Favouring institutions over small investors a bad move
Should institutions wield so much influence when they are not directly investing in the company on their own behalf?
Wednesday, December 14 2011 || Investment || BY David Hargreaves, Businessday.co.nz
But unfortunately receiving such treatment is a common experience for Kiwis who invest directly in the stockmarket. The small investors, the "mum and dad" investors, are often rendered powerless when a company suddenly makes a decision that adversely affects the value of their investment.
The latest private investors to be left feeling like they have been kicked in the teeth are among the 5000 unitholders in medical properties investor Vital Healthcare Properties (VHP).
ANZ Bank and its managed funds subsidiary, OnePath, proposed "internal-ising" management of VHP. But they wanted to charge VHP and its unitholders $14 million to buy OnePath out of the management contract. Institutional unit-holders resisted. Eventually after much toing-and-froing, ANZ-OnePath changed tack. It bought shares from institutional investors at above-market prices (an offer not made available to smaller unitholders) and built up a "blocking stake" in VHP. Then the VHP management contract was sold to Canadian group Northwest Value Partners for $11.5m. The blocking stake was offloaded to the Canadians as well.
VHP's smaller unitholders have twin reasons to be unhappy. They will now miss out on the benefits of internalised management, such as no management fees. And they missed out on the $1.19.5 unit price ANZ paid to the selected few institutions when it built its blocking stake. This observer is prepared to bet that the VHP units don't get anywhere near $1.19.5 again any time soon.
The VHP debacle raises two import-ant and intertwined issues of a broader nature. First, private share investors have never seemed more powerless. Second, the rise in influence of institu-tional investors is now bringing serious disadvantages for the private investor.
The "institutions" is the blanket term for professional investors who manage funds on behalf of others. An increasing desire for people to provide for their own retirement, coupled with rapid growth of the KiwiSaver scheme, has seen funds pour into the institutions. As a result, they are very substantial shareholders in most sizeable NZX-listed companies.
Kiwi individuals were once keen stockmarket investors. Reserve Bank figures show that in 1986 some 26.5 per cent of household financial assets were invested directly in New Zealand shares. But as of last year the figure had slipped to just 7.5 per cent.
Private investors still make up a large proportion of the total number of shareholders in New Zealand listed companies. But in terms of size of shareholding their influence is waning. For example, in 1986 the country's then biggest stockmarket company, Fletcher Challenge, had 50,355 shareholders. Of these, 49,621 investors owned parcels of up to 50,000 shares, collectively controlling 39.2 per cent of the company.
This year the now largest NZX-listed company, Fletcher Building, had 43,691 shareholders. Of these, 43,425 held parcels of up to 50,000 shares each, but together owned only 17.1 per cent of the company's stock. On the other hand, the biggest 50 shareholders owned some 79 per cent of the Fletcher Building shares.
The power is being consolidated into fewer hands, and much of this power is held by the institutions.
Obviously, the muscle that institutional investors possess has been on many occasions beneficial for small shareholders. If institutional investors vote against and overturn an unpopular initiative then all of the shareholders, not just the institutions, benefit.
But it must be remembered that the institutions don't really own shares themselves. They are effectively caretakers of the shares on behalf of their clients, using money essentially borrowed from those clients.
Yet, caretakers as they may be, the institutions are increasingly the first port of call when a company looks, for example, to raise fresh capital. Typically, the institutions might be offered some new shares at a heavily discounted price – shares that are then immediately available to be sold for a profit. Private investors miss out.
In the VHP case, institutional investors – not private investors – were given the chance to sell shares to the ANZ at a price 5.75 per cent higher than the previous day's close.
Institutional investors often have preferential access to a company's board and executives and are able to get information on the company that smaller investors are not privy to.
Is it right that the institutions have this kind of influence when they are not directly investing in the company on their own behalf? Should they have effectively more power than a private investor? Remember the private investor is using his or her own money. He or she is making a strong physical and usually emotional commitment to the company concerned.
Institutions can have a variety of reasons for buying and selling shares. Sometimes these reasons might have very little to do with the performance of a specific company, but much more to do with the cashflow situation at the institution. Much institutional buying and selling of shares is "index-linked". Shares are bought and sold in line with a company's relative position in a stockmarket index. In Chalkie's view, this is a very remote way of investing that is not actually helpful to the companies concerned.
Private investors are not dispassionate in that way. They buy usually because they like a company and want to be part of it.
Chalkie reckons the fact that the private investors are committing their own money means they should actually receive some sort of preferential treatment when they invest in com-panies – yes, ahead of the institutions. But your columnist believes the opposite is happening. The private investors are becoming almost a kind of "underclass" – with their wants and needs being considered secondary to those of the big investors, principally the institutions.
Companies themselves need to start taking this issue seriously. They should want private individuals to hold stock in them. If private investors decided they were sick of being treated like mugs and simply stopped directly investing, this would make for a very illiquid New Zealand stock market. Company share registers would be virtually entirely populated by institutions. The institutions would simply buy and sell among themselves. This would no longer be a "real" stockmarket. Companies would ultimately suffer from such a thin market.
The beginning of the Government's partial state-asset sales programme next year is likely to see at least several thousand people who have never invested in shares before take the plunge. Will they find the experience edifying? Or will it be disillusioning?
Things need to change. There is some help out there for the private investor at the moment. The Shareholders Association has done great things in forcing through some changes in company behaviour as well as helping with shareholder education and the handling of specific issues.
But the association doesn't appear to Chalkie to have the resources to follow up each and every issue that arises. More help is needed. Chalkie reckons there should be a company by company approach – instigated by the companies themselves – to help and support private investors. The adjacent box story gives some of this observer's suggestions for what could be done to make life better for the private investor.
Unless the companies support change and allow private investors genuine input into the running of business then the days of direct share investment by individuals could be numbered. And if private investors deserted the market it would be even harder for much-needed new enterprises to raise the capital they need to get off the ground.
David Hargreaves is a former Fairfax business reporter and columnist now writing freelance. Chalkie's name is derived from the people who used to "chalk" up the share prices on trading floors before the market went electronic.
