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High returns with less risk

Friday 28th November 2003

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A range of companies in the mature finance field are turning in gravity-defying performances in the Microsoft Search for New Zealand's Most Exciting Companies, researched by New River.
High revenue growth as a product of risk reduction is the opposite of the usual finance logic. One group has prised open a valuable new lending segment with better risk management techniques. Another is increasing its returns by taking greater responsibility for the investment funds it manages. Yet another is developing a market for high-return equity investment that is capital protected.
Non-conforming lenders

Some 40% of companies were nominated for the same thing, so instead of a single company there is a group. Geneva Finance and NZ Mortgage Finance were identified as the exciting local players. Australian companies pursuing this market include Liberty Financial, Bluestone, Pioneer Mortgages and Wizard Home Loans. US giant GE is also active.

Non-conforming lending is provision of credit to people who don't ordinarily qualify for bank credit. It's not just the credit impaired but also seasonal and part-time workers, and the self employed.

"In the past these people could not borrow or were charged horrendous [loan-shark] interest rates," says Scott Bailey, New Zealand operations manager for Liberty Financial. Improved risk management techniques are the keys to unlocking this market. Interest rates on non-conforming loans are only 1-4% above what banks offer.

Bluestone estimates 250,000 New Zealanders are unserved by banks, and 10% of New Zealanders have impaired credit histories. Conservative estimates (at only $10,000 loan an unserved person) suggest this is a multi-billion dollar pool of lending.

Kim Lyons, director of NZ Mortgage Finance, says "for the October month lending was $40 million ­ double that of nine months ago." NZ Mortgage Finance is one of the smaller firms.

Likewise, Liberty Financial has recently securitised $110 million funds for new loans. Ironically, this funding was secured with AAA rating, a reflection of the strength new risk management techniques bring.

Brook Asset Management

Fund management firms are often criticised for being passive shareholders. Brook Asset Management rated as exciting for its role in reversing this trend. It is acting as protagonist for corporate governance and is campaigning for greater accountability from the boards of the companies in which it invests.

"We are industry leaders in that respect ­ we believe we have a fiduciary duty to achieve the best outcome for our investors," chief investment officer Simon Botherway says. "We believe owning a share in the company entitles us to have a voice."

BAM is now often consulted by investee companies before changes in constitution or directors' entitlements ­ a sign its strategy is working.

"It has made us a little unpopular at times, but managing money isn't a popularity contest," Mr Botherway says. "We don't pretend to be able to run the companies we invest in, we just want to ensure there are due process, timely disclosures and a level of accountability."

Established in 1997 via a manag ement buyout from Axa, BAM is a wholesale investment management firm specialising in Australasian equities management.

It has more than $430 million under active investment management, making it a significant player in the sector. It was recently appointed one of two companies to manage the New Zealand Superannuation Fund.

Lion Tamer Protected Investments

The bolter in this month's pack is Lion Tamer Protected Investments, the only specialist capital-protected investment product provider in New Zealand (though some trading banks offer products in this area). These allow investors to reap equity market returns and avoid the risk of capital loss. Capital downside risk is removed by hedging mechanisms.

From the germ of an idea last October, the company's four founders, all with long experience in investment markets, worked to put its first products together for launch in May this year.

"Globally, capital protection products are very common, but what we're doing is unique [here]," director Michael Lodge says.

Lion Tamer's products are designed to be "friendly to Kiwi investors" and are assembled by Morgan Stanley.

"We've picked the best of breed," Mr Lodge says of its partner. Lion Tamer has total flexibility in designing new products and has been approached by large institutions to commission custom offerings.

The company distributes through independent financial advisers. It charges upfront fees but no management fees.

"We have the ability to turn products around quickly and cheaply. For example, our recovery product, where you get one and a half times the upside of the market, is a concept that's quite new overseas and we have one already."

Mike Pero Mortgages

Excellence in branding earned Mike Pero Mortgages a citation as exciting from its peers. It invests heavily in marketing ­ 30% of turnover in the early days, and about 15% now. Founder and managing director Mike Pero is not afraid to commit large sums of money to his chosen media.

A Colmar Brunton survey in July rated Mike Pero the most trusted financial institution in New Zealand to provide independent home loan advice. In brand awareness research, also by Colmar Brunton, 62% of people who could name a mortgage broker named Mike Pero first ­ the second ranked brand scored only 6%.

The brand focuses on Mr Pero himself, who says, "Michael Hill has been a major influence on me and I enjoy his style."

A thank you letter is written by Mr Pero to every customer ­ 600-700 letters a month ­ inviting them to call him collect at home if they have any problems. The few calls he does receive are as likely to be profuse thanks as they are a complaint.

Mr Pero franchised his business in 1998 and now has more than 30 franchisees around New Zealand. He believes there's potential to double the number. The company was named 2003 Franchise of the Year by the Franchise Association of New Zealand. Profitability has continued to snowball over the past three or four years, and steady growth has become exponential. The company chalked up a record of more than $125 million of loans in October, well in excess of the previous high of $106 million.

ASB Bank

ASB Bank is the only major trading bank named by respondents as exciting. Seen as the complete package by finance executives, ASB has not only led the way in online banking, then share-trading, but also in delivery of customer service, branding and growth.

Managing director and chief executive Hugh Burrett attributes much of the bank's success to its clear, focused vision of being New Zealand's best bank and financial services provider, excelling in customer service.

"Bank is still a very trusted word in New Zealand but the message is we're more than that."

He sees customer service as more than just the interaction between staff and customers. "It's also systems, policies, procedures, services, process. We try to reduce time and take paper out of the business."

The bank has topped the University of Auckland's Colgate customer satisfaction survey six years running for personal service and five years running for business service. A recent survey put it top in rural service, too.

Mr Burrett describes ASB branches as retail-focused, inviting and exciting. Nearly 20 mall sites are open seven days, something the competition has virtually ignored. "Internationally, we are viewed as having world-class branch design."

Last year, the bank achieved a 24% return on equity. Profitability has grown more than 20% for each of the last six years. Assets total $29 billion, up from $10 billion in 1993.

Other shortlisted companies in the finance sector were: NZX, Pacific Retail Finance, Strategic Asset Management, Pine Gould Corporation, AMI Insurance and TSB Bank

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