new zealand investor august

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NEW ZEALAND

INVESTMENT RESEARCH GROUP INVESTOR

Issue 187 AUGUST 2010

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ContentsFEATurES

10 Finance companies make slow progress ByBrentKing

12 Top 10 safest investments ByMarcoWong&DanStratful

20 Is rececession relevant to Restaurant Brands? ByVaughanYarwood

23 Investors hanging on Taxchangeshaven’tstoppedinvestors

25 Property trends look positive ByBennBathgate

28 Family Trusts 101 – exclusive book extract ByJanetXuccoa

32 Are we still in a recession? ByMichaelCoote

34 Golden opportunity in Vietnam ByDavidMcEwen

36 Red hot China is yuan for the money BySteveHart

39 Why we need a super regulator ByKirkHope

40 Financial astrology – does it really work? ByDavidMcEwen

50 Why the kiwi dollar may keep falling ByStephenCalder

54 Healthy life, healthier bank balance BySteveHart

rEgulArS2 Editorial

3 News

17 Sharetalk

30 Classifieds

44 Fundsource

46 Fixedterminvestments

56 Thefridgedoor

www.irg.co.nz

NEW ZEALAND


Issue 187 AUGUST 2010 Contents

EditorialEditorial

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Subscriptions:POBox1314,ShortlandStreet,Auckland1140.Tel:(09)3040145

Publisher:InvestmentResearchGroupLtd(IRG)POBox1314,ShortlandStreet,Auckland1140.

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COnTACTS: Sharebroking advice:SharonFang(09)3040235,DanStratful(09)3040232,NickO’Boyle(09)3040233,DavidBuell(09)3040223,RobCochrane(09)3040229Prospectus requests:Email:[email protected] and layout:[email protected]:PMPMaxum(09)9793100

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Disclosure of InterestDirectorsandstaffof InvestmentResearchGroupLtd(IRG)mayanddofromtimetotimeholdinvestmentsinsharesandinvestmentproductsreviewed inNewZealand Investor. It isourpolicy to followourownadvice. New Zealand Investor is the investment magazine of investmentanalystsandfinancialadvisers IRG.NewZealandInvestor isprovidedfreetoinvestorclientswhomeetqualifyinginvestmentcriteria.Itisalsoavailablebysubscriptionandthroughallgoodnewsagents.ClientsofIRGreceiveadditionalbrochuresand informationaswellaspersonaladvice.TobecomeaclientofIRGallthatisnecessaryisthatyouinvestthroughus.Wediscountentryfeesonalmostallinvestmentproductstobringourclientsahighlycomprehensiveservice. IRG may receive brokerage, commissions or other payments fromissuers of investments and advertisers. Disclosure under the InvestmentAdvisers(Disclosure)Act1996isavailableuponrequest.

Investment risks and Suitability Published material and advertisements arenot intendedaspersonal investmentadviceorrecommendationsofsuitabilitytoanyparticularperson.Articlesandadvertisementsmayincludereferencetoinvestmentswhichhavevaryinglevelsofriskandreturnfromspeculativeandriskytoverylowrisk.Itistheresponsibilityofthereadertoassesssuitabilityofanyinvestmentadvertisedorreferredtohavingregardtotheirownobjectives,particularcircumstancesandinvestmentportfolio.If inanydoubt,clientsandprospective clients of IRG should consult with us in order to better assesssuitabilityfortheirobjectivesorinvestmentportfolio.Investorsshouldalsoreadtheinvestmentstatementand/orprospectusorProductDisclosureStatement(PDS)foranyinvestmentwhichbylawrequirespublicationofsuchdocumentsand satisfy themselves that investments referred to are appropriate for theircircumstancesandportfolio.

Disclaimer IRG,aspublishersof thismagazine,believe that the informationcontained in the New Zealand Investor is correct at the time of publicationand that any estimates, opinions, conclusions or general recommendationscontainedinhereinarereasonablyheldormadeasatthetimeofcompilation.However,nowarrantyismadeastotheaccuracyorreliabilityofanyestimates,opinions,conclusions(whichmaychangewithoutnotice)orotherinformationcontained in this publication and, to the maximum extent permitted by law,IRG disclaims all liability and responsibility for any direct or indirect loss ordamagewhichmaybesufferedbyanyrecipientrelyingonanythingcontainedinoromittedfromthispublication.Anyactiontakenbyaninvestorisstrictlythatinvestor’sindependentdecisionandsoleresponsibility.Thecompanydeclinesanddisclaimsanyliabilitywhatsoever incontractand intort (fornegligence)foranydirector indirectconsequences fromorarising fromthe informationsupplied.

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NEW ZEALAND

INVESTMENT RESEARCH GROUP INVESTORBonds are considered among the safest investments

around, and various forms of promissory notes make up a number of our top 10 safest investments featured in this month’s issue.

However, there are pitfalls to consider when buying bonds. They include: • You can lose money in bonds.• You will get your interest payments, and the capital sum

will almost certainly be paid on due date. But that doesn’t mean the returns are guaranteed. In fact the return from a bond can fluctuate widely if you sell your bond before it matures.

• Bond prices move in the opposite direction of interest rates.

When interest rates fall, bond prices rise, and vice versa. But if you hold a bond to maturity, you will get back the face value of the bond, along with all the interest you expect. When interest rates rise, the price you will get if you tried to sell it on the bond market will be less. That’s because the bond must fall in value so that the yield can rise to match market rates. If you decide to avoid this capital loss by holding onto the bond to maturity, you incur an opportuni-ty cost. That is, you have settled for a return that is below the market rate your bond money could be earning elsewhere. And over the several years it takes the bond to reach its maturity date that loss can amount to a lot of money.• You pay tax on capital gains.

Unlike shares, which are not subject to tax on capital gains, the capital profit on the sale of a bond is treated as taxable income. That capital profit will arise as interest rates fall.• Shares do not always outperform bonds.

Before 1940, there was not a great difference in US stock market returns and bond returns. But post-World War II, shares have widely outpaced bonds in terms of their total-return. And so they should. The management of a company can take action to deliver growth ahead of inflation and interest rates. Prices can be raised, costs cut, new products found. Even in New Zealand’s lacklustre share market, shares will outpace bonds most of the time, but not all the time. In fact there are extended periods where bonds will lick shares. • You can have too much in bonds.

Bonds are essential in a mixed portfolio but offer limited safety on their own. A portfolio containing 75 per cent bonds and 25 per cent shares is less likely to lose money in any given year than a portfolio of 100 per cent bonds. Moreover, inflation erodes the value of bonds’ fixed interest payments. Share returns, by contrast, tend to keep pace with inflation. Young and middle-aged people should put a large chunk of their money in shares. Even retirees should own some shares, given that people are living longer than they used to.• Not all bonds are safe.

A loan to the government secured by bond has to be the safest you will ever make. That’s because the government can levy taxes to repay its debts if it really got into trouble. But some pretty dodgy second tier companies also have issued bonds, and while these often offer high yields, these reflect the extra risk.

The key thing to remember is: A bond is only as safe as the entity that issued it.

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News briefs

Mutual Finance “deeply disappointed” over receivershipMutual Finance managing director

Paul Bublitz says the company’s board is “deeply disappointed” by the decision of trustees Covenant Trustee Company to place the company into receivership.

Covenant Trustee Company appointed Brendan Gibson and Grant Graham of Korda Mentha as receivers after what the board claimed was a “technical breach” of one of its trust covenants. The trustee also believed a cashflow mismatch might arise through the timing of the realisation of assets and payments to depositors.

Bublitz said: “The company was working to address the technical breach and considers that the trustee has taken an extremely conservative view of the cash flows of the company.”

He said the board of Mutual Finance regretted it was not given the opportu-nity to deal with an issue it considered resolvable. Bublitz says the company had been “working with the trustee and its advisors to address the issue, which it viewed as capable of remedy in relatively short order”.

He said: “The board considers the

trustee has acted in his own interests rather than those of investors in placing the company into receivership.”

All Mutual Finance depositors are covered by the Crown Guarantee scheme and a Treasury spokesperson says it will contact depositors to help them claim their money.

The Treasury’s director of financial operations Phil Combes said: “The Crown stands fully behind its guarantee commitments, and we expect an orderly process of payment to eligible Mutual Finance depositors.”

NAI Harcourts, a member of the international NAI Global network, has entered the New Zealand market to operate in the commercial property sector.

The joint venture company is made up of NAI Global, one of the world’s largest commercial real estate service providers, Harcourts International and Brock Real Estate.

NAI Harcourts is also the brand under which Harcourts commercial property and business broking services will now be provided on both sides of the Tasman.

CEO of the joint venture company, Chris Nicholl, says launching the www.naiharcourts.co.nz website is the first step in a five year plan to establish the organisation in the top tier of Australasia’s commercial property service providers.

The company will offer access to buyers, listings and market knowledge from across NAI Global’s network of around 5000 commercial real estate professionals in more than 50 countries.

Harcourts New Zealand CEO Hayden Duncan says the Australasian commer-cial property market offers significant opportunities, generating an estimated $1 billion in fees at present.

Harcourts goes global

For the 11th year running, Pak’nSave has taken the top spot as the nation’s cheapest supermarket.

An independent survey conducted in June compared the prices of 40 top-selling products at different supermarkets across six regional centres.

Pak’nSave stores at Mill Street in Hamilton and in Lower Hutt battled it out for the title of cheapest store in the survey with basket prices of $115 and $116 respectively. However, as the Hamilton region was surveyed on a 38 item basket as opposed to the other regions’ 40 items, Lower Hutt narrowly pipped Mill Street to the post.

Pak’nSave was the cheapest supermarket in five of the six regions, with fellow Foodstuffs brand New World South City in Christchurch narrowly taking out the top spot by $2.

Personal loan provider Instant Finance has reported a profit of $3.3 million for the year to March 31. This was significantly ahead of the previous year’s $1 million, which had been affected by one-off costs from establish-ing funding lines.

Net loan receivables increased 17 per cent from $55.4 million to $64.9 million and, at March 31, the company had gross instalments receivable of $89.2 million and 18,756 active loans. Shareholders continued to forego dividends to boost balance sheet strength.

Cheapest supermarket is in Lower Hutt

Instant profit

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News briefs

For the first time in at least 15 years, retail sales across the country’s supermarket and grocery stores were lower in May than the year earlier according to Statistics New Zealand. Across the core retail sector, excluding vehicle sales, sales were 0.6 per cent down for the year – only the fourth time year-on-year core sales figures have fallen since 1995.

The falls were led by a 7.7 per cent ($14 million) drop in recreational goods, an 11.6 per cent fall in liquor sales ($12 million) and a 2.8 per cent ($9 million) fall in sales in cafes and restaurants.

Within the core retail industry, only the accommodation sector saw a rise, up 8.3 per cent ($14 million).

Total retail sales, including vehicle sales, rose 1.9 per cent ($98 million) in May from the year earlier, boosted by a 16.8 per cent ($88 million) increase in vehicle sales and a 5.8 per cent ($30 million) rise in fuel sales.

The seasonally adjusted total retail sales for May were 0.4 per cent higher than April.

Core retail sales fell by a seasonally adjusted 0.2 per cent during the month, led by the two per cent fall in sales across the combined hospitality industries.

BNZ has said the figures are disappointing despite the odd positive sign.

“There were a number of positives for May, in the form of good gains in appliances, footwear, clothing and personal and household good hiring.

“However, these were countered by at least as many weak bits, with notable falls in accommodation, takeaway food, liquor and the miscellaneous other retailing category.”

Kiwibank has launched a KiwiSaver scheme that offers investors more direct control of their funds in what chief executive Sam Knowles (pictured) says is “a logical expansion of Kiwibank services and products”.

Knowles says the bank aims to lead the market with the scheme in terms of transparency and disclosure of fees.

“We have a customer base of about 700,000 New Zealanders and there has been growing demand for us to have a scheme that helps customers save for their retirement,” he says.

“We have designed a KiwiSaver scheme that enables customers to choose whether they let fund managers make some investment decisions for them, or whether they more actively manage their own investments.”

He says not all customers would want to actively manage their savings so they could chose the acceptable level of risk and investment type that suited them best.

“Others will want to design their own portfolio and be more involved in its management,” he says.

The new scheme also aims to remove some of the mystery and complexity surrounding retirement provision.

“Our KiwiSaver scheme is able to be accessed via internet banking like other Kiwibank accounts,” says Knowles. “Customers will be able to see how their funds are performing and also make changes as appropriate for their retirement needs online.”

KiwiSaver scheme gives investors more control

Retail sales up despite grocery dip

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News briefs

NZX to buy back shares

Beat the GST hike

The listed share and bond market operator NZX plans to buy back 3.57 million of its shares (2.9 per cent of its stock) by the year end, saying its current share price undervalues the company and doesn’t take account of its growth prospects.

The company is also to switch from paying its dividends annually to twice a year (April and October) “to better meet the needs of investors looking for regular income as well as capital ap-preciation”.

“The current share price is significantly below fair value and doesn’t reflect a reason-able valuation of the company today, even without taking into account the growth prospects about which the board and management are confident,” NZX said.

NZX has pledged to raise its annual dividend payments by a minimum of one cent per share for the next four years.

With annual rates bills dropping in your letter box, this may be the time to pay them in full upfront – ahead of the rise in GST from 12.5 per cent to 15 per cent on October 1.

By paying your whole rates bill – or any other annual bill before the new GST rate comes in – you’ll avoid the extra GST payments and make savings of 2.5 per cent on your bills when compared to paying them after the new rate comes into force.

News briefs

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$80 million paid to troubled investors

Building blocks of growth

The Treasury has repaid almost $80 million to depositors under the Retail Deposit Guarantee Scheme which covers investors should the firm they invest in default.

So far six institutions approved for the scheme have triggered the Crown guarantee leading to payments totalling $79.1 million of principal and interest. Repayments have been made to depositors with three of the defaulting entities and the process is underway for the remaining three.

The six institutions approved for the Retail Deposit Guarantee Scheme that have triggered the payouts are:• Mascot Finance, which defaulted on 2 March 2009. To

date, $69.4 million of principal and interest has been repaid to eligible depositors, representing approximately 99.8 per cent of eligible depositors.

• Strata Finance, which defaulted on 16 April 2009. No claims are outstanding and $300,000 of principal and interest has been repaid to eligible depositors.

• Vision Securities, which defaulted on 1 April 2010. To date, approximately $9.4 million of principal and interest has been repaid to eligible depositors, representing approxi-mately one third of depositors.

• Rockforte Finance, which defaulted on 10 May 2010.• Viaduct Capital, which defaulted on 14 May 2010.• Mutual Finance, which defaulted on 14 July 2010.

With Rockforte Finance, Viaduct Capital, and Mutual Finance, the Treasury is currently at various stages of obtaining and verifying information about depositors and the amounts deposited.

“We’ll contact depositors when we have the necessary information,” says the deputy secretary financial operations Philip Combes.

“We’re mindful that repayments are funded by taxpayers and we have a duty to ensure that repayments are made to people entitled to receive the money.”

For investors who are looking to tap into high growth opportunities, BRIC funds – Brazil, Russia, India and China - are quickly becoming the rising star of the equities market.

HSBC Global Asset Management’s latest edition of Invest-ment Intelligence notes that BRIC funds have generated an annualised return of 23.4 per cent over the past five years in comparison to 16.9 per cent for emerging market equities over the same period.

Glen Tonks, manager of HSBC’s private clients division HSBC says for investors seeking aggressive growth oppor-tunities then BRIC funds are “certainly worth looking at in more detail as, on average, they have been outperform-ing emerging market equities for the past five years now.

“As money moves from developed to higher growth emerging markets, BRIC markets could benefit. Particularly as the debt crisis in Europe intensifies, it is even more likely that the divergence in growth outlook between developed and the emerging markets will become even more pro-nounced.

“Not only were BRIC countries the first to emerge from the global financial

crisis, but they are also currently contributing to almost half of global growth. Much of this can be put down to their hugely favourable demographics, the newly emerging middle class, a low penetration of consumer goods and services and the fact that they have signalled significant future investment in infrastructure.”

Tonks says Brazil, and Russia in particular, account for the lion’s share of global commodities.

“As commodity demand and prices are expected to rise as manufacturing recovers, the BRIC markets are set to benefit,” he says.

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Orcon enters mobile phone market

News briefs

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State-owned telco Orcon is to enter the mobile phone market on the back of Vodafone’s network.

While Orcon’s prices won’t set the world on fire, the company says its key proposition is that it isn’t asking customers to sign up to any long-term agreements “we want customers, not prisoners,” the firm’s CEO Scott Bartlett is quoted as saying in media reports.

Orcon mobile phone customers will be given the 020 prefix for their phone numbers and is offering four plans whereby customers pay in advance. Per-minute pricing will be 69 cents or 38 cents depending on how much a customer uses the service. Mobile computer users will pay $49.95 a month for one gigabyte of data or $1 a day for 10 megabytes when using the casual scheme.

Bartlett expects to have the firm’s pre-paid plans in the shops for Christmas.

Since announcing plans in 2006 to offer mobile phone and data services, 2degrees has entered the market along with a handful of mobile wholesalers. So competition is starting to happen in the mobile phone market following years of a Vodafone-Telecom duopoly.

Orcon says all its plans will have a basic text rate of 20 cents but there are a couple of add-on text bundles at $11.95 for 500 texts to any network or $9.95 for 2000 to other users on the Orcon scheme, including Vodafone and all other mobile operators that use the Vodafone network – with the exception of recent entrant 2degrees.

Writing on his blog, Ernie Newman, chief executive of the Telecomuncation Users’ Association says Orcon is a “welcome newcomer to the market with a well-differentiated product” but he has concerns about the complexity of its pricing structure with regard texting.

“Sadly, differentials between on-net and off-net pricing will be a feature of Orcon’s pricing,” says Newman. “How is your average busy consumer meant to get their head around that? Even before factoring in that they don’t readily know what network the people they call may be on at any specific time.

“Admittedly, Orcon’s surcharges are modest, but I think there will be massive brownie points for the first [mobile phone] service provider that does away altogether with these surcharges for off net calls.

“One really positive aspect is the absence of long term contracts. Customers can sign up today and leave tomorrow with no penalty, unless of course they’ve had the benefit of a

handset subsidy which they may have to refund.”

Newman says one issue he does have with Orcon is that it is not, at the time of going to press, a member of the Telecomu-nications Dispute Resolution Scheme.

“That’s not a good look,” he says. “Consumers are entitled to expect membership of such a scheme as a funda-mental sign of good business ethics and practice.”

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News briefs

Calls for ING to be reviewed as a default KiwiSaver provider in the wake of a Commerce Commission report into alleged breaches of the Fair Trading Act have been rejected by Commerce Minister Simon Power.

The calls for ING and ANZ to have their default provider status reviewed came from Frozen Funds Group spokesman Gerard Prinsen in the wake of a Commerce Commission report that said: “The commission is of the view that ING and ANZ engaged in misleading or deceptive conduct and/or made false or misleading represen-tations. . . it has sufficient evidence to commence criminal and/or civil pro-ceedings against ING and ANZ”.

The Commission opted against legal action instead securing a $45 million settlement for thousands of New Zealand investors’ in the two funds promoted by the ANZ-owned ING; the ING Diversified Yield Fund and the ING Regular Income Fund.

Commerce Commission chair Dr Mark Berry said the Commission opted for the settlement because “any court proceedings were likely to have involved significant delay, cost and risk, with no certainty of achieving an outcome that would benefit the affected investors”.

Prinsen believes that, while the report represents a moral victory, it also raises other issues.

He said a review - with the threat of

removal as a default provider - would act as a warning to other providers and offer an incentive to non-default providers that they could successfully compete for vacancies among default providers.

However, Commerce Minister Simon Power said: “The Diversified Yield Fund and Regular Income Fund are separate financial products to the ING KiwiSaver funds. As a default provider, ING is required to report quarterly to the Ministry of Economic Develop-ment and the Government Actuary on the performance of its default funds. I’m advised that officials have no evidence that indicates the fund is high-risk or marketed inappropri-ately. Officials also advise me that they do not think the stability of the fund has been compromised and that there are no grounds for terminating ING’s default provider status”.

The $45 million settlement is the largest monetary settlement to date secured by the Commerce Commis-sion and as part of the agreement ING and ANZ “have accepted that some of the representa-tions made in the marketing material and by ANZ advisers may have

breached the Fair Trading Act”.The dispute dates back to March

2008 when around 15,000 investors had their money frozen in the two funds.

