After a clear decade running one of the country’s best-performing investment funds, and two writing one of its best-read business columns, Brian Gaynor is stepping back from day-to-day fund management. Duncan Greive asks him why.
Update, May 16 2022: The Spinoff publisher Duncan Greive conducted a lengthy interview with Brian Gaynor when he retired from running Milford’s Active Growth Fund in 2017. It features a strong sense of his investing and journalism philosophy, as well as admiring quotes from erstwhile rivals which speak to the immense esteem with which he was held.
I don’t know when I first started reading Brian Gaynor. It would have been a decade ago at least. Probably it was something about the tax-privileging of housing in this country, a column he’s had cause to write on a roughly annual basis ever since, and one, based on current mainstream policy, he seems depressingly likely to continue to have to do so until the pair of us are in the ground.
I do know that I would have been financially illiterate at the time, and am somewhat less so now. And that a large part of my education, such as it is, has come through reading his columns most Saturdays. He writes roughly 1,000 words for the Business Herald, half of a broadsheet page, on subjects like tax and corporate governance and global financial issues and interest rates. It sounds like it would definitely be boring, and in the hands of many writers those subjects just die on the page. But Gaynor makes them fascinating, through a combination of research and analysis and a special kind of directness.
The directness often manifests itself in critiques of New Zealand-headquartered businesses and institutions, and its authority comes in part from the skin he has in the game. Because, you see, part of what makes Gaynor so authoritative is that he just moonlighting as a columnist.
His day job is at Milford Asset Management, a managed fund and Kiwisaver investment firm he co-founded in 2003. His chief responsibility over the past decade has been the Active Growth Fund, which has grown to the point where, a few years ago, they stopped taking on new private clients (it remains open as a Kiwisaver). This was largely because of its remarkable performance, returning 12.7% since inception – a period which included a long bull market, but also the cataclysm of the GFC. It’s this type of performance, along with his public role commenting on markets, which has brought him so many admirers. They include his competitors.
“Brian is a business legend. Full stop,” says Sam Stubbs, who leads passive fund pioneer Simplicity. “He’s a personal hero of mine. I wish he could live, and work, forever, and that’s in spite of him being a formidable competitor. Many Kiwis and been enriched, in many ways, by his contribution.
“While he’s ruffled a few feathers in his time, that, and his thorough analysis and commentary, is exactly what has made NZ business better under his watch.”
What’s instructive about that is that Stubbs and Simplicity were the subject of an extraordinary and uncharacteristically contorted attack from Gaynor in a column last year, and one he now regrets to an extent, as he expresses below (read Sam Stubbs’ response here). But such columns are rare. Far more frequently he takes an annual report, or AGM, or – very often – the performance of the NZX and its future, and delivers a deft and near-unassailable argument. Which is what has made him such an asset to the Herald’s business coverage over the years. While New Zealand business coverage is often critiqued for lacking the teeth or the insight of that of Australia or New York, Gaynor’s columns have a rare heft and narrative to them.
“He offers a historical perspective no one else can,” says his editor at the Herald, Liam Dann. “He has been a broker in New Zealand since the ‘80s, and remembers all the booms and busts and all the takeovers and big corporate plays.
“He takes a very strong (almost nationalistic) approach to the local stock market. He fought hard against the big international takeovers of the ‘90s and hates seeing good New Zealand companies sold off – especially for less than they should be.
“He’ll deliberately and slowly lays out all the facts and history on a topic before delivering his verdict – often in the last paragraph.”
After the final paragraph comes an inevitable disclaimer: “Brian Gaynor is an executive director of Milford Asset Management, which holds shares in… on behalf of clients.” It means his columns have the quality of activist investment. At times that has infuriated people in or adjacent to businesses whom he has criticised. But for the most part his columns read as a robust argument on behalf of shareholders – a group which now includes millions of us, thanks to the transformative impact of Kiwisaver.
Alongside accusations of conflict has come an incident which tarred Milford, resulting in the loss of their warrant to invest on behalf of the Super Fund and a $1.5m settlement with the Financial Markets Authority. Mark Warminger was last week found guilty of market manipulation in relation to trades he made in 2014. It’s an episode which has tainted the firm’s reputation, and helps further the idea which remains popular amongst much of the population that markets are somehow rigged – the kind of sentiment which has done so much to inflate our housing bubble.
