What would Key the Investor do?

Written By: - Date published: 10:27 am, May 11th, 2009 - 13 comments
Categories: economy, national/act government, superannuation - Tags:

Here’s a question for Mr Key but you can play along too.

What if you could buy into an asset that performs well usually but had a very bad year last year? Because of that bad year, the price is now at historically low levels but the outlook over the short and long term is very good. In fact, it has made about 16% in just over two months.

It may dive and rise again but prices are still low now and in the long-term the price will regain its normal levels. Bascially, its a classic chance to buy low and sell high later at the time of your choosing.

To make the investment you have to borrow but at a special low rate. Plus, you’re a smart investor and you tend to outperform the market average by quite a way. Should you buy?

I know what Key would have done when he was at Merril Lynch. He would have bought in a heartbeat.

Right now he faces exactly this choice, as Prime Minister. Should he continue contributions to the Cullen Fund?

Of course he should. The markets are recovering, and Key himself has repeatedly said he thinks the outlook for the would economy is good. Stocks and other assets are still at lowish prices and rising. The Fund has made $1.75 billion in a last two months, half the losses from the recession are already recovered. There’s literally been no time like the present to buy.

The only excuse for not investing is that it will mean more borrowing and that could lead to New Zealand’s credit rating being downgraded. Well, that’s not really a good reason. Moody’s says we’re unlikely to be downgraded. Cancelling the tax cuts and a lower new spending track will be enough to get deficits in the outyears tracking down.

No. If National cancels contributions to the Cullen Fund now, while it is making megabucks and buying assets up cheaply, the only real reason will be ideological.

– the mathemagician

13 comments on “What would Key the Investor do?”

  1. Rich 1


    Although one could compare returns on the Cullen Fund with the cost of government borrowing (maybe 4% average?). If you think the current slump has a way to go, then maybe pausing payments for a year or so might work out. OTOH, the call is hard to make and the temptation is to never restart payments.

    Also, the drop in the NZ dollar has mostly cancelled out the fall in overseas markets for an NZD investor – which explains some of the funds resiliance.

  2. bilbo 2

    “To make the investment you have to borrow but at a special low rate.”

    Can you provide some more information on this special low rate we can borrow at.

    What’s the rate and will it affect our credit rating ?

    Would you be prepared to forgo some public spending and have the funds put into the fund instead ?

  3. Tim Ellis 3

    Interesting question, mathemegician, but I disagree with your logic.

    Market price is determined by perceived market price. If the market decided that an asset was significantly undervalued, it would move accordingly and increase the price.

    What you are suggesting is that Key should second-guess the market, and that somehow he knows better than the market does, and throw a lot of money at it. That might be an appropriate response for his own money, where he’s prepared to accept much higher levels of risk for a higher return; or even for his investors’ money, when they have the risk explained to them and can choose whether or not to invest with him.

    Taxpayers don’t have any such choice. It is all very well to for you to say that asset prices will bounce back in the next year, but I would much rather that the government took a lower risk strategy with taxpayers’ money.

  4. Gareth 4

    This line of argument is as bad as that given by supporters of stopping contributions because unit fund values have dropped.
    It’s not about timing markets or guessing when it will be best to invest. It’s about ongoing investment until 2022 at which point the Fund is a net contributor – any prudent investor over that time does it with regular contribution and only extreme circumstances with well explained reasoning should allow for lowering that.

    Don’t make the Super Fund about timing the market. It’s poor investment management.

  5. Pat 5

    Fair enough Gareth, but do you agree that Cullen intended the Super fund contributions to come from surpluses rather than borrowed money?

  6. Maybe they are just following Cullens edict of only putting money in from surpluses?
    Mind you he bought rail so his edicts may not be up to much.

  7. Gareth 7

    Pat, I believe Cullen commented that way, but no, the Act has nothing to do with relative Government fiscal position. It has to do with funding a percentage of GDP.

  8. As Tim points out, timing the market isn’t nearly as easy as saying ‘stock prices will go up’ and thus buying them. The efficient market hypothesis might not be strongly true, but the market still does react to information – if it seems like the market will recover, that is likely to be (at least) partially reflected in the price you pay for shares now, unless Key has some sort of data that no-one else has.

    Perhaps if you are so confident shares are under-priced, you should invest large amounts of your own money in them, and make the ‘megabucks’ you say are out there.

  9. Lew 9

    Bah, lost my comment. Here’s a brief reprise.

    Essentially the NZSF like other sovereign wealth funds (including the Australian Federal Government’s Future Fund which not coincidentally is managed by Paul Costello, who ran the Cullen Fund, and is established on a similar model), intends to use its cash-rich position to cherry-pick investments which are undervalued but which other investors lack the cashflow to buy. This is a sound strategy – the problem is that while the fund is cashed-up, it’s cashed-up on the basis of government debt, which bears the risk of a credit downgrade, and that’s a possibility the mathemagician has failed to include in this reasoning. Sure, there’s plenty of opportunity in the market, but the risk of a downgrade means it’s not all sunshine, buttercups and rainbows if we continue the contributions.


  10. StephenR 10


    600 million is quite a bit. Sooo…cut something?

  11. Gareth 11

    The borrowing (and any related downgrade) is an outcome of the overall Government revenue and spending positions. So the contribution to our future Superannuation entitlements has as much to do with the borrowing as the decided tax rates or any other spending.
    It’s case of prioritising spending in the vastly tax reduced revenue situation we find ourselves (especially if planned tax changes go ahead).

  12. edoze 12

    You sir are a fuckwit!

    [lprent: Are you talking to me? The poster? The last comment? I’ll assume it is me and add you to auto-moderation until I get an explanation. In the meantime, I suggest you read the policy ]

  13. inpassing 13

    Most if not all of the above presupposes on-the-table investment/s.. would you be surprised to know how margin is still being made off-the-table.. and attracts its very own kind of investor.. of which the aforementioned Mr Key may be one.. though at this juncture one could not be sure of access to such margin-making for public money.. to wit the self-limiting nature of privatized profit-taking.. which aint for public entities anyway..!

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