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G & J

Investment Values

All investors like to see the value of their investments increase in value. Unfortunately diversified investment portfolios do not increase in value all the time. Investment returns seldom occur at a constant rate.

Mighty River Power (MRP) has only been listed on the New Zealand Stock Exchange for less than three weeks. Since listing, the price has moved all around the place. Some investors sold out within minutes of the listing. We understand that these were mainly Australian Fund Managers. They made a few cents per share, and sold before they had to pay for the shares. Unlike retail investors who had to prepay, institutional investors did not have to pay for the shares for several days after listing.

Interestingly, it has been NZ institutions who have been buying MRP on the market. The main reason is that they had been scaled back to around half the shares they wanted. We understand that the demand for MRP shares was in the region of eight billion dollars. Most people would realise that price wise, in the short time that MRP has been listed, there has been price movements both up and down. We are not concerned that MRP has fallen below its listing price. Most of the sellers have been overseas institutions. For the Americans, the decline in the value of the NZ dollar against the US dollar will have been a negative, whereas the Australians are benefiting from the decline in the Australian dollar versus the NZ dollar.

It is not surprising that it is likely that Meridian may be sold on a partially paid share basis. This was exactly what the institutions believe will happen. It also provides a greater opportunity for New Zealand institutions to buy a significant portion on behalf of NZ investors.  This will be of particular benefit to KiwiSaver Funds who receive regularly monthly cash flows from their members. It could also make Meridian look very attractive on a cash flow basis, especially in the first year when the yield could well be in excess of 10%. However there are risks, one of them being political, and the other centres around Meridian’s largest user, Rio Tinto.

Asset price movements are a normal part of investing. When the investments are listed shares and bonds, we see daily price movements. For most New Zealanders their major investment is a lifestyle investment, being their residential property. A lot of people also have investment properties. The only time market values really come into play for them, is when they are for sale, or when they are being purchased. The rest of the time, there is only broad market noise, primarily property sales reports, which are not an accurate reflection of what your property is worth.

It is rather perverse that there are inevitable warnings when properties go up in value. Isn’t that exactly what all the people with properties want? Of course if you are struggling to find an affordable property, you want prices to fall. The situation changes for a purchaser once the property goes unconditional.

So the situation is no different for an investor with a diversified investment portfolio, a home owner, or a property investor. We all want our investments to increase in value. The diversified investor does however know the market valuation of their investments, unlike the property investor. Worrying about the daily value of your investments regardless of what sort of asset they are can be a real risk. The chances are that you may make an irrational decision based on sentiment, rather than your investment needs.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.