to choose from Revenue for ashould "contribuit can be hard to know where to start but we reckon sticking to the basics is a step in the tions holiday" which right direction. So what are the basics to consider? suspends KiwiSaver Track record – whilst past performance is no predictor of future performance it does help deductions for up to 5 to gauge the investment ability of the people you are selecting to manage your money and at theyears. end of the day, returns do matter. As the graph below shows, even a 2% difference

passed to providers to date is invested in default funds. These are low risk with little exposure to assets that will grow your money. KiwiSaver is a long term savings plan so for most people with more than 5 years to save a default fund is probably not the best option. You need your money to grow in value to outpace inflation. Not long after KiwiSaver began in July 2007, global share markets experienced one of the most significant corrections of recent times. For many KiwiSaver members new to investing this was a nervous experience but it actually provided a great long term investing opportunity. Because KiwiSaver contributions are made on a regular basis members are able to take advantage of market weakness and buy shares in companies at discounted prices. No one can pick the bottom of the market or conversely when the market has peaked but by contributing on a regular basis you take away the emotion of when is the right time to invest and you will lower your average cost of entry. This is known as dollar cost averaging.

It’s not too late to join One of the most common reasons for people not joining KiwiSaver is procrastination. In this case procrastination actually hits you in the back pocket. As KiwiSaver is a voluntary savings program you can join at any time but as the graph below illustrates the earlier you join, the bigger the nest egg. If you have high interest debt or can’t afford to contribute we can understand why you might not join KiwiSaver just yet. But laziness? Do yourself a favour and join KiwiSaver. It’s a no brainer for most.

in return will make a significant difference to the retirement lifestyle you can afford.

Assumptions: This analysis assumes three investors in KiwiSaver,

www.equity.co.nz

Assumptions: This analysis assumes three investors in KiwiSaver, the first is a 20 year old, the second is a the 20isyear old, second is aabove 30and year and the third is 30 yearfirst old andis theathird a 40 year old. the Their income is shown rises old at 3.5% per annum until 65 they retire. 4% employeeincome contributions,is2% employer above contributions. assumedat return of 8%per a when 40 year old. Their shown andAnrises 3.5% after tax and fees each year is presented. Inflation is assumed to average 2%. All portfolio amounts are annum until 65 when they retire. 4% employee contributions, 2% shown in today’s dollar terms.

Assumptions: An investor starts saving at age 23, annual salary of $35,000. Wage inflation of 3.5%pa until they retire at 65. 4% employee contributions, 2% employer contributions. Two investment return assumptions an assumed Assumptions: An investor starts saving at age 23, annualare salarypresented. of $35,000. Wage1). inflation of 3.5%pa until theyreturn retire at 65. employee contributions, 2% fees employer contributions. return of4%4.5% after tax and each year.Two 2).investment an assumed assumptions are presented. 1). an assumed return of 4.5% after tax and fees each year. 2). an return of 6.5% after tax and fees each year. Inflation isassumed assumed return of 6.5% after tax and fees each year. Inflation is assumed to average 2%. All portfolio amounts are to in average 2%. All portfolio amounts are shown in today’s dollar shown today’s dollar terms. terms. Transparency and communication – it’s your money so you deserve to know where it is invested and why. Do you understand your provider’s investment philosophy? How do they keep you informed of the progress of your savings? Do you really have a sense of what is going on with your KiwiSaver savings?

employer contributions. An assumed return of 8% after tax and The assumed net returns of both graphs are illustrative only and do not reflect the actual or prospective fees each year is presented. assumed to average performance of the Scheme or of any Fund. Inflation The returns tois members of the Scheme are subject to2%. All investment andamounts other risks (including loss of income and principaldollar invested)terms. and no amount of returns is portfolio are shown in today’s promised or guaranteed. Returns will vary depending on the investment performance of your chosen Fund The assumed net returns of both graphs are illustrative only and do or Funds. not reflect the actual or prospective performance of the Scheme or Ifofyou have high interest debt or can’ttoafford to contribute we can understand whysubject you any Fund. The returns members of the Scheme are to might not join KiwiSaver just yet. But (including laziness? Do yourself favour and and join principal investment and other risks loss ofa income KiwiSaver. It’s a no brainer for most. invested) and no amount of returns is promised or guaranteed. Returns will vary depending on the investment performance of your chosen Fund or Funds.

Kickstart Your Kids KiwiSaver

Combine Rabobank’s exceptional rating with the upside potential of the S&P/ASX 200

By Darren Marinovich, F. Fin, CFIP, RIA General Manager – IRG Equity Investment Advisors

Zeeland Note Programme Series 1 – Five Year S&P/ASX 200 Index Linked Notes Rabobank and Intercap Funds Limited have developed the Zeeland Note Programme, a series of innovative notes to be issued by Rabobank Nederland New Zealand Branch. The first investment product under the Zeeland Note Programme is the Five Year S&P/ASX 200 Index Linked Note. On maturity, investors will receive the amount they initially invested and a return linked to the highly liquid S&P/ASX200 Index. Offer highlights include:  Notes constitute direct, unconditional, unsecured

debt obligations of Rabobank Nederland.  Rabobank is the highest rated bank operating in

New Zealand with credit ratings of AAA from Standard & Poor’s* and Aaa from Moody’s.  Participate in any rise of the S&P/ASX 200 over five

years, above an initial level determined by the issuer, up to a maximum return of 80%.  Capital amount invested will be repaid on maturity

even if the S&P/ASX 200 falls over the term.  The notes are hedged to the NZD, providing

protection from adverse movements in the NZD/ AUD exchange rate.  Minimum investment amount is $5,000 and $1,000

increments thereafter. So if you want exposure to the Australian share market without the capital risk of a direct investment, get a copy of the Investment Statement from your financial advisor, online at www.zeelandnotes.co.nz or by phoning Intercap Funds Limited on 03 977 8855. Offer open 15 June to 14 July 2009 **. RABO0509-11968

While KiwiSaver is generally seen as a good thing, there’s some debate about its roles in the saving habits of kids. Yet it is utter nonsense to think that it is anything but a good idea to put some money away for a rainy day – and the younger you start the better. Case in point. I have been educating my daughter, Melyssa for some time now on finances, and as a 10 year old she does pretty darn well. But it is a work in progress and quite frankly what we do as parents is always being studied and copied so we have to be role models and fiscally responsible in our own right to have any true impact when educating the younger generation. This is not so easy because the generation I’m speaking about are all about having the latest trends in clothing, cellphones and other discretionary items, and they are more about the “spend” than they are about the “save”. So why not break the mindset by opening a KiwiSaver account for them? You can start with a little if you like. The kicker is that typically 3 months after the IRD is notified by the KiwiSaver Scheme Provider that the account is opened, there will be a $1,000 kick-start deposited, complements of the Government. Here you have an account that has not even been going long enough to enjoy any significant return potential let alone compounding and you already have a grand added to it, just because you started one. Sure the money is on lock down till they are 65 or perhaps earlier for buying a first-home, but just imagine the nest egg in there when they do come to make that big house purchase and realize that all along they have some funds to help with the deposit. In the case of my daughter, this is an account that she can’t get her hands on now for the “fun” stuff that I know she would love to be buying, but she will understand eventually why this was a good idea. For Melyssa’s KiwiSaver, family and friends know she has one. Come Birthday or Christmas time when typically she is going to receive another toy, book or clothing item, those who are financially inclined normally give her cash for her KiwiSaver, so they too are getting into the spirit of the thing. KiwiSaver is not necessarily the answer for everyone, as there are other investment vehicles that provide for better flexibility; however with a free $1,000 thrown in at inception – why not at least start it? While the IRD/Government is actually giving us cash instead of constantly taking it away, we should take advantage of the offer. Here at IRG Equity we partner with several KiwiSaver providers. I’d be happy to discuss this with you further if you care to give me a call on 0800 437 8489 or email me at darren@irg.co.nz

Applications can only be made using the application form included in the Investment Statement. *Ratings are subject to change. For the latest ratings information please visit www.standardandpoors.com Ratings are solely statements of opinion and not statements of fact or recommendations to make any investment decisions. ** Unless closed earlier by Rabobank Nederland New Zealand Branch.

golden

opportunity...

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As a Special Offer for New Zealand Investor magazine readers we are offering the perfect Autumn Getaway - 2 nights at Gold Ridge Hotel in Queenstown for $215. Gold Ridge features spectacular lake and mountain views of Wakatipu and the Remarkables, from the restaurant, bar and most hotel rooms. Our landscaped grounds are spread over several acres of attractive gardens and lawns. If youâ&#x20AC;&#x2122;re keen on adventure, many Queenstown excursion operators and ski field shuttle buses pick-up and drop-off at the hotel reception. Youâ&#x20AC;&#x2122;ll find Gold Ridge located just 4kms from Queenstown town centre. Treat yourself this Autumn - at Gold Ridge Hotel. To receive this special rate, please call us on 0800 656 100 and mention this advertisement.

www.equity.co.nz

(Please note that this offer is subject to availability).

594 Frankton Road, Queenstown East

www.goldridgehotel.co.nz

ShareTalk

AUSTRALIA, NZ SHARE MARKET REPORT – 4 weeks ended May 22 THE AUSTRALIAN AND NEW ZEALAND SHARE MARKETS TROD A ROCKY ROAD OVER THE COURSE OF THE MONTH. BOTH MARKETS RETREATED SINCE HITTING A PEAK ON MAY 8 BUT THEY NEVERTHELESS REMAINED IN AN UPWARD TREND. In the big picture, Australasian sentiment was driven by the United States as the Dow Jones Industrial Index also hit a monthly peak around the same time as its New Zealand and Australian counterparts. But all is still not well in the States. The U.S. Federal Reserve cut its outlook for economic growth for the next three years and said a full recovery could take five or six years. The release of the Fed’s “stress tests” of several key banks caused some jitters early in piece but markets seemed generally to take them in their stride. The Reserve Bank of New Zealand cut its official cash rate by 50 basis points to 2.5% while its more optimistic opposite number across the Tasman opted to leave its rate unchanged at 3.0%. Reserve Bank of NZ Governor Alan Bollard said markets had shown some signs of stabilising but that he expected to see “adverse economic forces” generated by the crisis to remain dominant in 2009. In corporate news Auckland International Airport dropped sharply after the company poured cold water on expectations of how much revenue its retail operations

NZX50

ASXORDS ALL ORDS ASX ALL ASX ALL ORDS 2950

Moving average Moving average (5 days) (5 days) Moving average Moving average (20 days)(20 days)

May

DDI EMAIL

Dan stratful

DDI EMAIL

May

2950

Moving average Moving average (5 days) (5 days) Moving average Moving average (20 days)(20 days)

4000

3950

3900

3850

2900

2850

2800

2800 3800

3800

2750

3750

2700

3700

3700 3650

2650

3650

2650

3600

2600

3550

2550

3500

source: www.findata.co.nz source: www.findata.co.nz

09 304 0235 sharon.fang@equity.co.nz 09 304 0232 dan@irg.co.nz

May

source: www.findata.co.nz May source: www.findata.co.nz

Level 13, 57 Fort Street, Auckland, NZ

A free disclosure statement is available upon request call 0800 437 8489

New Zealand Investor

NZX50NZX50

would generate next year. New Zealand Oil and Gas was firm on the back of higher oil prices and New Zealand Refining also gained ground. Corporate dairy firmer NZ Farming Systems Uruguay showed signs of recovery on the back of better milk powder prices. Telecom launched its new mobile XT service but it didn’t do much for its share price, which remained under downward pressure. Pike River Coal fell sharply in response to weaker demand for coking coal from world steelmakers. Fletcher Building shares were stable after the company’s successful share purchase plan, which was over-subscribed. Resins maker Nuplex Industries continued its strong run following its recent recapitalisation and rural services group, PGG Wrightson, made a comeback. Australian stocks generally clung to their firming trend, although some stocks suffered on the back of concerns about capital raisings. There was little share market reaction to central bank governor Glenn Stevens’ comment that Australia’s economy was in a good position to benefit from a global recovery later this year. Australian banking stocks were mixed, with no clear trend emerging among the big four. Australasian brewer, Lion Nathan, which is the subject of a takeover bid from its biggest shareholder, Japan’s Kirin, was steady after delivering a strong first half result. Stockland, Australia’s largest housing developer, slumped after completing an A$1.56b share sale to institutional investors at A$2.70 per share. The company plans to raise another A$420m from retail investors.

ShareTalk

Telecom (TEL)

Air New Zealand (AIR)

Metcash (Au:MTS)

Telecom faces competition in all its revenue streams, but it is slowly positioning itself for the more competitive environment. A major development is the launch of its 3G mobile network, which puts it head to head against Vodafone. TEL presents an excellent dividend yield as long as the share is acquired in its periodic dips.

Air New Zealand could be in merger talks with another airline by the end of the year as the recession tightens, a leading industry think tank says. But even a potential merger is no guarantee of windfall profits on the shares, as mergers under distress situations don’t usually work out so well for shareholders.

Having put a lengthy and complicated restructuring and acquisition deal behind it, MTS now is a force to be reckoned with in the Australian retailing scene. While competition remains fierce - and it doesn’t come fiercer than Woolworths - the company’s track record in distribution suggests it should continue to prosper. skt

ADVICE: YIELD BUY

ADVICE: Sell

Price

$2.60

Price

$1.06

Market Capitalisation

$4.8 b

Market Capitalisation

$1.1 b

Year Rolling High/Low

$4.02/$2.19

Year Rolling High/Low

$1.30/$0.75

Price

Volume Share Price 30-day Moving Av

A$4.15 25000

3.50

Market Capitalisation

3.00

Year Rolling High/Low

A$3.1 b

1.25 1.15 1.10

20000

A$4.45/A$3.61 15000

1.00 0.95

Financial Year

2008

2009

0.90

10000

2009

Financial Year

2008

2009

EPS (cps)

25.7

EPS (cps)

20.7

8.5

2.00

EPS (cps)

26.5

28.5

0.80

PE Ratio

6.9

10.1

PE Ratio

5.1

12.5

1.50

PE Ratio

15.7

5000 14.6

0.70

Dividend (cps)

8.5

6.0

Dividend (cps)

21.0

0 22.5

0.60

Adjusted price ($) 4.004.00 Adjusted price ($)

Volume traded (thousands) 30000 Volume traded (thousands) 30000

3.503.50

Volume Volume Share Price Share Price 25000 30-day Moving Av Av 25000 30-day Moving

3.003.00

20000 20000

2.502.50 2.002.00 1.501.50 1.001.00 ©NZX ©NZX

whs

15000 15000 10000 10000 5000 5000 0 0

whs Telecom (TEL) posted atraded 14% gain Volume (thousands) Volume traded (thousands) in third-quarter profit on increased 250000 250000 Southern Cross Cable dividends, a 200000 smaller tax bill and lower mobile 200000 costs. However, it predicted weaker 150000 150000 full-year earnings. Net profit was 100000 $158m in the three months ended 100000 31 March, up from $139m a year 5000050000 earlier. The latest period included0a 0 $40m dividend from cable company Southern Cross and a 52% drop in tax expenses. The company has confirmed its guidance for a full-year profit of between $460m and $500m. TEL conceded that new competitors are putting pressure on its traditional revenue streams. New management is breathing life into the operation, but the road ahead is tough. Although it operates in growing markets, this is not really a growth share, given that its market share is under constant attack. That means it is a yield share, bought for its cash dividend, which remains high even though it has been declining.

