We tend to get some complaints when we write about New Zealand-based issues. This post is one of those New Zealand focused ones. Feel free to skip it if that isn’t what you are interested in.

Dear NZX

We like your work – we really do. The relevance and professionalism of the New Zealand share market has improved by an order of magnitude over the last ten years.

But we also love the quote from Il Gattopardo (The Leopard) – “If we want things to stay as they are, things will have to change”

We know you get that – for New Zealand to remain competitive we need stronger capital markets. The Capital Market Development (CMD) Taskforce has some good thinking – which needs the political support to implement. However, looking at the majority of suggestions – they are 20^th century solutions. Do they need implementing – absolutely. But for a small market like New Zealand we need to be looking at different solutions as well – what works in a big market doesn’t necessarily work here. We need to be looking at more innovative solutions – and again, I do think you get this. Adding Rod Drury to the NZX board is a step in the right direction.

We are in the broad equity research space – and we were disappointed by sections of the CMD Taskforce report. The CMD report (from page 69) outlines a situation where there is limited traditional equity research coverage of smaller listed companies. The CMD report offers solutions including public and private funding of additional equity research (supplied by traditional research providers) – because that is what other markets are doing. There is discussion about a “small levy on trades” (page 70).

Really. That is the best solution we have got. New Zealand is a very small market – quoting the CMD report:

“INFINZ data show that 30 stocks are covered by all six major New Zealand brokerages, and a further 37 stocks are covered by some of those firms. There are 47 (41 percent) NZX companies without any analyst coverage at all, and a further 15 have only one or two analysts covering them. There is generally no coverage of small stocks, and no coverage of the companies on the smaller exchanges, the NZAX or Unlisted.”

“All six major New Zealand brokerages”. Unless the plan is to make a significant investment in research (more than one analyst per company) – and that doesn’t seem possible – why are we bothering? The traditional large market research model doesn’t seem to be relevant here. Never mind that most traditional research reports are virtually impossible for the average retail investor to comprehend – anecdotally the consumption of research reports by retail investors in New Zealand is low. NZX knows where retail investor education is in New Zealand – the large electronic ticker going around the NZX Centre in Wellington uses full company names and the share price not ticker codes and the share price. That is the right thing for NZX to do by the way – but it shows how far we have to go.

Why not start with a plan to provide base financial information and valuation resources for the market? Let’s initially make information and tools available - how people use them is the next step. NZX.com is the logical home for those resources.

There will be traditional coverage where the market deems it worthwhile – the largest companies on the NZX only. For the rest not covered by traditional research (in fact for all of the NZX companies) NZX should be following Jeff Jarvis’ rule from What Would Google Do – “do what you do best and link to the rest”.

Most investors in New Zealand go to the NZX website for information on listed companies. NZX has added news feeds from Fairfax to encourage more engagement – but where is the financial information and analysis? NZX should make base financial information and valuation resources available. NZX.com is in a position to be the default portal for listed company information in New Zealand. There are options available to NZX where other parties are providing free access to information and tools to fill the current gaps on NZX.com.

Example 1 – Reuters

It isn’t well known – but the free Reuters website has good coverage of NZX listed companies. We can use New Zealand’s largest listed company Telecom New Zealand ($TEL.NZ) as an example.

For New Zealand companies all you need to add is a “.nz” suffix to the ticker code and there is a quantity of quality free information. The information is comprehensive – and in a single location. Using $TEL.NZ as an example – consensus analyst estimates, historical financial statements, charts and even paid research options. It isn’t only the large NZX companies – for example Xero ($XRO.NZ) even though they have no analyst coverage.

Example 2 – Valuecruncher

At Valuecruncher we provide interactive valuation tools for listed companies. This already includes 156 companies on the NZX. These are comparator based tools. Using $TEL.NZ as the example again.

Valuecruncher Interactive Analyst Report For Telecom New Zealand ($TEL.NZ)

Our algorithms choose the peer group from an international selection. But you can change the peers to a New Zealand focused group. The tools are interactive.

Disclosure: Yes – one of the solutions is Valuecruncher. In case there is any doubt – that is the company associated with this blog.

NZX – do what you do best and link to the rest. What would Google do? Google Finance uses links to Reuters for deeper data.  NZX.com can be the default financial information and valuation resources location for New Zealand as a first step to a potentially bigger future. It is time to look for specific solutions for this market - not simply copying the actions of larger markets.

