‘F’ is for freedom – NZ Initiative

The ABC of Economic Literacy | info@nzinitiative.org.nz

Trying to explain economic freedom to someone living in an economically free country is like trying to explain to a fish what water is. Like a fish in water, when we are free we rarely stop to consider what freedom is, why it is important to our livelihood, and what would happen if it was ever taken away.

Fortunately, New Zealand consistently ranks near the top of international indices measuring economic freedom. But this also means that we might take it too much for granted.

In its broadest sense, economic freedom is the ability for individuals to autonomously arrange their economic affairs and pursue greater prosperity. More specifically, it is the ability to exercise personal choice, participate in voluntary exchange, compete in markets, and enjoy the use of one’s property.

The choice to start a new business in any given field is an example of economic freedom. As is the ability to choose from ten different brands of bread at the supermarket. When you are able to sell your bike on Trade Me at whatever price you wish, this is also an example of economic freedom.

There is a role for government to play in economic affairs, but that role is limited. For the most part, it is to provide the legal structure to protect property rights and enforce contracts.

Of course, very few governments stick to those core functions. There are many other tasks that governments have taken on, such as the provision of roads and infrastructure, education, and health, to name a few.

But the more the government’s role is extended, the more economic freedom is threatened and diminished. The government harms economic freedom through corruption, over-regulation, taxation, and restrictions on voluntary exchanges.

While tax policies, subsidies, restrictions on foreign investment, or regulatory reforms by themselves may be undertaken with the best intentions, they all limit economic freedom. This has real material consequences. One only needs to observe the difference between North Korea and South Korea.

According to empirical research, high degrees of economic freedom are positively correlated with greater economic growth, higher average incomes, greater gender equality, higher life expectancy, and less poverty.

The value of economic freedom over crowd-pleasing government policies is only truly appreciated when it is gone. We should never take it for granted. Eternal vigilance is the price of liberty.

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘G’ for Government.

Shares For Good www.sharesforgood.com

Donate some shares to support New Zealand registered charities

Shares for Good has been established to provide a charitable home for unwanted shares and a place for those wanting to donate shares to benefit charities in New Zealand.

Many people have small shareholdings that are more bother than they are worth, keeping or selling. Just imagine the power those shares could have when combined… collectively they would make a real difference to non-profit organisations.

Shares for Good is a pro-bono collaboration between JBWere, NZX, Computershare and Link Market Services. 100% of proceeds from the sale of your shares goes directly to the recipient charity.

Note from Tanya:

I often find people with small packets of shares that are too small to sell and too much paperwork to keep, so this is a great option to do good and get rid of unwanted paperwork.

‘G’ is for government

The ABC of economic literacy | info@nzinitiative.org.nzABC_s_of_economic_literacy_2_2_.1


When searching for quotations about government, one thing quickly becomes clear: very few of them are positive. Thomas Jefferson, for example, put it this way: “History, in general, only informs us of what bad government is.” Or take Thomas Paine: “Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one.” And these two quotes are actually some of the nicer ones you can find.

Maybe government gets a bad rap because governing well is inherently difficult. On the one hand, government by its very nature reduces our freedom and so we are rightly watching its actions with scepticism. On the other, expectations on government are enormous and many people want it to solve all the world’s ills.

In political theory, the main justification for having a government is to prevent a “war of all against all” (Thomas Hobbes) and to guarantee peace, freedom and property rights (John Locke). This is the minimalist state, where the government’s role is to provide the basic legal machinery of the state.

Many economists would regard this as the core function of the state. To finance it properly, maybe 5 to 10 per cent of GDP would suffice for these tasks. This is also the size of government in most Western countries until the eve of World War I.

What we have seen since is a rapid expansion of government in which the state often controls almost half of all economic activity. At such levels, government does not guarantee freedom and property anymore. It becomes their greatest threat. This has consequences for economic performance.

In an empirical study conducted by the Canadian Fraser Institute, it was found that in advanced economies (such as New Zealand), the greatest factor that has increased the growth of government is the welfare state, or more precisely, the redistributive state.

Rather than performing the core functions of administering law and justice, defence and public order, and the provision of public goods, nowadays, government growth is due to transfers between taxpayers, or between taxpayers and non-taxpayers.

Economists are highly sceptical about such transfers because they do not create wealth, they only redistribute it – and in doing so, they destroy incentives to work hard.

Which leads us to another classic quotation on what government is: “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else.” (Frédéric Bastiat)

Loosely coinciding with this year’s election campaign, Insights is campaigning for economic literacy from A to Z. Coming up next week: ‘H’ for History of Economic Thought.



