Report on New Zealand Fixed Income Forum 2005
It was standing room only at the New Zealand Fixed Income Forum 2005, a one day conference held at Auckland's Hilton Hotel on 25 May.
Liontamer managing director Laetitia Peterson participated in the retail investors' outlook panel. The retail stream was tailored for the distributors to retail investors including researchers and advisers at dealer groups and brokers.
This report is limited in its scope to two panel discussions Liontamer attended. Some of the other topics discussed in the retail stream were Exploring CDOs and Structured Credit Alternatives; Black Swans and Elephants – What Risk are we Really Taking in Fixed Interest?; High Yield Income Investing in Australasia; Benefits and Risks of Innovative Structured Products; CDOs - How they have Performed and Why.
The keynote speaker was Finance Minister and Deputy Prime Minister of New Zealand, Dr Michael Cullen. Dr Cullen discussed the potential for closer ties between New Zealand and Australia in the sphere of banking and finance industry supervision and regulation. The conference coincided with the recent announcement of Dr Cullen's budget and the accompanying announcement of changes to the tax regime for on-shore and off-shore funds.
What's it for?
The New Zealand Fixed Income Forum is intended to help investors gain the most value from investing in fixed income securities. It also aims to help de-mystify innovative, structured and high-yield debt products to assess the relevance and benefits of each type of investment product for clients.
Investing in finance company debentures
The first panel discussion was 'Risks and Opportunities from Investing in Finance Company Debentures'. This is very topical since finance companies have been the subject of recent Securities Commission scrutiny.
The panellists included representatives from Marac Finance, ING, UDC Finance, Standard & Poor's, Pacific Retail Finance and the Securities Commission. The panel discussed the role of New Zealand finance companies in providing access to interest bearing securities and as an alternative to direct share investment. A few of the notable issues that came out of that discussion follow:
- David Jansen of ING commented that there is not enough differentiation by investors as to what the underlying assets of the finance company are (e.g. goods, property, etc). This can lead to the situation where an average investor with a home and an investment property invests in a finance company that invests in property and that investor is long x3 on property.
- Alan Williams of Marac Finance pointed out the huge growth in the finance company sector – 60% for finance companies compared to 18% for banks.
- Philip McIntyre of Pacific Retail Finance predicted increased growth in consumer finance due to the total market for consumer finance increasing (due to less people buying homes in the future) and non-banks taking a bigger share of the market.
- The Securities Commission report found that the key elements for disclosure improvement are risks, financial information and the summary of the issuer's business activities. The panellists discussed the difficulty in measuring risk and the fact that more rating of finance companies would enable increased transparency and objective comparison of risk.
- It was noted that a diatribe of theoretical risks set out in the investment statement may not help the prudent but non-expert investor.
In answer to the question 'How do New Zealand investors differentiate/assess risk?' the panel commented that the New Zealand market relies on industry participants and strong governance. It was noted that financial planners play an important role in educating investors.
The panel discussed the fallout from a finance company going 'belly up' and one participant commented that the levels of recovering by investors would be lower than expected. The panel agreed that this would potentially cause massive dysfunction in the New Zealand capital markets.
Outlook for retail investors
The panel discussion Laetitia Peterson participated in was 'Outlook for Retail Investors'. Laetitia's co-panellists included representatives from ASB Securities, Forsyth Barr, Grosvenor Securities, Macquarie New Zealand, Russell McVeagh and UBS.
Are the risks understood?
The first question posed was whether financial planners and retail investors understand the risks in their investments. The panel was divided and some of the comments were that investors are better educated in relation to the listed market but that they are still not necessarily aware of the differences between products.
Laetitia pointed out that the risk element is a non-issue for capital protected products. The risk element is removed in terms of capital and only remains in relation to return. The comment was made that because of the capital security, more risk can be taken with regard to the returns.
Investor education
The next topic was investor education and how to improve it. The panel agreed that education at the intermediary and end-client level is key.
Laetitia commented that Liontamer provides information to financial advisers through Liontamer's website and weekly emails. The weekly emails often describe overseas developments in structured products and how to fit these products in New Zealand. Laetitia commented that the lack of regulation in the New Zealand market means that issuers need to take responsibility for this education process.
Licensing for advisers?
The chair queried whether there should be a more prescriptive environment for intermediaries. Guy Lethbridge, a partner from Russell McVeagh, described the pending changes to the Investment Advisers Disclosure regime. Although these changes will not lead to a more prescriptive environment they will require more disclosure information from advisers.
One issue to come from the financial intermediary task force that has been set up is that a licensing regime, similar to that in Australia, is being considered. The report has now been distributed and it seems that a more self-regulatory approach is preferred.
Fund managers vs direct investment
Some of the panel commented that for offshore fixed income investments there is definite value in using fund managers. David Beattie of Grosvenor Financial Services pointed out that international fixed income as an asset class has over the last 15 years, outperformed New Zealand bonds.
Laetitia commented that offshore fixed income investments were complicated by currency exposures and that as a result these funds cannot be considered capital protected due to the volatile New Zealand dollar. She also said that this issue together with the management fees were often not attractive enough compared with the wide range of fixed income investments available in the local market.
Outlook for next year
Laetitia commented on the question 'What is the outlook for next year and how should investors be positioned?' by saying that structured retail products are continuing to grow with a huge range of products and innovations globally. In the New Zealand market we will be seeing more new asset classes being introduced such as commodities. There may also be more product innovations such as open-ended funds, lock-ins, and early maturity features. She also commented that due to the small size of the New Zealand market, there will be less product proliferation than overseas and more focus on quality products being offered to the retail market.
The event enabled stakeholders to meet, discuss and debate the most important drivers and restraints to market growth in New Zealand's capital markets and we recommend next year's forum to readers.
