There was heavy press coverage of telecom infrastructure company Chorus last week, following the Commerce Commission’s final decision on copper broadband pricing, which sent its shares down 23.7% over the week. As Chorus is held in the Dividend & Growth Portfolio, Property Inflation Portfolio and Equity Inflation Portfolio, we thought you might be interested in our thoughts on the situation.
First up we’d note that regulatory and political risk are a fact of life for many shares – examples include the electricity companies, Vector, Auckland Airport, Sky City, Sky TV and even Fletcher Building. In the short term these risks are best dealt with through portfolio diversification. For example, last week while Chorus was falling, Metlifecare, the largest holding in the Dividend and Growth and Property Inflation Portfolios, rose 9.3%, offsetting much of the Chorus fall.
Regulation can take many forms, but at its heart it is about ensuring that monopoly assets earn no more (and no less) than a fair return on the capital invested. In practice, the process of arriving at what is a fair return is an iterative and often arduous process that takes time. This is what is happening currently with Chorus. The Commerce Commission’s ruling is not the final word; it is a step on the path to determining what is a fair price.
Taking a longer term view, once the regulatory uncertainty is resolved, Chorus will own the bulk of New Zealand's fibre network, a high quality monopoly asset with growing demand that should generate good returns for investors.
While the news in the last week was disappointing. as long-term investors we are able to look past the current regulatory noise, and on that basis we have added moderately to our positions at these lower prices.
Source: NZ Funds Adviser Update - 13/11/13