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Picking the right finance company

Investors and advisers looking at finance companies need to be more discerning – especially as the economy slows this year, says McDouall Stuart’s Stephen Eaton.

Tuesday, 21 February 2006

by Rob Hosking

Eaton says that while some finance companies are very good, there is a wide range in quality.

There are some difficulties in gauging the type of investment in the sector, he says.

The broad categories – property, motor vehicle, business and personal/consumer lending each contain a wide variety of risk, he says.

“There are broad categories of lending within each of those categories. Motor vehicle, for example, contains lending to franchise businesses – which we would class as quite a low risk – and also to car importers, which is higher.”

New Zealanders are still too inclined to invest on the headline rates and ignore the risk factor, he says.

When one finance company is offering 10% and another is offering 7% a lot of people will be persuaded to go with the 10%; when, on a risk/return basis, the 7% is a better investment.”

Investors need to watch what finance companies are prepared to disclose – and, more importantly, what they do not disclose.

Factors which need to be examined are bad debts, and provisioning for those debts, inter-company dealings, and balance sheet factors such as liquidity, size and security of loans, related party transactions, and liabilities to total assets.

Overall, says Eaton, the higher yields are generally not compensating for risk at the moment, and with the current investment environment investors need to be cautious, less keen on chasing yield, and go for finance companies with size, a reputable brand and management, and history.

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