David Murray has the chance tomorrow to again put his stamp on Australian superannuation fund savings and the Australian sharemarket. It was Murray, as chief executive of Commonwealth Bank, who played a big role in transforming the bank’s technology and culture and who, as chairman of the Future Fund, played a key role in the management changes at Telstra, which have enabled its shares to perform very well in the current slump.
Tomorrow, the Future Fund will effectively determine whether we can break out of the short-term attitude of so many fund managers and analysts, which has left the Australian sharemarket dominated by four banks, plus BHP and Rio Tinto. It’s a policy that has contributed to making Australian superannuation savings very volatile.
Older Australians need a higher proportion of less-volatile stocks with high cash flows that are less vulnerable to world and local economic and market fluctuations. Banks and resource stocks are in the front line of the current volatility.
I must now confess a blatant conflict of interest. First, I am an older Australian who needs those sorts of less volatile, high-return stocks in my superannuation fund. And second, I am a shareholder in a unique company that is about to be flogged by the short-term focused managers, the board and an independent “expert” who ignore the position of people such as me.
This is all about tomorrow’s meeting of shareholders in toll road operator ConnectEast, which was priced about 42 cents before receiving a takeover offer of 55 cents. The board and independent expert told shareholders to sell because if they don’t the shares will fall.
And of course for the short-term managers and analysts who dominate our institutions this was very good advice — especially given the recent fall in the sharemarket. But it was very bad advice for those who need superannuation as a long-term source of retirement savings, and for whom short-term market prices in unique situations are not the main game. The Future Fund comes into a similar category.
The independent expert Deloitte did a first class job in analysing the likely future distributable cash of ConnectEast — information that directors had never shared with shareholders. The Deloitte analysis shows that ConnectEast might have low returns in the next few years but it blossoms into a magnificent annuity-style security offering very high returns for more than a quarter of a century. Best of all, those returns are inflation protected.
There are very few stocks on the list with such a magnificent low-risk profile for older people wanting future retirement income. Having completed this wonderful analytical work, Deloitte did not know how to interpret it for people such as me.
The ConnectEast bidders are a series of overseas pension funds who understand the need for retirees to have this sort of long-term inflation protected income. And they are overjoyed that most Australian superannuation fund managers and analysts do not have the sophistication to understand the value of future income to potential and actual retirees.
But the global superannuation fund bidders thought there might be those who needed this sort of income, so as well as offering 55 cents a share cash they also offered an unlisted security that provided the same benefits as they will receive while giving the short-term holders a chance to exit.
It’s true the security has limited liquidity but for people with an abundance of liquid assets, this was not a problem. There are several large shareholders in ConnectEast who understand that for long-term potential and actual retiree savers, 55 cents is a very low price, although it is a big price for the short-term punters — again, particularly given the fall in the market.
Lazard and the Future Fund are among the shareholders who understand the value of inflation-protected future income and together they hold close to the 25 per cent level that can block the deal. On a selfish basis, I hope they don’t accept because we will then all be able to buy more ConnectEast stock at low prices. But I repeat: this is a very selfish attitude because it ignores the interests of the short-term oriented shareholders and they are a clear majority, outside the global superannuation funds that can’t vote.
I had planned to write this commentary last week but world events delayed me. Murray has probably now made up his mind. If he leaves it to the fund managers, then the bid is likely to be accepted. It would be a very brave fund manager who — without permission from the beneficial owner — took a short-term loss. If ConnectEast is sold, I will be accepting the share exchange bid because this is a unique security. We need 2% of the shareholders to accept.