Adjusted price ($) ($) Adjusted price 4.504.50 4.454.45 Volume Volume 4.404.40 Share Price Share Price 4.354.35 30-day Moving Av Av 30-day Moving 4.304.30 4.254.25 4.204.20 4.154.15 4.104.10 4.004.00 3.953.95 3.903.90 3.853.85 3.803.80 3.753.75 3.703.70 3.653.65 3.603.60 3.553.55 ©NZX ©NZX

shlshl 12-month Chart for AIR to 15/05/09 Share Price ($) 1.251.25 Share Price ($) 1.201.20 1.151.15 1.101.10

Volume Volume 13000 13000 Volume 12000 Volume 12000 Share Price Share Price 11000 30-day Moving Av Av 11000 30-day Moving 10000 10000

1.001.00 0.950.95

9000 9000 8000 8000

0.900.90 0.850.85

7000 7000 5000 5000

0.800.80 0.750.75

4000 4000 3000 3000

0.700.70 0.650.65

2000 2000 1000 1000

0.600.60 ©IRG ©IRG

0 0

Air New Zealand is under pressure from Australian rivals Jetstar and Pacific Blue and long-haul giants such as Emirates Airline. Air New Zealand’s long-haul passenger volumes slumped in April led by an 18% decline in numbers on routes through Asia, Japan and the UK. AIR will always be a volatile investment as the airline industry can be unpredictable and incredibly tough with many variables affecting it. The industry worldwide is going through consolidation as struggling airlines band together to avoid failure. We have never favoured the airline industry and would never invest in this industry during the best of times. The AIR share is better suited to traders who can buy and sell into its inevitable ups and downs. But as trading attracts capital gains tax in NZ, it is not a viable strategy. The AIR share price has spiked recently which is an opportunity to sell into the recovery.

1.00 ©NZX

12-month Chart for MTS to 13/05/09 whs 4.50 4.45 4.40 4.35 4.30 4.25 4.20 4.15 4.10 4.00 3.95 3.90 3.85 3.80 3.75 3.70 3.65 3.60 3.55

Adjusted price ($) Volume Share Price 30-day Moving Av

Volume traded (thousands) 250000

200000

150000

100000

50000

©NZX

Shar

1.20

2008

skt skt 12-month Chart for TEL to 15/05/09

www.equity.co.nz

Volume traded (thousands) 30000 ADVICE: GROWTH BUY

Adjusted price ($)

2.50

Financial Year

4.00

Australian wholesale food distributor Metcash (Au:MTS) is planning to grow even as the recession bites. For 2009, new store forecasts are ahead of plan - now at 62 compared to 41 announced in 2008 with 28 extensions and 92 refurbishments also expected. MTS now distributes to more than 1600 independent food sellers. It reports that sales remain strong despite economic problems with market share gains continuing and new stores and refurbishments working well. Management notes a trend away from eating out to eating at home with customers also vacationing at home more often. MTS is a marketing and distribution company operating three business units- IGA Food Distribution, Campbells Wholesale and Australian Liquor Marketers (ALM). EPS growth is expected to remain strong over the next couple of years as value from its new assets are fully extracted. It is a defensive stock selling at a reasonable price.

0.85 0.75 0.65

©IR

ShareTalk

Wakefield (WFD)

Ebos (EBO)

Warehouse (WHS)

Private hospital operator Wakefield Health (WFD) continues to position itself to take advantage of consolidation in the healthcare sector. Wakefield is in a good, recession proof industry. But the share is fully priced based on a thin dividend. The share could be bought on weakness when it delivers a better dividend yield.

The share has held up very well amid the carnage of the share market fall, largely because a business model predicated on medical supplies has never seemed more attractive. Ebos also has a track record for paying attractive dividends around 5% yield. It is a defensive share that fits with the conservative dividend seeking investors.

Warehouse is clearly resilient but perhaps still quite vulnerable to a further deterioration in retailing. Despite all the uncertainties, and a poor retail outlook, WHS is a solid blue chip share that pays a reliable dividend. It is this good dividend that makes WHS worth accumulating on weakness but theBGr shares are too high now.

Advice: HOLD

Advice: YIELD BUY 9.20

Price

$4.80

Adjusted price ($)

9.50 Price

Volume traded (thousands) Advice: HOLD 800

Volume Share Price 30-day Moving Av

$3.63

700

9.00

$1.1b

600

8.50

$4.02 $2.19

Market Capitalisation

$130.3m

Market Capitalisation

$235.1m

Market Capitalisation

Year Rolling High/Low

$4.02/$2.19

Year Rolling High/Low

$5.05/$3.85

Year Rolling High/Low 8.00

Financial Year

2008

2009

Financial Year

2008

2009

Financial Year

EPS (cps)

71.6

82.6

EPS (cps)

37.6

40.2

PE Ratio

12.9

11.1

PE Ratio

12.8

Dividend (cps)

25.0

26.0

Dividend (cps)

23.0

BGrBGr 12-month Chart for WFD to 21/05/09

10.0 9.50 9.00 8.50 8.00 7.50 7.00 6.50 6.00

Adjusted price ($) Adjusted price ($)

10.0 9.50

Volume Volume Share Price Share Price 30-day Moving Av 30-day Moving Av

9.00 8.50 8.00 7.50 7.00 6.50 6.00 ©IRG ©IRG

XRO XRO

Volume traded (thousands) Volume traded (thousands) 800 700 600 500 400 300 200 100 0

800 700

5.00

4.50 500 400

4.00

300

3.50

200

3.00

100 0

2.50

4.50 4.00 3.50 3.00 2.50 ©NZX ©NZX

4.50 4.00

2009

EPS (cps) 7.00

9.3

26.0 200

3.50

11.9

PE 6.50 Ratio

12.4

14.0 100

3.00

23.9

6.00 Dividend (cps) ©IRG

21.0

0 21.0

2.50

Volume Volume 60 60 Volume Volume Share Price Share Price 30-day Moving Av 50 30-day Moving Av 50 40 30 20 10 0

Ebos Group is hunting for acquisitions as the recession forces consolidation in medical supplies sectors it operates in. Managing director Mark Waller said the medical supplies distributor could spend up to $100m on new assets and was in discussions about acquisitions and joint ventures on both sides of the Tasman. Business owners looking to sell were becoming more realistic about the value of their assets, said Waller, as weaker companies begin to feel the pressure of a recession. EBOS has secured bank facilities for the next three years. Its debt to debt plus equity ratio was a low 32.3% as at 31 December 2008, and it is well placed to fund further expansion. Ebos’ total revenue in the year to June 30, 2008 was $1.09 billion. Its main division distributes medical supplies and pharmaceuticals on behalf of multinational companies like GlaxoSmithKline to pharmacies and district health boards.

300

©NZX

12-month Chart for WHS to 21/05/09 XRO

600

Wakefield has reported a traded more than Adjusted price ($) Volume (thousands) Adjusted price ($) Volume traded (thousands) 4500 4500 6.00 Volume 40% increase in full-year earnings. The Volume 4000 Share Price 5.50 4000 Share Price 5.50 30-day Moving Av after-tax profit for the year 30-day to March Moving Av 3500 5.00 3500 5.00 3000 4.50 was $10.13m compared with $7.2m. 3000 4.50 2500 4.00 The profit was achieved on a 10.3% 2500 4.00 2000 3.50 rise in revenue to $86m and operating 2000 3.50 1500 3.00 1500 3.00 margins improved thanks to ongoing 1000 2.50 1000 2.50 work on cost efficiency. 500 2.00 500 2.00 Revenue growth reflected both 0 1.50 0 1.50 ©NZX ©NZX increases in in-patient numbers and a favourable case mix driving increased utilisation of hospital facilities. Solid growth was maintained across each of the company’s three hospitals. However, the company warned that patient number growth had slowed in recent times. Ongoing capital needs meant that borrowing would increase this year. However, long term prospects are good. Growth in the private hospitals sector is likely to increase in the years to come as demand for operations by baby boomers will increase as they age and many will be wealthy enough not to want to waste years on a public health service waiting list. 6.00

5.00

Share Price ($) Share Price ($) 5.50

400

5.00

2008

7.50

SKC SKC 12-month Chart for EBO to 22/05/09

5.50

500

Share Price 5.50

40 30 20 10 0

Adjusted price ($) 5000 6.00 5000 5.50 4000 5.00 4000

Volume traded (thousands) Volume Share Price 30-day Moving Av

4500 4000 3500

4.50 3000 3000 4.00

3000

3.50 2000 2000 3.00

2000

2.50 1000 1000

1000

2.00

500

0 1.50 0 ©NZX

2500

1500

The Warehouse Group (WHS) reported sales for the third quarter ended 26 April 2009 of $383.5m, down 2.8% on the corresponding period last year. Group sales for the financial year to date were $1.30 billion, down 2.9%. Group Chief Executive Officer, Ian Morrice says consumer demand remains soft but the company has made significant progress towards improving its market position. The one problem area is Warehouse Stationery, which had third quarter sales of $51.1m down 10.5%. Morrice said the stationery and office products sector remains difficult with higher ticket technology, office equipment and furniture sales down significantly on last year. The directors expect that net profit after tax for the full year will be similar to 2008. While it is holding up well, it is not doing quite as well as the discounting giants overseas, such as Walmart, which is seeing significant sales growth as consumers trade downwards in a tough economy.

New Zealand Investor

Price

10.0

SKC

Profile

NZ Assets Management finds path in stormy seas ew Zealand Assets Management is a highly regarded, but notoriously low profile company that handles high net worth clients. Recently, editor Neville Glaser paid a visit to one of the company’s principals, Alan McChesney, to find out what makes the company tick, and how the current market turmoil has affected them. Glaser: Who do you invest for? McChesney: We have around 400 high net worth clients – family trusts, charities, corporate pension plans and individuals – mostly in New Zealand, worth NZ$750m. We also have an Asia fund and China fund, both relatively small at a total of US$60m with a predominantly European investor base. Glaser: How does New Zealand Assets Management function? McChesney: We practice an “absolute return” style of management where equal priority is given to capital preservation, growth and income returns. We do not invest in New Zealand, only global markets.

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Glaser: Why don’t you invest in New Zealand? McChesney: We found New Zealanders are so massively overexposed to the local economy, its property and its shares, that we couldn’t see how we could add value by investing here. So we decided it made sense to invest overseas.

Glaser: Who makes the investment decisions? McChesney: We invest through selected fund managers in various countries, each selected on their track record and their own ability to generate absolute returns. When we look at new managers, their performance record attracts us. BUT that part is a given. We also want to know how they managed at stress times; that is the real long term determinant of returns. Did they learn from that experience? How did they

fare in awful markets? Any mug can make money in a rising market but it is the bear markets that test them. Glaser: How does absolute return work? McChesney: Cash is your benchmark and you invest to make a return above cash regardless of the market conditions. That is how investment used to be run. It calls for a lot of discipline because when market risk is high, these managers have to de-risk the portfolios and change the asset mix. This requires selling off shares at the height of a market boom – not always easy to do. It also means that at times we will under perform the market index, as we did between 1997 and 2000. But when the market fell between 2000 and 2002, we made money through that period. Glaser: Did your fund managers get it right is the lead-up to the recent market collapse? McChesney: We took a defensive stance by selling shares that enabled NZ Assets Management to avoid most of the carnage. But in the 2008 calendar year, the portfolios made a return of -3.8%. This was frustrating as all the loss was made at the beginning of the year when our fund managers were taken by surprise by the speed and severity of the market decline. However, since then the portfolio performance has been positive despite the dreadful performance of markets. Our more defensive stance is now paying off with a 6% return over the 12 months to March 31 vs the market loss of 37%. Our managers continue to hold an abnormal amount of cash in their portfolios, ready to act when the time is right. Glaser: The “funds of funds” style of management that you use is sometimes criticized as being too fee heavy, as

several parties have to extract a fee before the money is invested. What do you say about that? McChesney: With the managers we employ, we look at the after fee return that they achieve, so what they charge becomes irrelevant. Managers who can consistently deliver high returns over many years have proved they can carry fees. Note also that at NZ Assets Management we are not trying to achieve massive returns, because that comes with risk. We look for consistent returns through good and bad years, and a high overall average. In 18 years we have only had three negative years and we have delivered 10% per year. Glaser: How do you view share market valuations right now? McChesney: There is a lot of debate as to whether markets are cheap or not. Clearly the visibility of short-term earnings through 2009 is nigh impossible such is the economic uncertainty. On a short-term basis, markets are not cheap, rather closer to fair value. But if we take a longer-term view, as we should, and look at the average earnings over the last ten years so that we smooth out short-term earnings fluctuations, then the current markets are the cheapest they have been since 1986. Individually, there are many, many oversold stocks that offer unbelievably attractive buying opportunities now. The issue is timing the entry point into these individual stocks.

McChesney: unbelievably attractive buying opportunities

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CFDs

CFDs: Short selling How to profit from falling prices A feature of trading contracts for difference, or CFDs, is the ability to sell short in order to profit from falling prices. Short selling is counter-intuitive because it involves selling a share or commodity you don’t yet own. Most traders shy away from it, but they could be missing big returns – and investors can use it to protect their shares from a fall. Stephen Calder demystifies the strategy

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or the CFD trader who has no inhibitions about selling short, the capability of profiting from falling prices can vastly increase the number of trading opportunities at hand, and allow profits to be made at times when shares or commodities are often moving faster than when they rise – during a bear market. In the middle of May this year, the Australian stock market fell 3% in a single day – a large move, but not unprecedented. If you had opened CFDs to sell the Australian share index the day before, the leverage that multiplies gains and losses by up to twenty times could have delivered profits of up to 60% on a single trade. With the Australian S&P ASX 200 index at 3700, for example, a CFD over the index has a value of $A3,700, and in order to trade you would need a deposit of around 5%, or $A185. If the index falls to 3589, a 3% drop, the contract is now worth $A3,589. You buy back at this price to close the CFD and make a profit of $111, or 60% of your $A185 outlay before costs. Short selling, in other words, can deliver big profits for traders at times when it’s extremely difficult to make money in the sharemarket by buying – because most shares are falling in value. It’s also true that if you sell and the price rises quickly, big losses can result. But that’s not the reason most traders avoid short selling. The real reason is psychological. We are so conditioned to buying first and then selling later that to reverse the order seems unnatural, unfair or even faintly immoral, an impression reinforced by recent bans on short selling, notably in financial stocks, on a number of exchanges worldwide. If I sell and the price falls, doesn’t that mean I have profited from someone else’s misfortune? The answer is, no, not in any sense that doesn’t apply when you buy and the shares go up. In that case, those who sold at the lower price also missed out on the gains you enjoyed. In other words, the main difference between buying and short selling is the order of events.

There’s another important difference you should be aware of. When you buy a share, there’s a limit to how far the price can go down. You can’t lose more than the total value of the shares you bought, whether in the market or via CFDs. If you short sell, on the other hand, there is theoretically no limit to the upward price movement, and therefore you have potentially unlimited risk as a short seller. Traders use the same techniques for limiting losses on short sales that they employ when buying, and shares do not suddenly jump from $1 to $100 overnight, so the unlimited risk is more theoretical than actual. However, stocks often do move up quickly from a low base, offering buying opportunities. Such rapid moves can in turn lead to over-pricing and an opportunity to sell short. The greater risk in short selling simply means that the use of stop-loss orders, as described in our April issue, is even more critical when selling short than when buying.

How does short selling work? In the actual stock market, well before CFDs, short selling started when professional share investors, such as large fund managers, realised there was a way to profit from falling share prices. The shares I buy today don’t have to be delivered until a few days later, the timing depending on the local rules. That means that in some countries I can sell shares I don’t own today, provided I acquire them in time to settle the sale. If I do that, and the price of the shares has fallen during the same day, I make a profit because I have bought the shares at a lower price than that of my contract to sell them. This kind of short sale usually has to be covered by a purchase on the same day as the sale, so it works only for very short-term falls. It’s also potentially quite dangerous, because, apart from the risk of a price rise, if I cannot acquire the stock to deliver against the sale, I am in serious breach of the exchange rules, along with my broker. This is called naked short selling and is now prohibited in many countries, including Australia, where

most NZ CFD trading in shares occurs. Fund managers later realised there was another way to sell short that would allow them to hold a short position for more than a day. If they borrow the shares from another fund manager, or a specialist stock lender, they can deliver them in settlement of the short sale. The borrower in effect becomes the temporary beneficial owner of the shares, but the real owner earns a fee, and the borrower passes on such benefits as dividends to the owner, who is thus unaffected by the lending the stock as long as the shares are later returned. Now the fund manager can stay short in the stock for as long as it takes to give him a profit, or until he decides to quit. If the stock rises, the manager is forced to buy it back at a higher price and so makes a loss, but if it falls he buys it back at a profit and returns the shares. This practice is known as covered short selling, and is now permitted again on most global stock exchanges. In Australia, covered short selling was prohibited in financial stocks, such as banks, until the end of May 2009. The ban, designed to prevent massive share price falls as a result of overwhelming short sales, had expired twice before and been extended for a further period.