[BREAKING NEWS] Brook winding down

Brook logo[BREAKING NEWS] Macquarie Bank-owned Brook Asset Management has withdrawn its offer document from the market and is winding down its funds management operation in New Zealand.

Friday, April 4th 2014, 8:43AM

Good Returns understands that Brook will continue to manage the funds it has at the moment but has stopped taking in new money.

It will also put its KiwiSaver funds into an “orderly” wind down process rather than selling the business to another scheme provider.

Brook is one of the smaller fund managers in New Zealand and has failed to make much traction in the market, although its parent company also runs the Macquarie sharebroking business in New Zealand.

According to FundSource Brook had $128 million in funds under management as at December 31.

Good Returns understands all staff will lose their jobs in the wind down.

MORE TO COME www.goodreturns.co.nz

Had to laugh…

As advisers we are always getting bombarded with the “latest” information.  This is a quote from “The Daily” from First NZ Capital:

US Equities
Wall Street seems to have a short memory. After a big sell-off in tech stocks on Monday, investors dove back in today, encouraged by some better than expected news on consumer confidence and earnings reports. The Dow Jones Industrial Average had been up more than 100 points in early trading before falling back a bit. The tech-heavy Nasdaq rose about 1%. The broader S&P 500 was solidly ticking higher as well.

I don’t think it is just the US investors who have short memories, we all can at times, but it does beg the question about whether or not daily trading and checking your shares daily is a good thing.

Genesis Energy – Brian Gaynors opinion

This article is well worth a read if you want to be reminded of the 27 years of state asset sales we have had and whether or not they worked (usually not).  If you are interested, click here…

Here is a taste of what you will find:

The Crown’s first privatisation was the sale of 103 million Bank of New Zealand shares, representing 12.9 per cent of the company, at $1.75 each in February 1987. The $180 million capital raising was an NZX record.

BNZ’s share price fell before the October 1987 crash as investors realised it had a huge exposure to the highly leveraged listed property and investment companies. Its share price finished 1987 at $1.30, 26 per cent below the issue price less than 12 months earlier.

The trade sale programme also had a discouraging start when New Zealand Steel was sold to Equiticorp for $327 million in March 1988.

NZ Steel was not in a strong financial position and Equiticorp was struggling to survive after the October ’87 crash and the Crown accepted payment in the form of Equiticorp shares. Equiticorp shares were worth $3.25 at the time but plunged to $1.

However, the sale contract required Equiticorp to arrange the buy-back of its shares at $3.25 on demand. Equiticorp chief executive Allan Hawkins was later jailed for illegal activities related to the repurchase of these Equiticorp shares from the Government.

The lesson from the BNZ and NZ Steel transactions was that the Crown should only consider an IPO when the SOE was in a sound financial position and it should only make a trade sale to business people with substantial financial resources and extensive industry experience.

The preferred strategy was to have a partial sharemarket float…


Brian Gaynor

Executive Director

Brian is Chairman of Milford’s Investment Committee and head of Milford’s portfolio management and investment analysis activities. Brian is one of New Zealand’s most experienced and well-known investment analysts. Brian’s career includes roles as a Partner and Head of Research at stockbrokers Jarden & Co, a member of the New Zealand Stock Exchange, Chairman of the New Zealand Society of Investment Analysts and Chairman of the Asian Securities Analysts Council. Brian is Portfolio Manager of the Milford Active Growth Fund and the Milford KiwiSaver Plan Active Growth Fund.

Asset Allocation – Why bother?

Okay, so we have all heard the saying “don’t put all your eggs in one basket”, but do we really understand it?

This morning I was emailed a visual description about why it is so important.  The visual can be downloaded here, or you can see it below.

What it points out is that in any one year the best performing asset can be the one you don’t have, or can be the ONLY one you have, this is why it matters.  If you have been through the exercise with your financial adviser of finding out what risk profile you have (how much risk you can tolerate, cope with etc) then you will know that this answer directly affects how your funds are invested.  For example, a Defensive investor will never have 50% of their portfolio in shares, and an Aggressive investor will never have 80% in cash, unless they are about to invest!

As financial advisers it is important to us to get the right “mix” of investments, firstly to reinforce the adage about the eggs, and secondly to ensure that you don’t end up retiring on nothing after years of saving.  Of course the adviser statement about this is that “we don’t control the markets”. There have been many ups and downs in the share markets, but the fact is that so far they have never ceased to come back up again, it is all about time-frame, which is why when doing risk profiles you are usually asked for your age, as it does matter.

Here is the visual from Morningstar, if you would like it emailed to you please contact us, our details are at: DecisionMakers