Now that the $45 million settlement has been agreed the Commission is to work with ANZ and ING to determine the payment process, including the amount payable to investors, with a target date for payment of mid to late November 2010.

Minister rejects calls for review of ING as KiwiSaver provider

AMP Capital analyst Shane Oliver has said early positive earnings reports from the United States have lessened concerns of a double-dip recession, though he did warn “the New Zealand market will continue to be buffeted to

some degree with what is happening in the global share market”.

Oliver said in the wake of reports from some 40 large US companies that he believes “a double-dip recession will be avoided”.

“We saw some weakness a couple of weeks ago and double dip worries intensified. But in the last couple of weeks, there were some boosts in the market with profit reports in the US.”

Double-dip fears ease on US figures

Commerce Commission chair

Dr Mark Berry

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News briefs

People offered vouchers for discounted or free holidays, hotels and flights from cold-calling telemar-keters should be cautious of the offers made, warns the Commerce Commission.

The Commission is concerned that some consumers have been contacted by businesses claiming to be selling vouchers or schemes for discounted accommodation in New Zealand and Australia that don’t deliver everything that’s promised.

Some of those who have paid for the discount vouchers have found they cannot be used in all the places promised, while others are worried they have signed up for an ongoing membership that will be automatically renewed annually.

“These types of schemes have been marketed in New Zealand for some years now,” says Greg Allan, Commerce Commission enforcement manager.

“In our experience some are legitimate and others are not. We hope that highlighting these schemes will help educate consumers so that they can know the differ-ence and avoid being taken in. Once you have purchased vouchers, it can be very difficult to get your money back if they don’t deliver the benefits you expected.”

Allan says while it is understandable that people are attracted to getting discounted rates for holidays and accommodation, he advises people check any offers thoroughly before handing over their bank or credit card details to callers.

“While telemarketers can be persuasive and persistent, don’t feel pressured to make a decision straight away,” he says.

“Ask for details such as which providers are involved in the voucher scheme and check independently before making any commitment to purchase. This can be as simple as finding out the names of hotels who are supposed to be involved and calling them to check if they will honour the vouchers.”

The Commission has previously warned consumers about telemarketed holiday and accommodation vouchers. The Commission has also taken successful court action against a group of Australian companies marketing a voucher programme in New Zealand.

If you have bought vouchers for discounted hotels and believe that you have been misled, you can register your complaint via the Commission’s online form on www.comcom.govt.nz, by email [email protected] or phone 0800 943 600.

Discount vouchers may not offer any savings

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Dorchester PacificDorchester has made significant progress with its votes (by

holders of its notes, debentures and shares). The votes were all positive for the directors and management.

One factor to watch is whether the directors have learned from the major mistakes made over the past three years. Investors will have to make decisions about what to do with the three securities they will be issued. If investors are not sure what to do with these please contact IRG to discuss options.

South CanterburyI am sure all readers have read about recent developments

with amazement. I have watched Alan Hubbard’s career with interest over 25 years and I am very disappointed to see what has transpired.

Hubbard has been a mainstay and a point of last resort for many South Island entrepreneurs. It does seem a simple case of holding on too long.

IRG reiterates Sandy Maier’s comments that the develop-ments do not affect South Canterbury Finance Ltd. That business appears to be well managed under Mr Maier; the government guarantee is still in place and IRG continues to recommend the investments within the guarantee terms.

In short, we await with interest further information from the government authorities about the statutory management of Mr Hubbard’s affairs.

There are a number of other finance companies which are performing well and IRG recommends that investors regularly review whether an investment in a finance company is appropriate.

Life in AsiaI have been fortunate to travel to a number of countries

in Asia recently. The overwhelming sense I get is that their economies are strong.

We all read the stories about China, the ‘quiet China’ (Taiwan) and India. There is no question that those economies have massive growth. One interesting point is that Singapore is on a big bounce now. The government in Singapore has upgraded its annual growth predictions to between 13 and 15 per cent.

When has New Zealand ever had a growth of this level?It has been said that it is hard to make a mature economy

grow to a double digit rate. Singapore is proving that wrong. Growth of 13 per cent is a fantastic performance. We need to learn from this.

The simple fact is if your country makes a profit (a current account surplus) the country has more resources to invest in the next year.

New Zealand has not achieved this year on year for a long time. If we accept the performance shown in the graph, we will be poorer each year and other countries will move ahead of us.

For a long time now we have simply been happy to allow politicians to increase the price of houses while our country has gone backwards.

If we simply want to do what we have always done we will slip back in world rankings.

The real question for this government is whether it will weaken and pump the money supply, or will it hold tight and allow capital to move to areas where the best return is, such as providing the world with what it wants!

If we wanted to we could out-perform Singapore.It still rings in my ears the comment that Lee Kwan Yew

said to Robert Muldoon; “You pay people to do nothing. How does that make your country better?”

New Zealand and our government need to decide whether we want to retain our place in the world or get left behind in the dust.

This is a big topic and one we should all be focusing on. I will comment more next month.

ByBrentKing,ManagingDirectorofIRG

Finance companiesmake slow progress

IRG Comment

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We all know investments come with varying degrees of risk but it can be shocking when losses occur. Probably nobody thought that their investment in finance company de-bentures would result in a total loss of their

capital and interest. During the credit crisis, the share prices of apparently solid ‘blue chip’ companies lost 80 per cent or more of their value, and some companies even went bust. Even bank deposits and property investments turned out to be less safe than many investors believed.

Volatility in the price of almost all asset classes appears to be rising and, for all but those with the biggest appetite for risk, the time has come to make the protection of capital a top priority – more so than chasing an extra percentage point or two in capital gains or income.

With that in mind, here is our guide to New Zealand’s 10 safest investments.

1

Government bonds Domestic government bonds are generally

considered to be ‘risk free’. Domestic Government Bonds also protect against exchange rate risk because they are issued in local currency. The reason why there is virtually no risk of loss investing in a domestic government bond is because, at worst, the government can always print money to

repay investors. To date, the New Zealand Government has never defaulted on its Government Bonds. These bonds have a AAA credit rating.

Government Bonds are issued by the New Zealand Debt Management Office (NZDMO) and are sold to NZDMO registered buyers, known as counterparties. These parties are able to on-sell the bonds to the public. The minimum holding for members of the public is $10,000 and $1,000 lots thereafter. The table shows the yearly return for Government Bonds currently listed on the NZDX.

Code Maturity Current Yield CouponGOv320 15/11/2011 3.73% 6.00%GOv340 15/04/2013 4.21% 6.50%GOv360 15/04/2015 4.69% 6.00%GOv380 15/12/2017 5.16% 6.00%GOv390 15/05/2021 5.40% 6.00%

While the returns are not spectacular, Government Bonds are the safest investment out there. The downside however is that the market for these bonds is illiquid so they can be difficult to sell at times, which means you should carefully assess your future cash-needs before investing in Govern-ment Bonds.

For those worried about whether inflation might eat away at their bond returns, the government also offers an infla-tion-protected bond. You can access Government Bonds by requesting a prospectus through your investment advisor.

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Government-guaranteed finance companies Finance companies offer debentures and deposits

to investors. Finance companies usually service second tier lenders so there is greater potential for higher returns for you as an investor. The reason finance companies can afford to pay higher interest to investors is because their income is derived from high interest loans mainly to property develop-ers, the agricultural sector and consumers.

Volatile markets, soVereign debt crises and softening property prices

make it hard for inVestors to haVe confidence about protecting the

Value of their inVestments. therefore, safety first may be the order of

the day, according to marco Wong and dan stratful

New Zealand’s 10 safest investments

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Standalone, finance companies are relatively higher risk investments with credit ratings generally ranging from B to BB+, this means that under normal circumstances, there is a chance a finance company could fail to pay back investors. However, at present the government, with its AAA rating and ‘risk free’ status, is guaranteeing some finance company deposits.

On 22 October 2008 the Treasury and Reserve Bank announced the Retail Deposit Guarantee Scheme until 31st October 2010. This scheme was designed to protect investors who invested their money with banks and finance companies (collectively known as financial institutions). Under the guarantee, eligible financial institutions pay a fee to the gov-ernment, much like an insurance premium. This allows the government to fund potential payouts if a financial institu-tion defaults.

To date, six covered institutions have triggered the govern-ment guarantee, these are Mascot Finance, Strata FInance, Vision Securities, Rockforte Finance, Mutual Finance and Viaduct Capital. While the claims process took between a few weeks to a few months, investors were able to receive 100 per cent of their investment. Some trust deeds also stipulate that investors can receive interest during the claim period, though this is usually the exception rather than the norm. The key here is that you can gain up to 3 per cent more interest than banks without taking more risk of losing capital. In August 2009, the government extended the scheme until 31 December 2011. To date, eight institutions have been approved.

Institutions approved for the extended guarantee include MARAC Finance, Fisher & Paykel Finance and South Can-terbury Finance, PGG Wrightson Finance and Equitable Mortgages. Indicative guaranteed rates for these finance companies are set out in the table.

Company Min 9 Mths 12 MthsMARACFinance $1,000 5.00% 6.00%Fisher&PaykelFinance $1,000 6.00% 6.75%SouthCanterburyFinance $100 8.00% 8.00%PGGWrightsonFinance $1,000 5.45% 5.95%EquitableMortgages $2,000 -- 5.70%

You can access government-guaranteed finance companies by requesting an investment statement from your broker.

3

Local authority bondsThese are issued by city councils. Since the most significant source of income for city

councils is rates, local authority bonds may often be secured by a charge over rate revenue. This is one of the reasons these bonds are considered relatively safe. While councils are considered government bodies, local authority bonds are slightly higher risk than

government bonds for the mere fact that city councils cannot print money. However, it is hard to see that central govern-ment would let a city go under so a local authority bond is a way to secure a better rate than that offered by government bonds, with no virtually no increase in risk.

Local authority bonds that are rated generally have solid credit ratings of AA- to AA+, this rating means there is a minimal chance of default. An example is the Auckland City Council bond issued earlier this year which holds an AA rating, meaning it is as safe as any of the big four banks.

Local authority bonds vary widely depending on the council. Some issues such as the Tauranga and Manukau City Council bonds are not listed on the market, therefore, investors would need to treat such investments as fixed term investments in the sense that you may not be able to withdraw your funds if needed. Other issues, such as the Auckland City Council bond (ACC010) are listed and tradable on the market.

Issuer Maturity Min CouponAucklandCityCouncil 24/3/2014 $5,000 6.42%TaurangaCityCouncil 02/12/2013 $10,000 7.05%ManukauCityCouncil 15/09/2015 $10,000 6.90%

4

Bank term deposits Bank term deposits have long been consid-

ered safe havens for investments. Most big banks nowadays have at least an AA credit rating. RaboBank even has AAA credit rating which means they are considered as safe as the government. Barring a truly disastrous event, it seems unimaginable that a run on any of our big four banks would ensue.

Interest rates fluctuate depending on the economic envi-ronment and the term you invest for. This table shows the relative safety of some of our banks.

Bank Credit ratingRaboPlus AAAANZNational AAASB AABNZ AAWestpac AAKiwibank AA-TSBBank BBB+

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5

Investment grade corporate bondsCorporate bonds differ as much as the companies

that issue them. The term “investment grade” is given to companies with a BBB- and above. This rating means there are, on average, only about three defaults out of 1,000 issues.

These bonds are almost always listed and tradable on the NZDX exchange. Appropriately, most of the issuers of investment grade bonds are top tier companies with utility or monopoly characteristics such as Fonterra, Contact Energy and Vector. Some issuers choose not to obtain a credit rating but may still be considered investment grade depending on a range of factors. You can reasonably expect investment grade corporate bonds to be issued at an interest rate of between 7 per cent – 8.5 per cent.

The safety of these bonds depend on factors such as whether the bonds are secured by assets or earnings of the company, the amount of debt the company already has and the earnings volatility of the company. Although, the credit rating often incorporates these factors, an individual bond offering may have different qualities depending on the structure of the issue.

For example, BNZ recently issued a new type of bond, a covered bond, for the very first time in New Zealand. These bonds are secured by the repayments of high quality, fully documented mortgages. Because of this, these bonds were rated AAA, while BNZ’s credit rating is AA.

Here are some examples of high quality issuers.

Issuer Code Maturity rating Current Yield

Coupon

GoodmanPropertyTrust

GMB010 19/06/2015

BBB+ 7.12% 7.75%

TheWarehouse

WHS010 15/06/2015

NotRated

6.80% 7.37%

Fonterra FCG020 04/03/2016

A+ 6.41% 6.83%

ContactEnergy

CEN010 15/05/2014

BBB 6.40% 8.00%

AucklandInternationalAirport

AIA070 07/11/2015

A- 6.39% 7.25%

There are a few ways you can invest in corporate bonds. The first is to subscribe to them when they are first issued. The advantage of getting bonds when they are first listed is that you don’t pay any transactions cost to purchase them. You can contact your broker to find out about upcoming bond issues. Alternatively, you can purchase corporate bonds on the market through your broker.

6

Utility SharesWhen it comes to shares, utilities are among the

safer and more dependable shares there are to own. They are generally less volatile than other shares and offer defensive-like characteristics.

Utility shares usually include power companies, ports or infrastructure managers that provide a vital need to the community. As a result, demand does not go down during a recession as much as it would for more discretionary items.

Examples of utility companies include electricity distribu-tion companies Contact Energy and Vector, sea ports Port of Tauranga and Northland Port Corporation and airport operator Auckland International Airport. Utility shares can display less volatile earnings which can remain steady year after year and they tend to be low growth so that healthy and reliable dividends are paid back to shareholders. Sometimes local government may have a cornerstone shareholding in the utility company. Generally investors can expect an annual dividend yield of around 7 per cent to 9 per cent with the share price also rising and falling in-line with global share market trends, however usually with lower volatility than other shares.

For example, Vector’s shares currently pay a gross annual dividend of 9.1 per cent, paid semi-annually and over the last few years dividend payments have been very steady.

7

Rural PropertyProperty generally is an investment which goes

up over the long term and Kiwis in recognising this have fuelled a spike in the residential property market over the past few years.

Rural property, however, provides the base for the nation’s agricultural and horticultural products, and as ever-increas-ing areas of rural land are turned into residential subdivi-sions, good quality, well located rural land can be expected to become more scarce and increase in value.

Rural property, like other investments, provides two types of return - an income return to the land owner generated through the production and sale of food or meat, or an income return to the land owner in the form of rent paid by the occupier of the land if it is not owner/occupied. The second return is the increase (or decrease) in the current value of the land over time. However, property is a tangible investment and this remains its biggest attraction.

Research has found that rural property prices have risen by the greatest amount and with minimal volatility over the past two or more decades.

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100% New Zealand,rural property is a solid investment

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Expert opinion - Michael O’KaneNew Zealand Mint’s head bullion

trader Michael O’Kane says the current demand and enquiry for gold bullion is robust, and in the past four years he has seen an increase in sales of ap-proximately 1000 per cent. This is due partially, he says, to the onset of the global financial crisis which saw a real panic surrounding the banking system, and investors were literally withdrawing cash from the banks and investing in gold in an effort to mitigate the risk of not being able to get their money in the event of closure (more than 70 banks have closed in the USA this year alone).

O’Kane says New Zealand Mint’s core product is its one ounce gold coin which currently sells for NZ$1800, and he adds there is no GST payable on gold bullion over a purity of 99.99 per cent in New Zealand.

O’Kane says that the developing countries such as Brazil, Russia, India and China, are investing more of their reserves into gold, and he says that Chinese authorities have gone as far as urging its citizens to hold physical gold as a long term investment. As far as a prediction for the gold price is concerned, he says that by the end of 2010 we could see a gold price of around US$1,300 - US$1,400 per ounce up from today’s price of US$1,200 per ounce. The long term outlook for gold is strong he says, with the current gold cycle only 8 - 9 years into a typical 25 year upwards cycle. He says that history has shown that previous cycles enjoy a long slow upward trend in the first 10 - 15 years, while the last 5 years of the cycle typically sees a strong surge in the gold price.

O’Kane says that if we see a renewed bout of financial market volatility or another banking crisis, he will expect a further increase in the demand for gold bullion.

www.newzealandmint.co.nz

8

GoldGold was once used as a currency in itself, as a

medium of exchange for goods and services, before paper money was invented.

In the most uncertain economic times we have seen for decades there is rising investor demand for gold. As an investment gold provides no income return so investors are relying on a rise in value for a return or at least gold’s ability to keep its value when other assets do not.

Many believe that the outlook for gold is positive due to the excess money printing that has occurred by central gov-

ernments around the world. The excess money printing leads to a rise in inflation which is positive for gold, as gold is thought of as a hedge against inflation. Gold bulls are predicting a future gold price of US$2,000 - US$2,500 per ounce in the near future with estimates as high as US$5,000, which would provide a good return on today‘s current gold price of US$1,200. Investors can access an investment in gold in several ways: invest in the shares of a gold mining company, buy an Exchange Traded Fund that tracks the gold price with the units owning the underlying gold asset, or through the purchase of physical gold from a gold mint.

9

Physical cashWhen the world’s share markets, property

markets and foreign exchange markets are in meltdown some investors cannot go past holding good old cash as an investment. Their rationale is that everything else is falling in value, or at least too risky to invest in, so they hold cash for certainty. Cash investments are also easily un-derstood and quickly transferred into other investments and/or goods and services.

However, cash investments are at high risk of inflation which can erode the purchasing power of a dollar. An inflation rate of three per cent per annum can steadily erode away at the purchasing power of cash and a rate higher than this can be quite detrimental.

Despite its ease, understandability and convenience a portfolio needs more than just cash and growth investments are also needed to keep ahead of inflation.

Expert opinion - Jerome ConcisomJerome Concisom, chief executive of

safety deposit box company Common-wealth Vault, says he has seen an increased level of enquiry over the past two years and particularly during the global banking crisis.

During the banking crisis, he says there was an elevated concern from clients regarding the main trading bank’s liquidity, and some clients were actively withdrawing cash from their bank accounts and storing it on-site in the company’s vaults. This, he says, means the funds are out of the bank and simply sitting in secure storage, and clients were happy to do this at a time when bank failures around the world were a daily occurrence.

Concison adds that all manner of precious possisions are held on the premises.

The premises remain under manned-guard and video surveillance 24 hours per day, 7 days per week. Clients have access to their assets at any time.

www.commonwealthvault.com

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Collectible stampsRare, easily portable and always in demand,

stamps have often been used as a storage of wealth during difficult times, especially when their owner may have to up and leave at short notice or wants to transport valuables across borders.

Some stamps hold high value, but it is an area that needs a certain expertise or knowledge, and the naïve investor could end up over-paying for something which is either overvalued, or does not hold its value.

This is particularly true when stamps go through their fad phase or are in fashion for only a brief period of time. Stamps also provide no income return so the investor is again relying on capital gains for a return.

World’s most valuable stampThis is the 1858 Sweden

Treskilling Yellow, which sold in Switzerland in May this year to a mystery buyer for US$2.3 million.

Carrying a pricing error, and believed the only one left of its kind, the stamp has been highly sought after for over 100 years.

At one stage, it was owned Romania’s King Carol and found itself onboard a train laden with treasure (including a Rembrandt painting, priceless jewels) which took the “Playboy King” and his mistress to exile from the Nazis during World War II.

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Expert opinion - Earle Howe Earle Howe of the New Zealand

Stamp Dealers’ Association tends to caution people about viewing stamps as an investment. He says that at the top end of the market there are some profits to be made at international auctions, however collectible stamps are not a shortcut to wealth and should be viewed as a fascinating hobby. He says that one of the coveted HMS Vanguard stamps sold in New Zealand for over $31,000 in 2009 and this was an increase on the $22,000 paid when the same stamp last changed hands in 1999.

He often fields client enquiries as to the value of a stamp collection and that potential colletors need to bear in mind costs such as insurance.

While not all stamps were created equal, Howe says that it is often the forgeries and erroneous stamps, or the stamps with an intriguing past which attract the most interest and sell for the highest price.

www.nzsda.com

Spot the New Zealand stamps

The Private Client Team at Hesketh Henry works with families to advise on the structuring and administration of personal property, business ownership, trusts, estate planning, wills and relationship property agreements.