Short sales using CFDs Short selling in the actual sharemarket is probably best left to the professionals, but retail traders can achieve the same effect through CFDs, which are not actual purchases or sales of shares but simply contracts to pay or receive the difference between a share’s price now and its price at a future date. You

don’t have to worry about borrowing stock. So if you sell CFDs over Woolworths, for example, the party on the other side of the contract – your CFD provider – takes the opposite position as a buyer, profiting as you lose and losing if you profit. The provider may, in turn, hedge your short CFDs by arranging a covered short sale of the actual shares, eliminating its risk of loss if the shares fall. Or it may have another client who wishes to buy at your selling price, allowing it to match the two together. The best CFD traders have no in-built bias against short selling. Recognising that markets often fall faster than they rise, they are just as keen to identify charting signals and fundamental factors that indicate an imminent downtrend in a share, commodity or currency as they are to spot buying opportunities. If you haven’t sold short as a CFD trader before, you will need to revisit your trading plan, updating it to include the strategy, and study the literature on technical analysis to ensure that you recognise the indicators that a price is likely to fall -- the entry points for short sales. Do the indicators work for the stocks or commodities you are trading, and have you tested them on trading data for the past year? Remember that once you have identified a clear short selling opportunity in a stock you are following, you must act on it – hesitation, a fundamental trading error, is the enemy of opportunity. One way of approaching short selling more cautiously is via a pairs trade – buying one stock and short selling another. If you worry that you may be swept away by a sudden rally,

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CFDs

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CFDs

Short selling in commodities and currencies With the equity markets in turmoil, many CFD traders have turned to the commodity and currency markets for fresh pastures and markets that show a more clearly defined trend. Oil, gold, copper, and even agricultural commodities such as wheat have attracted more traders in recent months. Short selling via CFDs in commodities is virtually no different than in shares, especially since most commodity markets are now open for extended trading hours each day on electronic trading platforms. Make sure you use stop loss orders and that you know how these will be executed in a fast-moving market. Ask your provider whether there is any possibility that a stop-loss order may fail, leaving you with an exposed short position. In foreign exchange, every purchase of one currency is a sale of another, so buying New Zealand dollars against the US dollar is the same as selling US dollars short. Just take care that you know which way around the currency you are trading is quoted, to ensure that you don’t inadvertently buy when you meant to sell.

Portfolio hedging If you hold Australian shares, you can use index CFDs to protect them against a short-term fall in the market, enabling you to hold the shares for longer-term gains at a reduced level of risk. Unfortunately, you can’t hedge your New Zealand share portfolio the same way, because of the lack of index derivatives liquid enough to allow it. Only about 5% of NZ CFD trading occurs in the local market, and is restricted to the top 20 or so shares.

Case study – portfolio hedge using CFDs Suppose you have a portfolio of 15 or 20 diversified blue-chip Australian stocks worth about $A100,000 that you wish to hold long-term but which you think need insurance against a short-term fall. You don’t want to become market neutral – which means having short CFD positions equal in value to your share holdings – because that would result in no gain from any improvement in the portfolio value if shares rise. So rather than hedging the whole value of your shares, you decide instead to sell CFDS equivalent to half the value, or $A50,000.

Rather than hedge each stock individually, which is comparatively expensive because of the multiple commissions, you decide to use index CFDs, which trade at one Australian dollar per index point, giving a contract size of $3,800 if the index is at 3800.0. Selling 13 index contracts at this price, a value of $49,400, covers about half the value of the portfolio. The deposit required on the CFDs would typically be 5%, or $2,470. The example below does not take into account fees, commissions and spreads; check with your provider. There may also be small gains and losses from the trader’s standpoint resulting from fluctuations in the exchange rate between Australian and New Zealand dollars. The results when the market rises and when it falls are summarised below. Scenario 1 If stock prices fall 8% 1 June 2009 Portfolio value $A101,550 Sell 13 ASX S&P 200 index CFDs at 3800 $A49,400 30 June 2009 Portfolio value $A93,426 Buy 13 ASX S&P 200 index CFDs at 3515 $A45,695

Loss $A8,124 Gain $A3,705

Net loss $A4,419Notice that the gain on the CFDs was a little less than half the portfolio loss, because the index did not fall as far as the actual share portfolio. There will usually be some mismatch between the change in value of the portfolio and that of the index. Nevertheless, the hedge significantly reduced the loss on the share portfolio. Scenario 2 If stock prices rise 4% 1 June 2009 Portfolio value $A101,550 Sell 13 ASX S&P 200 index CFDs at 3800 $A49,400 30 June 2009 Portfolio value $105,612 Buy 13 ASX S&P 200 index CFDs at 3942 $A51,252

Gain $A4,062 Loss $A1,852

Net gain $A2,210 In this case, the market unexpectedly rose, and the shares gained more than the index, so the loss on index future was a little less than half the gain in the portfolio’s value. Although the hedge protected the portfolio from most of the fall in value, it also allowed some gain from any rally in the shares. The example is hypothetical, of course, and results in practice may vary slightly. Some investors use technical analysis to identify the times when a market is likely to fall, and only hedge when the signs are right, thus maximising the gains from a rally. Timing the exit from the hedge is also crucial. How do you know the need for protection is over? If the market returns to a long-term uptrend, you should remove the hedge, but if unsure, reduce it gradually to reduce the effect of nasty surprises.

New Zealand Investor

buy CFDs over a resources stock you like and sell a similar dollar value of CFDs over another stock in the sector you think will underperform. This will allow you to make money irrespective of market direction, provided the relative performance of the stocks is in your favour. Alternatively, you could buy a number of Australian stocks you think will outperform the market and sell CFDs over the S&P ASX 200 index, taking out market risk and giving you a modest profit if your stocks do outperform, but only a small loss if they don’t.

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Fundsource

Fund Exit $ Diversified Balanced PIEs AMP Lifesteps Moderate Bal Fund 1.0873 AMP Select Balanced Fund 1.0450 AMP Select Balanced Trust 1.0123 ANZ Balanced Growth Fund 1.5855 ANZ Retirement Plan Balanced 1.8555 ASB EasyFund Balanced 0.8130 ASB EasyFund Moderate 0.9087 Asteron Managed Fund* 8.5009 Asteron RSP Mgd Neutral* 1.6790 Asteron SP2000 Balanced Fund* 1.3858 Asteron Superplan Balanced Fund* 1.8471 ING Balanced Fund 1.4130 Public Trust Balanced Fund* 1.2193 Public Trust Balanced Growth Fund 1.0328 Public Trust Moderate Growth Fund 1.0594 SIL 60s Plus Super Balanced 1.9482 SIL Personal Retirement Balanced 1.9482 Thoroughbred Balanced Flexible 1.4001 Thoroughbred Balanced Locked-In 1.3757 Thoroughbred Balanced Trust 1.5956 Thoroughbred Education Fund 1.5955 TOWER FreedomPlan Balanced 2.1883 TOWER FuturePlan Balanced* 2.1911 TOWER Multi Sector Fund 1.6307 TOWER Tasman Balanced Growth* 1.9678 Westpac Diversified Trust 1.1579 Westpac Retire Plan Balanced Fund 2.0117 Diversified Defensive PIEs AMP Select Conservative Fund 1.2262 AMP Select Conservative Trust 1.2114 ASB EasyFund Conservative 0.9592 ASB EasyFund Defensive 1.0306 Lifestages Capital Stable Portfolio* 2.0272 Public Trust Conservative Fund 1.0961 Public Trust Defensive Fund 1.1616 Thoroughbred Cons Flexible 1.4678 Thoroughbred Cons Locked-In 1.5574 Westpac Income Plus Trust 1.1906 Diversified Growth PIEs AMP Select Growth Fund 0.8941 AMP Select Growth Trust 0.8618 ANZ Retirement Plan Growth 1.6217 ASB EasyFund Growth 0.7295 Asteron RSP Managed Growth* 1.6074 Asteron Superplan Dynamic Fund* 1.5555 Guardian EquityPlus Fund 0.9962 Public Trust Growth Priority Fund* 0.9989 Thoroughbred Growth Flexible 1.2897 Thoroughbred Growth Locked-In 1.2681 Thoroughbred Growth Trust 1.3441 TOWER FreedomPlan Growth Fund 1.4670 TOWER FuturePlan Growth Fund* 1.4720 Westpac Growth Trust 1.0310 Westpac Retire Plan Dynamic Fund 2.0533 NZ Equity (Active) PIEs AMP ING NZ Shares Fund 0.9235 Asteron Socially Responsible 0.9871 Investment Trust Fisher Funds NZ Growth Fund 2.3708 Fisher Funds Premium NZ Fund 0.5601 ING Equity Selection Fund 1.0161 ING New Zealand Share Fund 1.6478 SIL 60s Plus Super NZ Share 2.1759 SIL Personal Retirement NZ Share 2.1759 TOWER NZ Equity Trust 1.9637 NZ Equity (Passive) PIEs ASB NZ Shares Trust 0.9496 SmartFONZ 1.1350 SmartMIDZ 1.8900 SmartTENZ 0.8000 NZ Equity (Australasian) PIEs Asteron Superplan Trans Tasman Fund* 2.2550

1Yr -8.85 -11.55 -11.53 -13.01 -10.16 -13.62 -7.06 -13.16 -14.20 -14.30 -14.68 -11.21 -5.93 -11.85 -8.11 -13.01 -13.01 -12.11 -11.66 -12.22 -12.22 -13.16 -13.05 -15.96 -8.53 -11.46 -11.19 4.54 4.53 -3.90 1.90 1.10 -4.70 3.15 0.72 1.01 -3.69 -25.45 -25.50 -15.46 -20.18 -17.77 -18.39 -15.74 -18.41 -18.00 -17.76 -18.51 -24.38 -24.12 -15.78 -15.56

3 Yr

5 Yr Size $M Label

-3.10 -1.85

3.38 4.44

-3.84 -4.43 -5.00 -5.54 -2.35

3.30 2.86 2.47 2.19 6.69

-3.20 -3.20 -2.04 -1.64 -2.35 -2.35 -2.15 -2.12 -1.50 2.58

4.77 4.77 4.03 4.46 4.02 4.02 3.65 3.67 5.56 6.06

4.00

5.53

3.66 4.12

5.52 6.07

-4.41

4.05

-6.31 -7.62 -5.73

2.28 1.37 2.85

-4.57 -4.31 -4.90 -8.79 -8.69

3.30 3.65 3.58 0.87 0.94

-20.55

7.57 54.91 30.54 24.65  31.39  37.43 39.41 23.77  14.59   6.89 63.66  24.59  5.41 7.73 6.46 23.23  73.05  20.22  27.43  18.44  14.22  157.64  157.64  10.25  7.32  55.78 105.53 9.65 12.78 74.12 45.93 11.90  10.36 7.65 6.98  9.73  14.65 27.91 10.40 9.28 9.16 21.93 15.16 9.92 7.68 8.04 11.59 7.57 74.23 74.23 33.92 94.19

        

5.51

-21.96 -9.17

2.81

-30.45 -26.54 -17.66 -24.04 -20.46 -20.46 -25.34

-9.94

6.74

-8.43 -12.42 -10.16 -10.16 -10.47

0.67 2.04 2.04 1.63

5.55  

63.40 26.18 37.19 28.41 5.40 13.80 14.46

    

-23.57 -29.02 -33.65 -25.88

11.95 46.81 32.96 57.08

-22.55 -10.09 2.45

12.03 

Fund Exit $ 1Yr GSJBWere Transtasman Equity Trust 1.9466 -21.00 Guardian Small Companies Fund 2.4561 -22.88 NZ Property PIEs ASB NZ Property Trust 1.0443 -34.35 Guardian Property Fund 2.2416 -4.55 ING Property Securities Fund 1.1062 -29.72 MFL Property Fund 1.2969 -37.36 Mint Aust NZ Real Estate Invest Trust 0.6871 -26.76 TOWER FreedomPlan Property Fund* 2.6974 -8.56 TOWER FuturePlan Property Fund* 2.6996 -8.49 NZ Mortgage PIEs ANZ FlexiMortgage Income Trust* 1.0000 6.40 ASB Residential Mortgage Trust* 1.1288 7.29 Capital Mortgage Income Trust 1.0000 8.77 Guardian Mortgage Fund* 1.0000 6.75 Midlands Mortgage Trust 1.0000 8.43 Perpetual Trust Mortgage Fund 1.0000 7.36 Westpac Home Loan Trust 1.0000 5.72 Westpac Mtge Investment 1.0000 5.97 NZ Fixed Interest PIEs AMPCI NZ FI Index Fund 1.2780 12.84 AMPCI NZ FI Trust 1.3241 18.40 ASB NZ Fixed Interest Trust 1.2043 11.39 Asteron Corporate Bond Trust 0.9505 1.06 Asteron NZ Fixed Interest Trust 1.0300 8.61 Asteron SP2000 Capital Fund* 1.7829 7.30 Asteron Superplan Capital Fund* 2.1868 7.22 Asteron Superplan NZ Bond Fund* 2.3063 8.55 ING Enhanced Yield Fund* 0.9817 -4.97 ING Secure Income Fund 1.1140 3.80 SIL 60s Plus Super Capital Stable 1.9581 3.94 SIL Pers Retirement Capital Stable 1.9581 3.94 Tyndall Income Fund 0.9787 5.37 NZ Cash PIEs AMP ING NZ Cash Fund 1.2557 4.60 AMP ING NZ Cash Trust 1.1190 4.56 ANZ FlexiCash 1.0000 5.81 ANZ Retirement Plan Capital Stable 1.8482 6.24 ANZ Retirement Plan Deposit Portfolio 1.1149 6.58 ASB Cash Fund 1.0000 ASB Money Market Trust 1.1170 6.46 1073.9700 AXA UT34 - Selected NZ Cash Fund Guardian CashPlus Fund 1.0000 7.32 Public Trust Cash Management 1.0879 5.36 Thoroughbred Cash Fund 1.0000 6.67 Westpac Cash Plus Trust 1.0739 6.50 Westpac Retire Plan Accumulation 2.5393 2.65 Int’l Equity (Australian) PIEs Fisher Funds Aust Growth Fund 1.4494 -18.61 Fisher Funds Premium Aust Fund 0.6322 -17.54 ING Australian Share Fund 2.2992 -18.78 SmartMOZY 4.2300 -34.08 SmartOZZY 2.9000 -21.59 Int’l Equity (Regional) PIEs ASB Emerging Mkts Shares Trust 1.4786 -21.76 Asteron Superplan European Fund* 1.5304 -32.19 Asteron Superplan Far East Fund* 1.5130 -39.17 Asteron Superplan Nth American Fund* 1.6724 -19.17 TOWER FreedomPlan Asia/Emerging* 1.7370 -39.05 TOWER FuturePlan Asia/Emerging* 1.7296 -39.31 TOWER Spotlight Europe 1.8614 -23.16 Int’l Equity (Global) PIEs AMP AC Global Shares Fund 0.7366 -32.38 AMP Bernstein Global Shares Fund 0.6885 -36.94 AMPCI Global Shares Index Fund 1.0389 -16.18 ASB EasyFund World Shares Trust 0.6919 -24.66 ASB World Shares Trust 1.0854 -23.65 Asteron Superplan Global Fund* 1.4738 -25.21 Fisher Funds Inter Growth Fund 0.9717 -4.13 Fisher Funds Prem International Fund 0.9713 -4.28 Guardian Global Equity Fund 1.0413 -27.07 ING International Share Fund 0.9656 -12.06