The irony is that Gaynor’s writing, and advocacy, have for the most part been amongst New Zealand’s most effective weapons against that idea, and that policy. This is why, on the occasion of his stepping down from the day-to-day management of the Active Growth Fund, I walked up to Milford’s Shortland St offices to get a sense of New Zealand’s economy, politics and markets from one its most astute observers.
The following interview was conducted in late February, and has been condensed and edited for clarity and brevity.
Tell me about the decision to step away from the day-to-day management on the Active Growth Fund.
We want to create a real successful business in the long run and to do that you have to build depth and you have to employ people to do that. We have a staff now of over 60, and the investment team has 18.
It used to be just me. So as you employ young people – particularly New Zealanders coming back from offshore, they’ve been the main group of people we’ve employed – you get to a stage where you build up this expertise underneath you. And one of the things you have to do is bring people through. The judgment of management, more than anything else, is to judge when to promote people. Some people can come quickly, some people take longer. The view that I and the other people on the board and management had was we’re getting into position where there are a lot of guys ready, very capable, and in a position where they should be managing money.
The combination of having the right people there plus the fact that I was tied up more in management made it the right time to do it. There’s no use employing young people and then sitting on top of them, not giving them the opportunity. You’ve got to bring them through.
Have you had any pushback? Your own name and brand is so intertwined with Milford, but Active Growth particularly, has that sent tremors at all through your customers?
We deliberately tried to communicate it in such a way that we’re totally transparent. We had clients in here last night and the night before and we explained to them exactly what we’re doing. People say ‘oh I’m not so sure it’ll be good’, but I don’t think we’ve seen a single person say they’re going to leave us. The other thing that’s important to recognise is that internally we have a policy which is fairly unique in our industry, where people have to invest in our own funds. If you work for a bank or somewhere else, people have their own individual portfolio. Everyone here, if they’re going to have any investments, it has to be in our funds. Between the combination of our directors and our staff and the company itself, we’ve got about $36m invested in our funds.
So everybody internally is very comfortable with the changes and they see that over time they are going to be very positive. Good companies have to have succession plans. They cannot rely on [waiting] until the guy at the top loses it and is no longer capable of doing things, and that happens a lot in New Zealand.
The other reason you have to it is because if you don’t, they go off and work for someone else. You’ve actually spent four or five years training people, mentoring them, building up their skills – if they go to someone else, you’ve lost it all.
Milford’s early returns were off a relatively small scale. But now you’re getting pretty large in relation to the size of the market – what kind of issues does that present?
The scale is not the problem. It is in New Zealand if you get too big, but we’ve always had a very strong view that Kiwisaver was going to be huge, as were these PIE regimes, and they were going to attract a lot of money. And therefore New Zealand investment managers like us were going to have to invest offshore. I don’t discount the fact that in a few years’ time we’ll have an office in San Francisco or something like that. You are going to have to become a lot better at managing money outside New Zealand because the size of the pool of investment funds is growing far more rapidly than the size of New Zealand capital markets. I write about that all the time. That forces you to have to go offshore. It disappoints me. It’s a self-interest that New Zealand capital markets were bigger because that means we could put more money here, and we’ve got an advantage over people from offshore in New Zealand. But we’ve got a disadvantage against overseas people in overseas markets.
Where do you think the fault for that sort of trickle of listings to our market lies?
It’s not all one factor. I tend to write at certain times about one factor or another. It’s a combination. One of the positive things about New Zealand is we’re pretty discreet and we’re not flashy in this country. Once you’re listed on the share market, you’re very exposed. Everything you do is very exposed. So people are a bit more restrained in being listed on a public market. There’s a bit more of a reluctance to do that than there certainly is in Australia.
The structure of the market here is poor too. The biggest, agriculture, is the major economic driver in terms of exports – but you can’t really use farms or agriculture on the market. It’s different. Mining companies in Australia are very suitable for being listed on the share market because they need a lot of capital to actually dig the mines, all the machinery and stuff like that. Farming is a much more small-scale operation. So there’s a whole pile of factors.
One of the few columns you’ve written recently that I found odd was your column about index funds versus active funds, which didn’t name Simplicity but seemed to be targeted at them in terms of its timing (read Sam Stubbs’ response here). Obviously there has been a big flood of money internationally and locally into index funds and that represents the implicit challenge to the managed style. What prompted you to write that column and would you care to elaborate on the criticism?