Please visit our website to register for our regular e-zine on trust and estate planning issues at www.heskethhenry.co.nz

or contact team leader Mary Joy Simpson +64-9-375-8776

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ShareTalk

DESPITECONTINuEDGLOBALMARKETTuRBuLENCE,MIXEDHOuSINGDATAINNEWZEALANDANDPOLITICALCHANGEINAuSTRALIA,POSITIvESENTIMENTFROMTHEuSAHASOFFEREDGLIMPSESOFOPTIMISMFORTHEDOMESTICMARKETS

Aside from a small gain near the end of the month, the New Zealand share market entered the final week of June with a flat tone as uncertainty on the world’s financial markets discouraged buying interest. Market leader Telecom Corpora-tion did find favour though as bargain hunters moved in at around $1.90 a share. Bank shares Westpac and ANZ were soft on concerns about the banking sector in Europe and despite announcing a deferred tax liability The Warehouse Group saw its stock little changed. Entering July, the New Zealand market clocked a series of modest gains, boosted by a better perfor-mance on Wall Street. US stocks strengthened mid-week as positive earnings outlooks boosted financials and outweighed concerns ahead of the upcoming earnings season.

Leading stocks Fletcher Building and Contact Energy rallied while Telecom also firmed. By mid-July most New Zealand shares had maintained their upward momentum, though some selling interest had emerged. Telecom stock was trading well clear of its $1.83, 52-week low – despite a seemingly endless stream of bad news including an increased tax burden. In contrast Fletcher Building was struggling below $8, having hit a peak of $8.53 in April. Energy producer and explorer NZ

Oil & Gas rallied after the company announced larger than expected reserves in its Kupe Field and offshoot Pike River Coal was also well supported.

Across the ditch the Australian share market ended June weighed down by soggy offshore markets and political uncertainty as Prime Minister Kevin Rudd faced a leadership challenge from deputy Julia Gillard. Rudd had come under fire over his proposed ‘super’ tax on mining profits which drew the ire of mining sector heavyweights, many of whom operate in marginal electorates. The large banking stocks ANZ, Westpac, NAB and Commonwealth were all weak, as were mining giants BHP Billiton and Rio Tinto.

The market spent the first week of July in a downtrend though as in New Zealand investors took some cheer from improvements in the US market, however news Australian construction activity contracted for the first time in four months in June dampened local sentiment. Financial stocks Macquarie Group and AMP were soft but miners BHP Billiton and Rio Tinto saw a return to favour on news the ‘super’ mining tax would be scrapped. A mid-July return of confidence in the banking and mining sectors saw stocks surge higher with all four major banks, led by Westpac, enjoying a rebound.

Overall market sentiment was driven by optimism ahead of US corporate earnings and improved commodities prices. In its second quarter review Rio said growth was firmly back on the agenda and there was a range of expansion and invest-ment opportunities competing for capital. Gold continued to trade at over US$1,200 an ounce, helping underpin gold miners Newcrest Mining and its takeover target Lihir.

AuSTrAlIA, nZ SHArE MArKET rEPOrT-4weekstoJuly19

COnTACT uSDAVID BUELL DDI 09 304 0223 ROB COCHRANE DDI 09 304 0229

EMAIL [email protected] EMAIL [email protected] FANG DDI 09 304 0235 NICK O’BOYLE DDI 09 304 0233

EMAIL [email protected] EMAIL [email protected] STRATFUL DDI 09 304 0233 Afreedisclosurestatementisavailableuponrequest

EMAIL [email protected] FREEPHONE 0800 474 669

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nEW ZEAlAnD OIl & gAS (nZO)NZO’s primary assets include the Tui Area Oil Fields in which it is a 12.5 per cent partner and the Kupe gas and con-densate field in which it is a 15 percent partner. Both these fields are off the Taranaki Coastline and NZO also has two other significant investments including a 30 per cent stake in the South Island’s Pike River Coking Coal mine and a 15 per cent stake in Pan Pacific Petroleum, one of NZO’s partners in the Tui oil fields.

ADvICE:SPECuLATIvEBuyPrice $1.22

MarketCapitalisation $470.8million

yearRollingHigh/Low $1.80/$1.19

Financialyear 2009A 2010F

EPS(cps) 13.7c 5c

PERatio 8.9 24.4

Dividend(cps) 5c 5c

12-month Chart for nZO to 20/7/10

Tui, the jewel in NZO’s crown, is expected to continue in commercial production until around 2020 and pro-duction from Tui has been higher than originally expected. The initial Proven and Probable (2P) Reserves for the Tui area oil fields have been increased several times over the years, and the pre-production estimate was 27.9 million barrels of oil equivalent (mmbbls). The most recent full-life reserves assessment in August 2009 was 50.5 mmbbls and NZO’s share of this was 6.3 mmbbls. Production from Tui for the year ended 30 June 2009 was 9.1 mmbbls, against an original forecast of 6 mmbbls and a revised forecast of 9 mmbbls, and forecast production for the year ended 30 June 2010 is for between 4.7 and 5.1 mmbbls. NZO’s investment in Pike River Coal (PRC) is about to pay off and PRC has shipped its maiden shipment of coking coal in February 2010, but the shipment of 20,000 tonnes was at the lower end of the 20,000 – 30,000 guidance range.

CAvAlIEr COrPOrATIOn (CAv)CAV has been listed on the NZX since 1984 and has been a reliable dividend payer over the years and the company’s principal activities now include two broadloom carpet businesses, a carpet tile business, a wool scouring operation and a wool procurement business. CAV’s fortunes are tied to the building cycle to some degree, however it has proved in the past, to be a resilient performer in all types of economic conditions.

ADvICE:yIELDBuyPrice $2.45




EPS(cps) 22c 23c

PERatio 11.1 10.6

Dividend(cps) 15c 16c

12-month Chart for CAv to 20/7/10

In its latest interim result for the period ending 31 December 2009 CAV reported a net profit of $7 million, down 6 per cent on the previous corresponding period, while revenue was 14 percent lower at $112.8 million. The lower result could be blamed on a cooling construc-tion sector although CAV states that it also benefits from home and office fit-outs and renovation work. Despite a lower interim result CAV did well to maintain dividends and the company also improved its balance sheet and debt position during the interim period leaving it well placed for an eventual recovery. With about half of CAV’s products exported, mostly to Australia but to other destinations as well, the company faces some foreign currency risks and as an exporter it benefits when the New Zealand dollar falls. The company itself has provided guidance that adverse market conditions for its carpet business may have bottomed, and it expects a recovery in market con-ditions from here.

ShareTalk

WESFArMErS (WES)Wesfarmers has a diverse range of business activities that include Super-markets (Coles supermarkets), Home Improvement (Bunnings Warehouse chain), Department stores (Kmart and Target) Insurance (Lumley Insurance) Industrial and Safety (Blackwoods) and Energy (Coregas). The company’s origins date back to 1914 and WES has evolved to become a true corporate con-glomerate.

ADvICE:GROWTHBuyPrice $28.10

MarketCapitalisation $28.24billion



EPS(cps) 170c 145c

PERatio 16.5 19.4

Dividend(cps) 110c 110c

12-month Chart for WES to 20/7/10

With the mammoth acquisition of Coles now behind it WES is now quietly going about integrating the supermarket into its group operations which by WES’s own admission will take 5 years. But once complete, the Coles Group could underpin WES’s earnings for many years to come and patience could pay off for shareholders. WES often appears to have an unrelated group of busi-nesses, however this provides diversifi-cation, and its defensive businesses such as insurance and energy, often offset downturns in its highly cyclical sectors such as consumer discretionary retail and the home improvement stores which are closely related to the building cycle. In the interim result to 31 December 2009 WES reported revenue from ordinary ac-tivities of $26.53 billion up 1 percent on the previous corresponding period and net profit also lifted 1 percent to $879 million. The interim result showed that the turnaround of Coles was on track with its earnings before interest and tax increasing by 13 percent.

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19

New

Zea

land

Inve

stor

ShareTalk

QBE InSurAnCE grOuP lTD (QBE)QBE Insurance Group Ltd was formed and listed in 1973 as a result of the merger of two old established insurance businesses - Queensland Insurance Co Ltd (Q) and Bankers & Traders’ Insurance Co Ltd (B), each of which owned a 40 per cent interest in Equitable Life & General Insurance Co Ltd (E). Today, the company is a major general insurance and reinsurance business with over 200 offices located in 40 countries.


MarketCapitalisation $18.68billion


Financialyear 2009 2010F

EPS(cps) 193 180

PERatio 9.3 10

Dividend(cps) 128 130

12-month Chart for QBE to 20/7/10

QBE put in an improved profit perfor-mance over 2009. Premium rates on renewed business were up 4 percent – slightly ahead of target. Premium growth of 10 per cent was in line with a revised forecast although new business was slightly behind target in US and Europe. Technical underwriting results were strong by industry standards in all markets. Insurance profit margin of 17 per cent was at the mid point of QBE’s original target range of 16 per cent - 18 per cent but lower interest yields impacted the margin by 1.7 per cent. Agency businesses added $319 million to underwriting profit and agencies generated $1.6 billion of premium income underwritten by QBE. Based on management results before internal reinsurance, return on capital allocated to divisions was well above QBE’s 15 per cent minimum return on equity (ROE) hurdle rate. Australia’s ROE was 20.8 per cent, Asia Pacific’s 25.8 per cent, Europe’s 23.1 per cent and the Americas was 17.1 per cent.

FISHEr & PAYKEl APPlIAnCES (FPA)FPA designs, manufactures and markets a range of household appli-ances developed with a commitment to technology, design, user friendli-ness and environmental awareness. It includes three wholly owned subsid-iary companies: Production Machinery Limited, Dynamic Cooking Systems Inc. and Fisher & Paykel Italy, a company that manufactures European cooking products. It also has a Finance division.

ADvICE:HOLDPrice $0.53

MarketCapitalisation $391million



EPS(cps) nil 8

PERatio n/a 6.6

Dividend(cps) nil 4

12-month Chart for FPA to 20/7/10

Normalised group profit after tax for the 2009-10 year was $18 million, down on the prior year result of $33.8 million but within previously announced market guidance of $16 million - $23 million. The result reflected a second half recovery for the Appliances’ business, notwithstanding a continuation of difficult trading conditions in North America. The improvement on the first half Appliances business result was driven by financial benefits arising from the Global Manufacturing Strategy and market share gains in Australia. Appli-ances normalised operating profit before interest and tax for the second half of the year was $23.7 million compared to $5.7 million for the first half. Appliances full year normalised operating profit before interest and tax was $29.4 million. With the announced global manufacturing strategy now complete, one-off costs associated with the factory relocations amounted to $0.4 million in the second half compared to $15 million before tax for the first half.

FrEIgHTWAYS (FrE)Freightways is a leading provider of express package services throughout New Zealand, with complementary businesses servicing the information management and business mail sectors. The Group’s origins date back to 1964 through New Zealand Couriers - a pioneer in the express package industry in New Zealand. Since commencing op-erations in Auckland, Freightways has become a leading NZ service provider.





EPS(cps) 26.6 19

PERatio 9.9 13.7

Dividend(cps) 16.5 16

12-month Chart for FrE to 20/7/10

FRE produced an overall satisfac-tory result for the half year ended 31 December 2009, however tough trading conditions during the last six months meant that the result was lower than the prior comparative period (pcp). Consolidated operating revenue of $165 million for the half year was 4 per cent lower than the normalised pcp. The result was a demonstration of FRE’s resilience to market conditions and was consid-ered very satisfactory by the company, given the impact of the economic downturn on domestic activity during the period. Earnings before interest, tax, depreciation and goodwill am-ortisation (EBITDA) of $32 million for the half year was eight per cent lower than the normalised pcp, while interim earnings before interest, tax, and goodwill amortisation (EBITA) of $27 million was 10 per cent lower. Consolidated net profit after tax of $14.5 million for the half year was eight per cent lower.

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As a nation we may have cut back on discretion-ary spending since being hit a year or more ago by the worst recession in decades, but according to the latest sales data we have found a new appetite for takeaways – and that has helped lift

earnings for fast-food operator Restaurant Brands.Figures released last month by Paymark, which processes

three-quarters of the country’s electronic transactions, revealed that year-on-year spending was down in many areas, including pharmacies (7.1 per cent), travel agent sales (9 per cent) and liquor retail (2.9 per cent), and that shoppers were increasingly using Eftpos rather than credit cards for their purchases.

Among sectors bucking the trend were supermarkets (up by two per cent) and cafés and restaurants (up 8.7 per cent). Big-ticket consumer durables such as widescreen televisions, white-ware and computers also did well. However, the star performer was takeaway food, sales of which which grew over the past 12 months by a massive 9.5 per cent.

New Zealand is not alone in its uptake of fast food. Early last year in Britain, amid a darkening economic landscape, food chain Domino’s Pizza announced annual profit growth of almost 25 per cent and chicken outlet KFC outlined ambitious expansion plans.

Across the Atlantic the same trend appeared to be unfolding. According to the report ‘US Fast Food Market

Outlook 2010’, by Delhi-based market research company RNCOS, fast food’s share of the total United States restau-rant market reached 30 per cent in 2008. With United States households spending almost half of their food budget on restaurants, the figure represented a significant opportunity for the industry, said the report’s authors. They attributed the rapid growth of the sector at a time of recession to its comparatively low cost and concluded that this along with the increasingly busier lifestyle of Americans would continue to drive the fast food industry there through 2010.

Closer to home, Paymark’s findings offered no solace for fresh-produce distributor Turners and Growers, which suffered a 34 per cent fall in annual profit as shoppers trimmed spending on fresh fruit and vegetables.

The result prompted Turners and Growers’ chief executive, Jeff Wesley to strike a philosophical note. “People move from healthy foods to high-fat foods, high-salt foods, in a recession,” he told One News. “Until the recession really works its way out of the system we don’t see a great turn-around, although clearly the fast-food guys do very well”.

Restaurant Brands, the local operator of the KFC, Pizza Hut and Starbucks Coffee chains, certainly gave the appear-ance of riding a wave when it announced profits for the year to 28 February 2010 of $19.9 million – up 70 per cent on the previous year. Driving earnings was the 85-store KFC chain which contributed more than two-thirds of revenue,

Is recession relevant to Restaurant Brands?THELISTEDFASTFOODGROuPHASGONEFROMSTRENGTHTOSTRENGTHINRECENTTIMES,BuTREJECTSTHEvIEWTHATRECESSIONHASHELPED.vAuGHANyARWOODTALKSTOCHIEFEXECuTIvERuSSELCREEDy

Company Profile

20

ww

w.ir

g.co

.nz

Company Profile

Is recession relevant to Restaurant Brands?

with sales up 5.5 per cent to $223.5 million for the year. Total revenues for the year were up 2.8 per cent to $318.3 million, while same-store sales grew by 6.8 per cent.

Even the underperforming 91-outlet Pizza Hut chain seemed to shake off its lethargy, with same-store sales up by 3.9 per cent, although overall sales were down slightly to $64.2 million due to the closure of two stores.

It was not all good news. Same-store sales were lower across the 41-store Starbucks Coffee chain and total revenue was down 7.6 per cent to $30.5 million. Even here, though, earnings before interest, taxes, depreciation and amortisa-tion (Ebitda) were up almost 10 per cent to $3.2 million, thanks in part to an improved exchange rate and product rationalisation.

The market responded to the profit result by lifting Restaurant Brand’s share price to $2.10, its highest in eight years.

Just months later, the company was announcing more of the same, with first-quarter sales up 4.22 per cent year-on-year thanks to high-performing KFC, which contributed 72 per cent of the company’s revenue. Same-store sales in the chain had now reached a lofty 10.7 per cent, with sales for the quarter up $4.3 million to $54.3 million.

Despite the impressive results, Restaurant Brands’ chief executive, South African-born Russel Creedy, is not giving the ‘R’ word much credit.

“I’m not a believer that this is a recession-driven success”, he says. While admitting that diners were increasingly looking for more affordable options, that labour shortages had eased and that opportunities had arisen at prime retail

sites as the economy stalled, he puts much of the credit for the improved sales down to expanded menus, more focused marketing and the progressive make-over of KFC stores.

KFC has widened its range of burgers and wraps and courted the youth market with krushers – a new iced-smoothie style drink. Over the next two to three years the chain plans to introduce more drink choices, including coffee.

In December 2009, Restaurant Brands renegotiated the chicken supply agreements for its flagship chain, limiting its former supplier, Inghams Enterprises, to the North Island KFC stores and sourcing its South Island chicken from the country’s other big supplier, Tegal Foods. The company says the new five-year supply arrangements are on “slightly more favourable terms” than the single contract they replace.

But for KFC customers, the most noticeable change has been the store renewal programme. Starting with the $1 million flagship Hamilton store – all glass, refreshed colours, open space and remodelled furniture – the new look is being rolled out nationwide. To date some 40 stores – almost half of the network – have been refurbished, with new stores recently opened in Auckland’s Greenlane and Point Chevalier.

The refresh, which includes purging the retail environ-ment of much of its heavy branding, might be summed up as “fewer colonels, more direction”. The founder’s image is no longer etched on window glass, emblazoned on light fittings or stamped on much product packaging.

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‘It was very 1970s”, says Creedy.Change was prompted by Dallas-based master corporate

franchiser, Yum! Brands, which had grown alarmed at the local doldrums into which its brands – KFC especially – had drifted.

There are limits to what can be done, however, with all proposed store fit-outs and changes to product offerings subject to a tight approval process. The guiding principle, says Creedy, is “don’t bastardise the brand”.

“KFC isn’t just a name above a door. It wouldn’t sell dumpling, for example – even in China, where they would be a runaway success. We can perhaps tweak a few flavours for the New Zealand market, but that is where it ends”.

Meanwhile, Pizza Hut and Starbucks continue to perform sluggishly. Yes, they have improved since 2007 when Creedy took control of what by wide consensus was a “dog”. Long-service people who could not or would not adapt left, an entire layer of management was trimmed and the company stopped making its own television advertisements – the new, voiced-over American and Australian ads alone saved an estimated $1 million a year.

But, although there is talk of a turnaround at both Pizza Hut and Starbucks, it is nothing to get worked up about. The Pizza chain continues to face stiff competition while low barriers to entry in the New Zealand retail coffee market thwart Starbucks.

Figures for the year to to February 2010 show that while Pizza Hut improved total store ebitda to $5.4 million, from $2.8 million in 2009, that is still far short of the $13.6 million it clocked up back in 2005 – even allowing for a reduction in outlets from 101 to 91 over the five year period. Starbucks has also failed to fire. Despite a modest increase in store numbers, the total store ebitda is down from $3.7 million in 2005 to $3.2 million in 2010.

Creedy admits that Restaurant Brands has just one “mega-brand”, but he insists that the others are viable busi-nesses.

“It’s a question of relativity. Starbucks makes money, and given a certain expectation of return on investment it might well be what someone is looking for”, he says. “We are not actively looking to sell the chain, but if someone offered the right price we would talk. If we can get a better return by investing in KFC, or in another acquisition, we owe it to our shareholders to do that”.

In fact, Starbucks was on the market some time ago, but potential buyers melted away after the financial crisis made capital raising difficult – the chain is worth an estimated $10 million to $20 million. Meanwhile, an adviser was flown in from Starbucks’ Seattle head office to advise on ways to improve performance. Among the likely changes is the introduction of additional food offerings.

Pizza Hut, too, is on the blocks, with the sale of selected stores to owner-operators, first introduced last year, set to continue. However, Creedy stresses that the company is not chasing sales at any price. The cashed-up investment will either be ploughed back into the profitable KFC chain or used to fund the introduction of new franchises – Cal-ifornia-based Mexican-styled restaurant chain Taco Bell, another subsidiary of Yum! Brands, is one contender.

Any new business must have growth potential and play to Restaurant Brands core strengths, says Creedy. It must also offer returns that beat the weighted average cost of capital. He doubts that launching an entirely new brand is a likely option.

“Starting from scratch with a chain is very difficult. You can burn a lot of money very easily”, he says.

Neither is another trans-Tasman foray – the company’s earlier attempt to enter the pizza market in the state of Victoria ended disastrously.

Pragmatist that he is, though, Creedy is not prepared to rule anything out.

“Nothing is on the board at the moment but never say never”.

