Old school tennis champs NZ's hidden money-men

BY TIM HUNTER

BORN JUST two months apart in Auckland in late 1954, Gerald Noel Siddall and Russell William Tills have spent a lifetime in each other's company.

More than 50 years later they are the majority and intensely private owners of one of New Zealand's largest financial services groups, New Zealand Funds Management, regularly appearing together as directors or shareholders in a network of companies.

With large houses in the upmarket suburbs of Parnell and Remuera respectively, they are establishment figures, still involved in the activities of their old schools, Auckland Grammar and King's College, where they competed on the tennis court as respective school champions in the late 1960s.

Despite their success, Siddall and Tills do not appear to have won the respect of all their peers in the industry.

"I have no time for them personally," said one.

"There's a lot of fee levels in the products they put together, where the investor doesn't seem to do terribly well, but they get their fees," said another. "It's symptomatic of so much that's rotten in the New Zealand financial system. It's just greed."

Such comments could be just the gripes of jealous rivals, but they also reflect misfortunes for many people who invested in products connected to the pair.

Siddall and Tills were shareholders and directors of Matrix Funding Group, the creator and manager of the First Step investment funds marketed by Doug Somers-Edgar's Money Managers financial advisory firm. First Step was frozen in late 2006 and investors are still owed about $233 million, of which about $145m is impaired and may never be recovered.

In March and April 2007, a few months after First Step hit the skids, Siddall and Tills resigned as directors of Matrix and transferred their shareholdings to Somers-Edgar.

They were also indirect shareholders, and Tills a director, of Structured Finance, a mezzanine property lender that borrowed as much as $180m from First Step. Structured Finance has defaulted on its remaining debt and still owes First Step about $30m.

In April 2007, within days of quitting First Step, the interests of Siddall and Tills sold their stake in Structured Finance and Tills resigned as a director.

Other issues have included the Super Yield Fund, managed by NZ Funds Management, which was frozen in August last year leading to investor losses of about 22c in the dollar. The Super Yield Fund lent money to another mezzanine property lender, Fidelity, substantially owned by Siddall and Tills.

Fidelity, currently being wound up, owes about $15m to the Super Yield Fund and about $30m to another NZ Funds product, the Private Mortgage Fund, which is now closed.

Siddall and Tills resigned as directors of Fidelity in July this year.

As the record shows, investors have not had an altogether happy experience as clients of Siddall and Tills. But the same is surely true of just about any investment manager at one time or another, so what's different about these two?

"There are two ways you operate in this business," said a rival fund manager. "One, you make money for clients and then you benefit as a result. Two, you look after yourself first. They're in the second category."

Balancing that comment is another from a business associate: "I've known the guys for a hell of a long time and they are hard-working and scrupulously ethical. They've been scrupulously concerned to do things right."

Certainly, Siddall and Tills have made money from their enterprise. Siddall's address in Parnell has a rating valuation of $8.7m, while Tills in Remuera lives in relative modesty in a 1930s dwelling valued at $7.6m. As befits former gladiators of schoolboy tennis (Siddall was national under-17 champion), both have tennis courts.

Some sources ascribe to them a lavish lifestyle, with Tills, described by some as the more outgoing of the two, reputedly taking his whole family to France for a year.

While the First Step products yielded them a share of millions in beneficiary payments over several years, their main business engine is NZ Funds Management, which generated a net profit of $8.2m in the year to August 2008 on revenue of $27.9m.

NZ Funds has been around for 20 years but has maintained a remarkably low profile over most of that time, only recently adopting a more open public persona. It began as Nathan Funds Management after Siddall, a lawyer who was working with property developers Peter Cooper and Chris Mace on brewer LD Nathan's property business, suggested fund management would be a good proposition.

Tills, an accountant working for a bank in Sydney at the time, returned to New Zealand to join the fledgling business, which was for the first 10 years a joint venture with Australian fund manager Ipac.

When LD Nathan sold out in 1992, Siddall and Tills bought in.

By some accounts the business was far from an overnight success but, in time, its funds under management grew to as much as $2 billion. Individuals with some knowledge of their operations say a particular strength of Siddall and Tills is their attention to the details of investment structure and it certainly appears so when reading the reams of documentation covering the company's numerous funds.

There are trustee companies, administration companies, trusts investing in other trusts investing in companies owned by related parties, all taking a bite out of the cherry. "It seems like New Zealand Funds is a conduit for moving mum and dad investors' money into vehicles owned by Gerald and Russell, and Doug Somers-Edgar – and these guys clipped the ticket," said one source.

How well those unit trusts performed over certain periods is a matter of conjecture – NZ Funds has not included its funds in any monitoring services such as Morningstar or Fundsource for several years.

According to some, the lack of transparency was combined with a culture of intense privacy, with employees required to sign strict confidentiality agreements.

"[Siddall] has been described as a `godfather' personality," said one source. "He'll tolerate anything except disloyalty."

However it is perceived outside NZ Funds, within the company there is clearly plenty of loyalty – some of its senior people have been there for more than a decade. Chief executive Richard James, for example, joined in 1992.

In the firm's open-plan offices 18 floors up in Auckland's ANZ Tower, James is leading a noticeable move towards a more open culture. Some market sources even describe it as a "charm offensive".

"We have acknowledged that when you manage public money you have an obligation to be open," he told the Sunday Star-Times.

"The change is being driven by how investors feel.

"Investors today are saying `we don't trust all things financial. We want to know who's managing our money, where it's being put, how it's being charged'."

It may also be driven by a large drop in its funds under management to about $1b.

