Statutory requirement relating to Investments  
  Terms of use  
  This App is not purporting to provide investment advice. It offers an overview of key terminology and looks at some of the investment options and the range of considerations that might be considered in assessing appropriate investments. It is recommended that any investment decisions be made with the benefit of appropriate professional advice from a duly licensed advisor.
The information used about specific investments is illustrative, albeit based on published information on the date indicated. There are links to information sources. 		 
  I understand and accept the above statement.
 
   
   
  Introduction          
  As Morikau Station gets close to development maturity, the ever present question is the extent to which off-farm investment opportunities need to be considered.  In undertaking such considerations, there needs to be a process by which decisions can be made, starting with robust evaluation of specific proposals as a basis for making informed decisions.  
  The Policies and Procedures developed around 15 years ago set out some basic imperatives but never contemplated the complex investment environment that is today's reality. Crypto-currencies, whereby a given supply of computer generated numbers have created a market for investors, had not been invented. Neither was the concept of negative or zero interest rates known by the market!
The current Investment Policy can be viewed via the Dropdown menu below. 		 
  The following pages have been written as a precursor to an investment strategy workshop in an attempt to provide a basic understanding of the "landscape" ahead of more detailed discussion about specifics and how to navigate the veritable minefield!   
 
 
  Contents                
    Overview        
     
    Glossary      
     
    About Credit Ratings      
  Investment Policy  
  (Extract for the Policies and Procedures)  
  Policy                
  It is the policy of the CoM to ensure that investments maximise long-term overall returns while ensuring that adequate account has been taken of the risk profile of any investment.  The CoM must ensure that it has sufficient liquidity to enable the Incorporation to meet its day-to-day financial commitments.   
  Whenever an off-farm investment, other than a cash deposit with registered bank or highly rated financial institution, is being considered, the CoM should seek written analyses and recommendations from the Accountant, Secretary and at least one independent external professional with relevant experience   
  While the CoM is free to make its own decision the policy is (i) that it will only proceed if the three reports are in support; and (ii) at least five CoM members vote on the record to support the investment.  
  EXTRACT FROM THE FINANCIAL MANAGEMENT & REPORTING POLICY  
  In the case of capital expenditure, the figures in the budget are for financial planning purposes and are not approvals. Detailed plans need to be presented to the CoM for all CapEx items with alternative options and quotes. [This gives the CoM the ability to increase the allocation if more expensive options are shown to have quantifiable benefits.]  
           
               
                   
                   
   
  and the underlying realities of the retail market1  
               
  The fundamental objective for most investors is to grow their wealth or at the very least, preserve its value. However the latter is extremely difficult because of market volatility impacted by a myriad of factors.

While wealth and income are different, greater income is likely to be a consequence of enhanced wealth over the long term.

  
  There is a quote that is applicable to the wealth/investment space and that is "if you're not moving forward, you are falling back". 

There is another reality for those not emersed in investment markets on a minute by minute basis and that is once you hear about an opportunity, it is already too late for it to be "an opportunity of a lifetime". For retail investors, it needs to be remembered that what is offered "to the public" are opportunities professional investors and those at the "coal-face" have let pass them by.  This is especially relevant in today's market with such easy access to credit.
 		 
  1  The "retail market" is defined for the purposes of this commentary as where an investor is relying on professional advisors to identify opportunities. It also needs to be remembered that these professionals have a hierarchy of clients, usually based on the fee earning potential of each!  
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  This App has been developed as a basis for getting an understanding of the fundamentals of investment options and decision making. 

This version of the App has been prepared for Morikaunui Incorporation and The Whanganui Trust.

To proceed, you need to agree that your understand the terms of use App then you will be presented with a "Create Login" button.  Tap this and then Bookmark the URL (or Save to Home screen).  This will save any data you've entered into the App. 		 
                   
                   
                   
                   
     
   
   
               
                   
                   
                   
  Investment strategies and decisions  
  Understanding the options, fundamentals and risks  
 
 
  Introduction   
 
    The global economic system relies on participants at all levels making investment decisions from the myriad of options in the market-place and based on the best information available at the time.

Whether investing in a business, putting surplus funds on deposit in a bank or looking at the multiplicity of "securities" available around the world, decisions have probably never been more difficult because of fundamental uncertainties brought about by COVID-19.  This virus added to the already unsettling impact of historically low interest rates around the world, often significantly below rates of inflation, (a consequence of the remedial action taken by central banks in response to the 2008 global financial crisis) sending investors away from fixed interest investments.