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Investors hanging onCHANGESANNOuNCEDINTHELASTBuDGET,INCLuDINGTHEREMOvALOFDEPRECIATIONTAXBREAKSFROMINvESTMENTPROPERTy,APPEARTOHAvEDONELITTLETODETERPROPERTyINvESTORSACCORDINGTOTHELATESTHOuSINGMARKETSuRvEyFROMQv.CO.NZ

QV, the country’s largest valuation and property information company, found that the Budget does not appear to have had a strong impact on property investors,

with over half intending to retain their current portfolio and only 8 per cent planning to offload some or all of their investment properties.

The survey included new questions for property investors to gauge reaction to the Budget changes and found 54 per cent intend to retain their current portfolio, six per cent intend to sell some properties and two per cent plan to sell all their properties.

Of those investors surveyed 12 per cent intend to buy addi-tional properties, eight per cent plan to sell before re-buying and 18 per cent remain undecided.

Overall the survey found an increase in the amount of people who believe now is a good time to buy property, in contrast to strong sentiment that now is not a good time to sell.

The expectation property prices will fall over the coming year has softened from the March survey, and unlike the previous survey now a significant amount of people expect to see prices rise.

Some 43 per cent expect property prices to fall (down from

the March figure of 51 per cent), 33 per cent expect to see prices increase (up from 12 per cent in March) and 23 per cent expect values to remain unchanged (down from 32 per cent in March).

When it came to investors’ reasons for buying or selling property values remain the most significant factor, with job security increasing in importance.

Now they have been announced the tax changes were found to be the least significant factor, a change from March

• 33% now expect house prices to rise (up from 12% in March)

• 43% expect house prices to fall (down from 51% in March)

• 23% expect values to stay the same (down from 32% in March)

The overall breakdown is:

• Property values – 49% listed this as a factor, up from 35% in March

• Interest rates – 31%, up from 27% • Job security – 26%, up from 15% • Lending conditions – 19%, up from

14% in March • Financial pressures – stable at 16%

• 50% agreed or strongly agreed that now is a good time to buy (44% in March)

• 19% disagreed or strongly disagreed (21% in March)

• 30% were neutral (35% in March) • This leads to a net 31% believing now

is a good time to buy (23% in March)

0% 20% 40% 60%

Tax changes announced in the budget

Interest rates

Property values

Lending conditions

Job security

Financial pressures

None, I'm not currently planning to buy or sell

Percentage of responses

Factors influencing buying or sellingJun10

Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree


Now is a good time to buy

Jun10

Mar 10

0% 10% 20% 30% 40%

Decrease by more than 10%

Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%

Increase by more than 10%

Don’t know


House price expectations Jun10

Mar 10

The breakdown is:

• 58% disagreed or strongly disagreed that now is a good time to sell

• 13% agreed or strongly agreed • 28% were neutral • This leads to a net 45% believing

now is not a good time to sell

The breakdown is:

• 25% are intending to buy within 3 months, 32% intend to sell

• 22% intend to buy within 3 to 6 months, 17% intend to sell

• 53% intend to buy in 6 to 12 months, 51% intend to sell

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree


Now is a good time to sell

0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months


Timing to buy or sell own home

Buy

Sell

The breakdown is:

• Of those intending to buy or sell, 9% intend to buy within 3 months, 29% intend to sell


• 31% intend to buy in 6 to 12 months, 16% to sell

• 29% intend to wait at least 6 months before buying, 51% before selling 0% 20% 40% 60%

Within 3 months

3 to 6 months

6 to 12 months

Not in next 12 months


Timing to buy or sell investment property

Buy

Sell

The breakdown is:

• 39% intend to leave rent the same • 31% intend on increasing rent by

1-5% • 19% intend on increasing rent by

6-10% • 3% intend increasing rent by more

than 10% • 3% intend decreasing rent by 1-5%

and 1% intend decreasing rent by 6-10%

• 3% don’t know

The breakdown is:

• 35% considered the biggest financial impact to be from changes to depreciation rules

• 27% - the GST increase • 24% - the lower personal income

tax• 10% - changes to LAQCs and the

use of trusts • 4% - the lower corporate tax rate

0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%

Changes to depreciation rules

Changes to LAQC/ use of Trusts

Increase in GST

Lower personal income tax

Lower corporate tax


Tax change with biggest impact












0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax














0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax



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Property

when the uncertainty was a concern for many.The survey found 49 per cent cited property values as the

most important factor, up from 35 per cent in March, while 31 per cent said interest rates (up from the March figure of 27 per cent). Job security was a major factor for 26 per cent of respondents’, up from 15 per cent, while 19 per cent cited lending conditions as a factor, up from the March figure of 14 per cent.

The June figures also show a rise in the amount of people who believe now is a good time to buy property, up to 50 per cent from the March figure of 44 per cent. A neutral stance is being taken by 30 per cent (35 per cent in March) while 19 per cent disagreed or strongly disagreed that now was a good time to buy.

When it came to selling the survey included a new question, asking respondents’ whether they thought now was a good time to sell. Compared to results for buying this question revealed a more negative response, with 58 per cent disagreeing or strongly disagreeing that now is a good time to sell. Of the remainder 13 per cent believed now is a good time to sell and 28 per cent remained neutral.

In another new addition to the June survey for the first

time respondents’ were asked about their intention to buy or sell their own home in the coming year. Some 25 per cent said they plan to buy within three months, while 32 per cent intend to sell. Just over half, 53 per cent, intend to buy in six to 12 months while 51 per cent intend to sell. When it comes to buying 22 per cent intend to make an acquisition within three to six months while 17 per cent plan to sell.












0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax














0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax














0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax














0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax














0% 20% 40% 60%


Interest rates

Property values

Lending conditions

Job security

Financial pressures




Mar 10

0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



Jun10

Mar 10

0% 10% 20% 30% 40%


Decrease by 6-10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6 -10%


Don’t know



Mar 10

The breakdown is:




The breakdown is:




0% 10% 20% 30% 40%

Strongly disagree

Strongly agree



0% 20% 40% 60%

Within 3 months

3 - 6 months

6 - 12 months



Buy

Sell

The breakdown is:





Within 3 months

3 to 6 months

6 to 12 months




Buy

Sell

The breakdown is:






• 3% don’t know

The breakdown is:





0% 10% 20% 30% 40%


Decrease by 6 -10%

Decrease by 1-5%

Remain the same

Increase by 1-5%

Increase by 6-10%


Don’t know


Plans for rent

0% 10% 20% 30% 40%



Increase in GST


Lower corporate tax



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The property sector is still very healthy, according to a range of new figures.

The REINZ monthly property market report claims that despite the coming tax changes there has been little reduction in residential property

prices or sales in May.

President Peter McDonald said: “While there has been some decline in turnover from the boom times of a couple of years ago, during the past year nearly 67,000 homes were sold for a total of almost $27.5 billion so the real estate market is still very healthy.”

The REINZ report also noted house prices rose 0.6 per cent in June and that despite tax changes announced in the Budget there had been no significant reduction in residential property prices or the number of sales.

McDonald said that while the “post-Budget blues” had been avoided people should be careful not to interpret the modest monthly rise as a sign house values are still increas-ing.

“They are purely the median of all sales during the month and can be impacted by the number of properties sold at either end of the price bracket.”

McDonald’s remarks were echoed by the Realestate.co.nz June 2010 NZ Property Report, which said the property market continued to attract sellers with 11,106 new listings coming to market in June, a 16 per cent rise on the June 2009 figure.

Over the year to June 2010 145,920 new listings came onto the market, an increase of 8 per cent on the previous year.

The report also claimed there had been little movement in asking price expectations, with the truncated mean asking price for June of $410,058 indicating a staunch position being taken by sellers.

The Barfoot & Thompson June update also confirmed fears over the impact of tax changes have been overblown.

Barfoot & Thompson chief executive Wendy Alexander said, “While the Budget has definitely contributed towards lower sales, its impact on prices has not been great, and there is no indication that investors are getting out of the market. Factors that confirm this are the average price in June is the same as that for June last year while the number of new listings at 1194 for the month is down 12.8 per cent on those for May and the same for June last year. If investors were getting out, listings would be up and prices would be under more pressure than they are.”

Her comments on the property investment sector are also borne out by the findings of the June QV.co.nz Housing Survey, which found 54 per cent of property investors polled

Tax changes don’t dent property market ARAFTOFNEWDATAONTHESTATEOFTHENEWZEALANDHOuSINGMARKETHASPROMPTEDCAuTIOuSOPTIMISMFROMSOMEQuARTERS,REPORTSBENNBATHGATE

The BarfooT & Thompson June updaTe

also confirmed fears over The impacT

of Tax changes have Been overBlown

0% 20% 40% 60%

I am undecided on a courseof action yet

I will sell all of my properties

I will sell some of my propertiesand buy others

I will sell some of my properties

I will buy more properties

I will retain my current property portfolio


Impact of budget on property investors

-20000

0

20000

40000

60000

80000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Sources: ANZ, National Bank, Statistics NZ

Net migration

Net

ann

ual i

nflo

w

Net all arrivals(3 month average)

Net permanent and long-term migration

$400,000

$300,000

$200,000

$100,000

$0Jul 09 Sep 09 Nov 09 Jan 10 Mar 10 May 10

Aug 09 Oct 09 Dec 09 Feb 10 Apr10 Jun10

Median house prices

0% 20% 40% 60%









-20000

0

20000

40000

60000

80000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10


Net migration

Net

ann

ual i

nflo

w



$400,000

$300,000

$200,000

$100,000



Median house prices

Property

intend to retain their current portfolio with just six per cent planning to sell some properties and only two per cent planning to quit the market altogether.

The ANZ Property Focus report joins the chorus in downplaying the effects of Budget changes, noting “it was not the king-hit a lot had feared” though in a note of caution the report says it may take some months for the effects of the Budget to filter through into data.

On a more optimistic note the report argues the case for a ‘bigger picture’ view, saying, “If the overall Budget package delivers better economic performance, then the housing market will actually be better off over time. The tax package announced in the Budget is not going to deliver economic nirvana – the Treasury puts the economic benefit at around 0.9 per cent of GDP over seven years as changes to the incentives to work and invest take time to accrue.

In the near-term future there is certainly going to be gestation issues for the property market, especially those whose cashflow was reliant on the tax advantages. The key point is that the medium-term story is positive.”

However, in a note of caution, Goldman Sachs JBWere’s New Zealand economist Philip Borkin has pointed out that at present activity remains weak in the housing market, turnover is low, the time it takes to sell is increasing and house price growth is slowing.

prices look set to remain below

their november 2007 high for the

foreseeable future

“We are not getting overly excited by the relative movement in prices in June and still see the trend as softening.”

Borkin also claimed that with house prices under pressure the conditions are not conducive for a wider economic recovery, especially consumer spending.

On the plus side he does not foresee a sharp fall in house prices as he does not believe there will be a significant rise in distressed sales, though he cites a mix of factors including a drop off in migration and tax changes combining to make property a less attractive investment, one less trigger to stimulate higher prices.

Borkin’s wider concerns on the prospects for the housing market have been summed up by ASB economist Chris Tennent-Brown, who said that while the tax changes had not led to a wave of selling, they have “reduced the attractive-ness of holding investment property”, which added to falling immigration numbers and rising interest rates means prices look set to remain below their November 2007 high for the foreseeable future.

0% 20% 40% 60%









-20000

0

20000

40000

60000

80000

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10


Net migration

Net

ann

ual i

nflo

w



$400,000

$300,000

$200,000

$100,000



Median house prices

26

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• InvestmentAdvice

• Life&MedicalInsurance

• RetirementPlanning

• EstatePlanning

• Sharebroking&FixedInterest

• FinancialPlanning

PROFESSIONAL • PASSIONATE • PERSONALIRG Bay of Plenty

Phoneusorcallintoseeoneofouradvisors:RossSheerin,AndrewParkinsonandJonathanYork.

Phone:075783863.143DurhamStTauranga.

Disclosuredocumentavailable

onrequestfreeofcharge.

Leaky home costs to weigh on consumer spending

ANZ Bank has estimated that nearly three-quarters of the cost of leaky homes will be borne by the affected households.

In its latest Market Focus newsletter the bank said that under Government proposals 23,500 homes would qualify for a package announced back in May that would see 25 per cent of repair costs borne by Government, 25 per cent by local authorities and the remainder by homeowners.

However a PricewaterhouseCoopers report has claimed the number of affected properties could be as high as 89,000.

Taking the central estimate of 42,000 houses, the PWC report estimated the total economy-wide cost of the leaky buildings would stand at $11.3 billion.

In that case Government and local authorities would still provide $1.6 billion for the 23,500 affected properties, but for the 42,000 figure they would only be providing 14 per cent of the total $11.3 billion cost.

ANZ said for the 42,000 figure homeowners’ would need to find 72 per cent of the costs, $8.1 billion.

Assuming repair work under the plan took place over a 10-year period at an average of 2,350 properties per year, the boost to the construction sector would be around $600 million in 2008 dollars, or around 0.2 per cent of GDP a year over the next decade.

ANZ said that while the construction sector was set to benefit from the work, the bulk of costs would be borne by the household sector.

The report said the additional costs for households would also affect the consumer sector as “owners affected by leaky homes will be significantly out of pocket, and this is likely to weigh down on consumer spending.”

The $8.1 billion repair cost, if borne by households, amounts to around 1.3 per cent of total net household wealth.

28

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Reasons for Creating TrustsAt the beginning of this book I said people historically

created Trusts to protect their assets and to minimise their tax liabilities. These two reasons for establishing a Trust still hold true today. Asset protection and tax minimisation would be for many, primary goals for creating a Trust. There are however, other reasons people move their assets into Trusts as I have noted below.

Asset protectionPeople are subject to many risks in life. Risks can arise

from a variety of circumstances and situations such as personal living, business dealings and even relationships. In-dividuals tend to protect themselves and their assets against risks by taking out insurance. But in some cases, insurance cannot be taken out. For example, you cannot insure against creditors suing you nor can you insure against your relation-ship demising.

When a risk comes home to roost, any assets you own in your personal name may be attacked. For this reason, people move their assets to Trusts because by doing so, they generally protect those assets.

That protection arises because when assets are transferred to a Trust, the legal ownership of those assets moves from the individual to the Trustees.

When people move their assets into a Trust, they are engaging in a practice known as ‘asset stripping’ and if this process is completed in a timely manner and in the correct way, asset protection should be conferred.

Let me give you an example to demonstrate asset protec-tion in operation.

Let us assume Mr Brown owns his own home and also a business installing security alarms. Mr Brown wins a contract to install security alarms in an apartment block. He accordingly goes to Alarm Company Limited which supplies him with 300 security alarms. The company invoices him and Mr Brown installs the security alarms in the apartment block. Once the job has been completed, Mr Brown invoices the owner of the apartment block.

The apartment block owner has financial problems and fails to pay Mr Brown. When this occurs Mr Brown does not

have the money to pay Alarm Company Limited. Eventually, the company sues Mr Brown and bankrupts him.

When the bankruptcy occurs, Mr Brown’s home is seized and sold by the Official Assignee. The Official Assignee steps into an individual’s shoes when they are declared bankrupt. Their power to do this comes from legislation.

When the Official Assignee sells Mr Brown’s home, it gives the net sale proceeds to Mr Brown’s creditor, being Alarm Company Limited. Any surplus sale proceeds are then given to Mr Brown.

By having his home in his personal name, Mr Brown has put his asset at risk. If the home had been owned by someone else, such as the Trustees of a Family Trust, the home would have been safe. This is because the Official

Making family trusts easyIn her new book, FamIly TrusTs 101, JaneT Xuccoa provIdes an easy-To-undersTand guIde To FamIly TrusTs. In ThIs eXclusIve eXcerpT she eXplaIns The compellIng reasons For esTablIshIng a FamIly TrusT, ouTlInIng how you, your chIldren and FuTure generaTIons can beneFIT

Trusts

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Assignee would not have possessed the legal power to seize the home and sell it to satisfy the debt Mr Brown owed to Alarm Company Ltd.

Of course, asset protection can only be achieved if there are not any problems on the horizon. You cannot move your assets into a Trust if you already have creditor problems. If you did this, it is likely a Court would deem you to have established the Trust and transferred in assets simply to avoid paying your creditors. If a Court found this, it would likely unwind the Trust and make the assets available to satisfy your creditors.

Tax minimisationAs previously stated, a Trust can be used to reduce an

individual’s tax liability. Tax is however a very complicated subject, full of traps. Tax lawyers and structuring experts spend years studying and developing their craft. It’s a very specialised area of the law, to be treated with the utmost respect. Get it wrong and it could literally cost thousands and thousands of dollars. For this reason, I think it important to note that anyone establishing a Trust must ensure they obtain the correct advice from a professional who truly understands tax and Trusts.

To help you understand how tax can be minimised I am going to provide you with the following example. This example comes with a caveat, it’s a very simplistic illustration and to make it easy to follow, I have omitted quite a lot of detail.

Assume Kerry Jamieson owes shares in a company called KJ Company Limited.

During the year after 1 October 2010, the company pays a dividend to Kerry. Tax has to be paid on the dividend income Kerry receives and the tax that Kerry is liable to pay is calcu-lated using Kerry’s personal income tax rate which is 33 per cent.

Now rather than Kerry owning the shares in KJ Company Limited personally, let’s assume the shares are held by the Jamieson Family Trust. This means that when the company pays a dividend, it will pay that dividend income to the Family Trust, as opposed to Kerry.

Tax still has to be paid on the dividend income received but there are a couple of choices in this respect.

First, the dividend income can be retained by the Family Trust and the tax that has to be paid can be calculated at the Trustee income tax rate. The Trustee tax rate is, at 1 October 2010, the same as the maximum individual income tax rate, being 33 per cent. This means that no savings in tax can be made.

An alternative way of dealing with the dividend income would be for the Trustees of the Family Trust to pay it out to a Beneficiary of the Family Trust. Tax would still need to be paid on the dividend but the tax would be calculated using that Beneficiary’s personal income tax rate. This personal income tax rate may well be lower than the Trustee income tax rate. As at 1 October 2010 the personal income tax rate

could be as low as 10.5 per cent. Accordingly if the dividend income was paid out to a Beneficiary on this personal income tax rate a savings in tax could be achieved.

A couple of important points to note is that the dividend we have talked about would need to be distributed in ac-cordance with the terms of the Trust Deed and most impor-tantly, within the time limits stipulated by law. That time is within 12 months after the end of the relevant income tax year.

Asset testingAt the time of publication, eligible New Zealanders can

apply to Work and Income New Zealand (‘WINZ’) for a subsidy to help them pay for any rest home care they need.

When a rest home subsidy application is made, WINZ requires an individual to list all of their assets and liabilities.

If a person’s assets are over a specific value, WINZ are likely to decline the application for a subsidy. As at 1 July 2009, individuals are permitted to have $190,000 worth of assets in their own name. This includes the value of the family home.

Because the above threshold is low, people transfer their assets into Trusts. As I have said before, by doing this the assets become legally owned by the Trustees and are not therefore attributable to the individual’s wealth.

When assets are transferred to a Trust, they must be sold to the Trust at their market value. If they are not sold at market value, Inland Revenue might deem that a gift of the shortfall has occurred and gift duty is then likely to be payable on that shortfall. To avoid this, a valuation of the assets is obtained. The Trustees will usually provide a Deed of Acknowledgment of Debt to the Vendors (the individuals who are selling their assets to the Trust) for the amount stated in the valuation. The balance owing under this Deed is then forgiven annually at a rate of $27,000 per person.

When an individual applies for a rest home subsidy, WINZ will look at factors such as how much did the Trust pay for the assets and when did the Trust purchase the assets. The reason WINZ examines these factors is because WINZ currently has the legal ability, when calculating an individu-al’s current assets, to disregard any gifts that have been made within the last five years before an application is made for a rest home subsidy. For this reason, it’s vital that a Trust is established and assets are transferred to that Trust as soon as possible.

Janet Xuccoa holds degrees in accounting and law and is a partner at accounting firm Gilligan & Rowe Associates, where she leads the Professional Trustee Services division. www.gra.co.nz

Trusts

FREE COPIES!To go into the draw to win one of five free copies of

Janet’s book, please email [email protected] or call 0800 474 669 to go into the draw, which will be made on Friday, August 20th.

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King LegalNorth Shore – Auckland

Experienced Specialists in Modern Trusts, Business, Property, Asset Protection & Estate Planning

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Jacques Vannoort LLMBarrister and SolicitorFamily Trust [email protected]

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Lesson

Imagine you are offered a job for a month by a wealthy but eccentric uncle.