Regards,

Mark Clare

Valuecruncher CEO

Umair Haque is an on-line strategist - we are big fans of his work. His latest column on the Harvard Business Blog focuses on finance. It is written as a letter to Google ($GOOG). In it he asks if they can build a better global financial architecture. It is his usual great stuff. At the end of the piece he lists three examples of companies on the “leading edge of a revolution“. One of the three examples that he uses is Valuecruncher.

Tracked, ValueCruncher, StockTwits, and many more are the leading edge of a revolution — a revolution in what finance has been for the last several centuries, and what it must become in the 21st.

That is really cool.

We have previously looked at a view of the future of on-line finance. In that analysis we looked a range of scenarios:

One of the scenarios being Rock Stars.  We described the Rock Star scenario as:

Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing.

Last week Dan Carroll and the team at KaChing announced their new offering - and started to show how this scenario may play out. There was a feature in the NY Times which described the business model.

Customers will be able to open a brokerage account with Interactive Brokers and link their account with their choice of investors on KaChing. KaChing charges customers a single management fee of 0.25 percent to 3 percent, set by each investor. KaChing keeps a quarter of the fee, and the investors get the rest.

Each time the investors make a trade, KaChing will automatically make the same trades for the customer. Customers can log on whenever they want to check their portfolio’s performance. They can send the investor private messages and receive alerts if the investor does something unusual. With the click of a mouse, customers can stop mirroring an investor.

KaChing has an A-list team of investors behind them. The on-line finance space has a lot of interesting experiments going on - but we think this is a particularly interesting one. A lot of us will be watching closely how KaChing goes.

Disclosure: I met Dan and Jonathan from KaChing at the FinovateStartup09 event in San Francisco in April 2009. We had the stand next door. Good guys, smart guys - doing interesting things.

Valuecruncher CEO Mark Clare will be in the United States for the next two weeks. He will be based in San Francisco from the 21 September to the 26 September. He will then be in New York from 27 September to the 2 October.

Mark will be at the Finovate conference in New York on the 29 September and also attending the StockTwits StockCamp event at NASDAQ on the 2 October.

You can follow Mark on Twitter - @Valuecruncher.

We have been participants and observers of the on-line finance  space for a period of time now. As part of that we regularly examine our view of the competitive landscape. We have decided to share some of our views on where the very broad industry may be headed. This isn’t company specific – very much the high-level perspective.

Where We Are Today

We view the on-line finance space in three broad areas: Information, Analysis and Execution.

Pre-1995 this whole area was dominated by brokerage firms with full-service offerings. They had the information, did the analysis and the executed the trades. Since 1995 that has changed pretty significantly.

Information – background operational and financial information. The main players in this space are now the large finance portals (Yahoo, AOL, MSN, Google, etc). They built and extended these offerings in the Web 1.0 and 2.0 days. The business model is primarily advertising – free to consumers. It should also be noted that there is still a paid market for detailed and timely financial information (Reuters, Bloomberg, Capital IQ, etc).

Analysis – what does the information mean? Should I buy a particular stock? What is this stock worth? Full-service brokers still compile research notes and reports for clients – but this space has begun to be disrupted. This disruption is coming from a number of areas:

Qualitative – primarily finance blogs. These take two main forms: user-generated content aggregators (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Community Sites – where retail investors look to communities of investors for advice on where to invest. Examples: The Motley Fool, Wikinvest, Covestor, KaChing, etc.

Niche Tool Providers – primarily quantitative-based tools. For example Valuecruncher.

Execution – the actual buying and selling of stocks. The discount brokers have come to dominate this space (i.e. Charles Schwab, ETrade, etc). They disrupted full-service brokers with simple flat-rate commission structures starting in the Web 1.0 days.

That is a high-level view of where we are today. What might happen next?

We completed a scenario planning exercise based on the frameworks developed by people like Peter Schwartz.

We started with an analysis of trends and uncertainties. A trend is something that we feel certain is occurring. An uncertainty is something that could still go either way.

