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Benje Patterson is very critical of the way the MRP shares are being sold; he says it is wrong for the Government to shove risks it doesn't want on to "the most naïve and ill-diversified investors in the country"

Benje Patterson is very critical of the way the MRP shares are being sold; he says it is wrong for the Government to shove risks it doesn't want on to "the most naïve and ill-diversified investors in the country"
"The manner with which Mighty River Power is being sold is hypocritical." <a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

By Benje Patterson*

The manner with which Mighty River Power is being sold is hypocritical.

Bill English claims that the partial sell-down will allow the government “…to reduce the potential for the taxpayers to carry the burden of commercial risks that go wrong”, while also maintaining that he is giving New Zealanders the opportunity to “…diversify their growing savings away from property and finance companies”. 

It is true that the Mighty River sale will provide households with an additional option for diversification, but Mr English’s candy-coated sales programme is targeting some of the most naïve and ill-diversified investors in the country.

A significant proportion of Mighty River investors will be making their first independent forays into equity markets and establishing an equity portfolio that consists of one solitary energy investment.

The fortunes of this share will be ultimately depend on those very commercial risks in the energy sector that the government is trying to avoid.

I am not ideologically opposed to the government rebalancing its investment portfolio, but I do object to its “shares-lite” approach to marketing the Mighty River public offering.

I fear that, by avoiding traditional broker avenues and allowing paltry $1,000 minimum investments, the government is making share investment appear too easy.

Investing in shares requires careful thought and analysis of the relevant risks and returns. It is not an investment product that should be pushed on those who have limited means to diversify, no understanding of how to value a share, and no direct access to the advice of a financial professional.

Advertising for the Mighty River offer does provide the usual legal disclaimers which say that prospective investors should seek out independent financial advice before investing, but this disclaimer is not enough for a government-directed share sale.

People place a high level of trust in the government and are unlikely to take such a disclaimer as seriously as they would take one for investments promoted by the private sector.

Many New Zealanders only have a limited understanding of shares and a lot of people who buy into Mighty River will be unable to explain the ins and outs of what they have purchased. Although it would not be realistic to expect the government to hold everyone’s hand through the sales process, the government should have at least let the sale follow more traditional broker avenues. 

Stockbrokers should have been given a firm allocation, and would be Mighty River shareholders should have then applied for a share allocation through a broker. This method would have helped mitigate some of the risk of investors getting out of their depth, as only those who have a client relationship with a broker would have had a shot at purchasing Mighty River shares. This type of investor presumably has had dealings with share investment in the past and has ready access to professional advice should they wish to use it.

The awkward addition of loyalty shares to certain types of investors is also unnecessarily introducing confusion to the sales process.

Exact details of the scheme are yet to be announced, but the scheme is expected to involve the issuance of bonus Mighty River shares to New Zealand retail investors who hold their shares for a certain number of years following the public offering.

The scheme is aimed at discouraging retail investors from selling their shares shortly after listing to make a quick profit should the shares list at a premium to their issue price.

Valuing the price impact of the bonus scheme will be complicated because it only applies to certain types of shareholders.

Valuation models will have to take into consideration the proportion of the public offering bought by New Zealand retail versus other types of investors, as well as the probability that an eligible investor holds the share for the required holding period. These are hardly the types of issues that a first-time share investor is equipped to deal with when trying to ascertain what they are willing to pay for a share.

These types of issues raise questions regarding why the government needs to offer a bonus to stop people stagging the shares on listing. If the shares are priced right the first time, then the shares shouldn’t be expected to stag.

All this stinks of politics.

The government is going to sell the shares at a slightly lower price than it could have, simply to reduce the risk of mum and dad investors losing out, and is then engineering a bonus scheme to prevent people from exploiting the mispricing.

The sooner the government stops sticking its nose into finance and goes back to busying itself with running the country the better.

Any rebalancing of the government’s investment portfolio should be done through usual financial market channels.