3 Yr -5.02 -8.75

5 Yr Size $M Label 6.84 22.30  4.76 8.98 

11.73 9.14 11.84 38.91  -7.47 4.36 57.88  -14.12 -1.72 291.22  6.40 14.61 15.13 10.04  14.65 15.15 10.04  6.56 7.90

6.62

52.18  183.81 32.10 7.51 164.44  70.95 97.96 315.15 659.85

2.68 4.60 7.37 7.12 4.84

4.01 5.06 7.03 6.70 5.45

3.75 3.78 3.78

4.78 4.99 4.99

6.60 5.88 7.05

6.37 6.16 6.66

7.44

6.86

7.14

6.85

-7.09

7.59

-15.38 -13.93 -13.02 -4.72 -4.85 -12.43

-1.21 2.17 -3.78 10.67 10.58 0.03

10.71 6.97 23.79 49.14 11.57 5.66 61.89 6.82 22.34 9.46 7.96 7.72 6.83

       

7.70 17.30 9.14  8.33  42.93  521.50 41.74 62.16 96.31  40.31 175.86  370.56 31.12

62.81  57.06 -0.07 13.32 32.53  41.50 85.44 7.23 11.29 13.45 9.77 26.26 26.26 6.23

     

6.11 6.16 11.39 35.54 61.14 -11.82 -0.74 15.83  5.63 12.19 -7.65 1.91 13.84  -4.34 4.71 17.04 

Fundsource 3 Yr -6.10 -6.87 -13.18 -13.05 -1.53 -6.99 -11.87

3.04 7.35 2.00 -8.08

5 Yr 4.69 2.29 -0.86 -0.77 2.74 4.75 -0.93

Size $M Label 13.93  45.54  26.58  26.58  37.88  38.21  25.58 

4.28

8.54 67.57 34.37 6.08 43.72 

7.00 4.40

8.76 15.47  45.11  23.04 37.02 8.33 34.61 23.55 14.92 11.10 48.39 54.80 21.47 12.08 20.51 12.54 47.05 19.54 35.88 50.89 6.91 156.02 18.82 289.29 172.03 5.78 17.20 160.34 24.79 55.43 154.26 117.41 33.54 33.33 9.52 20.73 48.16 16.11 6.71 5.52 63.33 14.79 14.79 15.51 32.64 14.79 45.06 34.33 10.29 33.53 6.30 41.00

Fund Exit $ 1Yr 3 Yr 5 Yr Westpac KiwiSaver Cash Fund 1.0839 5.56 KiwiSaver Other PIEs Fidelity Life Options Kiwi Fund 3.1374 -1.71 Diversified Balanced Unit Trusts & Gif’s AMP Balanced Trust* 1.3546 -12.67 -3.49 1.58 AXA - PMF Active Growth Fund 1.3950 -13.14 -4.91 -0.03 AXA Balanced Growth Trust* 1.1260 -15.16 -5.55 0.75 Sovereign CFS Balanced Growth* 1.8609 -12.08 -2.48 2.07 Diversified Defensive Unit Trusts & Gif’s AXA - PMF Balanced Fund 1.7272 -6.04 -1.32 1.61 Diversified Growth Unit Trusts & Gif’s AMP Dynamic Trust* 1.1577 -26.89 -9.56 -1.02 NZ Equity (Active) Unit Trusts & Gif’s AXA - PMF NZ Equities Discovery Trust 1.4422 -19.66 -7.72 -0.74 NZ Equity (Australasian) Unit Trusts & Gif’s AXA Australasian Selected Equities* 1.1142 -22.67 -8.84 0.33 Sovereign CFS Tas Dev Comp* 1.6010 -23.33 -5.47 5.25 Sovereign CFS Tasman Shares* 3.5267 -12.67 -1.78 5.54 NZ Property Unit Trusts & Gif’s NZ Rural Property 2.0000 -33.33 7.21 9.36 NZ Mortgage Unit Trusts & Gif’s AXA - PMF Mortgage Distn Fund* (33%) 1.0001 3.48 4.61 4.53 AXA - PMF Mortgage Investment Fund* 156.7377 3.56 4.58 4.46 AXA Mortgage Backed Bonds* (30% April 1.2809 4.86 5.69 NZ Cash Unit Trusts & Gif’s AXA Cash Mgmt (30% from April 2008) 2.1054 5.17 5.45 4.86 Macquarie - Gilt Edge Access (30%) 1.6162 4.20 4.89 4.40 Perpetual Trust Cash Fund (30%) 1.9069 3.94 4.97 4.54 TOWER FirstRate Account (30%) 1.6789 3.50 4.65 4.26 Int’l Equity (Australian) Unit Trusts & Gif’s Sovereign CFS Australian Shares* 2.0561 -15.53 -3.84 5.77 Int’l Equity (Global) Unit Trusts & Gif’s AMP Passive Int Shares Trust* 0.7485 -16.62 -9.82 -1.48 AXA - PMF International Equity Trust 1.6914 -23.97 -11.58 -3.02 AXA Global Equities Trust* 0.5751 -28.47 -14.94 -3.12 Sovereign CFS Global Shares Trust* 1.6857 -29.04 -11.66 -3.21 Int’l Fixed Interest Unit Trusts & Gif’s AXA - PMF International Bond Trust 1.7396 0.24 3.11 3.57 Sovereign CFS Global Bonds Trust* 2.7047 4.92 4.97 4.45 Other Unit Trusts & Gif’s Sovereign CFS Global Prop Shares* 1.3754 -36.46 -16.75 -1.23 Diversified Balanced Ins. Bonds AMP Balanced Bond* 1.3356 -12.81 -3.71 1.35 AMP Managed Balanced Fund (C)* 3.2040 -14.07 -4.37 1.00 AMP Managed Balanced Fund (CN)* 1.5785 -14.55 -4.90 0.44 AMP Managed Performance (O)* 1.3749 -25.11 -9.49 -1.18 AMP Managed Performance (ON)* 1.3027 -25.52 -9.99 -1.72 Asteron Lifeplan/Go Kidz Balanced* 1.7893 -13.56 -5.12 0.12 Asteron Saveguard Plus Man Fund* 5.1825 -12.53 -4.23 1.33 Asteron Yield Glo Fund* 7.0836 -12.79 -4.15 1.10 Colonial Beaver Fund* 2.4468 -11.78 -3.98 0.86 Fidelity Life Balanced Portfolio 2.6779 -4.78 -0.83 Sovereign Balanced Growth Fund* 0.2350 -12.31 -4.29 0.52 Sovereign Conservative Growth Fund* 0.2420 -7.98 -2.11 1.47 Diversified Growth Ins. Bonds Sovereign High Growth Fund* 0.2310 -17.50 -5.99 0.44 Sovereign Maximum Growth* 0.1770 -21.68 -7.27 0.69 Diversified Defensive Ins. Bonds Fidelity Life Conservative Portfolio 2.9564 0.95 2.20 NZ Equity Ins. Bonds AMP NZ Share Based Fund (R)* 3.1491 -21.93 -9.31 -1.02 AMP NZ Share Based Fund (RN)* 1.9956 -22.36 -9.81 -1.57 Asteron Saveguard Plus Equity Fund* 4.6861 -26.37 -12.81 -1.79 Sovereign NZ Select Equities Fund* 0.3760 -20.34 -3.00 5.48 NZ Capital Stable Ins. Bonds ANZ Capital Protected Fund 3.2031 2.99 3.30 3.29 Asteron Yield Cap Fund* 5.3057 5.48 5.35 5.02 Sovereign Deposit Fund* 0.2770 4.53 5.04 4.62 Sovereign Income Fund* 0.3220 4.55 5.15 5.02 NZ Fixed Interest Ins. Bonds AMP Fixed Securities Fund (X)* 2.9916 11.92 5.30 4.37

Size $M Label 27.44 11.20 24.10 18.65 6.38 7.91

   

41.09



12.99



5.78  11.73  7.50  17.86  47.55  153.88  86.61  173.65  24.43 212.90 66.04 6.70

   

10.77  7.35  45.16   6.34 6.42  49.15  13.32  10.45  12.15 90.66 90.66 7.25 7.25 12.42 97.73 21.64 5.45 12.82 54.40 7.21

           

16.10  5.58  54.76  12.27  12.27   7.51 12.23  42.99 6.21 7.73 15.13

   

6.10 

New Zealand Investor

Fund Exit $ 1Yr SIL Personal Retirement Int Share 1.5524 -14.23 Thoroughbred Intl Equity Trust* 1.0996 -13.84 TOWER FreedomPlan Intl Companies* 1.4471 -34.22 TOWER FuturePlan Int’l Companies* 1.4538 -33.92 270.8032 0.71 TOWER GAM Global Gateway Fund TOWER Global Fund 2.5518 -16.96 TOWER International Equity Fund 1.0921 -19.41 Int’l Fixed Interest PIEs AMP State St Global FI Index Fund 1.2922 10.46 ASB Diversified Income Trust 1.0633 -0.01 ASB World Fixed Interest Trust 1.1632 9.08 ING Credit Opportunities Fund* 0.3016 -61.16 TOWER BondPlus Fund 1.1526 -3.47 Other PIEs ASB EasyFund Global Property Fund 0.5262 -42.49 Asteron Deposit Fund* 8.5382 6.80 TOWER GAM Multi-Trading Fund 309.0513 8.53 TOWER Mezzanine Global Commodities Fund 0.7506 -45.42 KiwiSaver Diversified Balanced PIEs AMP KiwiSaver Balanced Fund 0.8539 -10.91 AMP KiwiSaver ING Balanced Fund 0.8429 -13.99 AMP KiwiSaver Moderate Balanced 0.8916 -8.28 AMP KiwiSaver Moderate Fund 0.9613 -2.47 ANZ KiwiSaver Balanced Fund 0.8868 -8.53 ANZ KiwiSaver Conservative Bal Fund 0.9546 -3.75 ASB KiwiSaver Balanced Fund 0.8298 -13.07 ASB KiwiSaver Moderate Fund 0.9246 -6.05 AXA KiwiSaver Balanced Portfolio 0.8070 -14.52 Fidelity Life Balanced Kiwi Fund 5.0904 -1.39 National Bank KiwiSaver Bal Fund 0.8875 -8.48 NB KiwiSaver Conservative Bal Fund 0.9545 -3.82 SIL KiwiSaver Balanced Fund 0.8925 -8.19 SIL KiwiSaver Conservative Balanced 0.9594 -3.54 TOWER KiwiPlan Balanced 2460.1807 -11.87 Westpac KiwiSaver Balanced Fund 0.8825 -7.11 KiwiSaver Diversified Defensive PIEs AMP KiwiSaver Conservative Fund 1.0612 5.80 AMP KiwiSaver Default Fund 1.0270 1.02 ANZ KiwiSaver Conservative Fund 1.0300 1.48 ASB KiwiSaver Conservative (default) 1.0365 2.40 AXA KiwiSaver Income Plus (default) 0.9855 -0.86 Fidelity Life Conservative Kiwi Fund 5.1660 0.21 FirstChoice KS Tracker Conserv Fund 1.0354 2.42 ING KiwiSaver Conserv Fund (default) 1.0365 1.58 NB KiwiSaver Conservative Fund 1.0320 1.56 SIL KiwiSaver Conservative Fund 1.0363 1.72 TOWER KiwiPlan Cash Enhanced Fund 1.0311 -0.01 Westpac KiwiSaver Conservative Fund 0.9881 -0.17 KiwiSaver Diversified Growth PIEs AMP KiwiSaver Aggressive Fund 0.6955 -25.25 AMP KiwiSaver Growth Fund 0.7510 -20.34 ANZ KiwiSaver Balanced Growth Fund 0.8182 -13.44 ANZ KiwiSaver Growth Fund 0.7534 -18.25 ASB KiwiSaver Growth Fund 0.7484 -19.33 AXA KiwiSaver Growth Portfolio 0.7101 -22.56 Fidelity Life Growth Kiwi Fund 4.8309 -8.05 FirstChoice KiwiSaver Active Grow Fund 0.7720 -17.00 Fisher Funds Growth KiwiSaver 0.8205 -8.94 Scheme Huljich Growth Diversified KiwiSaver 1.0170 -0.17 Fund Mike Pero Saver Growth Diversified 1.0170 -0.17 Fund NB KiwiSaver Balanced Growth Fund 0.8177 -13.54 NB KiwiSaver Growth Fund 0.7504 -18.43 NZF SuperKiwi Growth Diversified Fund 1.0170 -0.17 SIL KiwiSaver Balanced Growth 0.8237 -13.12 SIL KiwiSaver Growth Fund 0.7567 -17.94 TOWER KiwiPlan Growth 0.7812 -21.42 Westpac KiwiSaver Growth Fund 0.8260 -11.59 KiwiSaver NZ Cash PIEs AMP KiwiSaver Cash Fund 1.1278 7.69 ASB KiwiSaver NZ Bank Deposit Fund 1.1216 6.81

Fundsource Fund Exit $ 1Yr 3 Yr AMP Fixed Securities Fund (XN)* 1.8065 11.30 4.71 Int’l Equity (Regional) Ins. Bonds Sovereign European Fund* 0.2220 -25.00 -9.55 Sovereign North America Fund* 0.3900 15.73 -2.28 Int’l Equity (Global) Ins. Bonds Asteron Saveguard Plus Int Equity Fund* 1.8995 -26.00 -10.16 Sovereign International Equity Fund* 0.1890 -26.46 -11.96 Other Ins. Bonds Fidelity Life Options Portfolio 2.7568 -3.68 5.06 Diversified Balanced Superannuation AMP Pers Super Balanced (A)* 16.5423 -13.92 -3.07 AMP PRP Balanced - Other Fund* 1.2194 -13.45 -5.54 AMP PRP Balanced* 1.3585 -12.78 -3.44 AMP PRP Legg Mason Balanced* 1.1049 -26.51 -10.61 ASB Easyplan Balanced Fund 1.7188 -16.53 -5.33 Asteron Retirement Plus Managed* 5.1825 -12.53 -4.23 AXA - FLP Balanced Growth Fund 1.4670 -9.10 -2.98 Fidelity Life Super Super Bal Fund 2.6779 -4.78 -0.83 Sovereign Personal Super Balanced* 20.2678 -11.31 -3.50 Sovereign Super Balanced Growth* 0.1850 -11.48 -3.98 Sovereign Vision Balanced* 1.8164 -11.57 -3.80 Diversified Growth Superannuation AMP Pers Super Performance (U)* 2.2363 -25.81 -8.07 AMP PRP Dynamic* 1.1871 -24.67 -8.64 ASB Easyplan Growth Fund 1.0685 -22.53 -8.35 AXA - FLP Dynamic Growth Fund 1.3004 -13.51 -5.66 Fidelity Life Super Super Growth Fund 2.4329 -11.81 -4.50 Sovereign Per Super Entrepreneurial* 20.2076 -15.32 -5.73 Sovereign Super High Growth Fund* 0.1800 -17.05 -5.75 Sovereign Vision Entrepreneurial* 1.6449 -15.57 -5.99 Diversified Defensive Superannuation AMP PRP Conservative* 1.4928 1.60 1.93 ASB Easyplan Conservative Fund 1.7716 -6.00 -0.36 AXA - FLP Conservative Growth Fund 1.1719 -3.52 -0.07 Sovereign Personal Super Capital 16.8075 -3.11 0.51 Stable*

www.equity.co.nz

NZ Capital Stable Superannuation ASB Easyplan Cash Enhanced Fund 1.9487 5.01 4.51 AXA - FLP Capital Enhanced Fund 1.6197 2.90 4.17 Sovereign Vision Capital Assured* 1.8028 3.40 3.82 TOWER FreedomPlan Cap Protected* 1.0520 10.69 6.53 NZ Equity Superannuation AMP PRP NZ Shares* 1.4030 -22.43 -9.13 Asteron Retirement Plus Equity* 4.6861 -26.37 -12.81 Int’l Equity (Australian) Superannuation AMP PRP Australian Shares* 1.6038 -26.06 -9.41 Int’l Equity (Regional) Superannuation AMP PRP Asian Shares* 1.1352 -21.28 -7.52 Int’l Equity (Global) Superannuation AMP PRP Intl Shares* 1.0373 -31.42 -13.37 AMP PRP Passive Int Shares* 0.7350 -16.24 -9.69 Asteron Retirement Plus Intl Equity* 1.8995 -26.00 -10.16 Fidelity Life Super Super International 1.4875 -20.97 -9.87 Shares

