The Medibank float is likely to be the largest and most keenly sought-after Australian Stock Exchange (“ASX”) retail float for a very long time.The high level of interest is a reflection of many issues – some valid and some not so valid from an objective investor point of view. In this post, i muse on the likely background for investor approaches to this float. Whether the float proceeds to listing and does so in a positive investment return or a loss for investors is not something that i intend to make a judgement on. Rather, this post is simply looking at the broader issue of large government businesses being listed, and the hullabaloo that surrounds any such large sale.

As usual, and probably even more so for this post – please remember the Great Disclaimer, set out in even more florid detail in the notes at the end of this post. Nothing in this post or on this site is to be considered personal advice. You shouldn’t even count it as general advice, as it’s really just my thoughts and musings on a current issue, with minimal attempt to cover even a fraction of the nuances, interpretations and possibilities relating to the Medibank float. Notes at the end of the post include more disclaimers, and attempts at plain English explanations of why you should not make any decisions on Medibank or any other investment until you are in possession of sufficient authoritative research and it’s relevance to your personal position. No internet Genius, tv financial personality, newspaper journalist or media commentator can achieve all of that level of investigation. Not even me. It takes personal investigation into your personal circumstances from a qualified planner or appropriate research on your part. Ok.. back to my musings…

Medibank float

Let’s start with a quick overview of my general impressions of how most investors will approach the upcoming initial public offering (“IPO”) for the government owned Medibank business :

• Commonwealth Bank and CSL are two very well known, well respected ex-government owned businesses that are trading at massive premiums over their respective initial listing prices. A lot of people will use these as a gauge of their involvement in Medibank.
• The health sector has been seen as “recession-proof” for quite some time. While this is only partially correct, and less likely into the future, underlying statistics suggest a large percentage of government revenue will continue to be channeled into health expenses – thereby providing a level of support for “infrastructure assets”.
• Medibank has a huge potential as a retail cross-selling database. This hasn’t yet been tried in a material way, as Medibank has stuck to its’ knitting and doing that knitting very well – but there is no doubt that much like airports, the retail leverage offered by the Medibank reach into the community, will be keenly sought after.
• Australian’s have only partially agreed to the “recovery” story post the Global Financial Crisis. Both retail investors and professional managers are still sitting on large piles of cash. Combine this with the possibility of low interest rates into the future, and many people will see exposure to Medibank as an “alternative to cash, which is likely to pay better dividends than you can earn interest from cash in the bank, and offer some potential to grow in value”. While this may be a superficial interpretation from a financial planning point of view, it will no doubt power a huge swell of funds towards any Medibank listing.
• Australia’s listed healthcare sector does not hold very many large-scale profitable enterprises (** see notes at end of post). A solidly entrenched business with surety of income will be a welcome addition to many portfolios.
• As a large company, most passive and active fund managers will need to buy into its float. This is again likely to boost its attraction.
• Quite a few people look to “floats” as a chance to “win” quick money. The financial market refers to it as a “stag profit”. When keenly sought after, there is a chance that bids are scaled back, meaning people do not get as much as they want to buy. This then creates a buying tension post listing, providing some price strength and allowing early investors a chance to sell into that “stag profit”. This is equivalent to red and black on the roulette wheel but many people do not see it that way.
• The government wants the best price it can get. The cynical part of me suggests this is not to obtain the best taxpayer value but to obtain the highest dollar amount to be able to meet other spending promises.

The last point being that governments do not seem to have much liability for non-commercial marketing when floating their businesses (this is a purely personal view based on past experience of floats such as Telstra), so the suggestion will be that most Australians should see this as a chance to profit from buying into an icon Australian asset. Portfolio balance, cash utility, tax position, debt position or simply market strategy will most likely NOT show up in marketing. When combined with the “hidden” commission (see notes at end of post) to brokers and advisers and the likely government spend on marketing, the result is likely to be a whirlwind momentum that impacts on investor emotion and reduces logic. Medibank is likely to be seen as a “must buy” and nothing else. Perhaps i am being overly cynical but these are my personal impressions after all, and that has been my impression with large floats in the past.