COVID has benefited a relatively small number of very large online businesses while devastating others. Those relying on large gatherings such as hospitality, arts and entertainment have been devastated. It  has also seriously impacted the global distribution system with empty shipping containers in many of the wrong places thereby causing uncertainty in relation to lead times for finished goods and raw materials.  This uncertainty has consequences all of their own including sending shipping rates sky high, putting pressure of costs and prices at a time economies are at best vulnerable.

In addition, the movement of skilled people around the world has virtually stopped making required changes to business models extremely difficult, if not impossible, to implement. 

It is in the context of this reality (2021) that individuals and individual businesses have to make investment decisions while trying to understand where the risks are.  Time will tell how "clever" some of these investment decisions have been with stocks like Tesla trading at 34 times its underlying book value (ie a liquidation payout of under 3c in the dollar) and 413 times its earnings! And it is in a sector in which unprecedented new investment is taking place globally, inevitably adding to the business's competitive pressure!

Our own Fisher & Paykel Healthcare is trading at 11.3 times its net book value, giving it a capitalisation value of $17.2b. 		 
  Decision imperatives  
    Investment criteria  
 
    As outlined above, investment considerations are extremely complex.  It therefore prudent for decision-making bodies to develop their own rating system, starting with the factors they collectively agree are fundamentally important for their particular circumstances.  Having a transparent basis for making such decisions is part of good governance and protection if decisions are ever challenged by adversely impacted stakeholders.

In considering investment options, the first question needing to be answered relates to the objectives.  In parallel with this is determining the risk profile.

If the investor is in business, consideration also needs to be given to investing in either future proofing or the expansion of that business and measured against external opportunities. [It is assumed that ensuring a business is fit for purpose in the then current economic environment is a given unless there is a planned exit strategy.] 		 
    Investor category  
 
  > private/family  
  > family/whānau trust, (decisions by trustees)  
  > family company,  (decisions by director(s))  
  > Māori entities - trusts or incorporations (decisions by trustees or committee of management)  
  > trust, company or incorporated society with multiple stakeholders, (decisions by governors).  
    Special considerations
 
 
  (in relation to entity type)        
  > The responsibility to oneself and/or one's family/whānau for investment decisions is fundamentally different from decisions in which others have a financial stake, regardless of how little or large that stake is.  
  > There can be personal liability exposure for trustees in the case of any losses as a result of dishonesty, wilful misconduct, or gross negligence. [Note: Unless a dissenting trustee records a vote against a decision exposing trustees to personal liability, they too are personally liable.]  
  > In an entity owning Māori freehold land, any increased value in that land from investment in improvements is unlikely to ever be realised because of the tight restrictions on the sale of such land.  
    Risk considerations  
 
  > preservation or otherwise of capital  
  > guaranteed or best endeavours income  
  > setting a minimum credit agency rating  
  > familiarity with the specific investment (favouring own business)  
  > likely impact of domestic political/economic factors  
  > ditto global  
  > weather/climate change consideration  
    Own business investment  
 
  > in future proofing (the financial impact of no investment)  
  > in regulation compliance  
  > in greater production (consider in relation to: (i) increased income; and (ii) increased capital value)  
  > in capital growth potential  
    Investment characteristics and objectives
 
  > Time horizon - short, medium or long term  
  > Maximise income/cashflow  
  > Maximise capital growth potential   
  > A mix of both above  
  > Fixed income v Stock market v Property  
  > Active versus passive  
  > Own or managed portfolio versus managed funds  
 
 
    There is a range of terminology in the investment space.  We've just included some key terms here.  For a more comprehensive list, visit the Glossary linked above.  
   