He offers you the choice of taking $1 million on the first day, to cover the month’s work, or taking payment on the last day of the month based on an extremely

modest payment of 1cent on the first day, doubling every day.At first glance, the former option sounds better than the

first. Who wants to put in a full day’s work for a measly 1 cent, then do the same job the following day for 2 cent, and so on, especially when the other option is a million dollars in cash right now?

However, this scenario is designed to demonstrate the power of compounding.

If you start with 1cent and double it every day of a 30-day month, you would end up with a staggering $5.4 million.

US investment advisor Richard Stoyeck points out the reason almost everyone would jump at the $1m up-front offer is because the way the human mind works.

“You might say that we are hardwired to think in this linear fashion. The software in our brains compels us to think about progressions as being simple arithmetic ones,” he says.

One person who thinks exponentially is US share market legend Warren Buffett. He drives a VW beetle when he can afford a Maserati.

When asked why, he points out that $1 investment now at a 10 per cent annual return over 25 years will turn into nearly $10. Therefore, whenever he buys something, he counts not its face value, but the lost opportunity.

Such an approach is quite an eye opener if you think about day-to-day living. That $4 coffee is actually costing you $40, that $9 magazine is actually costing $90 and so on.

The lesson: it doesn’t matter how small you start, you will make money by letting compounding work for you.

The joy of compoundingDAvIDMCEWENREvISITSTHEOLD,BuTEFFECTIvEWAyOFBuILDINGWEALTH

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Economy

The abiding mystery of the Great RecessionTHEINTERNATIONALMONETARyFuNDCOINEDTHETERM‘THEGREATRECESSION’AFTERTHEGLOBALFINANCIALCRISIS.MICHAELCOOTELOOKSATTHEMEASuRESPuTINPLACETOCOuNTERITANDWONDERSWHETHERITISPOISEDTORETuRN

According to a US institute, the National Bureau of Economic Research (NBER), the Great Recession officially commenced in December 2007, based on its reading of statistical indicators for the American

economy.Technically, a recession is defined as being at least two suc-

cessive quarters of negative economic growth or shrinkage.The Great Recession delivered many more negative quarters

than that.Countries that felt the recession hardest were Northern

hemisphere developed economies, especially the US, Japan and member states of the European Union (EU), including Britain.

A moot point is whether the Great Recession is even over yet, and it should be borne in mind that many countries – perhaps most notably China and Australia – didn’t experience economic contraction during the period.

New Zealand suffered a short, shallow recession, but was officially declared to be back in growth again before very long, and so for many of us living here the question asked is, “What Great Recession?”

For New Zealand, the Great Recession must seem more like a near miss reported through the news media than a searing memory of bitter direct experience.

The US economy started producing positive economic statistics again around June and July of 2009, leading many commentators to declare the Great Recession over.

However, NBER has so far refused to agree, issuing a statement in April to say that according to its statistics, the US economy was still in recession notwithstanding some evidence of improvement.

NBER was careful to point out that it relies on statistics that are subject to revision and that it does not take forecasts into account.

It is still debatable whether the Great Recession is (1) over, (2) ongoing, or (3) returning.

Indeed, a real mystery.

Austerity BingeToward the end of 2009 there was a lot more optimism

around and so recession seemed to be a thing of the past, but along came the Greek sovereign debt crisis that in the space of a few months blew out into a systemic financial contagion within the Economic and Monetary Union (EMU), the group of EU members states that share the euro as their common currency.

Evidence suggests that Europe is headed back into recession again thanks to the Greek fiasco and its aftermath, and there will be knock-on effects felt across other countries that rely on trade with Europe, not least the likes of the US, the UK, Japan, and China.

New Zealanders have been assured by economists that they shouldn’t worry about the risk of a “double-dip” or “W-shaped” recession hitting Europe because we do most of our trade with Australia and Asia, which came through the Great Recession pretty much unscathed.

However, that view overlooks that if China’s export trade with Europe gets dented due to collapse in demand, then the Chinese economy, which is already being deliberately slowed down by government authorities there, will feel the effects.

Lower demand out of China must inevitably affect New Zealand via the trade we do with that country but also through our other trading partners in the Asia Pacific region that depend substantially on Chinese markets for selling their exports.

Therein lies the rub with the Great Recession, in that its lingering effects are persistent and keep mutating into different forms and migrating to new climates.

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Economy

The abiding mystery of the Great Recession

One of the latest of its mutations is being expressed in the fiscal austerity programmes being unveiled by European gov-ernments in the wake of the Greek crisis.

European governments, including the UK government, have taken fright at the vast amount of public debt they have incurred during the Great Recession to provide emergency fiscal stimulus to their economies and fix the balance sheets of their battered banking sectors.

The desire in Europe now is not merely to unwind fiscal stimulus gradually, but to go quickly into active policy reversal and even outright contraction by way of tax increases and spending cuts.

For example, the new coalition government in the UK announced in an emergency budget that, among other belt-tightening actions, it was going to slash public spending by 25 per cent over four years in all its departments except health and overseas aid.

That is a lot of public sector demand to suck out of the already weakened British economy over a short period, and there is no guarantee that ailing private sector demand will recover and grow enough over the same period to compen-sate.

Austerity budgets are a topic hotly contested between newly thrifty European governments, on the one hand, and the US and emerging market economies, on the other hand, because of what it may portend for the likelihood of return or prolon-gation of the Great Recession.

The Americans and others in their camp want to try and prolong fiscal stimulus funding by borrow-and-spend even though they recognise that there is a limit to the amount of borrowing it is safe to undertake and that at some stage the resulting increased fiscal deficits must be scaled back.

The Europeans, by contrast, have opted for rapid exit from and reversal of fiscal stimulus in order to start cutting their fiscal deficits as soon as possible.

“Doing a Japan”The concern is that the European approach may be

premature and trigger another round of contagious recession, and perhaps beyond that a deflationary spiral.

Most countries that borrowed heavily to fund fiscal stimulus to mitigate effects of the Great Recession believe they cannot afford to borrow more to finance another dose of stimulus if recession returns.

But recession is the lesser of the two evils compared with deflation.

Deflation occurs when the general level of prices falls year-by-year and is destructive of consumption and thus economic activity because households cut their spending in anticipation of lower future prices for goods and services.

Japan notoriously experienced a long, debilitating period of deflation over the 1990s and up until 2005.

It wasn’t until around then that Japan got inflation back again and could celebrate what it thought was final closure of the painful deflationary era.

Ominously, Japan has tipped back into deflation courtesy of the Great Recession.

The worry is that other economies – but most particularly the US and member states of the EMU – could be headed the same way in “doing a Japan”, and that austerity economics in Europe will prove to be the catalyst.

Deflation is extremely difficult to extract from the economy once it has taken root – witness the case of Japan – and central banks find it much harder to deal with than the opposite problem of inflation.

The stakes are very high over the controversial European decision to embrace fiscal austerity, but having done so, European governments should at least enable us to know before too long the answer to our question as to whether the Great Recession is over, ongoing, or returning.

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Deep in the jungles of Vietnam, three enterprising Kiwi brothers find old gold mines deserted by the French during World War II. By digging under the mines, they find significant new deposits of gold,

worth tens of millions of dollars.While this sounds like a story line from an Indiana Jones

movie, the three Seton brothers and their company Olympus Pacific Minerals, have really achieved this remarkable feat and remain the only western company to be producing gold in Vietnam.

Despite the New Zealand con-nections, with brothers John, David and Paul Seton still active with the company, Olympus does not have a high profile in this country.

One reason is that its primary listing is on the mining-oriented Canadian TSX market, with a secondary listing in Australia (code: OYM), and its mines and exploration territories are all in Vietnam or Malaysia.

It deserves more attention. In the year to 31 December 2009, the company reported sales of US$16.4 million and shareholders’ equity of US$48.3 million.

Operating cash flow was negative US$1.4 million but this was a significant improvement over 2008’s US$6.6 million.

Chairman and chief executive officer David Seton says the company is cash flow positive in 2010 and this is likely to continue as Olympus continues to ramp up production. In addition, it has over US$25 million in the bank.

Olympus has been in Vietnam for around 20 years and remains the only western gold mining company there. It has two mines in production – at Bong Mieu and Phuoc Son - and an extensive exploration area.

It is a building a second ore processing plant, which by the end of this year should take its annual gold production to at least 80,000 oz.

“That will give us significant production by junior produc-tion standards and will put us on the map with investors,” he said.

The company does not intend to stop there. With a new mine planned for Bau in Malaysia, it expects production to go to 300,000 oz per annum by 2014.

Of course, new mines don’t come cheap and Seton estimates the company will need a further US$60 million in capital to achieve its goals. However, that is based on gold

at its current price. If it were to rise to US$1,400 oz from around US$1240 now, then the company won’t need any more capital – it could finance growth out of cash flows.

That’s because its costs are relatively fixed – and likely to run at US$500 - $550 oz – its profitability goes up as the world gold price appreciates.

Why choose Vietnam to look for gold? Seton says it was based on a contrarian instinct. Vietnam had been overlooked

by western mining companies and he and his brothers believed that alone offered opportunities.

There was a steep learning curve doing business in the region and Seton admits to

having learned a lot by trial-and error. This probably gives the

company a big lead over any other

companies that try to move into the region.One challenge

was finding a lot of illegal miners on its land at one stage, digging holes

with picks and shovels. “It was like the gold rush days of last century in central

Otago,” he says.They have since been cleared out.While much of the company’s activities are in Vietnam for

obvious reasons – it has 900 staff there - it still has an office in New Zealand offering technical support.

The company was formerly known as Olympus Holdings Ltd and changed its name to Olympus Pacific Minerals in November 1996. Olympus merged with related company Zedex Minerals in February this year to give the company a greater scale. Zedex subsequently delisted from the ASX market.

Since the merger, investor interest in Olympus has been strong, with the share price doubling in just two months.

The company is planning a feasibility study to justify increasing Bong Mieu’s annual production to 100,000 oz of gold. Over the next three years, total gold production between Bong Mieu and Phuoc Son is expected to be 160,000 - 170,000 oz a year. Ban should add a further 100,000 over the next few years. Olympus is planning further exploration and hopes to further exploit its estimated reserves of three million ounces.

For more information about Olympus shares call IRG’s trans-actions desk on 0800 474 669 or visit www.olympuspacific.com

ALISTEDGOLDCOMPANyWITHTERRITORIESINvIETNAMANDMALAySIAHASASTRONGNEWZEALANDCONNECTION.DAvIDMCEWENTALKSTOOlYMPuS PACIFIC MInErAlSCHAIRMANDAvIDSETON

Golden opportunity in Vietnam

Profile

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If you have a minimum of six employees, DorchesterLife’s Group Accidental Death Policy is a simple and effective way to show your employees you care. While we cannot predict or prevent accidents, we can take steps to lessen the financial impact of death on the lives of loved ones.

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China is booming with no outward signs of its economy slowing any time soon.

That’s great news if you are a manufacturer with goods and services to sell in a country that is remi-

niscent of the United States 50 years ago. But if you are not in business, and you don’t want to set up shop in what could be the global economic powerhouse of the next decade, how can you get a slice of the action?

For investors there are many opportunities – from shares in Kiwi firms already doing business in China (Chinese imports have risen 50 per cent year on year and its penchant for our wines and dairy is on the up and up), to firms already on the ground. These include a handful of local companies as well as international names such as Bombardier, Intel, Boeing and PerkinElmer to name a few. There are also plenty of invest-ment portfolios to choose from that concentrate on Chinese firms or its sharemarket.

But where are the investment opportunities? Jack Chow, a partner at KPMG, specialises in capital markets activities in China and says there will be a surge in manufacturing and agriculture activity in the coming years – fuelled by an increase in domestic industry consolidation and overseas investment.

“China is strongly positioned as a leader in the drive toward global economic recovery,” he says. “There will always be challenges, but we have great confidence for the future and are preparing for continued growth in China’s dynamic economy.”

It’s a view shared by his Auckland colleague Gary Ivory, a KPMG corporate finance partner. He says China is a devel-oping economy with a high demand for the products made there and for high quality luxury imported goods such as cars and brand named clothing lines.

“As people’s standard of living goes up so they look to buy higher priced products,” says Ivory. “It is an economy within an economy. It’s a little bit like India, there is a huge population there and they have developed a taste for wine and high-end western products. French winemakers are now setting up joint

venture operations there. For example, in June there was a wine expo in Beijing that featured many New Zealand firms. The automotive industry is another one that’s doing well…so you can see the people of China are moving up.”

And it appears the Chinese have the money to buy the goods Western countries produce. The income of China’s urban and rural residents continued to increase in the first quarter of this year, data from China’s National Bureau of Statistics shows. In the first three months of the year, per-capita disposable income for urban people was US$778, up 9.8 per cent year on year. However, after taking inflation into account, actual growth was 7.5 per cent.

The Economist Intelligence Unit says urbanisation is expected to lead to a shift in consumption away from grain and towards foods such as red meats, vegetables and dairy products. In terms of beverages, it says urbanisation will encourage a shift from consumption of basic tea and local beers to flavoured tea, fruit juices, premium beers and wines.

In fact, China’s retail sales grew 18.2 per cent in the first half of the year from a year earlier according to the National Bureau of Statistics. And according to HSBC, New Zealand exports to China grew by 459 per cent during the past 10 years – including a 116 per cent increase during the past five years.

China is also seen as a key potential growth market for coffee. British coffee chain Costa Coffee (part of the Whitbread group) opened its first store in Shanghai with an initial investment of US$4.6 million in 2007 as part of a joint-venture with Chinese partner Yueda Group.

Glen Tonks HSBC’s manager private clients says as we go through the 21st century so China and India will become the

most dominant countries on the planet.“What’s driving them is the high level of

savings in China,” says Ivory. “But the thing that is going to provide

the most growth is their low level of debt. The emerging

Yuan for the money

Feature

China is running red hot. steve hart finds out how it is buCking the trend and how kiwi investors Can take advantage

China is strongly positioned as a

leader in the drive toward global

eConomiC reCovery

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nations just don’t have the hang over of debt the western world has.

“The West is going to be borrowing to cover its deficits for the foreseeable future. Where as the East will be borrowing for capital expenditure. The Bric nations – Brazil, Russia, India and China – hold 40 per cent of the world’s currency reserves. These four countries will – over the coming years – spend US$4.3 trillion in infrastructure spending.

“So China is among those that are spending to build their economies while the West is borrowing to cover debt – the legacy of consumer spending over the past decade.”

As for investing in China, Tonks says you can read a lot about the country, but unless you have been there you don’t know the country at all.

“One of the keys to successful investing is diversification,” says Tonks. “And having a good financial advisor.”

However, Tonks says there are murmurs about China being hit by an economic slowdown, but he likens it to more of a pause that a stop.

“Our view is that China, at least in the short term, has taken a deep breath and is ready for the next stage of its evolution,” he says. “But what I’d say to investors who are looking in that direction is that it is very much a long term investment – at minimum five years for these markets. Poten-tially these are exciting markets.”

The Dagong Global Credit Rating, a Chinese credit ratings agency, rates the Chinese government as a safer investment than the US, the UK and Japan. The firm rated both Chinese and German sovereign debt AA+ with a stable outlook, while the US was given AA with a negative outlook, and Japan was awarded AA-.

This Beijing-based company’s rating is at odds with those released by Fitch, Standard & Poor’s and Moody’s which rated China AA-, A+ and A1, respectively, while the United States, Britain and France all ranked AAA.

Despite all the positive signs that careful investments in China could deliver good returns, the country ranks the bottom of one particular list – the one prepared by the Ethical Investment Research Service. It says China is among a group of countries that are the “worst performers in terms of environ-mental, social, and governance indica-tors”. But that, as they say, is another story and more of a matter of con-science than financial judgment.

China’s economyThe easiest way for New Zealand investors to benefit

from the Chinese boom is through a managed fund. This approach offers significant benefits and will keep

your investment clear of some of the pitfalls that can accompany investing in an emerging market.

The main benefit of a unit trust is that your investment will be looked after by an experienced fund management team. This will be made up of individuals with extensive contacts in the country in question’s business world as well as knowledge of that country’s language, business culture and way of life.

A managed fund also provides access to numerous investment opportunities, with a fund holding anything from 10 to several hundred different shares. This not only broadens your access but spreads your risk, reducing the impact of market fluctuations.

An investment fund will also have a buying power unmatched by the individual investor, enabling the fund to reduce costs through economies of scale solely available thanks to its buying power.

The final benefit is the sheer convenience that a managed fund provides. The paper work, buying, selling, decisions on rights issues, collection of income, dividends and so on are all handled by the fund manager, who then reports to you on a regular basis on the performance of the fund – and your investment.

The table below outlines some of the local fund options available to New Zealanders wanting to access the Chinese market.

Asian Fundsname Size (Total

assets)1yr

return5yr

return

AMP SIP PrP – Asian Share

$18.35million

10.41% 4.68%

AMP SIP unit Trust - Asian Shares

$2.23million 10.96% 5.24%

Asteron Superplan 2000 Far East Fund

$1.49million 5.62% -5.25%

Asteron Superplan Far East Fund

$15million 5.62% -5.25%

Ing PPS Asian Equities Fund

$22.47million

12.21% NAv

HSBC China Fund. uS$247.1million

-1.36% 11.82%

Source: Morningstar.net.nz.

Feature

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Contact us todaywww.nzmint.com • 0800 NZ MINT (696468)

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investor magazine.indd 1-2 21/07/10 2:20 PM

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Contact us todaywww.nzmint.com • 0800 NZ MINT (696468)

*Source: World Gold Council - increase from 595 tonnes in 2005 to 1271 tonnes in 2009 based upon identifiable investment - see www.gold.org for more details.

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Between 2005-2009 demand for investment gold grew 214%*

QUALITY

Producing and selling only the highest quality precious

metal products, the internationally recognised New

Zealand Mint Gold Kiwi was one of the first bullion

products minted in 99.99% pure gold.

Selling only certified and internationally recognised

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PAMP Suisse (Produits Artistiques Metaux Precieux) in

New Zealand.

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Dedicated people, custom built facilities and world

class systems make New Zealand Mint the only full

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Whether your order is $100 or $1,000,000, our services

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Check out our website at www.nzmint.com/bullion to

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Investments that are written in the starsINTHEFIRSTOFASERIES,DAvIDMCEWENLOOKSATINvESTMENTSTRATEGIESINSPIREDByMySTICALEvENTSANDPOWERS

Humans are hotwired to identify patterns, a heritage of our long past as hunter-gatherers. This was a big help when spotting predators or prey hiding in the jungle undergrowth. Unfortunately, the complexity of the modern

world means most people look for, and believe they find, patterns where none exist. Others believe powers beyond our knowledge have an important part in day-to-day life and that various patterns indicate such omnipotent tinkering with our world.

For most of human history, there has been a medicine man, shaman or priest whose job is to communicate with the gods and foretell the future based on their reading of various mystical signs. As a result, another feature hotwired into our brains is the capacity to instantly believe whatever an ‘expert’ tells us. Presumably once upon a time those with the genetic tendency towards cynicism didn’t live long enough to pass on their genes.

Whatever the reason, many people today still believe that there is knowledge, power or an intelligence beyond the capacity for humankind to easily understand. By unravelling the pattern, trail or message from such sources, they believe they can predict the future of investments and the markets.

However, many doubt that foretelling the future with any accuracy cannot be achieved.

After all, if only one person was clever enough to accurately predict the future of currency, bond or share markets, they would quickly be rich enough to buy a large chunk of the world. Curiously enough, most people who claim to have such wisdom tend to make their living by telling others how to do it – for a large fee.

Financial Astrology This month we look at Financial Astrology.Belief in astrology has existed for millennia and still pervades

society. Today, even the most sober and conservative of news-papers carries a daily horoscope that claims to forecast the fate of readers.

Share market investors are not immune to the belief in the awesome power of the planets and there is no shortage of practitioners who say they can use the movements of the stars to make money for themselves and their followers (for a fee, naturally).

While astrology was originally used to divine the outcome of wars, decide when to sow crops or forecast the love life of a king, it inevitably became a popular concept to use these methods to help get rich. Using the stars for such an outcome is known as ‘financial astrology’. Financial astrology has been used for centuries.

Traders in grains and precious metals in India are said to have used it thousands of years ago decide the most auspi-cious times to buy and sell at the markets. Greek philosopher Aristotle recorded the story of Thales of Miletus (699-635 BC), who used his knowledge of heavenly cycles to predict a bumper olive crop, and made huge profits by cornering the olive press market (using futures contracts, naturally).