Trends

1. Execution becomes a commodity – executing trades will continue as a low-cost business. There will be some geographic-based regulatory moats – but no ability to generate abnormal returns. Other parties could enter this market (i.e. portals).
2. Death of traditional equity research – the current model is too expensive and producing research reports that are complex and hard for retail investors to consume. Traditional equity research will head the way of newspapers. Equity research is important but the delivery methods must change. There will be a space at the top-end for high-quality  research (that clients will pay for) but only a niche.
3. Investor knowledge continues to improve – the level of general investor knowledge continues to improve but there still remains a significant gap between the average retail investor and the corporate finance professional.
4. Financial blogs continue to be influential – high-quality analysis continues from blogs. There are two broad models – aggregating content (i.e. SeekingAlpha) and traditional journalism on the web (i.e. The Business Insider).

Uncertainties

1. Individual VS Collaborative – how will retail investors choose to research investment decisions? Individual analysis – retail investors (with improving education) complete their own analysis on where to invest – both qualitative and quantitative. Collaborative – retail investors look to communities of investors for advice on where to invest – track record is vital.
2. Free VS Paid – financial information has proven to be an isolated area on-line where paid models have worked (i.e. WSJ). Moving forward – will retail investors be prepared to pay for financial information or will free win out?

We then construct a basic scenario matrix. These scenarios are not meant to reflect concrete versions of possible future states but rather to illustrate the potential impact of the identified trends and uncertainties. There will be components of all of the scenarios in the future – this analysis is intended to emphasize trends and uncertainties. We look at the winners in each scenario and where the portals come out.

Scenarios

1. We Live In Public – Retail investors seek advice from communities of other investors. Track record is vital – this is open to abuse. Retail investors won’t pay for this advice. Community owners seek models to monetize the audience not the content – none is initially obvious beyond advertising. Winners – The Motley Fool, StockTwits. Portals – business as usual providing (mostly) raw data.
2. Rock Stars – Retail investors seek advice from communities of other investors and are willing to pay. Investors make their trading accounts transparent on-line. Successful investors open their accounts to act as virtual fund managers. Virtual fund managers and community owners split a management fee paid by investors. Winners – Covestor, KaChing. Portals – business as usual providing (mostly) raw data.
3. Super Commons – Retail investors value analysis and tools but are not willing to directly pay. There is a move from traditional on-line financial information providers (i.e. Capital IQ) to low-cost/no-cost providers (i.e. financial portals). Retail investors and corporate finance professionals use the same tools. New tools are added (i.e. Google Domestic Trends). Pay-walls come down – financial blogs are at their most influential. Winners – Portals and financial blogs
4. Walled Garden – Retail investors value analysis and tools. The financial blogs continue to exert influence. However the pay-wall remains at the WSJ and on-line information providers (Reuters, Capital IQ) have a valuable and growing business. Winners – Reuters, Bloomberg, Capital IQ. Portals – Opportunity to launch a low-cost disruption strategy aimed at on-line information providers (a good enough offering to tempt [for example] Capital IQ’s clients).
   

Implications

• Discount Brokers – Challenged across all scenarios. Must follow a low-cost strategy and only add services if that will increase trades (and commissions).
• Financial Blogs – Winners across all scenarios (a role to play in all scenarios). Two distinct approaches – aggregating content VS traditional journalism on the web. We would expect one to come to the forefront (our bet would be on aggregating content – but it is too early to say).
• Community Sites – Winners in the “We Live In Public” and “Rock Stars” scenarios. Significant opportunity if community is the way that people choose to make investment decisions. A business model has proven to be a challenge to date for players like the Motley Fool (“We Live In Public” scenario). It is more obvious if investors will pay to be part of the community (“Rock Stars” scenario) – this is currently unproven however.
• Paid Finance Services – Business as usual in the “Walled Garden” scenario and challenged across all other scenarios. Even in the “Walled Garden” scenario there is the potential for the paid financial services to be disrupted (low-cost disruption) by the portals offering extended services (i.e. Google Domestic Trends). Currently users of paid services also use the free portal services (Yahoo Finance and Google Finance). There are limited options to defend this. Paid services do provide the data used by the finance portals. Reuters are also moving into the free space.
• On-Line Finance Portals – Winners across all other scenarios. In the “We Live In Public” and “Rock Stars” scenarios – it is closest to business as usual. These players are the ones with the ability to acquire or build community sites. Investors that are part of communities still require basic financial information and tools. In the “Super Commons” and “Walled Garden” scenarios there are big opportunities. Both require adding analysis tools. Partnering with financial blogs is key. Adding analysis tools is an arms race between the different finance portals.

This is one view of the potential future. Tell us what you think.