 
   
  Specific investment types    
 
    The following are examples of investment options in low risk order:  
    Investment grade credit rating        
    > government bonds  
    > bank deposits*  
    > local government/municipal bonds  
    > secured corporate bonds  
    > preference shares  
    > managed fund bonds  
    Non-graded investments        
    > Managed fund shares  
    > Property company shares  
    > Government bonds  
    > Listed property companies  
    > Listed non-property companies  
    > Commercial property  
    > Non-listed company  
    > Venture capital/angel investment  
    * capital sum invested always guaranteed    
    Listed investments - alternatives
 
    Securities exchanges around the world have seen unprecedented price rises over the last few years for both shares and bonds (based on record low yields).  This has been fuelled by historically low interest rates with the impact compounded more recently by central banks "printing money" (or as they like to characterise it, "quantitative easing").  This new money is then filtered into each country's financial system via the trading banks and other financial institutions and been used extensively in purchasing securities, thereby forcing up the prices as a result of the Supply & Demand maxim. 
Further demand for investments has been a result of COVID19 and the reduced spending on the likes of travel, hospitality, entertainment and recreational activities resulting in alternative uses for surplus funds. 

As economies are picking up and interest rates about to start rising around the world (in anticipation of inflationary pressures), we are likely to be entering another unprecedented phase as investment positions that have been funded by debt start to be unwound.
   		 
     
 
    For many starting out in the world, owning shares is aspirational, with stories of fortunes being made and providing solid dividend incomes.  Of course there are two sides to every story but share do offer the potential of both capital growth and regular income from dividends, the classic win, win if the market in going in the right direction.

Other that in the US (where historical cost accounting still prevails), the International Financial Reporting Standards ("IFRS") require company assets to be valued in the books at their "economic value".  This basic principle is designed to avoid "assets stripping" (whereby listed companies are trading on the stock market at significant discounts to their actual net asset value providing takeover opportunities and after that restructuring and/ or assets sales.

As a result of this, in the case of companies reporting under IFRIS, any value put them by virtue of their share prices that is on it above its net asset value is highly speculative. This "valuation" however might be influenced by past and future sustainable dividends in which case the yield in the prevailing market will be a major determinant of the share price.

Historically low interest rates with recent (COVID19 related) expansions of money supply by central banks, the prices of all but the near "hopeless case" shares have risen to such an extent that it is generally agreed their "capitalisation values" are not sustainable. This is setting up an investment version of musical chairs!

If we consider the NZ market and take A2 Milk. At its highest price over the 52 weeks to 30/06/21, it had a capitalisation value of $16.1 billion against its book value of $1.2b (a price to equity factor of 14.2). 

Likewise Fisher & Paykel Healthcare with a current capitalisation value of $18.3b against its book value of $1.5b (a price to equity factor of a shade over 12).

The USA figures are even more spectacular. However it needs to be remembered that because companies do not report under IFRIS, the share price to equity factor is  not directly comparable.  For six "glamour" stocks, eg Tesla, Amazon etc, whose capitalisation values collectively total over 20% of the total valuation of the S&P 500 index companies, the average price to equity factor based on 30/06/21 prices was 16.8 times. The Telsa high over a 52 week period was 35.9 times. [This represents a "liquidation" payout of under 3c for every dollar invested.] 		 
      Information timeframe  
 
   
 
   
 
   
 
                   
                   
       
                   
                   
   
   
   
   
                   
    Bonds      
 
    Bonds are unitised debt securities issued to the public or institutions with a "coupon", ie at a given interest rate and repayable on a stated date. Many are then traded on a secondary market whereby their value is determined by the prevailing market interest rate. That calculation takes into account the interest that will be payable for the remainder of the term, the number of outstanding interest payments and the maturity value.

The calculation below (all the figures can be redefinable) shows a 5 year bond paying 1.75% pa bought in the secondary market after  two years when the market interest rate is 1.25%.  The costs is $101,470.

At the "Market value of Bond to maturity" section you can see what value changes there are depending on market interest rate changes and remaining time to maturity. 		 
Issue: $   Coupon Terms (yrs)  
Buy-in: Yield      
To go (yrs)  
 
 
   
     
     
    Property investment  
 
    While there are other factors [sector (eg retail, commercial, industrial), building age, location, quality of tenants {we'll leave residential property right out of this conversation}], the over-riding driver is the return based on the net annual rent. 
By way of example, a property netting $4,000 pa in rental income with a 5% return being the market return would have a capital value of $100,000 {100/4) x 4000).  This is often referred to as the "Cap Rate".  The significance is that in a reducing interest rate environment (as we've had over the last number of years), the value of properties will increase while the opposite occurs if rates are increasing (the environment we are just entering). 		 
  Buy-in yield    
  Yield change %    
                   
   
   
  Search by:
   
   
       
   
   