The popularity of financial astrology has not waned in more modern times.

Entertainment baron Walt Disney apparently used astrology to pick the best times for launching his next movie. Several decades earlier, in the early 1900s, legendary stock and com-modities trader WD Gann is said to have used astrological principles when making accurate market forecasts months, and sometimes years, in advance.

Around the same time, Wall Street billionaire J P Morgan scandalised New York society by consulting with astrologer Evangeline Adams to gain advice on the best timing for major business and investment moves. Morgan famously once said, “Millionaires don’t use astrology; billionaires do!”

Those who promote financial astrology claim it is on the verge of becoming an accepted method of market analysis, ranking equally in popularity with fundamental and technical analysis techniques. Some say it is actively used by many Wall Street firms but kept a secret for fear of attracting ridicule.

Practitioners of financial astrology believe planetary forces exert their influences on the mood of investors, which is reflected in the overall direction the market. All they have to do is figure out where the planets are and what they are doing to read what the markets are going to do next.

They believe their methods work not because of some mum-bo-jumbo about the position of planets and stars millions of

THE POPULARITY OF FINANCIAL ASTROLOGY HAS NOT WANED IN MORE MODERN TIMES

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Investments that are written in the stars

miles away, but because those bodies are affected by the same patterns or cycles that influence everything on earth.

For example, the Jupiter-Saturn cycle of 19.86 years is believed to coincide with the change of market emphasis from bull (rising) to bear (falling) roughly every 20 years. The Jupiter-Uranus cycle, which lasts 13.81 years, has been found by some adherents of financial astrology to match changes in the popularity of investment techniques (such as momentum investing or day-trading) by investors and their advisors. The Saturn-Uranus cycle of 45 years is thought to point to major economic booms and busts.

One particularly significant set of planetary movements are known as planetary retrogrades.

From an astrologer’s viewpoint, the Earth and planets appear to rotate in a forward motion. At times the planets slow and seem to halt their rotation entirely. Then, after resting in a stationary position, it looks as if they are beginning to rotate backwards. This reverse spinning is known as a retrograde. Ap-parently, a retrograde can have an equally inverse effect on the earth, by having a negative impact on world events or individ-ual actions. Retrograde effects can change people’s emotions or actions, alter the way people communicate, even affect their ability to see or understand information.

Financial astrologers say Mercury retrogrades make good times to trade government stock on the share market. When Mercury goes retrograde, bonds and shares tend to hit a low point, or so the story goes.

Others say solar eclipses tend to happen around the same time as significant changes in the markets and a good time to buy or sell is when the moon is full.

One of the more notable financial astrologists of the past century was Evangeline Adams (1868-1932).

Distantly related to two American presidents, John Adams and his son John Quincy Adams, she was considered a shame to the family because of her attachment to practices disdained by polite society at the time. Ignoring the naysayers, she went on to develop a thriving astrological practice that lasted 40 years.

She claimed as clients such society leaders as filmstars Mary Pickford and Douglas Fairbanks, the King of Siam and the aforementioned Wall Street banker JP Morgan. Her prominence grew further with a series of popular books about

astrology and a regular radio show.At the time, fortune telling was a crime and twice she

appeared in court to face charges. However, she was acquitted both times, successfully arguing that there was a difference between fortune telling and astrology.

She pointed out that fortune tellers dealt in prophecy, while astrologers merely looked for indications. In other words, prophecies foretold events while astrology acted as a pointer to future events, that, having been forewarned, people could make happen or avoid through their subsequent actions.

Another prominent astrologer of the era was LJ Jensen, who wrote the book: Astro-Cycles and Speculative Markets & Astro-Economic Interpretation in 1935. Many devotees of financial astrology, even today, consider this a classic work.

Jensen wrote the book at the age of 77, using it to pass on knowledge he had accumulated after a lifetime of research and trading in financial markets.

While astrology was particularly popular early last century, it hasn’t died out and financial astrologers continue to operate today.

According to US magazine Timer Digest, an independent reviewer of market forecasts, two of the top five market timers of 2002 were financial astrologers: Arch Crawford of Crawford Perspectives and Bill Meridian of Cycles Research. Their recommendations during that year, if followed, would have produced gains of 51 per cent and 36 per cent respectively. Bill Meridian got his MBA from New York University in 1972 then worked on Wall Street as an analyst and market technician. Meridian quickly became fascinated by stock market cycles and observed after much research that they were similar to many astronomical cycles. In 1983, he developed software that connected planetary positions with market trends, and began using it to make forecasts.

Meanwhile, Arch Crawford worked at investment bank Merrill Lynch as a chalkboard operator, before moving to New York in the 1960s. Crawford became fascinated with astrology after reading a Wall Street Journal article about financial astrologer Lt. Commander David Williams, author of the 1982

SOME SAY A GOOD TIME TO BUY OR SELL IS WHEN THE MOON IS FULL

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book “Financial Astrology.” Since then, Crawford has spe-cialised in this area.

How it is supposed to work Financial astrologers try to spot “turning points,” – shown as

the top of a peak or bottom of a trough on a share chart. These are important times when a price trend changes. If identified correctly, they are the most profitable times for buying and selling a share.

Share prices are linked to the movement of the stars, as-trologers believe, therefore the direction of the markets can be determined by gazing at the heavens.

Astrologers start their search for the future peaks and troughs of any share or market analysing the historical price data – sometimes over decades - and looking for correspond-ing astrological influences.

Once these influences are identified, a repeat of an astro-logical event can be used to predict the future movement of a share, sometimes years in advance.

As with human beings, every share is believed to have a specific date of birth, such as the underlying company’s date of incorporation. Once this is known, it is possible to draw up a star chart and analyse the future stellar and planetary influ-ences that will have an impact on it.

Strong astrological alignments have been identified around major financial market events. Many investors have noted that charts around the US market collapses of 1929 and 1987 and 2008 stock market charts look similar.

When moon cycles and Fibonacci numbers are crunched, some say the two charts are identical.

Independent analysis There is some independent evidence that points to the effec-

tiveness of financial astrology. A research project by research-ers at the University of Michigan Business School in 2001 investigated whether there was a relation between lunar phases and the stock market. They studied the returns in 48 countries

and concluded there was “strong global evidence that stock returns are lower on days around a full moon than on days around a new moon”. The magnitude of the return difference was 5.4 per cent per year, annualised. “The return difference is not due to changes in stock market volatility. Moreover, the lunar effect is independent of other calendar-related anomalies such as the January effect, the day-of-week effect, the calendar month effect, and the holiday effect,” they say.

As much as financial astrologers and their followers maintain the accuracy of their methods, there are many people who remain equally convinced that there is no connection between the planets and the share market. Professional skeptic James Randi, of the UK-based James Randi Educational Foundation, has run a series of tests that found astrologers were unable to produce the goods.

Some years ago, during a TV series in the UK, he pitted a professional financial advisor - John Piper - against “astroana-lyst” Roy Gillett, giving them each a hypothetical sum of 10,000 pounds to invest in the stock market over a five-week period. The results: John the advisor made 1,793 pounds, and Roy the astrologist lost 4,039 pounds. In 2002, in another such experi-ment in the UK, this time for National Science Week, using a hypothetical 5,000 pounds to invest in a bearish market, financial analyst Mark Goodson lost 360 pounds, and astrolo-ger Christeen Skinner dropped 498 pounds.

This experiment, designed by psychologist Dr Richard Wiseman from the University of Hertfordshire, also involved an acknowledged market amateur Tia Laverne Roberts, who lost only 231 pounds, thus outperforming the other two investors.

Tia’s stocks were chosen entirely at random; the names of the different shares were written on fake money, fluttered over her head, and “eventually she grabbed four,” according to Dr Wiseman.

By comparison, astrologer Christeen Skinner made her investing decisions by looking at the “birthdates” of the companies and drawing up their astrological charts. “So much for that technique,” says Randi. “Despite all these high-tech state-of-the-art advantages used by the two adults, four-year-old amateur Tia was consistently ahead throughout the experi-ment.”

EVIDENCE EXISTS THAT STOCK RETURNS ARE LOWER ON DAYS AROUND A FULL MOON

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Fund Exit $ 1Yr 3 Yr 5 Yr Size $M labelTOWERIPIntlCompaniesFund* 1.7129 13.51 30.02INT’L FIXED INTEREST PIESAMPStateStGlobalFIIndexFund 1.3822 6.86 8.90 6.36 8.31 ASBDiversifiedIncomeTrust* 1.1639 6.17 33.43ASBWorldFixedInterestTrust* 1.2409 6.54 40.24TOWERBondPlusFund 1.3894 17.46 8.03 5.94 107.23 OTHER PIESASBEasyFundGlobalPropertyFund 0.6686 30.10 20.69BrookWalterScottGlobalShareFund 0.9678 -3.22 17.17PathfinderCommodityPlusFund 0.9401 -7.55 17.30TOWERGlobalCommodityFund 0.8558 2.53 -2.10 25.69 TOWERGlobalHedgeFund 292.9516 -1.89 0.61 2.75 19.34 KIWISAVER DIVERSIFIED BALANCED PIESAMPKiwiSaverBalancedFund 0.9350 7.27 79.67AMPKiwiSaverINGBalancedFund 0.9759 13.16 17.72AMPKiwiSaverModerateBalanced 0.9690 7.18 75.24AMPKiwiSaverModerateFund 1.0338 6.94 51.60ANZKiwiSaverBalancedFund 0.9847 10.52 44.27ANZKiwiSaverCnsrvtiveBlncdFund 1.0492 9.47 29.84ASBKiwiSaverBalancedFund 0.9176 10.35 106.30ASBKiwiSaverModerateFund 1.0154 9.67 129.44AXAKiwiSaverBalancedPortfolio 0.9191 11.20 49.56CraigsInvestmentPartnersBalanced 1.0382 7.13 24.76FidelityLifeBalancedKiwiFund 5.4106 7.06 33.44FirstChoiceKiwiSaverActvBlncdFund 0.9253 9.43 10.68FirstChoiceKSTrackerBalancedFund 0.9157 10.41 9.52FirstChoiceKSTrackerModerateFund 1.0075 9.71 7.68GrosvenorKiwiSaverBalancedFund 1.0801 9.13 29.70HuljichBlncdDiversifiedKiwiSaverFnd 1.0988 23.83HuljichCnsrvtveDiversifiedKiwiSaver 1.2013 48.95MercerKiwiSaverBalancedFund 0.9279 13.71 14.56MercerSTKiwiSaverActiveBlncdFnd 0.9270 13.46 24.68NationalBankKiwiSaverBlncdFnd 0.9860 10.53 65.63NBKiwiSaverConservativeBlncdFund 1.0494 9.51 38.18SILKiwiSaverBalancedFund 0.9937 10.76 88.98SILKiwiSaverConservativeBalanced 1.0571 9.75 35.40TOWERKiwiSaverBalancedFund 2771.8032 10.61 86.48WestpacKiwiSaverBalancedFund 0.9429 7.60 112.05KIWISAVER DIVERSIFIED DEFENSIVE PIESAMPKiwiSaverConservativeFund 1.1294 6.74 19.61AMPKiwiSaverDefaultFund 1.0910 5.05 277.32ANZKiwiSaverConservativeFund 1.1169 8.21 32.24ASBKiwiSaverConservative(default) 1.1106 6.88 600.79AXAKiwiSaverIncomePlus(default) 1.0849 8.97 324.66CraigsInvestmentPartnersConsrvtive 1.1105 5.36 13.72FidelityLifeCapitalGuarntdKiwiFund 2.1857 4.96 13.22FidelityLifeConservativeKiwiFund 5.5749 7.82 15.74FirstChoiceKSTrackerCnsrvtveFund 1.1091 6.86 34.19GrosvenorKiwiSaverConservativeFund 1.1207 8.26 8.07INGKiwiSaverConservativeFund(dflt) 1.1228 7.85 296.49MercerKiwiSaverCnsrvtive(dflt)Fnd 1.1419 12.30 321.99NBKiwiSaverConservativeFund 1.1197 8.25 45.51SBSLifestagesKiwiSaverScheme 2.0967 2.78 27.00SILKiwiSaverConservativeFund 1.1251 8.33 106.94TOWERKiwiSaverCashEnhancedFund 1.1145 6.77 276.23TOWERKiwiSaverConservativeFund 1.1300 11.05 12.14WestpacKiwiSaverConservativeFund 1.0600 7.18 254.38KIWISAVER DIVERSIFIED GROWTH PIESAMPKiwiSaverAggressiveFund 0.7784 7.71 65.63AMPKiwiSaverGrowthFund 0.8334 7.65 71.77ANZKiwiSaverBalancedGrowthFund 0.9188 11.61 31.26ANZKiwiSaverGrowthFund 0.8533 12.44 75.59ASBKiwiSaverGrowthFund 0.8284 10.38 102.90AsteronKiwiSaverBalancedGrwthFnd* 0.8691 11.85 9.18AXAKiwiSaverHighGrowthPortfolio 0.8096 10.90 37.60CraigsInvestmentPartnersGrowth 1.0282 6.67 25.43FidelityLifeGrowthKiwiFund 5.0794 6.07 18.40FirstChoiceKSTrackerGrowthFund 0.8264 10.44 8.27FirstChoiceKiwiSaverActveGrwthFnd 0.8474 9.03 10.87FisherFundsGrowthKiwiSaverFund 0.9993 16.60 131.60GrosvenorKiwiSaverHighGrowthFund 0.8822 8.42 29.09HuljichGrwthDvrsifiedKiwiSaverFnd 1.0491 66.42

Fund Exit $ 1Yr 3 Yr 5 Yr Size $M labelMercerKiwiSaverHighGrowthFund 0.7926 13.10 9.85NBKiwiSaverBalancedGrowthFund 0.9184 11.65 53.44NBKiwiSaverGrowthFund 0.8504 12.50 117.93SILKiwiSaverBalancedGrowth 0.9260 11.75 84.71SILKiwiSaverGrowthFund 0.8593 12.72 62.67TOWERKiwiSaverGrowth 0.9043 12.57 26.52WestpacKiwiSaverGrowthFund 0.8865 7.79 72.26KIWISAVER NZ EQUITY (ACTIVE) PIESMilfordKiwiSaverAggressiveFund 1.3032 10.76 8.40KiwiSaverNZEquity(Australasian)PIEsSmartkiwiGrowthFund 0.6732 7.44 8.52KIWISAVER NZ CASH PIESAMPKiwiSaverCashFund 1.1772 3.75 17.46ANZKiwiSaverCashFund 1.0653 2.01 13.19ASBKiwiSaverNZBankDepositFund 1.1528 2.39 97.13AXAKiwiSaverCashPortfolio 1.1542 3.93 10.44NationalBankKiwiSaverCashFund 1.0657 2.01 21.76SILKiwiSaverCashFund 1.1414 1.79 8.07WestpacKiwiSaverCashFund 1.1213 2.87 63.49KiwiSaverInt’lEquity(Global)PIEsSILKiwiSaverInternationalShare 0.8090 7.61 8.89TOWERKiwiSaverEquityFund 2222.3911 11.13 10.76KIWISAVER OTHER PIESFidelityLifeOptionsKiwiFund 3.9067 18.86 24.84DIVERSIFIED BALANCED UNIT TRUSTS & GIF’SAMPBalancedTrust* 1.4633 6.84 -2.62 1.70 18.89 AXA-PMFActiveGrowthFund 1.5443 9.61 -2.06 1.38 19.23 DIVERSIFIED DEFENSIVE UNIT TRUSTS & GIF’SAXA-PMFBalancedFund 1.8548 7.11 0.37 2.02 39.74 DIVERSIFIED GROWTH UNIT TRUSTS & GIF’SAMPDynamicTrust* 1.2772 7.78 -8.36 -0.73 10.79 NZ EQUITY (AUSTRALASIAN) UNIT TRUSTS & GIF’SSovereignCFSTasmanShares* 3.8340 8.07 -2.65 3.33 17.51 NZ MORTGAGE UNIT TRUSTS & GIF’SASBNZMortgageIncomeFund*(30%) 1.3558 2.88 4.57 4.90 64.58AXA-PMFMortgageInvestmentFund* 156.2383 -0.26 2.56 3.44 38.84NZ CASH UNIT TRUSTS & GIF’SPerpetualTrustCashFund(net@30%) 1.9514 1.39 3.31 3.86 49.78 INT’L EQUITY (AUSTRALIAN) UNIT TRUSTS & GIF’SSovereignCFSAustralianShares* 2.2890 9.44 -2.81 4.17 10.56 Int’lEquity(Global)unitTrusts&Gif’sAXA-PMFInternationalEquityTrust 1.7139 2.63 -11.18 -3.13 22.33 INT’L FIXED INTEREST UNIT TRUSTS & GIF’SSovereignCFSGlobalBondsTrust* 2.8172 3.85 5.21 3.87 13.93 unitTrusts,Gif’s&OtherSovereignCFSGlobalPropShares* 1.7449 30.54 -11.39 -2.08 10.41 DIVERSIFIED BALANCED INS. BONDSAMPBalancedBond* 1.4018 4.42 -3.68 1.01 12.06 AMPManagedBalancedFund(C)* 3.3573 3.67 -4.57 0.44 82.92 AMPManagedBalancedFund(CN)* 1.6434 3.09 -5.10 -0.11 82.92 AsteronLifeplan/GoKidzBalanced* 1.8539 5.13 -4.79 -0.35 12.47 AsteronSaveguardPlusManagedFund* 5.4140 5.91 -3.90 0.54 96.50

AsteronyieldGlobalFund* 7.4583 6.62 -3.65 0.76 20.74 FidelityLifeBalancedPortfolio 2.8650 7.06 0.23 3.18 13.78 SovereignBalancedGrowthFund* 0.2430 4.29 -4.50 0.17 51.66 DIVERSIFIED GROWTH INS. BONDSSovereignHighGrowthFund* 0.2430 5.65 -5.72 0.42 16.30 DiversifiedDefensiveIns.BondsFidelityLifeConservativePortfolio 3.1639 6.69 2.98 4.10 60.05 NZ EQUITY INS. BONDSAMPNZShareBasedFund(R)* 3.3380 3.58 -10.50 -2.39 11.78 AMPNZShareBasedFund(RN)* 2.1016 3.00 -10.99 -2.93 11.78 AsteronSaveguardPlusEquityFund* 5.3873 10.76 -10.86 -2.90 8.18 SovereignNZSelectEquitiesFund* 0.4320 7.20 -5.81 4.36 12.92 NZ CAPITAL STABLE INS. BONDSANZCapitalProtectedFund* 3.2652 1.78 2.70 2.94 36.01 SovereignIncomeFund* 0.3280 1.55 3.72 4.36 13.18 INT’L EQUITY (REGIONAL) INS. BONDSSovereignNorthAmericaFund* 0.3750 6.53 -1.21 0.27 7.57 INT’L EQUITY (GLOBAL) INS. BONDSAsteronSaveguardPlusIntEquity* 1.8754 2.73 -11.26 -2.97 7.65

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PIEfundreturnsaremeasuredpre-tax.ReturnsforfundsthathavebecomePIEs(e.g.from30/09/07)areshown‘grossed-up’(pre-tax)totransitiondate.Theseindicativereturnsareapprovedbyfundmanagersandareforfundcomparativepurposes,andarenotsuitableforcalculatinganinvestor’sinvestmentreturn.Non-PIENZfundreturnsarereportedpost-taxassumingamarginaltaxrateof30%.Allreturnsaremeasuredpostmanagementfeesbutbeforeupfrontfees.Alldistributionsareassumedtobereinvested.AustralianfundreturnsareinNZdollartermsandaremeasuredpre-taxbutAustralianexitpricesareinA$asarefundsizes.FundSourceFundRatingsarecalculatedfromrisk-adjustedreturnsoverthepastthreeyearsto28/2/2010comparingsimilarfundsacrossalllegalfundtypes.Thetop15percentoffundsattain5stars,next20percent4stars,next30percent3stars,next20percent2starsandbottom15percent1star.

Fundswithlessthanathreeyearhistoryhavenofundrating.Pastperformanceisnotnecessarilyaguidetofutureperformance.AnyrepresentationorstatementexpressedinthisdocumentismadeingoodfaithonthebasisthatFundSourceLimitedisnotabletobeliableinrespectofsuchrepresentationorstatement.FundSourcedoesnotguaranteetheaccuracyofthird-partyinformationusedtocalculatefundreturns.Thisinformationshouldnotberelieduponasasubstitutefordetailedadvicefromaprofessionalfinancialadviser.Copyright©FundSourceLimited.[*representsaclosedfund].