Since January, the performance of some of its unit trusts has been posted on its website, along with market commentary and an increasing amount of detail about asset allocations.

"If people want to be critical," said James, "tell them to put their numbers on the table."

After such a period of financial turbulence few fund managers have stunning numbers but NZ Funds' performance figures, outside those of its obvious catastrophes, look neither shockingly bad nor surprisingly good.

Where it differs from many of its peers is in its complex structures – it runs at least 25 wholesale funds and perhaps the same again in a hodge-podge of other trusts and legacy funds – and its fees.

Many of the headline unit trusts run by NZ Funds charge a fee of 1.5% of assets and these often invest in other trusts run by NZ Funds, which also charge fees. The result is a structure with fees ranging from 0.3% for cash management up to 2.9% for growth funds. On top of that, investors are paying fees of about 1% of assets to financial advisers such as MMG, formerly Money Managers, which is now part-owned by interests associated with NZ Funds.

This fee schedule is on the high side by comparison with traditional fund managers and with the sharebroker portfolio advisory model. Craigs Investment Partners, for example, charges up to 1.75% for portfolio management and custodial services. Cash management is free, but brokerage of up to 2.5% on share trades can add further cost. Meanwhile star Australian fund manager Platinum Asset Management charges 1.54% for its retail International Fund, a growth-oriented equity investment, plus a buy-sell spread of 0.5%.

James acknowledges NZ Funds is not cheap, "but I don't think it's by any stretch expensive. It's relatively easy to prove that fees are not a determinant of performance".

Certainly, NZ Funds has a business model that doesn't make for easy comparisons. It is not a straight fund manager in that it aims to provide a full suite of investment products to fit clients' financial plans into retirement. It is not a sharebroker portfolio manager in that it offers only its own structured unit trusts.

"We believe [financial] advisers and investment managers should be integrated," said James. "It's the only way you can deliver service the client's trying to achieve."

As for channelling investor money to related party vehicles, James had this to say.

"We invest with 12 different investment managers and Fidelity is one of them. Fidelity is being wound down.

"Would I say we'd never do a joint venture again? No. Are private assets appropriate for [clients] with high liquidity needs? Certainly not in the proportion we owned it. Mezzanine debt as part of a client's long-term growth portfolio? There's an arguable basis for it."

In discussing NZ Funds with the Star-Times, James went to considerable effort to share information and ensure no question went unanswered – a clear sign that if the firm was secretive in the past, it does not want to be seen that way now.

The one request that led nowhere was for an interview with Siddall and Tills themselves. They remain enigmatic figures, unknown even to senior executives who work in the same trade in the same building. Privacy remains their watchword, but times are changing.

Like a law firm, "we need to have an ongoing transfer of ownership from exiting partners", said James, although Siddall and Tills "will stay as meaningful shareholders in the business".

For the new leadership, however, the legacy comes with luggage.

THE NUMBERS...

NZ Funds runs 14 headline unit trusts with funds totalling $380m for clients of its related advisory group MMG. It also runs a further $490m in eight funds for clients of other advisory groups. With about $150m in various other funds, that gives NZ Funds a total under management of about $1 billion, less than before but still in the top 15 of retail fund managers.

Of the main 22 funds, about 20% is held in cash and about 25% is invested in funds run by external fund managers, the bulk of it by Tweedy Browne and T Rowe Price.

The numbers also show that the asset allocations are rebalanced regularly, such that in some funds the amount invested in German government bonds is exactly the same as the amount invested in British government bonds, or the amount run by fund manager Crispin Odey is exactly the same as the amount run by Platinum.

Achieving this precise asset allocation on a monthly basis apparently leads to the counterintuitive process of selling a strongly performing asset and buying more of a poor one, but "there is an enormous amount of empirical evidence that overallocating to assets that have underperformed is a good strategy", said chief executive Richard James.

... AND HOW THE PORTFOLIOS STACK UP

UNIT TRUST                                                FUND SIZE                           ONE-YEAR RETURN

1. Cash Portfolio                                            $8,234,251                               n/a

2. Diversified Cash Portfolio                           $17,731,308                            3.87%

3. Select Income Portfolio                               $22,719,147                           6.56%

4. Global Income Portfolio                               $7,669,978                               n/a

5. Australian Enhanced Yield Portfolio             $5,508,318                              n/a

6. Inflation Plus Portfolio                                 $22,380,383                            n/a

7. Diversified High Grade Property Portfolio     $6,476,564                             n/a

8. Defensive Global Shares Portfolio                $17,493,494                            n/a

9. APS Balanced Growth Portfolio                    $93,116,887                            1.64%

10. APS Diversified Growth Portfolio                $118,035,764                          4.21%

11. APS Growth Portfolio                                  $52,610,067                            2.51%

12. Dividend Income Portfolio                          $5,415,356                              -1.71%

13. Debt Opportunities Portfolio                      $3,173,807                              -5.23%

14. Global Absolute Returns Portfolio               $374,616                                 n/a

15. Money Market Portfolio                               $60,056,569                            3.95%

16. Core Income Portfolio                                 $58,651,443                            5.56%

17. Mid-Term Growth Portfolio                           $55,796,371                            0.73%

18. Balanced Growth Portfolio                           $29,039,012                            1.32%

19. Diversified Growth Portfolio                         $111,246,007                          2.08%

20. Wealth Appreciation Portfolio                      $147,261,932                          0.46%

21. Dividend Yield Portfolio                                $17,264,073                           -1.12%

22. Credit Opportunities Portfolio                      $11,276,087                           -4.91%

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