Fonterra investors need vigilance
Fonterra unit investors need to keep an eye on the governance of the big dairy company, says fund manager Harbour Asset Management.
In an advisory to clients, Harbour said investor interest had been unprecedented in the unit trust, the Fonterra Shareholders Fund, which lists tomorrow.
"Retail, farmer and global demand was very strong. That is why it is relevant to remember the key short term drivers of this investment and valuation is not the milk price, but instead centres on Asian growth and Fonterra's ability to maintain a fast growth rate in the food services segment.
"Investors must also keep an eye on governance."
Elaborating, Harbour managing director Andrew Bascand said there were many structures like Fonterra's unit trust fund in the world, but none in New Zealand until now.
"We don't have the ability to vote at shareholder level, so we are relying on the normal trust and due diligence of the directors of Fonterra who have sanctified and issued the units to us to operate in the manner which all stakeholders are happy with."
Bascand said he expected that to happen "because of the people involved and the structures put in place".
But he said when a breakdown in these sort of structures has occurred overseas they "wobble badly". Shares which don't vote fall to a substantial discount, he said.
Rupert Murdoch's NewsCorp with its A and B shares was an example.
But when governance improved unit investors were happy again.
Ironically NewsCorp had turned out to be one of the best performers this year because despite the turmoil and fallout around newspaper hacking scandals, governance had improved.
"When it was bad, (non-voteable) shares traded at a 15 per cent discount.
"When we value Fonterra, we have to watch governance."
Governance of New Zealand's biggest company has been in the spotlight in recent weeks, with some farmer-shareholders expressing concern over the board election of Waikato farmer John Wilson as chairman-elect to succeed outgoing Sir Henry van der Heyden, and van der Heyden's decision to stay on the board for a few more months after stepping down at next month's annual meeting.
There is also concern among Fonterra's 10,500 shareholders about a governance review currently underway, and a suggestion that the number of farmer directors could be cut and independent directors increased.
The board's scolding response to a farmer proposal to change Fonterra's constitution to cement the number of farmer directors and therefore continued 100 per cent farmer control post-fund listing, has also caused friction.
Bascand said none of this was unusual in Fonterra's history.
"If you look at the history of who has comprised the board through time, there's always been this tension. The tension persists today and it's probably healthy tension, but it needs watching."