Formoreinformationpleasesee:[email protected]

Fund Exit $ 1Yr 3 Yr 5 Yr Size $M labelOTHER INS. BONDSFidelityLifeOptionsPortfolio 3.2607 13.00 6.89 8.14 31.02 DIVERSIFIED BALANCED SUPERANNUATIONAMPPersSuperBalanced(A)* 16.9802 2.10 -4.42 1.06 61.09 AMPPRPBalanced-OtherFund* 1.2742 3.99 -4.81 -0.25 10.42 AMPPRPBalanced* 1.4234 4.22 -3.65 1.11 160.27 AMPPRPLeggMasonBalanced* 1.2890 13.22 -6.01 -0.27 17.11 ASBEasyplanBalancedFund* 1.9140 9.93 -3.76 1.47 109.09 AsteronRetirementPlusManaged* 5.4140 5.91 -3.90 0.54 96.50 AXA-FLPBalancedGrowthFund 1.5740 6.19 -1.35 1.68 152.66 FidelityLifeSuperSuperBlncedFund 2.8650 7.06 0.23 3.18 17.49 SovereignPersonalSuperBalanced* 21.4100 5.74 -3.18 0.95 112.94 SovereignSuperBalancedGrowth* 0.1940 4.86 -3.67 0.74 18.60 SovereignvisionBalanced* 1.9120 5.42 -3.48 0.65 85.68 DIVERSIFIED GROWTH SUPERANNUATIONAMPPersSuperPerformance(u)* 2.2998 1.53 -9.82 -0.99 26.37 AMPPRPDynamic* 1.2587 4.77 -8.72 -0.89 98.43 ASBEasyplanGrowthFund* 1.2040 10.68 -6.80 0.51 50.07 AXA-FLPDynamicGrowthFund 1.4005 7.52 -3.81 0.87 36.01 FidelityLifeSuperSuperGrowthFund 2.5827 6.84 -3.35 1.75 10.56 SovereignPrsnlSuperEntrprneurial* 21.1581 5.07 -5.67 0.03 174.22 SovereignSuperHighGrowthFund* 0.1920 6.67 -5.15 0.85 7.89 SovereignvisionEntrepreneurial* 1.7163 4.75 -5.96 -0.28 55.41 DIVERSIFIED DEFENSIVE SUPERANNUATIONAMPPRPConservative* 1.5399 3.80 1.69 3.01 10.70 ASBEasyplanConservativeFund* 1.9177 7.62 0.86 2.90 48.81 SovereignPersonalSprCpitalStable* 17.8000 5.45 1.09 2.49 8.99 NZ CAPITAL STABLE SUPERANNUATIONASBEasyplanCashEnhancedFund* 1.9935 2.22 3.78 3.80 19.52 AXA-FLPCapitalEnhancedFund* 1.6146 1.06 2.19 3.18 24.09 SovereignvisionCapitalAssured* 1.8116 0.42 2.50 2.91 33.47 TOWERFreedomPlanCapitalProtected* 1.0706 1.51 5.61 4.76 54.74 NZ EQUITY SUPERANNUATIONAMPPRPNZShares* 1.5164 4.84 -10.35 -1.53 16.00 AsteronRetirementPlusEquity* 5.3873 10.76 -10.86 -2.90 8.18 INT’L EQUITY (AUSTRALIAN) SUPERANNUATIONAMPPRPAustralianShares* 1.8796 13.55 -5.55 2.15 23.35 INT’L EQUITY (REGIONAL) SUPERANNUATIONAMPPRPAsianShares* 1.3673 10.41 -2.27 4.68 18.34 INT’L EQUITY (GLOBAL) SUPERANNUATIONAMPPRPIntlShares* 1.1429 9.31 -11.57 -3.11 33.10 AMPPRPPassiveIntShares* 0.7235 1.93 -9.12 -1.46 35.38 AsteronRetirementPlusIntlEquity* 1.8754 2.73 -11.26 -2.97 7.65 FidelityLifeSuperSuperInternational 1.5301 4.97 -8.47 -1.03 17.80 NZ FIXED INTEREST SUPERANNUATIONAMPPRPNZFixedInterest* 1.8502 5.67 6.74 4.84 23.95 NZCashSuperannuationAMPPRPNZCash* 1.3787 1.97 3.76 3.92 39.97 NZ PROPERTY SUPERANNUATIONAMPPRPNZProperty* 1.2297 -21.45 -11.39 -1.85 36.48 AUSTRALIAN UNIT TRUSTS DIVERSIFIEDBTActiveBalancedFund-NEF* 1.2560 8.12 -2.56 4.26 98.09BTBalancedReturnsFund* 1.3467 7.29 -1.66 4.37 160.44BTDiversifiedShareFund-NEF* 0.9800 6.97 -6.90 2.43 10.78BTFutureGoalsFund 1.4293 8.03 -4.69 3.76 641.00BTIncomePlusFund 1.0190 7.91 1.57 4.41 52.00BTSplitIncomeFund* 0.9087 8.25 3.44 5.11 45.00GSJBWereDiversifiedGrowthFund 1.7934 10.38 -1.18 4.76 19.32Perpetual’sBalancedGrowthFund 1.0410 9.35 1.28 4.58 24.00PMCapEnhancedyieldFund 1.1029 6.61 9.77 8.90 365.15AUSTRALIAN UNIT TRUSTS EQUITYAlphinityAustralianShareFund* 1.9259 11.55 -8.65 4.33 9.02 AlphinityConcentratedAustShreFund* 1.2800 10.16 -14.98 0.60 27.22 BTAustralianShareFund 2.9175 8.87 -3.12 7.49 1263.56BTCoreAustralianShareFund* 2.9080 8.70 -3.41 7.21 139.71BTImputationFund 1.3800 7.79 -4.74 7.85 215.27BTSmallerCompaniesFund 1.4410 22.81 -5.72 8.51 206.40GSJBWereAustralianEquitiesFund 0.9235 10.72 -0.85 7.61 21.45 GSJBWereEmergingLeadersFund 1.8612 10.36 -10.25 1.86 180.36 GSJBWereLeadersFund 1.9430 10.31 -4.91 8.52 131.42 HunterHallAustralianvalueTrust 1.2774 24.45 -1.94 9.11 83.00

Fund Exit $ 1Yr 3 Yr 5 Yr Size $M labelPerpetual’sIndustrialShareFund 1.5770 11.28 -4.55 4.87 1667.00 Perpetual’sSmallerCompaniesFund 0.9730 22.41 -6.41 7.35 73.00 PMCapAustralianOpportunitiesFund 1.0973 22.87 -5.59 5.19 73.00 WilsonHTMPriorityGrowthFund 2.3592 20.92 6.11 104.20 AUSTRALIAN UNIT TRUSTS FIXED INTERESTBTAustralasianBondFund* 1.0987 7.22 10.39 7.32 23.77ChallengerHighyieldFund* 0.7135 9.54 -6.79 -1.48 34.92AUSTRALIAN UNIT TRUSTS REGIONAL EQUITYBTAmericanShareFund 1.5794 5.48 -5.28 -0.35 28.78BTAsianShareFund 5.6122 15.55 0.66 9.85 455.74BTEuropeanShareFund 2.1093 4.00 -9.85 1.40 89.68PlatinumAsiaFund 2.3439 12.76 8.25 16.67 3640.00PlatinumEuropeanFund 1.7911 19.71 -0.89 7.76 159.88PlatinumJapanFund 1.8783 -2.85 3.57 6.16 461.62AUSTRALIAN UNIT TRUSTS INTL EQUITYANZAscentWorldEquityStrategies 0.9151 13.10 -10.64 -0.16 64.42 BTGlobalShareFund* 1.2420 5.25 -9.11 -1.46 13.02BTInTechHighOpportunityFund 0.7198 9.12 -9.39 -1.20 10.00BTInternationalFund 1.7023 5.08 -9.71 -1.55 401.88BTPlatinumInternational 0.9487 10.21 2.28 6.89 97.00BTSplitGrowthFund* 2.1382 8.31 -7.46 1.70 255.14BTTechnologyFund 0.2563 8.83 -2.60 2.82 10.10GSJBWereGlobalSmallCompanies 0.7616 7.43 -11.43 -1.95 16.85 GSJBWereInternationalFund 1.1303 6.80 -5.20 1.32 21.74 HunterHallGlobalDeepGreenTrust 0.9448 11.56 9.00HunterHallGlobalEthicalTrust 1.0805 6.02 -7.68 4.16 334.00 HunterHallvalueGrowthTrust 2.0806 14.99 -3.68 8.66 1103.00 MLC-PlatinumGlobalFund* 1.3684 8.37 2.69 8.35 766.00 PerpetualInternationalShareFund 0.7140 1.55 -7.48 -0.71 69.00 PerpetualSplitGrowthFund 0.9570 5.43 -5.94 1.74 14.00 PlatinumInternationalBrandsFund 2.0775 30.91 9.30 12.82 467.96 PlatinumInternationalFund 1.5734 10.65 7.54 10.97 9400.00 PlatinumInternationalHealthCreFnd 0.9711 12.24 2.80 6.66 17.99 PlatinumInternationalTechnologyFund 1.0485 6.40 6.46 10.87 42.25 PlatinumunhedgedFund 1.1396 28.94 7.66 8.36 72.19 RussellWorldEquityStrtgies-ClassB 0.7472 14.03 -11.20 -0.46 125.00 AUSTRALIAN UNIT TRUSTS INTL FIXED INTERESTANZAscentWorldBondFund 1.2770 13.23 8.31 5.96 53.12BTGlobalBondFund* 0.7715 -3.01 10.53 3.80 9.73RussellWorldBondFund-ClassB 1.0423 18.03 9.79 6.97 114.00AUSTRALIAN UNIT TRUSTS RESOURCESBTNaturalResourcesFund* 5.9930 15.06 -1.48 14.21 36.15GSJBWereResourcesFund 2.8541 6.40 -0.01 11.43 21.16AUSTRALIAN PROPERTY SECURITIESBTPropertySecuritiesFund 0.8423 17.00 -17.53 -3.93 242.40AUSTRALIAN CASH MANAGEMENT TRUSTMacquarie-CashManagementTrust 1.0061 1.43 8.37 7.10 12007.90Macquarie-GiltEdgeAccess 1.0000 1.50 4.63 5.26 166.80AUSTRALIAN MORTGAGE TRUSTLMCurrencyProtectedAustIncmFnd* 1.0000 4.75 7.33 7.89 575.00AUSTRALIAN OTHER UNITTRUSTSPMCapAbsolutePerformanceFund 1.0962 17.16 -10.85 -1.98 293.88

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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. Yields are changing daily and some issues have annual rate resets. Call IRG on 0800 474 669 to discuss.

ISSuER CreditRating NZDXCode Maturity

DateMinimumHolding

Currentyield1 Coupon Payment

FrequencyGOVERNMENT STOCKNZGovernment AAA GOv390 15May2021 10,000 5.32% 6.00% Six-MonthlyNZGovernment AAA GOv380 15Dec2017 10,000 5.07% 6.00% Six-MonthlyNZGovernment AAA GOv360 15Apr2015 10,000 4.66% 6.00% Six-MonthlyNZGovernment AAA GOv340 15Apr2013 10,000 4.20% 6.50% Six-MonthlyNZGovernment AAA GOv320 15Nov2011 10,000 3.70% 6.00% Six-MonthlyCORPORATEBANKSANZNationalBank A+ ANBHA Perpetual 10,000 9.03% 9.66% Six-MonthlyANZNationalBank AA- ANB080 09Jun2014 10,000 5.80% 8.50% Six-MonthlyASBCapitalNo.2 A- ASBPB Perpetual 5,000 5.07% 3.86% QuarterlyBNZBank A+ BISHA Perpetual 5,000 9.33% 9.89% QuarterlyBNZBank A+ BNSPA Perpetual 5,000 8.48% 9.10% QuarterlyBNZBank AA- BNZ080 15Jun2012 10,000 6.25% 8.42% Six-MonthlyCBA A+ CBAFA 15Apr2015 5,000 4.51% 3.82% QuarterlyCreditAgricole A CASHA Perpetual 5,000 11.40% 10.04% QuarterlyRabobankNederland AA- RBOHA Perpetual 5,000 5.11% 4.12% QuarterlyRabobankNederland AA- RCSHA Perpetual 5,000 8.19% 8.78% QuarterlyPOWER COMPANIESOriginEnergy BBB- OCFHA Perpetual 5,000 6.88% 4.95% QuarterlyPowerCo BBB PWC050 29Mar2013 5,000 6.30% 6.39% QuarterlyPowerCo BBB PWC040 30Mar2011 5,000 5.40% 6.22% QuarterlyPowerCo BBB PWC080 28Sep2012 5,000 6.00% 6.59% QuarterlyTrustPower NotRated TPW080 15Dec2014 5,000 6.75% 7.60% QuarterlyTrustPower NotRated TPW060 15Mar2014 5,000 7.00% 8.50% QuarterlyTrustPower NotRated TPW020 15Sep2012 5,000 7.00% 8.50% Quarterlyvector BBB vCT040 15Jun2012 5,000 6.75% 8.00% Six-Monthlyvector BBB+ vCT050 15Oct2014 5,000 6.10% 7.80% Six-MonthlyBUILDING & INFRASTRUCTUREAucklandInternationalAirport A- AIA050 29Jul2011 10,000 5.40% 6.83% Six-MonthlyAucklandInternationalAirport A- AIA070 07Nov2015 10,000 6.55% 7.25% Six-MonthlyAucklandInternationalAirport A- AIA080 15Nov2016 10,000 6.50% 8.00% QuarterlyBurnsPhilpFinance NotRated BPF020 15Nov2011 5,000 9.60% 9.95% QuarterlyContactEnergy BBB CEN010 15May2014 5,000 6.20% 8.00% QuarterlyFletcherBuilding NotRated FBu190 15Mar2011 2,000 7.25% 7.55% Six-MonthlyInfratil NotRated IFT060 15Sep2013 5,000 7.90% 8.50% QuarterlyInfratil NotRated IFT070 15Nov2015 5,000 9.00% 8.50% QuarterlyInfratil NotRated IFT090 15Feb2020 5,000 9.30% 8.50% QuarterlyWorksInfrastructureFinance BBB- WKS010 15Jun2012 5,000 15.00% 9.80% QuarterlyWorksInfrastructureFinance BBB- WKS020 15Sep2012 3,000 7.90% 9.65% QuarterlyGENERALAMPGroupFinancialServices A- AQN010 01Apr2019 5,000 6.70% 9.80% QuarterlyAucklandCityCouncil AA ACC010 24Mar2014 10,000 5.75% 6.42% Six-MonthlyFonterra A+ FCG010 10Mar2015 5,000 6.10% 7.75% QuarterlyGPGFinance NotRated GFN030 15Nov2012 5,000 9.65% 8.30% QuarterlyMaracFinance BB+ MAR010 15Jul2013 5,000 10.55% 10.50% QuarterlyNufarmFinance BB NFFHA 24Nov2011 5,000 9.59% 6.71% Six-MonthlyPGGWrightsonFinance NotRated PWF030 08Oct2010 5,000 8.10% 8.25% QuarterlySilverFernFarmsLtd NotRated SFF030 15Dec2010 5,000 14.50% 10.25% QuarterlySkyNetworkTelevision NotRated SKTFA 16Oct2016 5,000 4.56% 4.01% Six-MonthlySouthCanterburyFinance BB+ SCFHA Perpetual 5,000 40.00% 5.61% QuarterlySouthCanterburyFinance BB+ SCF020 15Jun2011 5,000 10.90% 10.50% QuarterlyTelecomFinanceLtd A TCN540 15Jun2013 5,000 6.40% 8.20% Six-Monthly

1=Currentyieldslistedareindicative,subjecttoavailabilityandexcludebrokeragepayable.

Rates for Tradeable Fixed Term Investments

These rates are current as at 20th July 2010rates are subject to change at anytime and should be reconfirmed by calling Irg on 0800 474 669

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Fixed Term Investments

FINANCE COMPANIES - DEBENTURE STOCK

STANDARDTERMS MinimumInvestment

3Months

6Months

9Months

12Months

18Months

2years

3years

4years

5years

AlliedNationwideFinance* $1,000 7.50 8.50 9.00 9.25 9.25 9.25 9.25

BroadlandsFinance* $500 8.50 9.00 9.25 9.25 9.25 9.25

EquitableMortgages** $2,000 3.00 5.50 5.70 5.90 6.00 6.50 7.00 7.25

Fisher&PaykelFinance** $1,000 5.00 5.25 6.00 6.75 6.75 7.25 7.50 7.50 7.50

MaracFinance** $1,000 4.75 5.25 5.00 6.00 4.00 7.00 7.50 7.75 7.75

NZFMoney* $1,000 4.25 4.75 6.75 7.25 7.50 8.25 8.25 7.75 7.75

$10,000 4.50 5.00 6.75 7.50 7.75 8.50 8.50 8.00 8.00

PGGWrightsonFinance** $1,000 4.45 5.20 5.45 5.95 5.70 6.45 7.20 7.45 7.70

$10,000 4.65 5.40 5.65 6.15 5.90 6.65 7.40 7.65 7.90

SouthCanterburyFinance** $100 4.50 4.75 8.00 8.00

uDCFinance* $5,000 4.70 5.10 5.75 6.15 6.40 6.80

NON-STANDARDRATES MinimumInvestment

7Months

10Months

15Months

16Months

20Months

21Months

22Months

28Months

30Months

BroadlandsFinance $500 9.50

SouthCanterburyFinance** $100 8.00 8.00 8.00

MaracFinance(NonGuaranteedrates)

$1,000 7.25

CREDIT RATINGS - FINANCE COMPANIESStandard&Poor’s Govt.Guaranteeduntil

Oct-10 Dec-11

uDCFinance* AA 3

MaracFinance** BB+ 3 3

SouthCanterburyFinance** B+ 3 3

EquitableMortgages** BB 3 3

PGGWrightsonFinance** BB 3 3

Fisher&PaykelFinance** BB 3 3

AlliedNationwideFinance* B 3

BroadlandsFinance* BB- 3

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.

• IRGrecommendsthatbeforeinvestinginvestorsconsiderthesizeoftheinvestmentcontemplatedinrelationtotheirtotalportfolioandoverallriskasthelevelofriskandreturnvariesconsiderablybetweenFinanceCompanies.

• WerecommendinvestorscallIRGtoassistindeterminingtheappropriateriskexposurefortheirportfolioandtoreceivetherelevantInvestmentStatementandResearchontheseandotherinvestments.

• RatesforFinanceCompaniesnotmentionedinthislistingareavailableuponrequest.• TherearenoEntryorExitFeespayableoninvestmentsheldforthefulltermintheaboveFinanceCompanies.• BrokeragereceivedbyIRGinconnectiontoaFinanceCompanyinvestmentispaidbytheissueratstandardindustryrates.These

ratesarefreelyavailablefromeithertheFinanceCompanyorIRGandaresummarisedintheinvestmentstatement.

These rates are current as at 19 July 2010. rates are subject to change, and often do, therefore they should be reconfirmed by calling Irg on 0800 474 669.

A disclosure statement is available free of charge upon request by phoning 0800 474 669.

*ParticipantofGovernmentGuaranteeRetailDepositSchemeuntilOctober2010(upto$1,000,000pereligbledepositorperinstitution)**ParticipantofGovernmentGuaranteeRetailDepositSchemeExtensionuntilDecember2011(upto$250,000pereligibledepositorperinstitution)

All rates below (unless otherwise specified) are offers under the Government’s Retail Deposit Guarantee Scheme. For enquiries regarding non-guaranteed rates, please call us on 0800 474 669.

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IRG Comment

Reporting season has kicked off state side once again. At the time of writing we are in the middle of

the first week and so far so good. However, minutes released from the

Fed’s June meeting show officials are more concerned with the pace of economic recovery. That added to jitters stoked by a weak report on June retail sales. The reality of a slow recovery has brought resistance to a market that wants to push higher.

Moving downunder we have an earning season ready to go. In the resource sector, my favoured space, increased profits are expected to be driven by strong iron ore and gold prices. Balance sheets are expected to show continuing strength on the back of strong cash flows and earnings.