NZ Fixed Interest Superannuation AMP PRP NZ Fixed Interest* 1.7586 11.25 NZ Cash Superannuation AMP PRP NZ Cash* 1.3477 4.72 NZ Property Superannuation AMP PRP NZ Property* 1.5476 -21.66 NZ Mortgage Group Inv Funds ASB NZ Mort Income Fund* (19.5%) 1.0000 6.07 Australian Unit Trusts Diversified BT Active Balanced Fund - NEF* 1.1590 -14.43 BT Balanced Returns Fund* 1.2477 -12.18 BT Diversified Share Fund - NEF* 0.8940 -18.60 BT Future Goals Fund 1.3070 -18.30 BT Income Plus Fund 0.9548 -6.46 BT Split Income Fund* 0.8535 -3.34 Challenger Diversified Income Fund* 0.2254 -15.49 GSJBWere Diversified Growth Fund 1.6742 -12.14 Australian Unit Trusts Equity BT Australian Share Fund 2.5981 -19.61 BT Core Australian Share Fund* 2.5940 -20.01

5.56

5 Yr Size $M Label 3.80 6.10  0.27 1.00

8.17  8.48 

-2.36 -3.77

7.68  5.81  24.48 

1.76 0.28 1.63 -0.84 0.34 1.33 1.31

43.68  11.65  161.64  16.20  117.96  97.73  152.85  15.06  1.33 119.04  0.66 18.21  1.03 90.75 

0.16 -0.41 -0.88 0.33

27.91  99.04  47.73  35.88  8.72  0.46 176.64  0.68 7.26  0.17 58.56 

3.50 2.34 2.23 2.43

13.96  64.58  6.45  9.58 

4.28 4.20 3.48 5.12

24.51 88.00 36.76 63.58

   

-1.39 16.33   -1.79 7.51 1.34

21.78

2.63

15.65 



-4.96 31.79  -1.81 40.47  -2.36 7.68  15.72  4.63

33.44 

4.67

4.23

43.29 

2.22

4.34

45.90 

6.33

6.08 171.28

-3.88 -2.87 -7.93 -5.54 -0.73 0.92 -4.69 -3.59

5.12 94.76  5.10 174.88  3.66 11.08  4.89 550.89  4.45 52.91  4.92 46.03  2.25 7.00  5.25 20.25 

-2.85 10.50 1094.87 -3.16 10.25 132.92 

Fund Exit $ 1Yr 3 Yr 5 Yr BT Imputation Fund 1.2460 -22.31 -2.14 11.32 BT Smaller Companies Fund 1.0700 -33.01 -6.33 9.63 Challenger Australian Share Fund* 1.6951 -25.31 -7.82 6.40 Challenger Aust Share Income Fund* 0.4281 -17.44 -4.80 4.80 Challenger Select Aust Share Fund* 1.1407 -35.51 -13.24 2.95 Challenger Socially Responsive Fund* 0.8275 -26.85 -10.59 3.31 GSJBWere Australian Equities Fund 0.9239 -16.50 -1.30 10.79 GSJBWere Emerging Leaders Fund 1.5772 -31.84 -9.24 4.66 GSJBWere Leaders Fund 1.9520 -14.98 0.10 12.01 Hunter Hall Australian Value Trust 0.9529 -23.18 -5.94 2.88 Australian Unit Trusts Fixed Interest BT Australasian Bond Fund* 1.0896 16.46 7.43 6.94 BT Fixed Interest Fund 1.2070 16.23 6.99 6.48 Challenger High Yield Fund* 0.6475 -24.91 -9.94 -2.32 Australian Unit Trusts Regional Equity BT American Share Fund 1.5601 -8.59 -6.19 0.41 BT Asian Share Fund 4.6525 -16.98 -2.91 8.36 BT European Share Fund 2.0650 -21.99 -8.30 2.86 BT Japanese Share Fund 0.3675 -8.64 -14.64 -2.88 Platinum Asia Fund 2.0818 -2.12 6.85 19.10 Platinum European Fund 1.5522 -6.13 -4.13 4.90 Platinum Japan Fund 2.0807 24.27 -3.87 6.70 Australian Unit Trusts Intl Equity ANZ Ascent International Shares Fund 0.8579 -21.19 -11.65 -1.52 BT Global Share Fund* 1.2070 -14.47 -11.21 -1.48 BT InTech High Opportunity Fund 0.6682 -20.87 -12.17 BT International Fund 1.6524 -15.40 -11.53 -1.50 BT Platinum International 0.9888 2.11 -1.89 3.61 BT Split Growth Fund* 1.9819 -18.65 -8.96 1.99 BT Technology Fund 0.2397 -11.16 -3.03 -0.08 GSJBWere Global Health & Biotech 0.8755 0.96 -5.82 -0.23 GSJBWere Global Small Companies 0.6871 -23.39 -15.77 -2.22 GSJBWere International Fund 1.0691 -16.35 -7.52 0.96 Hunter Hall Global Ethical Trust 0.9739 -20.04 -8.33 4.85 Hunter Hall Value Growth Trust 1.7336 -22.52 -5.48 6.58 Platinum International Brands Fund 1.7148 4.76 -0.93 10.32 Platinum International Fund 1.6808 13.74 2.58 7.75 Platinum International Tech Fund 1.0155 15.34 1.44 4.64 Australian Unit Trusts Intl Fixed Interest ANZ Ascent World Bond Fund 1.0971 3.62 4.03 4.54 BT Global Bond Fund* 0.8474 35.31 8.86 5.67 ING Diversified Yield Fund* 0.2202 -67.47 -37.88 -19.39 ING Regular Income Fund* 0.1844 -67.30 -38.45 Australian Unit Trusts Resources BT Natural Resources Fund* 4.9700 -33.81 -1.92 16.83 GSJBWere Resources Fund 2.5696 -29.33 1.37 18.65 Australian Property Securities BT Property Securities Fund 0.6777 -49.68 -18.89 -5.31 Australian Cash Management Trust Macquarie - Cash Management Trust 1.0002 12.46 8.04 7.31 Australian Mortgage Trust LM Currency Protected Australian 1.0000 8.63 8.93 Income

Size $M Label 177.20  152.98  9.00  31.50  24.00   6.00 19.96  177.69  148.47  64.20  25.73 27.80 33.50 19.05 383.42 100.97 9.03 2490.00 168.00 423.00 70.30  14.02  10.18  411.60  73.48  223.98  10.84  11.43  20.28  27.28  344.72  907.49  389.00  7630.00 37.00  56.39 12.11 94.05 42.79 33.01 20.20 173.29 18668.70 653.00

Australian Other UnitTrusts PM Cap Absolute Performance Fund 0.9240 -25.68 -15.44 -4.93 377.00



PIE fund returns are measured pre-tax. Returns for funds that have become PIEs (e.g. from 30/09/07) are shown ‘grossed-up’ (pre-tax) to transition date. These indicative returns are approved by fund managers and are for fund comparative purposes, and are not suitable for calculating an investor’s investment return. Non-PIE NZ fund returns are reported post-tax assuming a marginal tax rate of 30%. All returns are measured post management fees but before upfront fees. All distributions are assumed to be reinvested. Australian fund returns are in NZ dollar terms and are measured pre-tax but Australian exit prices are in A$ as are fund sizes. FundSource Fund Ratings are calculated from risk-adjusted returns over the past three years to 30/4/2009 comparing similar funds across all legal fund types. The top 15% of funds attain 5 stars, next 20% 4 stars, next 30% 3 stars, next 20% 2 stars and bottom 15% 1 star. Funds with less than a three year history have no fund rating. Past performance is not necessarily a guide to future performance. Any representation or statement expressed in this document is made in good faith on the basis that FundSource Limited is not able to be liable in respect of such representation or statement. FundSource does not guarantee the accuracy of third-party information used to calculate fund returns. This information should not be relied upon as a substitute for detailed advice from a professional financial adviser. Copyright © FundSource Limited. [* represents a closed fund]. For more information please see: www.fundsource.co.nz. Email fundsource@fundsource.co.nz

Fixed Term Investments FINANCE COMPANIES - Secured Debenture Stock STANDARD RATES

Minimum Investment

Allied Nationwide Finance*

$1,000

3 Months

6 Months 3.50

Broadlands Finance*

$500

Equitable Mortgages*

$2,000

4.00

4.50

Fisher & Paykel Finance*

$1,000

4.50

Marac Finance*

$1,000

4.50

NZF Money*

$1,000

PGG Wrightson Finance*

South Canterbury* UDC Finance*

9 Months

12 Months

18 Months

2 Years

3 Years

4 Years

5 Years

3.50

5.25

6.00

7.00

8.00

9.00

9.50

5.00

6.25

7.00

4.75

5.50

6.00

7.25

8.00

4.50

4.75

5.25

6.25

7.50

7.75

8.00

4.25

4.35

5.25

5.75

6.75

7.15

$10,000

4.50

4.60

5.50

6.00

7.00

7.40

$1,000

4.20

4.45

4.70

5.95

6.70

7.45

7.95

8.30

$10,000

4.40

4.65

4.90

6.15

6.90

7.65

8.15

8.50

$100

3.50

4.00

5.50

6.00

7.00

8.50

4.35

4.30

5.00

4.85

5.40

5.70

16 Months

20 Months

21 Months

22 Months

28 Months

30 Months

$5,000

* Government Guarantee Approved *Interest Paid Quarterly NON - STANDARD RATES

Minimum Investment

Broadlands Finance*

$ 500

Equitable Mortgages*

$ 10,000

Fisher & Paykel Finance*

$ 1,000

NZF Money*

$ 1,000

PGG Wrightson Finance*

$ 1,000

6 Months

14 Months

15 Months

7.50

6.85 5.75

7.75

$ 10,000 South Canterbury*

$ 100

7.50

CREDIT RATINGS - Finance Companies Standard & Poor's UDC Finance AA

Marac Finance*

BBB -

South Canterbury Finance*

BBB BB

NOTE: • We are mindful that historic data may not be a predictor of the future. We recommend that clients review each investment to ascertain that it’s appropriate for their needs. In this market we believe caution is appropriate and clients should not take undue risks. • EQUITY recommends that before investing investors consider the size of the investment contemplated in relation to their total portfolio and overall risk as the level of risk and return varies considerably between Finance Companies. • We recommend investors call EQUITY to assist in determining the appropriate risk exposure for their portfolio and to receive the relevant Investment Statement and Research on these and other investments. • Rates for Finance Companies not mentioned in this listing are available upon request. • There are no Entry or Exit Fees payable on investments held for the full term in the above Finance Companies. • Brokerage received by EQUITY in connection to a Finance Company investment is paid by the issuer at standard industry rates. These rates are freely available from either the Finance Company or EQUITY and are summarised in the investment statement.

These rates are current as at 20th May 2009. Rates are subject to change and should be reconfirmed by calling EQUITY on 0800 437 8489. A disclosure statement is available free of charge upon request by phoning 0800 437 8489.

New Zealand Investor

Equitable Mortgage*

Rates for Tradeable Fixed Term Investments This list is intended to provide investors with a guide only and contains debt instruments such as Bonds, Capital Notes and Preference Shares, each of which has a particular structure . We recommend that investors consult with EQUITY Investment Advisers to determine the most appropriate risk exposure for their individual portfolio.

Minimum Holding

Current Yield1

Coupon

Payment Frequency

15 Dec 2017

10,000

5.65%

6.00%

Six-Monthly

GOV360

15 Apr 2015

10,000

5.64%

6.00%

Six-Monthly

GOV340

15 Apr 2013

10,000

6.02%

6.50%

Six-Monthly

AAA

GOV320

15 Nov 2011

10,000

6.15%

6.00%

Six-Monthly

AAA

GOV300

15 Jul 2009

10,000

5.85%

7.00%

Six-Monthly

ANZ National Bank

A+

ANBHA

Perpetual

10,000

9.59%

9.66%

Six-Monthly

ANZ National Bank

Credit Rating

NZDX Code

NZ Government

AAA

GOV380

NZ Government

AAA

NZ Government

AAA

NZ Government NZ Government

ISSUER

Maturity Date

Government stock

CORPORATE Banks AA-

ANB080

09 Jun 2014

10,000

6.50%

8.50%

Six-Monthly

ASB Capital No. 2

A-

ASBPB

Perpetual

5,000

13.00%

9.11%

Quarterly

BNZ Bank

A+

BISHA

Perpetual

5,000

9.89%

Quarterly

BNZ Bank

AA-

BNZ080

15 Jun 2017

10,000

7.55%

8.42%

Six-Monthly

CBA

A+

CBAFA

15 Apr 2015

5,000

4.52%

3.82%

Quarterly

CASHA

Perpetual

5,000

10.91%

10.04%

Quarterly

AA-

RBOHA

Perpetual

5,000

9.37%

7.45%

Quarterly

Credit Agricole Rabobank Nederland Power Companies Origin Energy

BBB-

OCFHA

Perpetual

5,000

12.97%

8.04%

Quarterly

PowerCo

BBB

PWC050

29 Mar 2013

5,000

8.50%

6.39%

Quarterly

PowerCo

BBB

PWC040

30 Mar 2011

5,000

7.80%

6.22%

Quarterly

Trust Power

Not Rated

TPW060

15 Mar 2014

5,000

8.25%

8.50%

Quarterly

Trust Power

Not Rated

TPW020

15 Sep 2012

5,000

7.70%

8.50%

Quarterly

A+

AIA070

07 Nov 2015

10,000

7.10%

7.25%

Six-Monthly

Building & Infrastructure Auckland International Airport Auckland International Airport

A+

AIA050

29 Jul 2011

10,000

5.50%

6.83%

Six-Monthly

Not Rated

BPF020

15 Nov 2011

5,000

10.45%

9.95%

Quarterly

BBB

CEN010

15 May 2014

5,000

7.50%

8.00%

Quarterly

Fletcher Building

Not Rated

FBU190

15 Mar 2011

2,000

8.75%

7.55%

Six-Monthly

Infratil

Not Rated

IFT060

15 Sep 2013

5,000

10.75%

8.50%

Quarterly

Infratil

Not Rated

IFT070

15 Nov 2015

5,000

10.73%

8.50%

Quarterly

Infratil

Not Rated

IFT090

15 Feb 2020

5,000

12.50%

8.50%

Quarterly

Works Infrastructure Finance

Not Rated

WKS010

15 Jun 2012

5,000

10.80%

9.80%

Quarterly

Not Rated

ARW010

15 Dec 2010

5,000

25.00%

9.50%

Quarterly

Burns Philp Finance Contact Energy

General A&R Whitcoulls Auckland City Council Fidelity Capital Guaranteed Bon Fonterra Generator Bonds

www.equity.co.nz

ACC010

24 Mar 2014

10,000

6.15%

6.42%

Six-Monthly

FDY010

15 Jul 2013

5,000

19.00%

9.25%

Six-Monthly

A+

FCG010

10 Mar 2015

5,000

7.30%

7.75%

Quarterly

A-

MCB010

07 Sep 2011

5,000

30.00%

8.25%

Quarterly

# GPG Finance

Not Rated

GFN030

15 Nov 2012

5,000

11.00%

8.30%

Quarterly

Marac Finance

BBB-

MAR010

15 Jul 2013

5,000

10.80%

10.50%

Quarterly

NFFHA

24 Nov 2011

5,000

5.77%

5.02%

Six-Monthly

Silver Fern Farms Ltd (Formerl

Not Rated

SFF030

15 Dec 2010

5,000

10.50%

10.25%

Quarterly

Sky City Entertainment Group

Not Rated

SKC020

15 May 2010

5,000

8.50%

8.00%

Quarterly

Sky Network Television

Not Rated

SKTFA

16 Oct 2016

5,000

10.06%

7.24%

Six-Monthly Quarterly

Nufarm Finance

South Canterbury Finance

BBB-

SCFHA

Perpetual

5,000

17.13%

9.42%

South Canterbury Finance

BBB-

SCF020

15 Jun 2011

5,000

9.70%

10.50%

Quarterly

TCN540

15 Jun 2013

5,000

7.25%

8.20%

Six-Monthly

Telecom Finance Ltd 1

AA Not Rated

= Current yields listed are indicative, subject to availability and exclude brokerage payable.