   
  [ Term ]            
  Annuity Series of identical fixed payments to be made for a specified number of years.  
  Basis Point One percent of one percent (0.01%) e.g. 0.5% is 50 basis points.  
  Bear market Is when a share market experiences prolonged price declines, usually of 20% or more from a high.  
  Blue Chip Larger companies with a long history of profitability and stability.  
  Bonds All yield-traded securities traded on the debt market.  
  Book value The book value of a business is the net assets after all indebtedness has been taken into account.  It equates to the Equity shareholders in the business.  
  Bull market Is when the prices of any financial instruments are rising or are expected to rise.   
  Capitalisation For shares, this is the market value based on the share (market) price multiplied by the total number of shares on issue.   
  Coupon The periodic (usually quarterly or half-yearly) interest payment to the holder of the debt security.  
  Credit rating agency Is a company that assigns credit ratings, which rate a debtor's ability to pay back debt by making timely principal and interest payments and the likelihood of default.  The big three are Moody's, Standard & Poors and Fitch Ratings.  
  Debenture Fixed interest securities issued by limited companies in return for medium to long term loans. Debentures are dated for redemption, usually at their face value ie issue price).  
  Dividends Payments from issuing companies to shareholders as a share of the company's profits, allocated to shareholders on a per-share basis. The amount payable, in cents per security held.  
  Dividend Imputation Tax credits passed on to a shareholder who receives a franked dividend. Imputation credits entitle investors to a rebate for tax already paid by a New Zealand company.  
  Dividend yield The latest dividend as a percentage of the share price, usually the latest but may also be an investor's buy-in price.  
  Earnings Income or profit of an entity. May be expressed as gross or net.  
  EBIT Earnings before interest and tax.  
  EBITDA Earnings before interest, tax, depreciation and amortisation.  
  EPS Earnings per share, the latest rolling 12 month’s earnings divided by the number of shares on issue. Earnings are profit after tax.  
  Equity Equity represents the (theoretical) amount of money shown in a company's balance sheet that would be returned to that company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off in the case of liquidation.  
  Fundamental analysis Method of analysis using ratios and percentages calculated from financial data of a company to assess the company's quantitative and qualitative aspects.  
  Futures contract A futures contract is a legal agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.  
  Gearing The extent to which an investor or business is using borrowed money. Also known as leverage.  
  Gross Dividend Yield Rolling 12 month yield based on dividends and imputation credits.  
  Government bond Debt security issued by the government. These are the least risk investments in the market  
  Holding Company A company that holds the securities and/or funds of another party in his/her or its absence or for the purpose of safekeeping of assets, or for investment purposes.  
  Imputation The amount, in cents per share, of imputation credits accruing to each security.  
  Initial Public Offering Or IPO. The process by which a private company becomes a publicly held company by selling shares of its stock to the public for the first time.  
  Insolvency The inability of a person or legal entity to settle debts when they become due.  
  Instrument An instrument (also known as a security) are tradeable instruments used to raise capital. Equity securities represent ownership interest in a company (shares) and debt securities represent borrowed money which may be repaid with interest (bonds).  
  Interim dividend When a dividend is paid more than once a year, dividends other than the final one are called interim dividends. Typically, dividends are paid twice a year, one interim and one final dividend.  
  Leverage The extent to which an investor or business is using borrowed money.  
  Liquid assets Assets that can be bought or sold easily with little impact on price.  
  Liquidity Measure of the ability to buy or sell assets easily and with little impact on price. Characterised by bid and offer prices close together and many shares available (depth) at these prices.  
  Managed investments Professionally managed portfolio of assets.  
  Market capitalisation See Capitalisation  
  Market price Prevailing price of shares traded on NZX. May be the last price at which the shares traded, or the most recent price offered or bid for the shares.  
  Market Risk Risk of a general decline in the market.  
  Maturity Date The date on which the principal amount and any outstanding coupon payment is to be repaid to holders, and the instrument ceases to be listed.  
  Merger When two or more companies combine either by takeover or creation of a new entity.  
  Mutual fund A managed investment fund.  
  Note A loan made to a company at a fixed rate of interest with the right to be either redeemed (i.e. repaid by the company) for cash or converted into ordinary shares at a predetermined date or within a certain period.  
  NTA Net Tangible Assets divided by the number of shares on issue at last reported balance date.  
  OCR (Official Cash Rate) Rate at which the central bank charges on overnight loans to commercial banks. Main method by which the Reserve Bank of New Zealand influences interest rates.  
  Ordinary Share The most commonly traded security in New Zealand. Shareholders collectively are the owners of the company in which they hold shares. They are the last to be paid if there are any funds over after all assets are sold and debt paid , in the event of liquidation.   
  Par Value The face value of a stock which has no relation to its market value.  
  P/E Ratio (price-earnings) The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its earnings per share (EPS). [A $10 share price and earnings of $1 per share is a P/E ratio of 10.]  
  Parent company or entity Controlling company or entity.  
  Preference Shares Shares that rank before ordinary shares in the event of liquidation.  
  Private equity fund Investment fund not available to the general public that often makes concentrated investments directly into companies.  
  Promissory note An unconditional written promise to pay a specified sum of money on demand or at a specified date.  
  Pro rata issue Issue offered to all holders of securities in a class on a pro rata basis.  
  Property trust Trusts that enable investors to purchase an interest in a diversified portfolio of real estate assets. Investors in property trusts gain exposure to the value of the real estate the trust owns, and receive rental income through distributions the trust pays to investors.  
  Return on investment Earnings from investments over a given period - usually expressed as a percentage per year of the amount invested.  
  Risk Chance or probability that an investment will result in a loss to an investor. Can also be referred to as the level of volatility returns attached to a particular investment.  
  Risk margin Margin for futures and exchange traded options required to cover the likely one or two day probable worst case movement against the position.  
  Securities Includes all instruments in the relevant equity securities market, such as ordinary shares, units in property trusts and warrants.  
  Security Type The class of instrument, determined by its most salient features.  
  Share indices Measure of movement in the price of a nominated group of shares.  
  Share price For a listed (on a stock exchange) share, this is the (market) price of a share at any given point in time.  
  Share registry Organisation which, on behalf of a company, records changes in share ownership, issues share holding statements and makes adjustments for dividend payments, bonus and rights issues.  
  Shares Issued Total quantity of equity securities currently on issue.  
  Unsecured notes Loan made to a company for a fixed period of time at a fixed rate of interest. They are issued mainly, but not only, by finance companies for between three months and three years. They offer a higher rate of interest than a debenture of the same maturity, but do not have the same security as a debenture.  
  Warrants A security that gives the holder the right to buy a security at a fixed price (called an exercise price) until the expiry date. Warrants are similar to options, except warrants are issued by the company itself.  
  Wealth Is an accumulation of valuable economic resources that can be measured in terms of either real goods or money value.  
  Yield Is the return based on the interest/dividend payments in relation to the purchase price, also taking the maturity value and date into account.   
       
