Tuesday, March 29, 2011

ACC Influence on Stockmarket Liquidity a Concern to Private Investors

I am a little worried about the Accident Compensation Corporation having such an influence, in terms of sharemarket liquidity, on the local NZX.

It has been buying up significant stakes in several NZX listed companies and now owns over 4% of the free-float of the market:

The Accident Compensation Corp now has significant stakes in 28 NZX-listed stocks, cementing is position as the biggest player in the market.

ACC manages some $13 billion of assets and had about 10 per cent of its reserves in New Zealand equities in 2010. So far this month it has declared holdings of at least 5 per cent in Argosy Property Trust, Abano Healthcare and Pumpkin Patch, while adding to its stake in Nuplex Industries. In February it emerged as a holder of DNZ Property Fund, Goodman Property Trust, Mainfreight, Tourism Holdings, Kermadec Property Fund and Restaurant Brands.

"New Zealand equities are cheaper than they once were but you can say the same thing about global equities," said Nicholas Bagnall, the state-owned accident insurer's investment manager.

He wouldn't be drawn on whether the disclosures point to a bet on a revival in New Zealand's economy, which the International Monetary Fund sees growing just 1 per cent in calendar 2011 before accelerating to 4 per cent in 2012, helped by the rebuild after the Christchurch earthquake. Figures this week showed the economy narrowly avoided a double-dip recession last year.

ACC now owns more than 4 per cent of the free float of the New Zealand stock market, giving it influence over liquidity in some of the nation's biggest listed companies as well as smaller-cap firms.

"We're effectively enhanced our returns by being a seller of liquidity to the market," Bagnall says. "It works for us and it works for the market as well."

The corporation's investment mandate is to ensure it can cover the long duration of claims liabilities. Its allocations between asset classes tend to be "riskier than the minimum possible risk position," according to ACC's 2010 financial condition report.

It may not seem like a problem to the uninitiated but the New Zealand Stockmarket already suffers from a lack of liquidity and while this obviously will have positive effects as the ACC is buying, it will have very negative effects when they sell.

The ACC has a short term relationship to our market and its main pursuit is to extract the best returns for its investments as possible - as we all do - but that goes against the sort of long-term investment that the NZX has been pushing for the last 10 years.

In short the size of ACCs stake in the NZX is bad for the average investor in the long term because they are able to manipulate the market because of that size.

What we need from this taxpayer funded Government Department is a upper cap - I suggest 5% - on what they are allowed to invest in terms of overall investment in the stockmarket.

It is our money after all and using it to compete against local investors to their detriment is clearly unwise at best and reckless at worst.

It keeps other private investors from using their own money and building up stakes in companies because the ACC are artificially competing with them.

Real competition still remains in the private realm not the bureaucratic one.

Disc I own, PPL & MFT shares in the Share Investor Portfolio.


Recent Share Investor Reading
Buy Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up: What I've Learned About Surviving Tough Times

Toughen Up - Fishpond.co.nz


c Share Investor 2011