These rates are current as at 20th May 2009. Rates are subject to change at anytime and should be reconfirmed by calling EQUITY on 0800 437 8489

New Zealand Investor

Grosz Clippings

Opinion

The wonders of exchange traded funds

www.equity.co.nz

ne of the most innovative developments in financial markets in recent times has been the development of Exchange Traded Funds (ETFs). Since first being launched in North America in 1989, ETFs have grown in popularity worldwide and in the US; ETFs are now amongst the most traded instruments with ETF assets under management expected to exceed US$2 trillion by 2011 and are set to change the way many investors build and manage their portfolios in the next decade. ETFs are listed managed funds providing investors with the opportunity to buy a diversified portfolio of assets in a single transaction and for New Zealand investors are a good way of diversifying a portfolio through geographical exposure or sector exposure through a single security with minimal time and effort. ETFs are also able to provide this diversification and exposure from a lower cost base as ETFs are typically able to achieve lower operating costs; the management fees are significantly lower than traditional managed funds meaning that lower management fees can enhance investor returns. ETFs also trade at fair value as they are designed to ensure that they trade close to their underlying value, which provides an investor with certainty that the on-market price will reflect the value of the assets held in the fund. Another advantage of ETFs is that they are able to provide an investor liquidity and transparency as unlike unlisted managed funds, investors are able to enter and exit a fund during stock exchange hours at a quoted price. Investors can also track the value of their investment on an intra day basis, unlike traditional managed funds where the Net Asset Value is calculated weekly or

monthly, to determine the unit price. Investors can use ETFs as an investment strategy for core equity holdings, sector plays or international exposures. Importantly, ETFs provide the advantages of shares with the benefits of a diversified portfolio that managed funds provide. One way to add ETFs to your portfolio to improve asset allocation is to use a ‘core and satellite approach’ by which investors build up a core exposure to an asset class through a passive indexed ETF to capture market return (known as ‘beta’) and then add to this with satellite additions to generate ‘alpha’, which are returns higher than the market. Alpha could be generated, for example, by direct share investments. This approach can assist investors to reduce volatility while still providing an opportunity to generate some above market returns. Similarly, ETFs can be used simply as a diversification tool by New Zealand investors to access specific sectors or international markets unavailable to New Zealand investors to supplement their NZ/Australian share portfolio. The NZX listed ETFs known as Smartshares do not really provide any sector or international diversification for investors with existing New Zealand or Australian share portfolios so therefore I would advocate ASX listed ETFs of which there are three different types trading on the ASX, investors can choose from: • Domestic Index ETFs (tracking three domestic indices). • International Index ETFs (tracking 14 key global indices); and • Commodities (including gold) Some of these which I recommend for exposure to some of the world’s largest companies with international diversification are:

By Nick O’Boyle

1, iShares FTSE/Xinhua China 25Reflects the 25 leading companies in the Fast Growing Chinese market. 2, iShares MSCI BRIC Index FundReflects price and yield performance of securities traded in emerging market country indices of Brazil, Russia, India and China. 3, iShares MSCI Emerging MarketsLeading Companies in 22 emerging markets and 10 industry sectors. 4, iShares S&P Global 100- 100 large transnational companies with a market capitalization of US$5bn. Provides exposure to companies such as IBM and Exxon Mobil. 5, iShares S&P 500- US large cap stocks across a range of industries. Top holdings include Microsoft and JP Morgan Chase. 6, iShares S&P Europe 350- 350 stocks in 17 European markets and 10 industry sectors. Provides exposure to companies such as Royal Dutch Shell and Nokia. 7, iShares S&P Asia 50- Reflects price and yield performance of 50 stocks across four countries, Hong Kong, Korea, Singapore and Taiwan. 8, SPDR S&P/ASX 50 Fund- Replicates the performance of the top 50 Australian listed companies. 9, iShares S&P Global Healthcare- The Healthcare ETF provides diversified exposure to global manufacturers of medical supplies, healthcare providers and biotechnology companies such as Johnson & Johnson and GlaxoSmithKline. 10, Global Telecommunications- The Telecommunications ETF provides exposure to the world’s largest suppliers of telecommunications such as Vodafone and Telefonica SA. All of these ETFs can be bought during regular ASX trading hours. To discuss how these can fit into your investment strategy, please call Nick (09) 304 0233.

Opinion

hen I was a kid growing up in the late 1950s, the Post Office Savings Bank conducted a savings program via Primary Schools. We were given a deposit book which featured a squirrel on the front cover, encouraging us to be “squirrel wise” by making regular weekly deposits into our brand new savings accounts. Tuesday was “banking day” and we all gave our bank books to the teacher, along with our shillings or pence, depending on how much our hardpressed parents were prepared to part with, in payment for our regular jobs around the house. Next day, we got our books back, with a new stamp and bigger balance. I can’t remember this process continuing through secondary school, but I still had a Post Office Savings Bank account until I got my first job with a company owned by the Bank of New South Wales, now Westpac. All salaries paid by my new employer were paid to the mandatory BNSW account we had opened for us, and that ended my relationship with the Post Office Savings Bank. What that programme sought to initiate, was a cradle to grave relationship with the customer, later copied with varying degrees of success by all the Banks. More importantly, it taught young New Zealanders the value of regular saving and enjoyment of the interest additions increasing their balances over time. So strong was the Post Office’s relationship with its clients that when it tried in later years to move clients out of the very low interest rate accounts they had started with into better yielding deposit accounts, thousands refused to move.

Safety is what they wanted and the low interest Post Office accounts had always provided them with an absolutely safe haven. I don’t think the schools conducted or encouraged savings programmes when my two children were at Primary School in the early 1990s. Fortunately, their mother is of Scottish ancestry, and she encouraged them to open their own accounts, into which went the birthday money from grandparents, aunts and uncles, and irregular donations from Mum and Dad to “round the balance to another even hundred”. I don’t recall them ever banking their weekly pocket money or even part of it, until much later when they both worked to pay their way through University. From the same background, my son is careful with his money, his sister not so. She has always had problems relating expenditure to income, something she probably inherited from me. Where is this all going? Money in the Bank is not the most profitable investment now that interest rates have plummeted. Whilst Bank savings accounts are still the bases upon which investment portfolios are built, many have discovered that there lurks an

By Rob Cochrane

enemy among their deposit accounts, and it is inflation. In fact, the number one challenge to the investor and their adviser is to maintain buying power into retirement. Alas, cash in the bank cannot do that and you have to move up the risk scale, even slightly, to have any chance of reaching retirement with your savings in tact. Property, both commercial and residential has been popular the popular choice for those wishing to say ahead of inflation. But combined with the share market and corporate bonds you are likely to have a better outcome with lower overall risk. It starts with a few cents in the bank, though and what is important here, is the need for our younger generation to learn the benefits of regular saving early, and embark on a programme which will assist them later in life. All parents and guardians have a responsibility to ensure their children are aware of the savings ethic, even if, in most cases, they remain unable to convince their children to do it. Sometimes the way to break through our kids’ disinterest is to bring them to an adviser, like myself. I find they can absorb simple messages from me, especially when I show them what regular investments compounds to over time. That often surprisese them and helps set off the savings habit. . If you want to benefit from an introduction to me and to IRG Equity, please send me an email with a brief background summary, and relevant contact numbers, and I’ll get back to you. Rob Cochrane rob@irg.co.nz

New Zealand Investor

Why haven’t we all been “Squirrel Wise”?

Investment Lessons

To choose a yield share In the next of his investment lessons, Neville Glaser looks at the factors that make up a good yield share n the last issue of NZI Magazine I explained that investors can choose either yield or growth when it comes to share investment, but usually not both. Where your return from a share comes mainly in the form of a high annual cash dividend, you have selected a yield type share and the growth in the share price is likely to be slow. There ’s another thing you ought to know about yield investments. They are often the most boring companies on the market, run by CEOs you seldom hear about, in industries that cause no excitement. The very fact that they are high yielding indicates that the shares are low growth stocks, attracting little attention of the newspapers. But yield investors trust these companies, and many have done very well out of them. In general, we steer clear of companies that are structurally weak, with high debt levels, erratic cash flow, poor dividend cover, unproven management, unable to sustain fierce competition and operating in an industry we either don ’t understand (biotech) or don ’t trust (airlines). Having said that, yield shares have seldom looked better than they do now. In the prevailing weak economy, with a real risk of corporate profit being under pressure and share prices going nowhere for a long while, receiving your returns in the form of an annual cash dividend is quite attractive.

www.equity.co.nz

Picking the Best Dividend-Payers

Successful dividend investing requires finding candidates with: 1) minimal risk of dividend cuts and/or other negative events, and 2) a high probability that the dividends will increase while you own the stock. You win two ways when the dividend increases. First, the yield on your initial investment goes up with the dividend, and even better, the dividend increase often propels the share price higher. Conversely, a dividend cut shrinks your yield and often precipitates a drop in the share price as well. The criteria we look for are: 1) High dividend yield 2) Excellent cash flow 3) Reliable earnings 4) Reliable dividends 5) Good competitive power 6) Positive analysts assessment

High Dividends The strategy involves finding shares paying dividends yielding at least 6% annually (calculated as dividend per

share divided by the share price when you first acquire the share), and likely to increase their dividend payouts by at least the inflation rate and no lower than 5% per year. Over time that should guarantee an annual return of 11% (6% cash in pocket, 5% rising share price), virtually tax free as capital gains aren’t taxed in NZ, and dividends are largely tax free.

Good Cash Flow Cash flow is the money that flows into, or out of a company’s bank account resulting from its basic operations. Cash flow is different than earnings, because a myriad of arbitrary accounting decisions affect the reported earnings. Dividends are paid out of a company’s cash flow, and cash flow growth can lead to growing dividend payouts. But cash from operations measures the actual cash that flows into and out of a business, and that’s hard to fake. That measure is further improved as we subtract capital expenditures, which is the money a company is spending on buildings and equipment. The resulting free cash flow figure pays the dividends and funds the future growth. The problem for many is that there are too many complications in calculating free cash flow. But a very simple method, developed by Tom Gardner, strips down free cash flow to its bare bones and takes a couple of minutes to calculate from a company’s annual report. From the accounts, note the reported net profit; add back depreciation; add back any amortization; eliminate onetime items (deduct a positive item, add a negative item); deduct capital expenditure in the year under review. The resulting figure gives you a very close approximation of free cash flow, and this figure should be at least 150% of the declared dividend, so the company has a good margin of safety.

Reliable earnings While dividends come from cash flow, flat or declining earnings signal problems that could jeopardize the dividend payouts. A couple of setback years is to be expected, but earnings should be maintained or rising in four of the past five years. That would give a quantitative measure of reliability of earnings. But because reliability is so important, you also have to use a qualitative measure. And that is the following item.

Reliable dividends. A company ’s track record for paying good dividends is as

Investment Lessons

much a matter of attitude as affordability. Some directors take very seriously their responsibility to the yield investors that support them, and will maintain a dividend even in lossmaking years. These are the companies that yield investors should seek out. However, avoid companies that repeatedly pay out more than their earnings, as this could be a ruse to keep up the share price to avoid being taken over, or for other reasons, or to cover up deterioration in earnings capability. The dividend should have been maintained or increased in four of the past five years.

Good Competitive Power Competitive power equals reliable earnings. Dominance gives the company an advantage in the pricing, distribution and marketing of their products, which flows through to earnings and dividends. You measure competitiveness by asking the questions: Does the company have a competitive advantage (such as size, patented invention, brand recognition) within a market, or within a niche in a market? (Need a yes). Are powerful competitors emerging to challenge its dominance? (Need a no). Can it maintain its dominance? (Need a yes) If on balance, the competitive advantage can be carried forward into the future, then a stable earnings record can probably be expected to continue.

Positive consensus view Analysts who keep a close eye on listed companies don’t always get it right. But when taken as a group giving a consensus view, they provide an excellent reality check for any investor ready to launch into a yield share investment. Avoid stocks that the majority of analysts are recommending selling. IRG’s web site gives buy, hold, sell recommendations on most shares, which can be compared with the recommendations from other analysts, such as Morningstar recommendations contained on the ASB Securities site. ASB Securities also provides an average of the analysts’ buy, hold, or sell recommendations for each stock in a single number called the analysts’ consensus rating, With this system, 1.0 means “strong buy,” 2.0 means “weak buy,” and 3.0 to 5.0 equate to gradations of “sell.” Any stock with a rating of 4 or higher should be avoided.

Good Yield Stocks Stock Vector Sky City Hallenstein NZ Refining Cavalier Cabcharge (Au)

Sector energy supplier casino operator fashion retail oil refining carpet exporter taxi pay technology

YES

YOU HAVE FOUND AN EXCELLENT YIELD SHARE

Has the company maintained or increased earnings in at least 4 of the past 5 years? Has the company maintained or increased its dividend payout in at least 4 of the past 5 years?

Is the net dividend yield at least 6% or better? NO

Is analysts’ consensus view reasonably positive, rated lower than 3 on the scale of 5

YES

YES YES In the free cash flow (calculated as shown above) at least 150% of the dividend payout?

YES

Does it dominate its industry ranking number one or two in a market or niche within the market? NO

YES

AVOID!

New Zealand Investor

Income

Show me the income Get your asset mix right, and you will be able to sleep at night writes Philip King

www.equity.co.nz

he most pressing issue for most investors is income, which has become even more pressing in the light of a financial meltdown that has squeezed the wallets of many. For all, sooner or later, the income you derive from savings or investments will be called upon to replace salary, wages or drawings of the retired. This transition is regularly not well planned. The assets that provided growth and tax effective performance over time, are often by their nature not good for delivering regular and reliable income. Capital risks and volatility need to be considered during this transitioning from asset accumulation to passive income utilization. How to generate steady reliable portfolio income has as many recipes as the ‘Edmond’s cook book’. In reality, while you can get creative with the ingredients, and there are fancy mixes of asset classes; cash, property, fixed interest and shares are still the core assets – end of story. If we address our more common expectations of income generation, they differ from those in most overseas environments for the very reason that our local cash, term deposit and fixed interest (bonds) rates are far and away higher. Property distribution yields are also much higher – we have grown up on very high interest rates – stunningly high, and that has contributed to many being so poorly off, but that’s another story. The core options to consider; 1, Bank deposits or mortgages that cap earning capacity while lacking any defense against inflation or any means of protecting your purchasing power over time. 2, Debenture or unsecured and unrated deposits – second tier, high rate offerings that have visited satanically upon many investors in recent times. The underlying risk is often not evident in the way these instruments are marketed. 3, Higher yielding listed stocks, shares or fixed interest bonds that have the double jeopardy of company performance, price movements and an overlay of market sentiment. 4, A property based portfolio of either commercial or residential bias that has high capital requirements and limits to liquidity. In other words, it is hard to sell when you need to.

‘We have grown up on very high interest rates – stunningly high’

A further option is referred to as the ‘tank and drip’ method, which in reality is a ‘balanced managed fund’ blend of assets, providing a drip stream of either income or capital disbursement ‘top up’ regardless of market performance over time. At the moment with most of these balanced funds down around 16%, plus whatever income is drawn, say 6% net, they don’t look too flash either, delivering almost a 25% capital loss, for the year. As with politics, religion and sex there are as many proponents of each option or style as those willing to argue that black is really just dark white. The above possibilities carry challenges as you can see. A dispassionate review reveals what is likely and what is wishful fancy. If there was ever a time to confirm you cannot get blood from stone we are living it right now.

