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Look down first

By Vincent Heeringa

Monday 1st September 2003

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Watford supporter, former London-based fund manager, one time chairman of the BNZ (during the crisis of 89), investment columnist, and director - Frank Pearson's seen a bit in the money-go-round. In 1991 Pearson quit the institutional investing scene to use his experience to manage a few portfolios, including his own. In the first of an occasional series about how the pros invest, we thought we'd pick his brains. Right now he's long on caution, short on risk. In a big way.

"After many years in this job, I've got a few adages. One I picked up from Jimmy Rogers, right hand man to George Soros, and known widely as the investment biker after he rode around the world on a BMW. His rule: always look down before you look up."

Meaning that, unlike institutions that benchmark themselves against the rise and fall of impartial indices, private clients hate going backwards. Hate it so much in fact that Pearson's management is fixated on protecting wealth. "Private investors are asymmetric in their tolerance - they hate losing far more than they love winning."

Pearson's second axiom borrows from a 100-year US rule of thumb for average investors: 1% low risk assets for every year of your life. So a 48-year-old Unlimited reader with a mortgage-free home, a boat or bach, stable income and savings, should have 48% of his or her savings in low risk havens. And he really means low risk: New Zealand government stock, bank deposits, free-hold residential rentals. He doesn't like capital notes (because they offer neither stable returns nor fall into the high risk/high return category), debt instruments (he's no expert in credit risk so avoids it) or even commercial property. "Commercial property is popular but show me where it's worked. Waltus? Money Managers? Usually the retail investors get involved with debt and professional managers and it turns to tears more often than not." Or in the case of a private syndicate the inexperienced investors buy "yesterday's stories".

As for the 52% risk portion, again he's cautious. In principle he favours listed property stocks, although the property is boom is making them costly just now. For the New Zealand portion, he suggests just two or three managed investments. His preferences: the likes of UK- and New Zealand-listed NZ Investment Trust Plc (disclosure of interest - Pearson is a director) and Infratil (he was a founding board member until 2000). For international exposure, try to use no more than four or five. His choice: passive funds such as Planit or WiNZ (listed on the NZSX) and listed companies such as the Sydney-based Platinum Asset Management (run by Kerr Nielsen, "who may prove to be a legend if he keeps going at this rate"), the Rothschild Investment Trust (another UK investment trust) and Ron Brierley's GPG.

Notice how they're all tax efficient, being either stocks or tax-free trusts. "The key is to use vehicles in which there's a lot of activity inside the company, but not by you."
How about private equity? Yes, and here's a surprise, farming. A partnership with a farming couple in the Manawatu in 1986 is still reaping rewards for Pearson and his mates. "It's a superb enterprise, but for every success there are plenty of failures."
A good reminder to look down first.

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