Medibank float – remember the negatives

There is a genuine psychological concept known as Depressive Realism, which suggests that depressed people are more likely to see the world as it is, whereas people who are not depressed will tend to view the world through rose-coloured glasses. In part, this is just the positive human thinking slant that helps us all get out of bed each morning, and to brush aside difficulties as just movable roadblocks on the pathway to obtaining the things we want. I raise depressive realism because to my mind this is the approach that takes hold of investor mindsets post large “crashes” such as the 1987 sharemarket crash or the 2008/9 Global Financial Crisis (“GFC”). Investors stop believing stories of growth and potential and possibilities, and focus on actual returns, results and profits. I am talking in a broad sense of course but anyone actively involved in the financial services industry would be able to relate their observed examples of this behaviour. i make the comparison of post GFC thinking to depressive realism because i actually view it as a very good approach to investment. Sometimes the negativity gets too strong but in general, it serves people well. Will depressive realism impact the Medibank float?

It should always be remembered that positive outcomes from the public listing (“float”) of companies is not guaranteed as an outcome. Some businesses aren’t received as well as expected, while others are the victim of broader market conditions. For example, as of today (Thursday 16th October 2014), the broader investment scene is looking a little unstable. Here’s a quick look at just some areas :

• The Dow Jones Index has fallen 6.5% since mid-September
• The United Kingdom FTSE Index has fallen 9.2% over a similar period
• Australia’s S&P/ASX200 Index has fallen 8.6% since the beginning of September
• Within the Australian market, the “financials” Index (“XFJ” : banks, insurance companies and the like) is down 8.3%
• The Metals and Mining Index (“XMM”) is down 16.2% since mid August
• The Small Ordinaries Index (“XSO”) is down 11.6% since early September
• The USA 10 year government bond yield has fallen 18.4% – from 2.6191% on the 17th September to 2.1353% yesterday.
  • The Sydney Morning Herald website suggests that the yield last night reached a low of 1.86% before closing at the 2.1% level. That’s a lot of volatility in a huge market.

Not many months ago, market talk was all about the risk of rising interest rates and inflationary pressures, as the US Federal Reserve moved to a rising interest rate cycle. Today that market talk is more about deflation, and the threat of a spiral into ever decreasing prices.

In other words, the Medibank float will be just one company in a sea of companies that makes up the Australian market in an ocean of companies that make up the global market. Although each company’s share price technically should reflect its current value, that valuation will be dependent upon forecasts of future income, costs, profitability and market conditions. Therefore, even good companies can find that their prices are impacted by broad market conditions. The government, its advisers and the float promoters and brokers will all do their best to market the Medibank float as a good investment. There remains no guarantee that their efforts will end in a positive outcome for investors.

Medibank float – who is buying the shares?

This is a good point to ponder. Some people will rush to pre-register and use their own names without musing on the appropriateness of buying shares in joint names or through a trust or a company or their super fund or… It’s always worthwhile with any investment to consider any potential taxation impacts, as well as broader ownership issues.

Medibank float – how does an adviser view this?

That’s a big question, and i can only touch on it here. So i’ll stick to some key points that an adviser is likely to consider:

• Firstly, is a particular client in a position to invest money in the first place?
• If they are, has the value of investment been considered against other cashflow alternatives such as paying down debt or holding cash?
• What time frame would any investment be made in from a strategic point of view?
• Is a direct share investment with all its’ associated volatility a good fit for the risk profile of a particular client?
• If an investment should be made, who should own it?
• What are the likely taxation implications of buying, holding and eventually selling the investment?
• If an investment should be made, how should it be owned? Directly? In an investment platform? In a super fund (also part of the ownership question)?
• Is direct investment suitable to the particular client or would professional funds management be more suitable?
• Is there sufficient cash for the purchase to be made? Would other assets have to be sold? What are the pro’s and con’s of doing this?
• What level of investment is appropriate?
• What impact will this have on asset allocation, future return expectations or the mix of income/growth in a portfolio?
• If Centrelink is an issue, will this potentially impact on Centrelink benefits?
• If a direct share purchase is made, under what terms will it be held or sold? Should a full investment be via the float or should it be via a staggered, gradual purchase of shares?

i’m not being silly here. These are legitimate issues to dwell on. There are more but they would tend to be even more personal and subjective, varying from client to client.

Medibank float – advisers, rules and compliance

From a compliance point of view, nobody can recommend or comment on Medibank specifically as there is no registered publicly available prospectus or offer document. From my point of view as an adviser, i am not able to make specific recommendations nor comment on the suitability of Medibank until such time as it has been adequately researched and further investigated by RI Advice Pty Ltd’s compliance and research teams. Hence my rather extreme and Michaelesque attempts at highlighting this fact.

Medibank float – is an adviser authorised to participate or recommend such shares?