Meeting your investment income needs – a closer look

Cash and Bank deposits - Security and reliability. Banks are viewed as secure and reliable, and luckily NZ has not been devastated by failures as others have. However, New Zealanders are experiencing unusual times: Gross interest rates of sub 3% for call accounts and around 4% to 4.50% for 12 month deposits are a very new experience for us living in a country that generates high interest rates to reflect the small country risks. With cash or term money, a key risk lies in the eroding impact of inflation on the capital and your purchasing power, never more evident than now. But what’s left, you should at least still have!

Secured Debentures – ‘as solid as’ – yeah right. For ten years or so these flooded into the market with great gusto, secured debentures – from all manner of providers. The market grew to nearly $14 billion and folk enjoyed returns in the 7% to 11.50% per annum range. The clover was knee deep and folk shunned most other options offered. Few considered a melt down was ahead. As the industry collapsed spectacularly, we had a deluge of every catch phrase of reassurance imaginable being trotted out by those yet to succumb. The facts now revealed are that many of these companies were financing projects that were never worthy of funding, taking securities of questionable priority and no robust value – worse,

Income

Fixed interest – Bonds or hybrid debt securities. Many fixed interest issues have made it to the market in recent months at higher rate of 7.25% to 10% per annum. The structure of these widely varies from bog standard corporate bonds to perpetual preference shares of every colour and hue. Subordinated and unsecured, rated and unrated. Terms from 36 months to perpetual (no fixed term) and the interest rate reset parameters also very different – billions have been raised with ease, but many investors will not know what they have got. Most do not understand the volatility of the listed debt market - which is to their peril. Yes, many of the rates look attractive right now but some will bring tears. Bonds are an excellent addition to many portfolios, just be very aware of what you have purchased.

High Yielding stocks or shares. The New Zealand share market is somewhat unique in that dividend yields average maybe 50% to 75% higher than most other recognized options. Much of this difference is due to local taxation issues but regardless, this is a benefit that NZ has pretty much to ourselves. Many listed assets will produce the income needed, but only distribute twice per annum. A dividend income approach will provide greater liquidity levels than some other options by virtue that small amounts of capital can be liquidated (through share sales), from time to time to meet unexpected needs more readily, if need be. Yes, dividends are dependent upon company policy (remember Telecom?) and the cost of liquidity lies in price volatility – you see it daily and for some that is just all too hard. The perceived higher volatility of the share market has been shunned by many investors since 1987 more the pity for us all - get over it!

Property - Reliable income and growth. Commercial property is generally held as one of the most reliable stores of real wealth and the basis of most of the world’s wealth and wealthy people, [see May Issue], and also provides: A realistic expectation of inflation adjusting income over time. Moderate to lower volatility in most parts of the

‘The share markets have been shunned by many investors since 1987 more the pity for us all – get over it!’ economic cycle. When combining a wide selection of investment property interests (generally excluding bare land and residential) you can protect your lifestyle, leave a nice nest egg for future generations, and due to lower volatility (risk) sleep at night! Investment income and capital wealth can realistically be expected to trend with or ahead of inflation or the general economy – on average and over time. There is however a number of caveats and specific risks that should be avoided, excessive leverage being one. Syndications can be good but also need careful assessment.

Well smarty what’s the answer then? Diversification and a number of exposures are paramount. Every asset will have its time in the sun. Spread the risk, if you are seeking to increase your average income and reduce serious capital fluctuations. Even then we will get it wrong sometimes despite our best efforts, as recently experienced. Ideally build a portfolio of direct property, higher yielding stocks, some quality bonds, along with shorter term liquidity reserves in cash, and you should reach your objectives. Note that debentures are not on the list. Get the assets right and you will end up with a tolerable rate of volatility in your portfolio, a relatively smooth income stream, and a portfolio that at retirement easily stayed ahead of inflation and protected your buying power. Philip King is General Manager of Investment Research Group BOP. You can email him at irg@irg.co.nz

Commercial property: The road to Retirement? New Zealand Investor

many of these facts were obscured from the investor (and adviser might I add) – and the bubble burst with huge cost. We now have a small number of surviving providers, still taking deposits, supported by a Government guarantee scheme until October 2010 – the rest are in various forms of intensive care, some will sadly not reach recovery, so tread with care.

Wine

Bordeaux 2008 – A Good Year?

www.equity.co.nz

t the time of writing, the 2008 Chateau Lafite Rothschild has just been released En Primeur. Right now the wine is still sitting quietly in a French oak barrel somewhere on the Rothschild estate in Bordeaux, France. The grapes for this wine would have been picked in September/October 2008, and proceeded to finish their fermentation several weeks later. The wine would have then been placed into barrels sometime in December. In March 2009, all the king’s horses and all the king’s men, in the guise of journalists, critics, traders and privileged punters, descended upon the region of Bordeaux to be given exclusive tastings of barrel samples. The analytic mob roaming from estate to estate swirling and cogitating on developing wines, in front of nervous estate owners. The King himself, Mr Robert Parker would have hundreds of these samples lined up in front of him in quiet rooms around Bordeaux, as he used his pen, the most powerful of swords, to critique each and every wine and provide his famous Parker score out of 100 points. For the Lafite he gave the highest of scores possible for an

By Puneet Dhall, Director Dhall & Nash Fine Wines

En Primeur wine – 98-100 points, and in doing so it unofficially became the wine of the vintage. In April 2009, the Gates opened and Trading began. The peculiar system of Bordeaux, quite unlike any other wine region, allows for the trading of wines as future options. The Lafite will not be bottled and therefore released as a physical item (viz luxury commodity) for at least another year. Its full drinking potential may not be realised for decades. First out of the gates in April were Chateau Angelus, one of the premier ‘right bank’ wines from St Emilion. They declared at NZ 1,800 per case of 12x75cl bottles, and Dhall and Nash were the first wine company in New Zealand to declare the prices on its website that day. (This price is before New Zealand tax and shipping to New Zealand, which can only be applied once the wines have actually arrived into the country.) Decanter Magazine gave the wine 17.5 points out of 20, and described it as ”Typically Angélus in style. Deep, dark hue. Spicy, cedar nose. Rich, full extract but reined in and accented towards the fruit. Polished texture. Firm finish. Big but harmonious. Drink 2016-2028”

CASH PAID FOR SWISS WATCHES THIS MONTH

THIS MONTH WE ARE PAYING TOP CASH PRICES FOR NEW, OLD, USED OR NOT WORKING, OLD, MEN’S AND WOMEN’S, POCKET WATCHES. WE ARE PARTICULARLY INTERESTED IN THESE BRANDS & MODELS:

BUYER ON SITE AT PENDULUM SHOP 6, QUEENS ARCADE, 34-40 QUEEN ST, AUCKLAND MON-FRI: 10AM - 5PM SATURDAY: 10AM - 4PM Ph: ( 09 ) 377 7700 Mobile: 021 299 8672

WE ALSO BUY GOLD AT TOP PRICE

New Zealand Investor

ROLEX, PATEK PHILIPPE, CARTIER, HEUER, OMEGA, JAEGER-LE COURTRE, AUDEMARS PIGUET, I.W.C & TUDOR, CHOPARD, BREGUET, VACHERON CONSTANTIN

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Wine

Over the coming weeks, on a daily basis Chateaux released their prices. The more ‘lowly’ Chateau tending to release first (Angelus was an exception), and the more highly graded Chateau releasing further down the line as they assessed the market and watched each other tentatively – their aim, to release at a price which is a win-win – for themselves, the traders and the punters. Dhall and Nash received a limited quantity of the 2008 Lafite Rothschild and released the wine in New Zealand in the third week of May at NZ$ 9,775 for a case of 12x75cl. Wine Spectator wrote of the wine “This has a very intriguing nose. Already shows complex aromas of currant and crushed berries, with hints of dried flowers. Full-bodied and very chewy, with intense tannins, but polished and velvety. Long and pretty. The finish stays with you a long time” So how has the 2008 Bordeaux vintage fared thus far against previous vintages? By late August 2008, there were many concerns for the vintage across Bordeaux. A cool and unsettled summer reminded many of 2007, where similar conditions had lead to many wines being pretty but without much depth or gravitas. As late as the first week of September, numerous winemakers continued to believe as such, having witnessed much summer rain and onset of mildew and rot within the vineyards. Almost without exception, Chateaux decided to wait rather than pick. Harvest, normally underway in early September was delayed by most. Fiona Morrison, owner of Chateau Le Pin with her husband Jacques ThienponT wrote on newbordeaux.com, that harvest for Le Pin on October 1st was the latest on record, and that the late September Sunshine and healthy north wind helped to save the day. During Vinification, Morrison writes “We noticed that the juice was deep purple in colour with a bright crimson foam already developing under the tap. The fragrance was impressive – floral with notes of peony and rose and fruity too with notes of cassis and bing cherry. We had not expected to have such forward aromas or such deep colours and this compensates for some initial worries about high acidity and volatility. In fact the alcohol levels were also surprisingly high. Unlike last year, we have readings reaching up to 14° alcohol for the Merlots, a little less for the Cabernets at Vieux Chateau Certan.” James Suckling of Wine Spectator wrote in his blog on April 6th “The best of the resulting wines show

lovely aromas, fruity palates, silky tannins and bright acidity that gives them long, lively finishes. However, the weaker reds can be light, green and acidic” Overall, the 08 Vintage in terms of depth of quality is up on 2007, 2004 and 2002. Samples from the best Chateaux ranged from very good to outstanding as assessed by the majority of critics. Many compare favourably with 2001 and 2006 also, but concede that the wines will not be as opulent as the 2005 and 2000 vintages or even possibly 2003. There seem to be no weak appellations across the region. Winemakers realised early on that with the late harvest and low yielding fruit in fragile states, gentle vinification was required to avoid extracting the grapes’ considerable quantity of tannins. With prudent selection, one can stock the cellar with a number of wines which will be long lived and full of flavour. In terms of price, 2008 has also impressed. With memories of the 2005 stellar vintage and escalated prices still reverberating, combined with a shrinking global economy – the pressure had been on the Chateaux since the beginning of the year to be realistic about pricing in 08. As Angelus was released, it was clear that this comment was taken on board, with a drop in price of 30% from 2007. This has continued throughout the releases, with Lafite some 40% lower in price from 2007. What we have seen at Dhall and Nash is that this has kept the Trade buoyant, and concerns that consumers would ‘wait it out’ until wines were released in 2010 has not ensued. Being ‘first’ in the queue to guarantee both supply and sharp price has kept the Bordeaux Futures trading bright. However some traders are a little sceptical. Releases of the First Growths at their reduced levels has lead to brisk sales, and most traders sold their first growth allocations within hours. However what we do not know is exactly how much volume of production was released by the top Chateaux. It is felt unlikely that they released their entire production, and were testing the water. If the Global economy has reached a tipping point and we are on the long walk back of recovery, then a ‘secondary’ release upon bottling at an increased price is ‘on the cards’. Where does this leave the consumer? Well it leaves the 2007

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vintage looking a little ‘prickly’ at the moment, and if it is still possible to find stock of the ‘higher’ 2008 Bordeaux Chateaux at first release pricing, our thoughts are to ‘take a look at it’ as the price/ quality ratio has tipped in favour of the consumer. For some of the ‘lowlier’ estates who have come up trumps in 08 with outstanding wines such as Marjosse and Senejac, there is absolutely no need to buy these En Primeur in 08, and the best advice here is to wait until they are bottled. The Bordeaux’s produced from 08 will suit the lovers of traditional claret best. Racy wines not overripe in flavour. At Dhall and Nash, these are our pick of the crop: Of the first growths on the left bank of the Gironde, undoubtedly Chateau Lafite. Cheval Blanc (95-97 points RP) leads the charge in St Emilion at NZ$9,900 per case of 12x75cl. Other high scorers we recommend include: Chateau Pontet Canet from Pauillac at NZ$1,650 per case. Scoring 96-98+ from Robert Parker and Wine Spectator who wrote: “Very dark and brilliant in color, showing wonderful pure fruit, with crushed blackberry, currant and fresh-cut flowers. Full-bodied, with ultrafine tannins and a long, crisp, fruity finish. This offers impressive finesse and length” Chateau Montrose from St Estephe at NZ$ 1,400 per case. Scoring 95-97 from Robert Parker and Wine Spectator, who wrote: “Shows blackberry and black licorice, with hints of mint. Fullbodied and fruity, with very fine tannins, good acidity and a nice intensity of mineral and spices.” For value, (and there is no rush to secure these during En Primeur) the following wines were outstanding quality and should be kept in mind upon release: Ch Bernadotte 2008 Haut-Médoc Ch Bouscaut 2008 Pessac-Léognan Clos Les Lunelles 2008 Côtes de Castillon Ch Fougas Maldoror 2008 Côtes de Bourg Ch Haut-Gardère 2008 Pessac-Léognan Ch Marjosse 2008 Bordeaux Ch Mille Roses 2008 Haut-Médoc Ch Sénéjac 2008 Haut-Médoc Ch Domaine De Chevalier Rouge Ch Petite Eglise As parting words, at Dhall and Nash, our Golden rules for buying En Primeur are to buy the wines that you know and love (or think you will if you are yet to taste them). Do look at the notes and scores posted by critics – the better ones such as James Suckling , Jancis Robinson and of course Robert Parker, are getting very good at assessing the barrel samples at this early stage of their development. Only buy from companies you trust – it will be 18 months from when you part with your money to when you actually see your wine. Do buy into the ‘Big brands’ but also take a punt at the value wines – half the fun is seeing for yourself how they turn out in two years time. And finally, if you are looking at the wines from a more serious Investment potential, be prepared to wait out your returns.

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Opinion

Watch out for leverage

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am not a big fan of borrowing to invest in the share market. While the leverage effect can help you make excellent returns during the good times, it can destroy your portfolio during the bad times. At worst, the lender can make a ‘margin call’ if the value of the shares falls too much relative to the debt and this can end up forcing you to sell shares are heavily discounted prices just to retire debt. Then there is the prospect of having debt that is costing you interest when the value of the assets you have bought is declining. Not only is this stressful but it encourages poor decision making, such as getting out of the market when prices are low and arguably at bargain levels. As legendary US investor Warren Buffett once put it, leverage is the only way a smart guy can go broke … “You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. “But it’s reinforcing when the people around you are doing it successfully, you’re doing it successfully, and it’s a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it’s more and more fun, you think, ‘Why the hell should I leave at a quarter to 12? I’ll leave at two minutes to 12.’ But the trouble is, there are no clocks on the wall. And everybody thinks they’re going to leave at two minutes to 12.” He also said: “I’ve seen more people

fail because of liquor and leverage - leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing”. That said, leverage can be a very good tool for enhancing portfolio returns if used prudently. As always, sensible investors have to avoid the critical emotions of greed and fear and leverage tends to enhance both. One group of investors I advise has not had any signficant issues with their six-figure overdraft, which they use to buy shares with (although it is likely that the leverage effect of buying shares with debt helped drag down their portfolio in the past year). Fortunately, they have a self-imposed limit which is 25% of the value of the portfolio. During the bull market of past years, the dollar value of the overdraft lifted because the value of all the shares were rising. In the past 18 months, however, that 25% threshold has been breached a number of times as share values have fallen but, regrettably, the debt remains the same. To keep within their limit, the group has been encouraged to sell shares after they have fallen, having bought shares after they had risen to take advantage of their newly created credit. This has got me thinking that there has to be a better way to manage leverage so that these signals are reversed. What a wonderful way to make money if you are encouraged to use leverage to buy shares when they

As Warren Buffett once put it, leverage is the only way a smart guy can go broke.