Following a sales process which shifts some of the taxpayers’ risk from the government’s balance sheet onto first-time share investors is pathetic.

If the government truly believes that New Zealanders are financial naïve, and wants to help them learn to diversify their portfolios, then taking steps to increase financial literacy is a more first appropriate step.

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Benje Patterson is an economist at Infometrics. You can contact him here »

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13 Comments

It's good to point out that many NZers are doing enough caveat emptoring. But the real issue remains: it's wrong to sell something that we all own collectively to a select few who have a thousand bucks or so that they are willing to gamble with.

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Sorry but this stinks of snootsville to me. If its general thesis were true then only very bright and highly educated people would succeed in life. All this serious thought and financial advice is great for the bonuses of fund managers and share salesmen, oops sorry, I meant sharebrokers, but really, you will learn more by just getting stuck in and having a go yourself. Nothing beats the experience of making you're own mistakes. By all means join the shareholders association and learn what you can, but don't let these people treat you like a child.

 

Seriously, I have learned far more from putting $1000 in to various shares and seeing what happens over time than I have from endless hours of study. Trial and error, provided your mistakes are small, is a great way to gain skills.

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Absolutely agree. Much better for a first time investor to invest a small sum of money in a relatively robust stock than to take the advice of a 'professional' and pay for the privilege. The key thing is to diversify and this is a good step to get Kiwi's investing in things other than term deposits, their houses, and finance companies, with relatively low risk.

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Or invest a thousand dollars in a stock that operates in an area they have some direct understanding of. So if you work in retail you are probably better able to judge for yourself how well run a retailer is than any stock market analyst or broker or fund manager.

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2 and 3 are the interesting ones considering PV panels are set to become cheaper and eat the utilities profits for them....you can look at Germany for that drastic effect.

regards

 

 

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Snippy and Steven: right on the money

The silence, the timing of the float, the trumpeting, while one nz energy generator is investing in solar in USA but not nz. Is that under instruction? Do not hamper surreptitious unloading of these assets.

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When you read about how solar is eating thermals profits (which it seems is mostly generated from peak load charges) in some countries already you just have to wonder where the present NZ profits are going to be going....or rather I dont wonder where, clearly down, the Q is how far.

Lots of NZ base load is of course hydro, which is dirt cheap to produce so where are the overheads/costs?

For everyone not in the existing busnesses and owning shares this is good news IMHO.

Given how spread out NZers are and how much sun we get then it even starts to make sense for our townships to have a town generator that of course means the transmission companies are not transmitting thats good for the townships they become more resiliant.

Or that we generate much power down south yet use it up north...with so much solar up north at point of use just what does that do to our grid? or its cost structure?

Why do we need more wind farms? solar is an ideal match for day time use...

Got to work through the effect on EROEI mind, i'll have to dig that out...and how long these things last....they really need to last 30 years if not more.

Oh and one of the biggest Qs is, what does that do to the assets like the hydro dams if their output is no longer so needed? surely the asset price drops? ouch (well not for me, Im not touching the shares).

regards

 

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Would the pricing regulator allow a fully privatised generator to re-value assets upwards annually as they have been able to under an SOE regime? Same question for a partial privatisation. Would have to while other generators are state owned. But eventually? What is the end game?

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Looks like the SOE ISP, Orcon is also up for sale. http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=108…

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Maybe everything has to be for sale - what don't we know that Bill English is not telling us in respect of the apparent need to sell off any asset to return to surplus by 2014/15 - are the prospects for taxpaying employers and their employees so poor, we have no choice?

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You cant have free power, what ever you do it costs someone, somewhere. They are not sunset industries, they are now or will become just part of the mix, that gives us (I hope) more resiliance especially given the expected more frequent and dryer years.

regards

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yeah....funny that.....absolute cwap IMHO.

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Why trust anybody who would allow Forsyth Barr to sell on behalf.  We have just been shown very well how Forsyth Barr operate and it's not in the interest of the buyers.  Mind you they would be very fair and would screw the government vendor if they could.  Probably already have.

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