Each adviser will have different levels of competency, education, and authorisation. Some never recommend shares while others solely recommend shares. There is no “standard” in this regard. However, your adviser will be able to confirm for you whether their dealer arrangement is such that they can provide recommendations or assist you with floats or share purchases.

Even if your adviser is authorised to recommend shares or floats, their dealer may specifically not include Medibank on its approved product listing. So it’s a matter of asking and doing your own investigation.

Medibank float – in conclusion..

I vividly remember situations for the various Telstra floats, where some people went so far as to register shares in the name of dogs and pets in an attempt to get the most shares they could in the event of a scale-back of the retail offer. Perhaps that is behind some of my cynicism of large floats, and perhaps that leads me to a little bias against taking float literature or marketing at face value? i’m not sure.

It may be that the public interest is low – some have suggested that the pre-registration process received a lacklustre response…

Please let me know if you have any comments, suggestions or criticisms of this post – i don’t usually stray onto individual products or investments but thought this one was worthy of a few more musings.

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Disclosure

I have no idea whether or not i will personally by Medibank shares. I am a Medibank member, so i received the pre-registration offer, and i’ve completed the application form – more out of professional interest than from any investment perspective. Not that any purchase i may potentially make would be anything more than a token exposure but good form and bountiful legislation require me to inform you of my personal linking to any individual investment or product.

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The Great Disclaimer

Nothing in this post or on this site is to be considered personal advice. Personal advice can only be provided by a suitably qualified adviser, after appropriate investigation into your needs, objectives, risk profile, current financial position, expectations of change, and analysis of the impacts of economic conditions, legislation, taxation, and changes to these inputs. Any personal advice should be in the form of a written Statement of Advice (“SOA”), which would include appropriate recommendations and any alternatives or shortfalls in the scope of the advice.

Any figures quoted are put forward in good faith but i make no representation to their accuracy as these are my personal posts and they are not checked for accuracy (as evidenced by the occasional spelling or grammatical slip-up). Any reference to past returns or figures must not be taken as an indication of possible future returns, as the future is unknown. Philosophically, whether we operate under free will or in a deterministic universe is not going to change our ability to intuit the future.

Nothing in this post is to be taken as a recommendation for or against an investment in Medibank, nor is it to be inferred that any judgement on the validity of the company itself is contained in this post. i have no personal opinion whatsoever on Medibank as an investment, and like the bulk of the nation, have not as yet seen a prospectus or offer document.

There’s also a corporate disclaimer, which is to say that this is my own personal site, established, administered, authored and cherished by me alone. It’s mine and no-one else’s. So any liability for my musings rests with me, and not with my business partners, associated entities, nor with my dealer group – RI Advice Pty Ltd, nor my family, my children, nor any other human being, financial institution, business entity or casual acquaintance.

Basically, these are my musings only and i don’t know you and you don’t know me. Even if we did, i’ve written this post while wearing my universal philosophical hat, which doesn’t make room for individual desires and wants, so this particular post especially is of no value as financial information regarding the Medibank float. It may be of some value in considering likely investor approaches to the float of a large business in a post GFC environment – but i’ll leave that an a subjective unknown.

Notes

“Hidden commissions” – i’ve used this reference in the post to highlight (perhaps a little provocatively) the fact that every float of a business involves some fairly substantial costs. These costs include a marketing allowance or brokerage to those who promote or sell the shares in question. The money paid is usually a percentage of the dollar value sold or promoted. Sometimes that comes out at 1% and sometimes it’s higher and sometimes lower. It’s a market directed rate that is negotiated for each float. All i am suggesting is that it should always be kept in back of mind that there can be a lot of money available for those actively promoting any float. Quite often investors have suggested to me that there is no brokerage on a float and i’m really just saying that this is only partially true. In the harsh real world of money, it costs money to get your name out there, and that cost has to come from somewhere. i happen to hold a very positive view of financial planners and stockbrokers, and am comfortable that for most this money is not a material factor in any recommendation of a particular float. However, any large float becomes a little all-consuming, so i’m just recommending a little caution at every stage.

“Australia’s listed healthcare sector does not hold very many large-scale profitable enterprises” – i’m referring to the XJO 35 Healthcare Index (“XHJ”), which includes Ansell Holdings (a global reach company), Cochlear Limited (a global reach company), CSL Limited (global again), Sonic Healthcare, Primary Healthcare, ResMed Inc, as well as Sirtex, Virtus Health, Mesoblast Limited, Japara Healthcare Limited and Greencross Limited. They are impressive names and businesses but it remains a fairly short list.