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November 2005 Edition ---- to page back through Previous Editions click here

In this month's action packed edition we consider: more on high-flying, and a review of the Accident Compensation Corporation's 2005 annual report which (unlike previous reports) has not been posted on their web site.- click here

High Flyers It goes without saying that last month's piece was written from a satirical or sarcastic perspective. We will finish the topic now in a generally straight manner although the imagery that the topic evokes means that we can't help drifting back into it. The greatest NZ high flyer accountant (not mentioned last month) would quite undoubtedly be the late Sir Robert Muldoon, prime minister from late 1975 to mid 1984. As a junior minister Sir Robert successfully oversaw the country's change to decimal currency in 1967 and soon after become Minister of Finance, then soon after his political party lost the 1972 election he became the parter leader. Certainly there was sound and steady climb in height to that point. Another high flying accountant Sir George Chapman also deserves mention for his sort of John the Baptist role. As party president Sir George packaged or launched "this man Muldoon" for the 1975 election when Sir Robert swept into power. But Muldoon was flying too high and wished to stay up there. In the lead up to the 1981 election his government set "supplementary minimum prices", designed to cushion any steep fall in farm product prices. at a level somewhat above the then market prices, and, worse, committed huge amounts of Government funding to large new, mainly energy related, projects dubbed "think big",opposed by many academics. . Although it was somewhat seen to be addressing the problems of the day these policies were a disaster which lost the country its first world wealth status. Subsequent governments have tended to be blamed for the country not keeping up economically. It seems not to be understood that if one sells (or mortgages up) the cow for a handful of beans that don't turn out to be magic. then one will most certainly end up in the poor house from which it will be most difficult to escape.

The concept of high flying accountants is offensive. Accountants need to have both feet firmly on the ground. The ICANZ needs to find attributes and objectives which are genuinely worthy of young accountants aspiring to. and quit that site name.

ACC's 2005 Annual Report. The Accident Compensation Corporation has released its Annual report on paper, dated 2 September, but it is yet to go on the corporation's web site. In previous years this has been prompt. Perhaps it is getting harder to face up to this medium. We therefore ventured out into the old traditional world to get an ancient (light cardboard) form of their 2005 report from their office.

We have taken an interest in the investment activities of this Corporation since the time of its venture into National Mail shares just days before NM suddenly ceased its core activity with a share value plummet . . Very recently Mr Cliff Cook, the National Mail share vendor concerned, has been quitting his considerable Metlifecare shareholding. One would expect that he will have retained his broker with clout (as Mr Cook put it) used for the NM sale but this time ACC would seem to have its hard hat on in keeping with its quite new accident prevention policy. This is interesting because Metlifecare is in the business of providing housing for the less active, an activity which ACC should be keen on promoting. Also Metlifecare to date has not paid dividends which one would think would give ACC a comparative advantage as a shareholder over those shareholders who can take advantage of imputation tax credits. And Mr Peter Fitzsimmonds continues to chair Metlifecare for the moment at least. It was confidence in Mr Fitzsimmonds, who was appointed a director of National Mail a few months prior to the demise, that was a major reason for ACC's decision to take a stake, or so it was said. Justification for a lot of confidence in Mr Fitzsimmonds's impartiality was of course necessary if he was not to tell his close associate Mr Cook what was going on at National Mail, in particular how much mail was coming through the slots and how concerned the directors were.

To be fair it is probable that ACC has held a typical 1-2% shareholding in Metlifecare even although such a shareholding is not reported in the annual report of either corporation. The percentage must be less than 2.5 since the capital value of Metlifecare is $330m and NZ equity holdings above $7.5m were reported by ACC. But there seems to be a full takeover of Metlifecare by Australian interests so ACC will probably sell such a holding as per the offer that must be made. While Mr Cook is possibly cashed up it might also be a good time for ACC to see if it can get its money back on the NM deal. There should have been some implied guarantee as to immediate quality in the circumstances. ACC have apparently had a staff change in this area so perhaps an attitude change is pending as well.

ACC continues to put its Investments and Claims Liability section between the Statement of Service Performance and Financial Statements sections of its report The latter two sections are audited and it would seem appropriate that the one in the middle should be to. It is in the middle presumably because it is similar information. All similar information should be audited. There is no colour coding for audited sections.

ACC investments have had a good year in keeping with the markets. They have exceeded all their benchmark returns yet again although they are becoming more modest about it. The term benchmark seems to be used for both a somewhat objective overall comparative market return for each investment category and also a predetermined objective of how much to hold in each category. They should find another word.

They probably have to too much confidence in the accuracy of their benchmarks however. They explain how they don't get any benefit from imputation tax credits so they "need to" take those credits out of the market yield benchmark which they are using. Perhaps that is ok but it would be reasonable and probably sensible for ACC to skew its investment selection in favour of stocks which do not pay dividends with imputation credits and so get an advantage over their adjusted benchmark.

To illustrate, suppose the market consists of two only identical companies with the same number of shares on issue and same market share price. The only difference is company A has a 10% profit yield to shareholders with no imputation credits available, while B has a profit yield of 11% which includes 3 percentage points of imputation credits. Most might say the market benchmark return is 10.5% but ACC does not recognise imputation credits so it adjusts the benchmark to 9%. But ACC also sees A as being the better performing company as far as it is concerned (10% return as against 8%) so holds say twice as many shares in A as in B. Its return is 28/3 or 9.33% which beats its benchmark yet again.

ACC maintains that the probability of it having overall negative investment returns in a year as one in five despite never having reported the phenomenom to date, but has increased the lines of print devoted to the subject subject from 19 to 43. Generally a fall in share prices reduces market yields and so increases bond values which cushions them quite nicely. But they seem to fear that if they incur a loss for a year their stakeholders might become steakeaters and have them for breakfast. This would not seem to be justified. How this probability can be "calculated" is beyond belief.

A large amount of attention is also given to calculating the "claims liability" in respect to accidents and incidents covered by ACC which have already occurred. An accounting firm has been brought in to address this issue, no doubt at great cost. The corporation used to work on a pay as it goes basis but it has changed philosophy to working towards fully funding the total long term costs of accidents as they occur. The merit of this change is dubious and possibly more to do with the state sector wishing to participate in investment markets. But regardless of the merits of full funding there is no need to take it to the nth degree by trying to calculate the liability accurately. Adopting a static long term real rate of return should be sufficient. If a bird-flue pandemic or a big earthquake comes along it is likely that the community will divert medical and care resources to where it considers they will do the most good regardless of how well the now existing accident victims' care is funded.

ACC no longer reports on the influence that it can have on other company management as it has done in the past by declaring its biggest percentage shareholdings. This remains an important issue. Its policy on voting rights is never discussed. Arguably proxies should be auctioned off annually to the highest bidder to avoid wayward tendencies.

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