That was at the end of last year. Mary Holm writes about it every week. By the end of the year you’re kind of – I won’t use the word exhausted – but I wouldn’t write something like that right now because I come back at the beginning of the year and have all kinds of fresh ideas and different things. But at the end of the year you’re kind of beaten a bit down.
With Mary Holm, I’ve written about active vs passive probably twice last year, and she’s in there every single week.
So I guess at the end of it I wanted to put my point of view across. Was it all Simplicity? Yeah probably in the background there’s partly that, I don’t deny that. But Simplicity hasn’t had any effect on our business. I’m not actually opposed to passive funds, we use passive funds in here, to a degree. But I just feel that it’s the picture that’s being presented like the only thing is passive funds.
Passive funds work incredibly well when markets are good. There’s no question about that. But when the markets turn, they’re terrible places to be because they go down fully with the market. So if you have all your money in passive funds and the market turns, if we did have another global financial crisis and if we did have anything like 1929, people in passive funds will be wiped out. One of the reasons we’re successful is we never had any negative 12 month period – even during the global financial crisis, because that’s what you can do in an active fund.
What impact has the launch of Kiwisaver had on the managed fund sector in New Zealand as a whole, given it’s had such explosive growth and there are all these quite differently scaled and motivated operators within it?
It’s a vastly improved industry compared to what it was, for a combination of different reasons. It used to be a very languid industry, it was hopeless, it wasn’t going anywhere. One of the reasons was the tax regime. Tax plays a huge role in everything that occurs in the financial community. What we had up until October 2007, we had a regime where funds were taxed like companies.
So this industry was flat, it was going nowhere. Then Michael Cullen just changed the whole rules dramatically. He said that PIEs are not subject to tax. It changed the industry. What it has meant is that it’s made it more sophisticated, to a degree.
That’s been combined with the FMA being like a dragon out there. You could walk up and down the street and call yourself a fund manager ten years ago. There was no requirement. Anybody could call themselves an investment manager. But now we have to go through this very strict licensing regime, we’ve got the FMA sitting on top of us about the way we do things, anti-money-laundering acts, the requirements we have regarding how we invest the money. So it’s in a very good shape.
It is being dominated more and more by the banks. The banks have now I think 66% of Kiwisaver, they had 51% five or six years ago. They’re the dominant party as far as Kiwisaver is concerned. People like ourselves are doing quite well but we’re having to work pretty hard in terms of we’ve got to perform very well. The banks can perform very poorly and people don’t seem to worry about it.
Has the growth of Kiwisaver surprised you?
Treasury made a forecast that there would be 618,000 Kiwisaver members at the year 2014, which was three years ago. But there was 2.2million at that particular time. In the end it’s a voluntary system, and I like voluntary systems. We wouldn’t like it to be made compulsory because in actual fact we’re 2.7 million members at the moment. When you have a voluntary system and there’s 2.7 million members, that’s a signal that it’s not going too badly.
Could we talk a bit more broadly about the New Zealand economy? The challenges facing it. What do you pick out as the things which most trouble you?
We’ve had a great run. I’ve been here 41 years and this last two or three years were the best in my time here. But the structure isn’t quite as strong as Australia. I always feel that we’ll have three or four or five years where we’ll do better than Australia, we’re certainly doing better than Australia now, there’s no question about that, but Australia has a stronger foundation. I think they have a wider spread of investments. I think their companies are better and they’ve got more entrepreneurs. They have stronger management teams, they’re more critical of one another. They take action more quickly when things go wrong. We tend to be a little more placid.
There’s nothing wrong with New Zealand. I think the two best countries in the world are Australia and New Zealand, I’ve got no doubt. I lived in quite a few before I came here. But I think that in the long run Australia has a slightly better foundation and quite a more vigorous business community. And they’re willing to take more risk.
The fact that you’ve got 2000 companies listed on the Australian share market, you’ve got 97 new companies last year – [in New Zealand] we got three – shows that people are willing to expose themselves. We’ve had many reports, we’ve had capital market taskforces, we’ve had all that, but we never quite get there. We have a lot of taskforces and then people forget about it completely.
But our politics are much better here. Australian politics has been a disaster for the last seven or eight years, and that has actually eroded some of that strong foundation base. We’ve actually been slightly growing it. I think MMP is a great system because it gives representation to everybody at the table, whereas first past the post doesn’t do as much, as you can see with the States.