Valuecruncher Future Of On-Line Finance Summary (Four-page PDF summary).

The Capital Markets Development Taskforce currently reviewing the New Zealand financial markets released am interim report this week. Media reports have focused on a range of issues - one of which is a lack of analyst coverage.

From page 14 of the interim report:

“Work commissioned for the taskforce has found that there is no analyst research is available on 42% of the companies listed on the NZX, and a further 13% of companies have only one or two analysts covering them.”

We would disagree with that assessment. Here at Valuecruncher we cover 156 companies listed on the NZX. This is more than 42% of the companies on the NZSX. We have valuation tools available for companies from Telecom New Zealand ($TEL.NZ) to Xero ($XRO.NZ).

Telecom New Zealand ($TEL.NZ) - Valuecruncher Interactive Analyst Report

Xero ($XRO.NZ) - Valuecruncher Interactive Analyst Report

Now our reports are not the “typical” analyst reports. But we would argue that the current analyst model looks broken - the current model is too expensive and produces research reports that are complex and hard for retail investors to consume. Those are some of the reasons that there is a lack of traditional analyst coverage in markets like New Zealand.

We believe that equity research will change moving forward and while we may not yet know what the final solution looks like - it will be different to what has gone previously. Parties like the The Capital Markets Development Taskforce should be looking at different more innovative solutions and how those can be encouraged.

Clay Shirky - “That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread.”

Financial markets need experiments. For small markets like New Zealand - these are vital.

We have added some new major new functionality to the Valuecruncher site.

The first thing you will notice is that we have added a lot more companies to our dataset.  We now have 8,000+ companies on the site.

The second thing you will notice is that we have added an interactive comparator (or multiple) based valuation tool to the site.  This new interactive comparator tool allows you to complete valuation analysis of a company against a peer group across a range of changeable metrics.

As an example here is the Interactive Comparator Valuation Tool for Google ($GOOG).

We have previously written about using comparator company valuations - also called comparable company valuations. We will complete a step-by-step guide to using the tools shortly - but the Valuecruncher newsletter noted above gives a good overview to the broad concepts.

We will soon be adding the capability to change the peer group of companies. Currently the peer group is set by an algorithm and can not be changed.

Discounted cash flow (DCF) valuations are not available for all the companies in the dataset. This is because of data limitations and the relevance of the three-year DCF format for certain industries. Where they are available they are on a tab on the company page.

We are excited to bring you this new interactive comparator valuation tool.  We are still working through the kinks - so there are still some rough edges. We are working through those.  But we hope this tool makes more valuation analysis accessible to a wider group of people.

In late April Valuecruncher was one of the companies that presented at the FinovateStartup09 conference in San Francisco. It was a great event and showcased some interesting companies in the finance space.

There are videos of all the presenting companies up on the Finovate site. This includes one for Valuecruncher.

Enjoy.

Valuecruncher was at FinovateStartup09 this week in San Francisco.

It was a great event for Valuecruncher.  We met some really interesting people and got to show off what we are doing to a smart connected crowd. We recorded a formal video there which we will link to when it is up on the Finovate site.  But here are some other links and thoughts for now:

Banktastic were providing coverage of the conference and they captured Mark Clare giving a demo of the Valuecruncher service to an attendee.

Mark Clare spent some time talking to Larry Chiang from BusinessWeek.  Larry asked what were the three things he learned at Finovate that he did not learn at business school (the name of his column).  Here is his three - enjoy:

1. To be a successful personal finance management (PFM in the lingo) site you need to have grass on your home page – examples Mint and Rudder (HT: LendingKarma).
2. Speaking of LendingKarma. Even without the MBA I know that LendingKarma and CreditKarma (both participants at FinovateStartup09) should merge for the name synergies alone.
3. That there are sure are a lot of you “English” guys around.  I am from New Zealand.  Literally the other side of the world.

Update: these links are currently down.  We hope to have them back up as soon as possible. 

NZX is the New Zealand stock exchange.  Today NZX placed links to Valuecruncher valuations for the NZX 50 on their website NZX.com.

NZX Summary Page For Telecom New Zealand ($TEL.NZ)

At Valuecruncher we believe research is important for retail investors participating in equity markets.  Retail investors are looking for recommendations and guidance in making investments.  Valuecruncher is very pleased to be making our interactive analyst reports available to a wider audience through our partnership with NZX.