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Fund manager calls for NZX to sell funds business

Fund manager Elevation Capital wants the NZX to sell its funds business and focus on doing "a few things better".

Tuesday, October 2nd 2018, 9:49AM 5 Comments

Elevation holds about 6.2 million NZX shares for its clients, which it said was about 2.3% of NZX’s issued capital.

It has today released a presentation explaining how it thinks the NZX should overhaul its business.

It said the underperformance of the NZX versus the S&P/NZX50 Index between 2012 and 2017 had cost shareholders $235 million in returns. It said suboptimal capital allocation had resulted in poor returns on invested capital.

That had been exacerbated by poor operational performance and cost control and NZX shares had underperformed the domestic market and global peers.

Elevation said NZX should spin off non-core businesses and focus on doing few things better, with improved transparency.

It said NZX’s non-core business segments, such as funds services, were generating about 30.5% of revenue but only 10% of operating earnings. The businesses were subscale, had few barriers to entry and lower margins than NZX’s core business, it said, but at the same time NZX was having trouble growing them.

Being an exchange market operator was a different business to operating a funds service firm, Elevation said, requiring different management and board skills. But spun off, that new funds management company would compete fully in the marketplace via the acquisition of active funds management businesses, private equity and/or venture capital businesses. It could also develop a fund seeding and incubation business to capitalise on investment made in regulatory compliance.

“NZX’s current strategic plan presented in November 2017 is not strategic, nor a plan,” said Elevation Capital manging director Christopher Swasbrook.

"If I handed the current document to someone to go and execute, they would know neither (i) what to do, nor (ii) what results it was meant to achieve. In essence it is a political document, written so the Board and Management can maintain good graces with the stakeholders that they are looking to cultivate. In this, the NZX of today, has become the NZ Post of old. Looking for political solutions to business problems, instead of looking for real business change.

"NZX is a company still run for the agents (management) versus the actual owners (shareholders) with excessive headcount, costs and wasteful spending. Symbolic of this culture of wasteful spending is the recent trip to New York by over 10 members of the NZX Board and Management team. If ever there was a time for Shareholders to assert their rights to hold Board/s and Management/s accountable given the recent headlines and poor financial performances with seemingly no impact on remuneration levels amongst corporate New Zealand, it is now. The least I can do is stand-up publicly and highlight the need for increased accountability."

He said Elevation's proposal would unlock about $150m in value for shareholders and lift the intrinsic value of NZX shares to between $1.62 and $1.89, compared to $1.10 at present.

Elevation estimates that Smartshares and SuperLife could be worth $68.3 million at the end of next year, and the Wealth Technologies business $8.3m.

WHAT DO YOU THINK? Should the NZX be in the funds management and administration business? Leave your comments below.

Tags: Elevation NZX

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Comments from our readers

On 2 October 2018 at 12:02 pm Brent Sheather said:
I think that the NZX's decision to start the TNZ fund and then buy the MDZ fund off Craigs was one of the best things they ever did … from the perspective of NZ's retail investors.

The worry is that if they sold Smartshares to an active manager that manager would shut it down or at least not develop it any further.

The logical buyers would be iShares or Vanguard but it's probably too small for them to bother with and, given they have their own infrastructure, they might not believe it had any goodwill element.

Having said that, if iShares did buy the business they could shut down all the small sub-scale ETF's ie everything apart from TNZ, MDZ and FNZ and replace them with their own products.
On 2 October 2018 at 12:25 pm Pragmatic said:
The simple response to the question is "yes" - NZX should divest themselves of all of their various acquisitions and concentrate on bringing quality debt and equity offerings to the NZ market. The previous CEO strategy of purchasing various parts of the value chain has proven to be a distraction to their core business, and adds limited value to their target audience. The 2017 departure of Vero should have been a signal to NZX Executives, along with the constant ASX connections with NZ investors for capital raisings.
On 2 October 2018 at 1:19 pm Kimble said:
Why don't you buy it, Brent? Your wheelhouse isn't it?
On 2 October 2018 at 2:32 pm Pragmatic said:
Ooops Xero not Vero
On 2 October 2018 at 3:31 pm Brent Sheather said:
Hi Kimble

The obvious reason I wouldn’t buy it, apart from the fact that I would rather be surfing than attending stupid meetings, is that one of the attractions of not owning a fund manager or having an investment banking arm is that that makes it relatively easy to give independent advice.

Besides I think the vertically integrated model is broken. For the record we recommend just as many actively managed funds for our clients as we recommend passive funds.

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