       
    There are three main Credit Rating Agencies that rate the debt instruments of business as well as local and central governments, raising money from the public. These are Moodys, Standard & Poors (S&P) and Fitch Ratings.
    Any country or entity issuing debt instruments to the public will have commissioned a Credit Rating.  These are very important and are a determinant of the interest rate  that will need to be paid.
    NZ has AAA. No business can have a higher credit rating than that applicable to the country in which it is domiciled.

Below are examples of Fitch Ratings and S&P:
  Fitch              
    Investment grade        
     AAA: the best quality companies, reliable and stable
     AA: quality companies, a bit higher risk than AAA
     A: economic situation can affect finance
     BBB: medium class companies, which are satisfactory at the moment
    Non-investment grade
     BB: more prone to changes in the economy
     B: financial situation varies noticeably
     CCC: currently vulnerable and dependent on favorable economic conditions to meet its commitments
                   
  Standard & Poors  (S&P)          
    Investment grade            
    All the A's are various versions of very good.  There is only one other in the Investment Grade category - BBB
     BBB: Adequate capacity to meet its financial commitments in good time. Possible weakened capacity in adverse economic conditions or changing circumstances.
    Non-Investment Grade (also known as speculative-grade)
     BB: Less vulnerable in the near term than other lower-rated obligors. Facing major ongoing uncertainties and exposure to adverse business, financial, or economic conditions increasing risk of diminished performance.
     B: More vulnerable than the obligors rated 'BB', but the obligor currently has the capacity to meet its financial commitments. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitments.
     CCC: Currently vulnerable, and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
     CC: Currently highly vulnerable.
     C: highly vulnerable, perhaps in bankruptcy or in arrears but still continuing to pay out on obligations
    There are lower grades that can be characterised as very high risk.