PAUL MCBETH: Finance company lessons still unheeded

Paul McBeth is the editor of The Bottom Line and Curious News, and previously worked at BusinessDesk for 15 years. He’s owned shares of Geneva Finance since January 2024.

New Zealand’s investing public has a real problem when it comes to understanding risk.

The past 18 years of KiwiSaver has helped people wrap their heads around volatility in stock markets, where the daily fluctuations of prices have historically given way to an upward trajectory over long periods of time.

It’s why there’s been such a big focus on shifting younger people out of conservative funds that are heavy on the bank deposits and government bonds and into those equities-laden growth funds, where 40 years of investing should deliver a healthy nest egg when it comes time to retire, with or without our universal pension whose future is looking increasingly shaky.

But risk is more closely linked to the reward that we as investors should be demanding from someone asking us for a pot of cash. When it’s out of whack is when we have issues.

That lack of understanding was clear through the 2000s when the house of cards underpinning a string of finance companies collapsed, leaving tens of thousands of Kiwis clutching at hollow promises of being made whole again.

Most didn’t survive, although there were notable exceptions such as George Kerr’s carving up of Marac Finance to spit out the good parts to form Heartland Bank while nursing the toxic assets back to life in his Torchlight fund.

Better to jump than hesitate

Dorchester Pacific and Geneva Finance were another two whose respective restructurings saw both survive the sector’s wipe out, with the former now part of the energetic Turners Automotive Group and the latter still plying its trade.

That won’t have been much comfort to the retirees wiped out in their hunt for a few percentage points more than what the banks were offering in term deposits at the time, which in retrospect was entirely divorced from web of risky related party lending on property developments that should’ve been offering something north of 20%.

The part that really grinds is that the mis-selling of many of those secured debentures gave the impression that people were parking their money in something safe, akin to a term deposit, hence the willingness of people to park their entire live savings in those finance companies.

And that’s where we get to the tragedy of some of the wholesale offerings that have agitated the Financial Markets Authority and spurred it into action to freeze things and get its mitts on the controls.

Du Val has been well-traversed by all and sundry, with screeds of column inches devoted to the bombastic principal Kenyon Clarke and the government-ordered statutory management to untangle the affairs of the property group and the $200 million or so still owed to various creditors and the $64 million to more than 170 investors who signed up as experienced or rich enough to take part in an unregulated offering.

Meanwhile, the interim liquidation orders whacked on the Chance Voight group of companies is turning into yet another example of the flawed wholesale investor regime, which undermines confidence of the broader public if not significant enough to threaten the integrity of the wider system.

There’s a light shining in the dark

Ultimately, we’ll discover whether or not their respective forays into the greyer parts of the law were a step too far – Du Val’s still waiting for the FMA to file charges against it after several courtroom skirmishes, while a late January hearing date looms for Chance Voight’s interim liquidators to report back to the High Court.

But we’ll always have questionable offers hit the market as the cheeky and the innovative test the boundaries of policymakers’ imaginations in the never-ending game of whack-a-mole.

You simply can’t ban these types of offers outright, because a variation will pop up to replace it.

The heart-breaking element is that we keep seeing investors pour their entire life savings into a get-rich-at-a-marginally-faster-pace-than-more-reliable-options scheme.

It’s hard to feel anything but pity for the retired brickie chasing 12% annual interest payments on the $350,000 he poured into one of Chance Voight’s investment options, who’s now stranded while finer minds argue whether everyone played by the rules.

Du Val has similar stories among its out-of-pocket investors who were chasing a 10% annual return that seems to be the magical number in keeping at bay inbuilt suspicions that something might just be too good to be true.

Too blind to see

Much of public raging by commentators has been seeking a shorter regulatory leash on those unregulated investments, as if that will stop the next Ponzi scheme re-emerging to swindle unsuspecting people from their hard-earned savings.

That might be a useful intervention, but it’s not going to stop people from making those very simple mistakes like putting all their eggs into one basket held together by some fraying wicker strands.

People are always going to make bad decisions, and it does make you wonder whether a least-harm approach might be more helpful in mitigating the damage from the next blow-up will inevitably happen.

Outgoing Retirement Commissioner Jane Wrightson had a useful list of five rules when investing in property she shared with BusinessDesk’s Maria Slade in her ‘The Fall of House of Du Val’ podcast, the first of which is to not to put all your eggs in one basket.

We quaintly call that diversification in adopting the clunky jargon of the sector we know and love, but those pragmatic tips in plain English will probably go much further than the self-righteous tut-tutting plenty of journalists – yours truly included – are prone to indulge in when we get a whiff of something a little off.

Just as we can’t regulate risk, we’re not going to save people from themselves, but there might be some merit in encouraging people from buying just one magic bean rather than the whole bag.

Image from janilson furtado on Unsplash.