Overview: NZX Limited operates markets for capital, risk and commodity products. They are a monopoly in many senses with no other market operators in NZ of any scale. Along facilitating equity, debt and derivative trading, the NZX provides data, produces agri publications, and has recently got more involved in funds management.
Pros: Their funds management division was boosted by the acquisition of SuperLife in January. This week, the NZX reported a jump in SuperLife funds under management of 10.7 percent, lead by SuperLife’s KiwiSaver funds which was up 15.7 percent.
Along with SuperLife, the NZX operates 19 Exchange Traded Funds (ETF’s) under the Smartshares brand. 14 of these ETF’s have been launch since last December. An ETF are passive funds that seek to track an index or sector. The 19 ETF’s that NZX have in their stable range from an NZX50 tracker, though to an emerging market’s ETF, and even an ETF that tracks smaller US companies.
The increasing FUM the NZX is enjoying is indicative of a growing capital market, something the NZX has been working to foster lately. The amount of KiwiSaver funds flowing into the market can only benefit the NZX over time.
Cons: The growth in the funds management business helped increase costs by 19.3 percent for the first half of the financial year. Revenue was only up 10.4 percent in comparison. Many of these costs were one-off, a result of launching the new ETF’s and from ‘professional fees’ relating to a continuing court case over an exchange the NZX purchased in 2009.
The costs relating to the new ETF’s are being minimised by the NZX outsourcing the running of the funds. The NZX is, in essence, re-branding funds already run by ETF pioneer Vanguard. This is practical given the costs associated with running funds and the relatively small market in New Zealand.
The NZX will suffer if world markets deteriorate as trading volumes will decrease, listings will become less likely and the public perception of the markets will be dented.
Price performance: The NZX has underperformed the collective market that trades on its platform in recent years, off 6 percent in 2014 and 9 percent this year.
Investment outlook: A monopoly with reasonable gross dividend yield looks attractive. If the company can control costs and grow margins, then profits should rise in the long term.
*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.