In terms of the companies that you speak to, that you invest in, do you see that the fact we’ve got this insane price issue with Auckland housing and no real prospect of it being solved in the short term, how much of an impact is that having on our business community?
Well it’s not. Most of the about 60 people that were here with us, I’d say 40 of them would be under 35. So we’re very conscious of it all around us. They’re all talking about will we buy house or what will we do. It’s actually as bad in Sydney, so it’s not as if it’s just us here. We’ve got a guy who’s been in Sydney two and a half years, he’s now engaged to be married, how many auctions has he been to. How many prospects did he have, houses that he thought he was certainly going to get. Agreements that he had with agents on a Friday without it being signed and then someone gazumped him.
It is very unsettling for young people. Is it unsettling for business? No, it’s not been a problem in attracting people back. But it was easier for us, houses were dirt cheap and you were able to pay for them very easily.
It’s in our business too. No matter how much we pay people, the fact is that the house prices are out of the reach of most people. The vast majority of our staff now, and I do feel sorry for them, live in either Whangaparoa or Albany, or up in Coatesville, and they travel. The compensation is they’re in here at 6:45 in the morning because they’re leaving early, and we let them go at 4:30. It affects the business that way because the productivity is slightly affected. But we’ve got to deal with that because of the reality of life.
I always look at it like what percentage of your income is going on housing and what would you otherwise do with that. We obviously pay a magnitude less but we’ve got 22-23 year olds who are spending huge proportions of their income on rent and for the few that have got mortgages, it’s even higher again. I just look out across the city and think of all our retailers, all the funds managers, all that money that would be going somewhere more productive than to housing.
My son is 24. He’s the same, he’s flatting, so he takes me through the whole economics of it. I look at it and every 10 or 20 dollars is key to those people. Because they talk about going to a place to rent and it’s now $260 instead of $230 at the previous place. It’s very unproductive the amount of money that’s piled into existing houses. It’s okay if you’re building a new set of houses because there’s a whole set of activity going with that. Having a house that was worth $500,000 and then is worth $700,000 and nothing has been done to that house is a very unproductive part of the economy. But it’s a factor in all the Western world. But I think prices are likely to continue to go up. I can’t see any other way. Unless we build more apartments here. But the Unit Titles Act is a disaster in New Zealand. I live in an apartment and I know the consequences of some of these things. We don’t have the right legislation for body corporates to operate.
Those interlocking issues with RMA, the Unit Titles Act, the lack of serious capital gains tax on investments and so on – they never seem to be resolved in any comprehensive way.
Nikki Kaye’s looking at the Unit Titles Act, everybody’s looking, but it’s all so slow. It’s desperately slow. It’s pedantic, the movements that we have. The Unitary Plan and all these kind of things that are so important to the city. And there’s the entrenched views. We had a woman in here and all she wanted to talk about was that she’d seen the Unitary Plan was going to allow a four-storey apartment block within four houses of where she lived. We didn’t talk about anything else but that. Now she has got that changed in three or four days. I don’t know how she did it, she just did it. It destroys all the planning.
What’s your assessment of Bill English as a prime minister, both going into the role and how he’s performed to this point?
There are two things. I think there are certain people in life who are superb number twos, excellent number twos. We’ve had a lot of them in New Zealand in the past. Not that I agreed with them all. The Bill Birches, the Geoffrey Palmers. Geoffrey Palmer was a very good number two.
English may be okay but he’s more suited to the number two position. John Key, whether you love him or loathe him, was a successful prime minister to the extent he did the number one role very well. So you tend to have people who are very good in the number one role. I worked for David Lange when he was prime minister – he could never be the number two, he was brilliant but he wasn’t that man.
Bill English was a super number two, and whether he’s a number one is going to be tested over time. Is he going to be bad? He won’t be a disaster, but he’s going to find it hard to get away with what Key could get away with, because Key had that kind of personality that just seemed to work with New Zealanders. But he’s done a very good job as Minister of Finance. Our government finances are probably, and I’m not exaggerating, the best in the world. It is absolutely superb what we’ve done here. And that is despite the cost of the Christchurch earthquake. For us to be running surpluses, for us to in the position we’re in given the Christchurch earthquake is a remarkable performance, and that really is Bill English.
Disclosure: Duncan Greive is a customer of Milford’s through its Kiwisaver fund.