The outlook for the next 12 months is uncertain, espe-cially with the slowing pace of GDP in China as a backdrop. Despite this, analysts’ are expecting the large caps, BHP, RIO and NCM to report record profits.

Average analyst forecasts’ point to Rio more than doubling last year’s first-half underlying profit of US$2.6 billion to report a record first-half earnings of US$5.6 billion, while Newcrest’s full-year profit is expected to grow from $483 million last year to a record $660 million. BHPs’ full-year profit is expected to jump from US$10.7 billion last year to US$13 billion.

These optimistic forecasts follow soaring iron ore and gold prices, with strong increases in coal. The death of annual iron ore pricing and a drop in shipping costs mean spot prices have not soared to the heights of 2008, but Australian iron ore miners have received more cash per tonne than ever before.

With consensus expectations for increased earnings, the market will be looking for indications of how all this extra capital will be deployed. The question of an increase to dividends has been asked, but I wouldn’t be surprised to see companies take a cautious view going forward, holding onto cash in case the markets take a negative turn. But on the flipside, with new Australian Prime Minister Julia Gillard putting to death the RSPT and opting rather for the Mineral Resource Rent Tax (MRRT), miners may revisit their capital spending and expansion plans.

For investors this is a tough environment in which to make decisions. Your decisions on what to buy will be based on whether you call heads or tails when flipping a coin. On one side we have the macro story, a global recovery that is slowing in pace, with GDP numbers being revised down across the globe. While jobless claims are reducing, this is not flowing

into increased hiring. On the other side of the coin we have the micro story, individual companies and sectors experiencing increased earnings and revenues.

While the slowdown in the global economy is a reality,

I believe the micro story to be compelling and a reason to invest

selectively. At any given time value can be bought at bargain prices. To assist us with our search for value this earnings season, I want to discuss two terms that will be discussed frequently - bottom line and top line growth.

A company’s bottom line is its net income. More specifi-cally, the bottom line is a company’s income after all expenses have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative costs and income taxes. A company’s bottom line can also be referred to as net earnings or net profits. The top line refers to a company’s gross sales or revenues.

Therefore, when people comment on a company’s “top-line growth”, they are making reference to an increase in gross sales or revenues. Both these figures are useful in determining the financial strength of a company, but they are not inter-changeable.

Bottom line describes how efficient a company is with its spending and operating costs and how effectively it has been controlling total costs.

Top line, on the other hand, only indicates how effective a company is at generating sales and does not take into consid-eration operating efficiencies which could have a dramatic impact on the bottom line.

However, this is not to say that a company cannot experi-ence both top-line and bottom-line growth at the same time. This can be achieved if a company earns more revenue (top line) and reduces its operating costs (bottom line).

In your search for value this earnings season, try taking a bottom up approach. Look for sectors that are experienc-ing growth and have expectations for further growth despite global headwinds. Then search for the companies within those sectors that are showing growth in both their top and bottom line numbers. Once a short-list has been formed, vol-atility in the markets now becomes your friend. Broad large percentage falls in the market can now be taken advantage of.

There are many more criteria a value investor can use when assessing earnings numbers.

For further assistance with screening the market for value opportunities, give me a call on 0800 474 669, (09) 304 0223 or email: [email protected]

ByDavidBuell

Heads or tails?

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Can the Kiwi dollar recover? Like the Australian currency, the New Zealand dollar is considered high-risk, and right now the world’s financial markets – investors and traders alike – are suffering risk exhaustion. The alarming fall in

the world’s major sharemarkets in late May is one of the results.

When risk is seen as too great, investors retreat to safe havens. That means possibly gold, but more likely US dollars, still the world’s strongest and most liquid currency despite the affliction of gargantuan US government debt.

The Kiwi dollar is a commodity currency – one whose un-derlying economy is dependent on exports of raw materials – and that makes it a hostage to global growth, or lack of it. In the current climate, global growth, including the budding recovery in the US, is being threatened by the new debt crisis.

The crisis – for which there appears to be no quick solution – emerged when a slew of European governments, notably those in Greece and Spain, but also Italy, Portugal and Ireland, came under pressure as a result of their sovereign debts and the perception that default on their official bor-rowings was a distinct possibility.

“The situation in Europe is at the forefront and the Kiwi is being bundled in with other high-risk currencies,” says Francisco Solar, senior dealer at foreign exchange specialist Easy-Forex Australia.

“There was some respite with the bail-out package but recently problems have emerged within Spanish banks and contagion is still a danger, putting both the Aussie and the Kiwi on a weak footing.

“It’s an issue that’s not going to go away any time soon. It’s made worse by anything that suggests commodities are weakening. There are fears that problems in the eurozone may bring about a double dip recession,” Solar adds.

He suggests traders keep an eye open for any indication

of increasing interest rates, which would help support the Kiwi. But he says the European situation reduces the probability of hikes in rates.

Adam Lewis, market analyst with IG Markets, comments, “All funda-mental factors [affecting the NZ dollar] are external to what’s happening in the country. It’s all about European sovereign debt and how that’s affecting global risk appetite. We are seeing the de-risking of financial markets as loss of risk appetite by investors leads them to bring funds back to the US and to safe havens like the US dollar.”

The plague of uncertainty on the markets means that the euro as a currency is likely to fall even further – though it has been declining all year – and that means the US dollar will probably keep rising against most other currency units.

That includes the NZ dollar. But the Kiwi won’t go down in a straight line, any more than it rose in a straight line in 2009. A glance at the accompanying chart will show that, while profits have been lavish for those who got the timing right, it would also have been possible to make big losses selling NZ dollars at the wrong time.

A CFD trader who sold NZ dollars against the US currency at around US70c late in February, for example, would be ahead today if he or she had managed to hold on while the price leapt to US73c.

But that’s an unlikely scenario unless the trader has both deep pockets and strong convictions. CFD traders must pay up paper losses as they go, and on a typical CFD contract size of US$10,000, the jump from US70c to US73c would mean

Why the kiwi dollar may keep falling

CFDs

THISyEAR,THENEWZEALANDDOLLARHASFALLENALMOST10PERCENTAGAINSTTHEuSDOLLAR.STEPHENCALDERLOOKSATWHERETHEKIWIISHEADEDNEXTANDHOWTRADERSENSuRETHEy’RENOTCAuGHTBySHORT-TERMSWINGS

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CFDs

losses – and therefore margin payments – of around NZ$580. That’s a loss of several times the NZ$100 it takes to enter the trade.

Both the NZ and Aussie dollars fell precipitously through-out May, and further falls of this magnitude are not likely. But if you had sold NZ dollars at US73c early in the month and held the trade until the rate dropped to US67c, you could have turned a NZ$100 initial margin into a profit of around NZ$1200.

The keys to making profits from trading currencies without getting caught by short term moves against the trend are sound risk management – never risking more than one or two per cent of your trading capital on any one trade – the flexibility to sell short, rather than just buy for an upturn, and the recognition that you won’t win on every trade.

Adam Lewis of IG Markets says that the technical indi-cators currency CFD traders use can be divided into the following three types, and that an indicator from each type should be used to confirm that entry into the trade has a good chance of success.

1 Trend indicatorsThese include trend lines like those shown on the accom-

panying chart, and moving averages, in which the average price over a number of days (often 10, 20 or 100) is recal-culated daily and plotted against the current price. A price moving up or down through a moving average is a signal to buy or sell.

2 Momentum indicatorsThese include price oscillators,

relative strength indicators and moving average convergence and divergence (MACD) indicators. “Use them to assess current momentum and if the currency is range trading [keeping within a narrow price band] use momentum to give direction within the range,” Lewis says.

3 Volatility indicatorsThese include average true range

(ATR) and the Bollinger bands discussed in last month’s issue. “These are used for setting stop loss orders [orders to exit at a given price] and profit targets,” he says.

“Look at the overall trend, and check whether overall momentum is with or against the current trend,” Lewis suggests. “If there is no trend, look

to range trade.” Range trading involves buying close to the bottom of the current range – the support level – and selling when the price is close to the top – the resistance level.

He says the NZ currency moved from a bull to a bear market late in November 2009. “A key level of support is US66c and we are looking for support there; if it holds it could bounce and move up; if it were to break that level that would make a new leg down [a bearish sign]” he says.

“The top of the recent range is close to US72c, but to get there we would have to see things change in Europe,” Lewis contends.

He says the “safe and conservative answer” to the question of the likely price for the NZ dollar in the short term is “US66c to US70c – but we expect it to bounce between trading ranges until we see a break into a solid bear or bull market.”

He advises traders who have experience in shares, but not in currency trading, to be aware of the differences – currency markets don’t behave like shares. “You can’t look at a price-earnings ratio, and shares have an upward bias – the market may crash but it consistently recovers.

“Foreign exchange is not like that – it’s just trading what one currency is worth in terms of another. It’s both a long and short game and traders need to be mentally prepared to switch from long to short and back.”

Unlike long-term investors who carefully research stocks and invest for value, forex traders cannot expect a high success rate. “What you’re looking for is a weighted op-portunity in your favour with a greater than 50 per cent probability,” Lewis says. Being wrong and getting stopped out is not that bad, he says, because sound money manage-ment helps traders to win overall despite a percentage of losses.

...THE LIKELY PRICE FOR THE NZ DOLLAR IN THE SHORT TERM IS US66¢ TO US70¢...

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Comment

By this time next year, the Financial Markets Authority (FMA) should be up and running. The super regulator is eagerly

anticipated by consumers, policy-makers, and financial markets partici-pants alike. If it functions optimally, it will provide investors with greater confidence to continue to invest in the non-bank financial services sector, which remains important for the New Zealand economy.

As the experts continue to pore over the fallout from the US subprime crisis that precipitated the Global Financial Crisis and closer to home New Zealand’s finance company failures, it’s clear that gaps within both policy and regulatory functions worldwide contributed to the devastation. Busi-nesses were too easily able to achieve fast growth in risky markets without any co-ordinated regulatory oversight.

So the question everyone has been asking is how do we ensure that we get the benefits of strong growth in our financial markets without the emotional and financial costs that we have recently experienced? And what is the best policy and regulatory model to help achieve this?

One part of our Government’s response has been the establish-ment of the FMA. In announcing its formation through the merger of the Securities Commission, parts of the Companies Office and the stock ex-change’s regulatory arm, Commerce Minister Simon Power is taking a bold – but entirely necessary – step to

restore investor confidence. There are considerable benefits to

having a regulatory authority that can see across our capital markets, un-derstand the themes emerging from a business and product sense, and respond when necessary from a regula-tory perspective.

But commentators have pointed out that the devil will be in the detail, and I couldn’t agree more. What hasn’t been talked about much is what the detail should look like in order to help restore that confidence.

To be truly effective, the FMA’s powers will need to be wide. In particu-lar, it should combine both a policy and regulatory function rather than being limited to a strictly technical regula-tory role. This is because to be truly effective, it needs to have future market developments firmly within its purview, so that changes such as new products, business structures, or forms of operation can be met with crisp policy responses and regulatory intervention if necessary.

However, at the current time it appears that the overall policy function will remain with the Ministry of Economic Development, which I would argue will compromise the FMA’s potential from the outset. To be effective, the FMA needs to be able to act quickly, rather than having to rely on another agency to first set the policy framework. The success of the FMA depends on regulatory responses that can be measured in weeks and months, not years as has been the case in the past.

In order to be able to effectively exercise those wider powers, the FMA also needs to be adequately resourced. Within this context, the FMA’s policy developers and regulators will need to tread a fine line and balance priori-ties so that the FMA does not become overly resource-intensive. They will be required to be well informed and close to market developments, but not meet every development with undue suspicion. Where suspicion is warranted, they will need to be equipped – through law and resources – to act quickly without having to rely on another agency to write the rules first.

The Financial Services Federation strongly supports the increased regula-tory oversight that a well-designed FMA promises because it will provide investors with greater confidence to invest in the non-bank financial services sector. This will ultimately also benefit the wider economy, given this sector’s crucial role in continuing to provide investment opportunities for many New Zealanders, and in doing so providing vital consumer, business, farm and property financing that is not met by the banking sector.

The Financial Services Federation is an incorporated society that has represented New Zealand’s non-bank financial sector since 1965. Today the Federation repre-sents 38 members including finance and leasing companies, building societies, and other major financial service providers. www.fsf.org.nz

ByKirkHope

Why investors need a ‘super regulator’ THENEWFINANCIALMARKETSAuTHORITyISABOLD,BuTNECESSARy,STEPTORESTOREINvESTORCONFIDENCE,SAySTHEFINANCIALSERvICESFEDERATION’SEXECuTIvEDIRECTOR,KIRKHOPE

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McEwen investment Report – the active investor’s advantage

Who would have thought investing in your health and well-being could actually help save you money?

It appears that not only can you save thousands of dollars every year by giving

up some bad habits, but the long-term benefits include a healthier life resulting in fewer visits to the doctor and lower insurance premiums.

One person who’s looking after her health after almost a lifetime of being a smoker is Porirua District Court stenogra-pher Mandy Cairns. She realised just a few months ago that giving up smoking not only saves her money every day, but that her healthcare and life insurance payments could be cut in half.

By stopping smoking, the 49-year-old is looking forward to saving more than $600 a month.

“I have tried to give up smoking many times, but once I realised what being a smoker was costing me it was a real motivator for me,” says Cairns. “Everyday at work I print out an updated list of how much I have saved and that keeps me motivated.”

Cairns says she is saving money not only because she has stopped buying cigarettes, but also in buying less chewing gum and toothpaste – which she’d use at work between smoke breaks. She also had an ongoing medical condition that

required treatment with antihistamines that has now cleared up as a result of not smoking any more – that in turn means her monthly visits to the doctor have stopped.

Cairns has two life insurance policies as well as a disability insurance policy. The premiums for these will be cut by more than half after she has been smoke free for 12 months.

“That will mean a saving in insurance costs of more than $126 a month,” she says. “I’ll also save on dental bills as

smoking causes damage to gums and teeth – but as yet I don’t know what the savings will be. But I’m sure the long term savings will be quite significant.”

Cairns says the first she heard of being able to save money on her insurance premiums was when her broker explained why she was paying so much for a new policy she wanted to take out.

“For one policy I was quoted $40 a month, but when they asked if I smoked the price went up to $84,” says Cairns. “I don’t think many people really understand the total savings that can be made when you stop smoking. They just factor in the savings in tobacco and don’t take into account all the other savings that can be made.

“But when I sat down and did the maths I realised there is so much more than just the cost of cigarettes.”

Kerry Vaughan of online insurance firm Pinnacle Life agrees that people who stop smoking – even though the savings may take a while to kick in – can save thousands of dollars in premiums.

As an example, she cites a 50-year-old male smoker wanting $250,000 of life insurance cover. A smoker would be charged $115.84 a month by Pinnacle, while a non-smoker would pay $55.05 a month.

“The savings are huge,” says Vaughan. “Smoking is very bad for you.”

Stop smoking, start savingTHEHEALTHBENEFITSOFGIvINGuPSMOKINGARECLEARBuT,ASSTEvEHARTDISCOvERS,THELONG-TERMFINANCIALSAvINGSGOBEyONDTHEOBvIOuS

Health

PEOPLE WHO STOP SMOKING CAN SAVE THOUSANDS OF DOLLARS IN PREMIUMS

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How Mandy Cairns will

save money every month

Tobacco: $303

Chewing gum for fresh breath:

$33.36

Toothpaste used during work time:

$13

Antihistamines: $87

Doctor’s visits: $44

Future savings

Insurance premium discounts for

being a non-smoker: $129

Dentist bills: Unspecified

TOTAL: $609.36

Health

The firm’s definition of a smoker is someone who has smoked within the last 12 months. People who have given up smoking need to be totally smoke free for 12 months before the company will reduce their premiums.

“For people who look after their health there are benefits as you could pay less for your life cover,” says Vaughan. “Although premiums are set on a case by case basis.”

Not all insurance firms operate in the same way, so it’s always worth shopping around after you’ve changed your lifestyle.

Diabetes is another financially costly health issue that many people could avoid with healthier eating habits and regular exercise.

Marguerite Durling of Diabetes Auckland says the condition is a growing problem in New Zealand, but says if people can act on the early warning signs then they may avoid a life of daily injections, deteriorating health and higher medical bills. “Type 2 Diabetes is often caused by eating too many calories and not burning it off,” says Durling. “This upsets your body’s ability to produce quality insulin, and then your blood glucose goes up to unacceptable levels.

“It is the long term effect of running high glucose levels that causes major damage such as blindness, heart attacks, kidney failure, strokes and impotence. “Once you get diabetes then you are in for a lifetime of regular visits to the doctor, the cost of prescriptions and unless carefully managed, severe complications. All this can compromise your ability to work productively.”

And that can mean a hit to your income and more expen-diture. A double whammy that could send your disposable income spiralling.

It’s something Peter Tynan, chief executive of Southern Cross Health Insurance is keen to help people avoid. And by way of a carrot, his not-for-profit organisation offers discounted premiums to people who are making an effort to look after their health.

Southern Cross offers new members a 10 per cent discount on premiums so long as they live a healthy lifestyle. After two years members are switched to a low claim discount option of 10 per cent.

“We are wary of offering a no claim discount because we don’t want to put anything in the way of our members seeing a doctor,” says Peter. “So we offer a low claim discount.”

According to figures from Southern Cross its low claim discount has reduced premiums for 317,443 of its members – saving them $32.8 million a year. And the 21,843 people claiming the healthy lifestyle discount are saving $2 million every year.

“The low claim reward kicks in after two years and replaces the 10 per cent discount,” says Tynan. “There is a direct financial benefit for people with good health – whether you have good behaviour when you join us or develop them while you’re with us. People who make few claims on their policy are probably doing their best to look after themselves and we want to reward that.”

However, Tynan is keen to acknowledge that lifestyle alone is not a reflection of the full picture when it comes to people’s health.

“People are born with latent risks, but your lifestyle can make them worse over time,” he says. “It can get very compli-cated, but the thing you have most control over is your own lifestyle and behaviour, so it makes sense that that is the best place to start.

“You’re born with what you’ve got – your genes – but you can do things to look after yourself and this can lead to financial savings. It seems that as a population we are not as healthy as we once were.”

Another smoker saving money thanks to living a healthier lifestyle is Sarah Leighton.

She used to describe herself as a ‘social smoker’. In fact, she didn’t really consider herself a smoker at all – even when it came to census time.

“I’d smoke heaps when I was out socialising, and maybe just a couple during the day,” says the 30-year-old who started smoking when she 17 and gave up three years ago.

Currently in training for the Auckland Harbour Crossing swim in November, having already taken part in it previously, she is planning to complete a Half Iron Man contest - “the full Iron Man is just too hard” - and has saved thousands of dollars as a result of having stopped smoking.

Not only that, her nagging cough has gone and she’s feeling healthier than ever.

“After I stopped smoking I did feel sick for a while as my body started to recover and my lungs got back to normal,” says Leighton. “I started exercising even more than before and was able to do things I didn’t have the energy for when I was smoking.”

Not only is Leighton feeling better, she has more cash in her pocket too.

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The Fridge Door

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Did you know?When flipping a coin, more than 75 per cent of people call heads rather than tails.

Money matter:The term “Blue Chip” when referring to the shares of large, solid companies with reliable earnings is believed to stem from the colour of the highest value chips when playing poker.

Editorial addition

IRG has boosted its editorial

operations with the recruitment of Benn

Bathgate in the role of sub editor.

Benn comes to IRG with a strong writing

background in general and business news, both in

New Zealand and the UK.

Benn came to New Zealand after

a decade writing business and

investment news for Precise Media,

London’s top financial and business

news monitoring agency.

After a year at Gulf News on

Waiheke Island Benn is excited

to be getting back to business

– literally – for New Zealand’s

premier investment magazine.

WHAT’SNEWWITHIRGANDFRIENDS

Quote of the month:

''Money is in some respects

life's fire. It is a very

excellent servant, but a

terrible master.''

- P.T. Barnum 1810 - 1891

IRG August 10.indd 1 19/07/2010 3:31:53 p.m.

100715_297x210_AUDUSD_NZI.indd 1 7/15/2010 11:48:19 AM

new zealand investor august

Documents

life insurance cover

life cover

redundancy claim

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bystephencalder54 healthy

bankruptcy cover

health questionnaires

gap ins nz investor