Coronavirus: Economic turmoil from Covid-19 massively reduces wealth of the super-rich
Rob Stock05:00, Apr 12 2020
Wealthy people with cash to deploy tend to grow their fortunes when economic crises end and recovery begins, says Jeff Matthews, a Forsyth Barr investment adviser.
"Most of them end up being wealthier because they have the cash, or funding lines available, so they are able to pick up bargains," Matthews says..
"Ordinary people don't have that ability to go out and buy a whole lot of Auckland Airport or Heartland Bank shares, if they think they are good value."
The rich aren't different from ordinary folk, Matthews says. "They are just regular people with more zeroes in their bank accounts than the rest of us."
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Rod Duke says wealthy people do not track their wealth on a daily basis.
While wealthy people's assets take a hit in crises, they do not enter panic mode, providing their wealth is not built on an edifice of suddenly unsustainable debt.
And if they have cash to invest when prices are low, they can position themselves to profit from rebounds in share and property prices, Matthews says
This was a strategy most famously adopted by legendary investor Warren Buffett which he outlined in a New York Times column in the immediate aftermath of the global financial crisis, saying he would be buying American company shares at bargain prices because it made sense to "be fearful when others are greedy, and be greedy when others are fearful".
Briscoe Group majority owner and managing director Rod Duke says he has taken an eye-watering wealth hit from Covid-19, but he is not panicked.
Duke's 77 per cent stake in the retail group that owns Briscoes, Rebel Sport, and Living and Giving, was worth around $775 million in January before United States and New Zealand Covid-19 panic set in.
His stake is now worth around $505m, having at its lowest point hit just under $400m.
Duke is no longer drawing a wage from Briscoe Group, and the dividends he was being paid, which totalled more than $33m in the past financial year, have been suspended.
But Briscoe shares were being valued as a result of other people, not Duke selling them. And on March 20, he bought another 216,000 of them.
"If you sat down and tracked all the purchases and sale of Briscoe shares over the last 19 years, the one thing that would be abundantly clear is that I am not a seller. I have never sold," he says.
In March Kein Geld (NZ) a company in which Duke is a shareholder, bought just over 200,000 shares in Briscoe.
The reason he keeps buying, Duke says, is that Briscoe has been a great investment, evidenced in it increasing its dividend for each of the past 18 half-years.
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Investor Warren Buffet's view is buy when there's blood in the streets.
When asked how he feels about the $300m-odd drop in his wealth, he says, he doesn't feel anything.
"I don't think about it."
His eye remains on the long-term value of Briscoe, and he does not track the daily movements to see how his wealth was increasing, or decreasing.
"None of my friends, who have been relatively successful, do that either," he says.
Duke sold his Auckland waterfront mansion late last year.
There are other big shareholders in listed companies whose wealth declines can be tracked by share price movements.
Members of the Hill family, of Michael Hill jewellers, had 483 million shares in the NZX listed company.
They were worth 76 cents at their high point on January 13, and are around 25c cents last week, making for a drop in value from just under $370m to just over $120m.
But some very wealthy people's wealth is in unlisted assets, which are not priced daily, making their rises and falls in wealth trickier to track.
New Zealand's richest person Graeme Hart's Rank Group is not listed on any sharemarket.
But US wealth publication Forbes estimates the wealth of the world's billionaires, continually updating its estimate of their "real time net worth".
Forbes estimated Hart was the world's 127th richest person on March 8, with a real time net wealth of US$11.5b based on estimates of value for his packaging empire, which makes everyday products such as milk cartons, paper and aluminium foil.
In late December, Forbes estimated Hart's net worth at US$10b.
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Sir Michael Hill has seen his paper wealth dip as shares in his jewellery company fell in price.
"People tend to get wealthy by concentrating their wealth, having a mass of money in Microsoft, or Apple," Matthews says.
But once they've made a fortune, they tend to diversify to reduce the risk of losing that fortune, he says.
That often means diversifying into property, which Duke has done though several properties he owns in Auckland that have Briscoe Group shops as tenants, as well as buying into other businesses either directly, or through bespoke share portfolios put together for them by investment advisers.
Property values remain unclear at this point in time with the real estate market having ground to a near lockdown halt.
Of the top 20 people on New Zealand's rich list, almost half built their wealth through property investment, including Sir Michael Friedlander, worth $1.85 billion with an "empire of office buildings, retail strips and industrial properties," according to the NBR Rich List.
The wealthy have other advantages in a crisis.
They tend to be able to make use of tax losses in recovery phases, while ordinary people whose wealth is in their homes and KiwiSaver, cannot, Matthews says.
Wealthy people also tend to have advisers, who can help them take action, such as sweeping in to buy up unloved stock in a company, or locate them bargain investment properties.
Though it has not happened in New Zealand, a crisis can lead to tax breaks for the rich being slipped through unnoticed by the voting masses, as has happened in the US, which means they stand to do well during the recovery phase.
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New Zealand's richest person is Graeme Hart.
The rich are good at weathering crises, and overseas and in New Zealand, it's been observed many head to out-of-town second homes to distance themselves from centres of viral activity, a tradition going back to the outbreaks of plagues in Medieval Europe, captured in stories and reportage, such as Boccaccio's Decameron and Daniel Defoe's Journal of a Plague Year.
But in the age of social media, it has become harder for wealthy business leaders not to share some taste of workers' pain.
Across listed companies, whose share prices have plunged on the NZX, executives and directors have been giving themselves pay cuts.
If those pay cuts aren't deep enough, protests can force them to dig deeper.
That happened to Fletcher Building chief executive Ross Taylor, who was forced to increase his temporary pay reduction from 15 per cent to 30 per cent, after Fletcher employees protested.
The workers had been forced to take a 70 per cent pay cut for 12 weeks.
In an open letter, the wife of one Fletcher Building worker told Taylor: "I do wonder about how you justify taking only a 15 per cent pay cut when you earn well in excess of half a million dollars a year, hard work and sleepless nights at present or not, while we have to worry about having money to buy milk and bread."
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Fletcher Building chief executive Ross Taylor was forced to take a bigger pay cut than he had been planning.
But leaders in some industries, like banking and insurance, remain more sheltered, and have so far not announced they will be taking pay cuts.
Most senior executives are exposed to falls in the value of shares in the companies they lead. ASB chief executive Vittoria Shortt held shares in ASB's parent bank Commonwealth Bank of Australia (CBA) worth 113 per cent of her base pay at June 30 last year. Her base pay was A$965,550 (NZ$1m)
At the end of June, shares in CBA were worth A$83. On April 8, they were worth A$59.81. |
