Fund units ‘almost uninvestable’

It’s looking like units in the Fonterra Shareholders Fund — which give investors outside the co-op access to its dividends — could soon go extinct.

In its response to Fonterra’s proposals, FSF Management, the manager of the Fonterra Shareholders’ Fund, said a buyback would require a price to be negotiated between the manager’s subcommittee and Fonterra.

The fund has 107.2 million units on issue, with a market capitalisation of around $493 million.

As it stands, farmers have to buy one Fonterra share for the right to supply 1kg of milk solids. Under the new proposal, it could be one for four.

Fonterra’s preference is for a reduced share standard and a capped fund or no fund at all.

Mark Brown, chief investment officer at Devon Funds, said the units had long lost favour and were “almost uninvestable”.

The scheme was designed to deal with Fonterra’s redemption risk — when the co-op has to pay out farmers when they exit. History had shown that if enough farmers left the co-op at one time, it posed a potential risk to its balance sheet.

“You (as a unit-holder) are a minority shareholder in a business that is run for the majority of those shareholders, and the majority of shareholders just happen to be your suppliers,” Brown said.

“The capital structure is wrong.” Craigs Investment Partners head of private wealth research Mark Lister said Fonterra’s structure could not be blamed for the units’ underperformance. The farmer-only Fonterra shares — which trade in lockstep with units — had not performed either, he pointed out.

The units debuted on the NZX at $6.66 in 2012 and rocketed to $8.00 shortly after.

Since then it’s been a rocky road, the units hitting a low of $3.18 in 2019.

“In the bulk of that period Fonterra was not doing particularly well as a business,” he said. “The irony is that the progress . . . in recent times has been too little, too late.” — Jamie Gray