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No wonder private investors shun the market

By Peter V O'Brien

Friday 25th July 2003

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Private investors got a new insight into continuous disclosure rules this week when the daily press canvassed brokers' analysts for views on the reporting round for the year ended June 30.

We learned that companies had plenty of time to disclose whether actual results for the year were in line with earlier forecasts. That was a reasonable comment but the argument was eroded when people said companies had to live up to "market expectations" of likely profit, apparently a justification of continuous disclosure.

It transpired that market expectations were based on investment analysts' assessments of profit.

We have come to a stage where brokers and their analysts are entitled to be miffed if calculations are wrong and can invoke continuous disclosure rules to cover errors. This is farcical, considering brokers run the NZX (despite it now being a public company) and have no continuous disclosure rules applied to them.

Analysts are eventually under their employers' collective thumbs, with the firms having the say on what they distribute to institutional and private investors. The latter usually get fobbed off with abbreviated newsletters while the institutions are graced with substantial research documents.

A Securities Commission probe into possible conflicts between the investment banking and research arms of local firms was not released at the time of writing. It will either find no sustainable evidence of conflict (a whitewash for people with experience of how the industry operates) or a damaging outcome that will get screams from the firms and the NZX denouncing the report.

There are several problems involved in the statements of firms and analysts in relation to companies' requirements to make continuous disclosure. Companies are responsible to their shareholders first and the NZX and its members second, irrespective of listing rules.

Analysts and brokers moan when results surprise them and are outside their forecasts but are willing to spray predicted profit estimates across the media.

They receive sycophantic support from daily press people, who seem unwilling or unable to do basic analysis, preferring to quote a range of individuals with vested interests.

There would be nothing new in investment analysts becoming overexposed, resulting in a loss of reputation among investors and their firms, who could see employees growing too big for their boots, particularly when their comments were proved wrong.

A proper response to lazy media people could be refusal to comment, leaving the scribes to do personal assessments.

Both scenarios are unlikely, given the attention-craving outlook of some analysts and editorial edicts to hang a story on "informed" sources. This will continue until both sides realise private investors, as opposed to institutions, want more than pap.

Institutions are unlikely to object to this suspect system because it works in their favour. It also works in favour of the firms that get solid brokerage and placement fees from institutional deals, while private transactions are minor.

An interesting insight into the procedure came in a comment from Urbus Properties chief executive Murray Barclay when he was reported as saying his newly listed company benefited from meeting financial institutions in the period before listing.

The analysts and institutions had the meeting. Potential private investors were left with the investment statement/
prospectus.

Guess who had a potential advantage when Urbus listed on Monday, despite the company doing everything by the book.

Private investors have been reported as leaving the sharemarket and managed funds for residential and commercial property. Better yields from property were partly responsible for the switch but those running the investment industry should not dismiss the change as merely a periodical move.

They should look to themselves.

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