By David McEwen are cheap and sell them when they get expensive. One way to do that is to make your threshold relative to a moving average rather than a portfolio valuation on any given day. This will limit the ability to borrow when prices are rising and enhance the capacity to invest when they are falling. For example, let’s look at an actual portfolio (which I have reset to a starting value of $100,000 for simplicity) in March 2006. With leverage of 25%, it starts with an overdraft of $25,000. Over the next 12 months that portfolio does extremely well during a very bullish market, reaching $130,000. At this point the investor is able to spend just under $33,000, buying shares at high prices. Then, from late 2007, the portfolio falls steadily, again affected by a very weak market. At its low point the value is only $56,000, with an overdraft capacity of $14,000. This means the investor has been forced to sell $19,000 worth of shares into a distressed market in order to keep within the borrowing limit. Not only that, but some of the shares being sold were purchased at the top of the market and are being sold for a loss of 50% or more. How can we avoid this? One way is to look at the average value of the portfolio over the past 12 months, which will contain both peaks and troughs, and basing our 25% on that. The limit should be lower than it otherwise would be during times of rapid price appreciation, and fall more slowly during market corrections. This should have the effect of limiting the ability to leverage up and buy shares at high prices while creating the capacity to buy shares in a market downturn rather than having to sell them.

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Opinion

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By Brent King

There is a raging debate over the value or otherwise of home country bias. This is the concept where investors choose to hold a disproportionate slice of investments in their own market - their home country. The current government has sparked this debate by suggesting that a greater share of the New Zealand Super Fund should be invested in New Zealand than the conventional Modern Portfolio Theory would indicate. Roughly, the conventional argument goes that the investment mix across countries should be based on the proportional size of each country compared to the world markets. So, a country that represents 5% of the world’s economic activity, should be allocated 5% of your investment portfolio. This would mean of course that the vast majority of NZ Super funds would be invested off shore. Currently 20% of our Super funds are invested in New Zealand. The debate is whether this should be increased to 40% with the balance invested on the basis of the split above. In am in the camp that says we should have home country bias, and keep a disproportionate amount of our money at home. My arguments are 1) New Zealand is different to other countries. We have a small economy which will always struggle to attract international capital, so the concept of borrowing from other countries whilst we invest in those countries makes no economic sense. We are in effect sending capital abroad that is needed here. 2) It is possible to make a return internationally but have it all reversed by currency movements. 3) The only real measure that a New Zealander is interested in is what is the return in New Zealand Dollars (NZ$). The fact that a particular market or currency has gone up or down is not that relevant to a New Zealander. The major reference that they have is normally the cost of living in New Zealand. 4) If we can stimulate investment in the New Zealand share market by having these funds invested locally, New Zealand as a whole benefits from the additional capital injected locally. This lowers the cost of capital and all steps that reduce the cost of capital in New Zealand is good for the economy. There is no question that there is a significant body of research showing that over time and on average the spread of investments internationally has a very stabilising effect. On balance however this is more than off-set by the benefits of investing in your own country.

Brent King Managing director of the IRG group.

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Is home country bias wrong?

Collectables

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The charm of philately

Portable wealth has always held some appeal for poor and rich alike, and none more so than the not so humble postage stamp. Vaughan Yarwood gets out his magnifier and takes a closer look By Vaughan Yarwood

n September 1940 Carol II, the ousted ‘playboy’ king of Romania, took hasty leave of his country in a special train, fleeing across the border to freedom with his mistress. The train, laden with royal treasure, including a prized stamp collection and paintings by Titian, Rembrandt and other Old Masters, got safely into Yugoslavia despite being fired on by a death squad of fascist soldiers and some time later the king fetched up in Portugal with his worldly goods. Among his philatelic collection – at the time one of the most valuable in the world – was a Swedish stamp, the ‘treskilling yellow’, which he had bought just three years

earlier from a London auction house for £5,000. Carol II has long since faded from memory, but the treskilling yellow lives on. Acquired by a succession of new owners for increasingly astronomical sums, it last changed hands for US$2.3 million and remains unchallenged as the world’s most expensive stamp. It is also the most valuable commodity on earth, if anyone cares to see it that way, the sale price equating to US$86 billion per kilogram. Other monarchs have also been partial to philately, perhaps because historically they have enjoyed three useful attributes: a large purse, a proprietorial interest in distant ter-

Collectables

ritories and ample leisure. England’s George V, an inveterate collector, is said to have spent an hour a day with his albums despite having the demise of an empire to oversee. In 1904 he set a new record price for a single stamp when he bought a Mauritius two pence blue for £1,450. The same stamp today is said to be worth £550,000. George VI took up his father’s hobby and passed on to his own daughter the substantial fruits of their combined labour. As a result, Queen Elizabeth now possesses one of the most extensive collections in the world. With an estimated value of £400m, the Royal Philatelic Collection is the Queen’s largest private investment.

Over recent years rare stamps have proved to be a very stable investment, and an increasingly popular one internationally. In 2008, the value of the GB 30 rare stamp index grew by almost 40% and one in ten hits on the website of the venerable London-based stamp dealer Stanley Gibbons now come from the emerging Chinese market. Stanley Gibbons, the largest stamp dealer in the world, calls the supply-constrained rare stamp market ‘a compelling form of alternative investment’. The company, which is listed on the London Stock Exchange’s Alternative Investment Market, has seen turnover double in the past three years and its share price climb from 18.5p to 148.5p. Investing in rare stamps is also considered to be an effective hedge against inflation, with rare stamp prices increasing six-fold in ten years during the inflation-prone 1970s. A graph recently published by Stanley Gibbons shows its GB 30 index outperforming the retail price index, property, the share-market and even gold between 1998 and 2008. Stamps also happen to be highly portable, tangible assets and – given the estimated 48 million collectors worldwide – highly liquid. They also have a low correlation to other investments, meaning that they can help smooth out poor performance in a traditional portfolio. These factors may help explain the interest shown in philately by wealthy families such as the DuPonts and Rothschilds and more recently by investment oracles Warren Buffett and Bill Gross. Gross, a bond and inflation expert, is said to have spent more than US$76m in stamps over the past five years. In a philanthropic gesture he sold for US$11m a collection of Great Britain stamps which he had built up over five years and donated the proceeds to the charity Médecins Sans Frontières. The continuing appeal of philately was underscored earlier this year by

revelations that the French president Nicolas Sarkozy and the Russian tennis player Maria Sharapova are devotees – they join the ranks of unlikely stamphoarding celebrities, which include John Lennon and Freddie Mercury. By all accounts Sarkozy falls into the camp of passionate collector rather than pure investor and it is a significant distinction. Stanley Gibbons itself admits that there are few truly rare stamps worthy of investment, claiming that just 0.00005% of its current stock of three million stamps are truly of investment quality. The point is elaborated by New Zealand dealer David Holmes, co-owner of Auckland City Stamps. Holmes is careful not to push the investment side of philately, saying that people looking to spend money on stamps should be motivated firstly by a genuine interest in them. The subject is so vast and complex, he says, that anyone tipping money into it in the expectation of high returns is likely to get burned unless they do a great deal of homework first. He cites the collapse in 2006 of two large Spanish investment companies that specialised in philately. The Madrid-Based Afinsa and Forum Filatelico had almost 350,000 clients in Spain and Portugal whose stamp investment portfolios were thought to be worth some £4.5 billion. Following investigations by the Spanish authorities, the investors discovered that their investments were in fact almost worthless and that the ‘antique’ stamps they had been lured into buying were hugely overvalued, if not fake. The schemes, which advertised annual returns of up to 8% and which guaranteed the repurchase of the portfolios for the original prices at the end of the contract period, were in fact fraudulent pyramid schemes. A lack of sufficient investment grade stamps meant that lesser stamps were bought and money to pay interest to investors

New Zealand Investor

Stamp dealer John Mowbray: ‘If you buy sensibly it can be financially rewarding’.

Collectables

came not from an appreciation in the that over all it has proved to be a good value of the stamps but from funds investment’. from new investors. To avoid collapse, One characteristic of modern philately the schemes relied on an endless supply is that the range of collections has of new investors. narrowed and deepened. Instead of being ‘The people who got hurt were mum a catch-all for stamps issued anywhere in and dad investors who didn’t know the world, a typical collection will focus what they were doing’, says Holmes. He on a single theme or country. even has some doubts about the admitFortuitously, New Zealand issues tedly reputable investment schemes are well collected internationally, says offered by Stanley Gibbons which rely Holmes. ‘Commonwealth stamps are on the expertise of the company’s staff. widely collected, and New Zealand is ‘These schemes are aimed at people one of the most popular countries in who know nothing about stamps. the Commonwealth. We started issuing Investors would be better off researching the market themselves and building up a picture of what has happened historically,’ he says. ‘If you buy sensibly it can be financially rewarding,’ says John Mowbray, chief executive of auction house Mowbray Collectables, and a long-time stamp specialist. ‘I don’t Antipodean rarities: an 1855 envelope bearing New Zealand’s talk the stamp market first full-face queen stamps up and there are all (auction price $138,000) and an sorts of liquidity issues, 1870 Paris balloon post cover mailed to Australia (auction price but there is no doubt $238,625).

stamps in 1855, just fifteen years after the world’s first stamp, the Penny Black, was issued’. Collections of early New Zealand stamps can command high prices. Earlier this year auction house Spink set a new record for the sale of New Zealand stamps when one of Joseph Hackmey’s collections went under the hammer in New York, fetching for more than US$2 million. Hackmey, an Israeli living in London, is something of a phenomenon in his own right. Fluent in 14 languages, he has assembled philatelic collections of 23 countries, 22 of which are the best collections ever formed of their respective countries. ‘He is operating on a different level to anything ever achieved in philately’, says Mowbray, who flew to New York for the sale.

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Collectables

The stamp that started it all: Victorian era Penny Blacks on offer at Auckland City Stamps.

worth more than an average example of the same issue by a factor of ten. It should also be said that the sale price achieved by a rare stamp is not always reflected in the catalogue price. As with all collectables, ultimately it depends on who is buying at the time. As to the future of collecting and investing in stamps, Mowbray admits that fewer young people are becoming involved, but that with people living longer and therefore having more leisure and disposable income, and with the emergence of new middle classes in developing countries, the industry is in good shape. ‘I thought that I would be turning the lights out at 60’, says Mowbray. ‘I am that now, and I have never been busier’.

New Zealand Investor

Among Mowbray’s $250,000 worth of purchases at the Spink auction was an envelope bearing a pair of the country’s first full-face queen stamps which he bought on behalf of a client for $138,000. Sent to Birmingham from Auckland in 1855, it is thought to be the earliest recorded use of the 1d stamp. A few weeks later, Mowbray’s Sydney office set a record of its own – the highest Australasian price for a philatelic item – when it sold at auction a ballon monté cover mailed to Australia from France during the siege of Paris for $238,625. The envelope, which had a pre-sale estimate of AU$50,000, attracted the attention of President Sarkozy who ordered a catalogue, and was bought by the French dealer Pascal Behr, who flew out to Australia for the auction. With so much at stake in such purchases, establishing the genuineness of sale items is vital. In New Zealand the Royal Philatelic Society of New Zealand undertake authentication of investment grade stamps for a fee of about one hundred dollars. With a reference collection to judge individual stamps against and a requirement that each stamp must be seen by three experts, certificates of authenticity issued by the Society add credibility to the sale process. This is especially important given that small variations in individual stamps – such as the easily forged overprinting of the letters OPSO (‘On Public Service Only’), which was used for a time prior to 1907 to frank external official correspondence – can increase the value of a stamp enormously. Most dealers recommend staying away from recent issues, unless they have printing errors, or some other attribute that makes them rare. The increasing number of new issues being released by New Zealand Post has philatelic societies petitioning for a return to sensible levels. Hobbyists of modest means are no longer able to maintain complete collections of New Zealand stamps. Moreover, stamps issued since 1967 still have postal validity and most are unlikely to become valuable. ‘Older issues have proven values’, says Mowbray. ‘You know whether they are common or scarce before you buy them. The benchmark is based on scarcity, not on the value New Zealand Post puts on them’. Collectors are conscious, also, that they must pay for quality, he says. A rare stamp of exceptional quality can be

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Opinion

Goodbye to cherished concepts there are plenty of buyers and sellers. And which shares have the highest trading volumes? It is these enormous, blue chip companies. So, in 2008 we began to see an extraordinary thing; the safest blue chips were falling faster than smaller, not so safe companies. Their liquidity became their downfall. Another popular phrase that advisors roll out in an emergency is ‘Time in the Market’, which you hear during market downturns to encourage investors not to fire them and to encourage everyone to wait for the next boom. In the past, this has worked as recessions have been short and sharp and were followed by extended bull markets. Sometimes, however, downturns can be drawn-out, gruelling affairs such as the 24-year period following the 1929 crash or for the decade or more of stagflation during the 1970s. The jury is out on whether we are experiencing a rebound or merely a ‘dead cat bounce’ ahead of further economic and market declines, but either way there is a distinct possibility of an extended period of minimal growth. The fact is, the credit fuelled growth of the past five years is not going to be seen again for several years. Don’t rely on the buy and hold strategy.

Another truism that has shown it to be less than reliable of late has been ‘invest in companies that make things’. These companies are relatively easy to understand and their financials quickly point to problems (inventories increasing, cash flow decreasing) and they have real assets (warehouses, manufacturing plant) that can be sold and presumably result in a partial return of capital to shareholders. But the problem with companies that make things is that they usually carry heavy overheads to make those things, and when sales fall below their breakeven costs, even the most venerable manufacturer can disappear in no time. And none are more venerable than Fisher & Paykel Appliances. That this company survives at the behest of its bankers is not only extraordinary but also humiliating. But that is the reality: It requires enormous debt and overheads to take on the global markets as an exporter from New Zealand. And when cash flow fathers, the banks get nervous. The one truism we can repeat is that share markets and economies will always go up over time, but never smoothly because THEY WILL FLUCTUATE. Our planning should incorporate the fact that the only certainty about the share market is its head spinning volatility.

Flight To Safety?

New Zealand Investor

ne of the hardest things about being an investor in the past 18 months was watching the failure of almost all the experts’ most cherished concepts. Think of ‘Flight to Safety’, the concept that in bad times money would flow from highly geared growth shares to solid, conservative blue chip shares. When the market was imploding the way it did last year, there was nowhere to hide and all shares were sold down. Take Auckland International Airport, for example. A monopolistic provider of an essential service (at least to an island nation like NZ). Its share price went from over $3 in late 2007 to as low as $1.56 in December 2008. That is virtually a 50% drop from supposedly a super-safe share. The flaw in the Flight to Safety concept is that it involves the biggest and best companies on the share market. When the banking system began falling apart investors had to exit the share market quickly to accumulate cash and prepare for the hard economic times head. But which shares in their portfolio are the easiest to exit in vast quantities? Those that are the most liquid; that is the shares with the highest daily trading volumes, where

By David McEwen

Wine of the Month

Te Mata Estate Te Mata Estate is New Zealand’s oldest winery, dating from the early 1890’s. It is a New Zealand family owned winery – a true estate, specialising in grape growing and winemaking from its nine Hawke’s Bay vineyards. It is acknowledged as one of only five icon wineries in New Zealand according to Robert Parker’s team. Under the direction of John Buck, Te Mata Estate has, over nearly thirty years, produced a stunning array of red and white wines including such famous labels as Coleraine and Awatea Cabernets/ Merlots, Bullnose Syrah, Elston Chardonnay, Cape Crest Sauvignon Blanc and launched in 2009 Zara Viognier. Over the last few years, Coleraine - Te Mata’s flagship – has gained outstanding endorsement as possibly, New Zealand’s best Bordeaux blend. ”Coleraine ‘07 the finest wine ever made in New Zealand.” Sam Kim. “After completing two verticals of Coleraine, witnessing a couple of tasters undergo their Te Mata epiphany, I conjectured whether this is New Zealand’s greatest wine? Well, let me put it this way, it is the frontrunner” Neal Martin – Robert Parker’s Wine Advocate.

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