Danger lurks in MIS badlands
May 29, 2009
PORTFOLIO POINT: Investors should tread warily on MIS schemes, characterised by a lack of information, data and success.
The collapse of Australia's two biggest promoters of managed agricultural investments schemes - Great Southern and Timbercorp - has drawn attention to agricultural investments and their place in investors' portfolios.
Those in existing schemes face an anxious wait as the administrators sort out where they stand with respect to their investments. The 8000 who borrowed through Great Southern Finance and had their loan obligations onsold to Bendigo Bank have the dual worry of managing both their debt and their investments.
My own aversion to agricultural managed investment schemes has not changed from an article I wrote in 2006, which looked at assets other than shares, cash and fixed interest investments that professional investment managers use (see Exploring the 'alternatives'). At the time I commented that "Agricultural investments are among the most actively promoted investments. Yet the professionals don't see enough value to invest in them."
Three concerns hold me back from investing in - or recommending - agricultural investment schemes.
- Lack of proven historical returns.
- Significant levels of risk that are dumped in the investor's lap.
The agricultural managed investment market is a relatively new one in Australia and there is almost no performance data that I am aware of. Put another way, I am not aware of any "successful" broadly promoted managed agricultural investment scheme in the Australian environment (and while I have looked hard for returns data from successful schemes, it is possible that I may just not have found it).
My measure of success would be that, after tax, the return must be higher than that from the average Australian share investment over the same period. The higher return is needed to compensate investors for the illiquidity of the average agricultural investment.
This lack of historical performance data makes investing a leap of faith for investors - having to base their hopes for returns on forecasts rather than hard data. The ASIC consumer website FIDO includes some interesting comments on agricultural investments, including the following comments relating to performance:
"Many of these schemes lose all or some of your money or fail to make a better return than money in a bank account."
The lack of liquidity in agricultural investments is a difficulty for investors, who often have to wait many years for their forecast return. We have seen many investment schemes suffer from a lack of liquidity during this global financial crisis - including hedge funds, mortgage trusts and some fixed interest investments - which should highlight the value of cash, shares and liquid fixed interest investments to investors who may need ready access to cash.
Finally, investors should think about all the levels of risk they are exposed to in agricultural investments. As an example, I have looked at the PDS of the 2007 and 2008 Great Southern Diversified Olives Income Project. This outlines some of the risks for investors as including:
Environmental and growing risks
Market and commercial risks
Failure to achieve prices
Interestingly one of the listed risks is the ?Financial Position of the Responsible Entity', an all too real problem for investors with Great Southern in administration.
All the risk lies with the investor - growing risks, marketing risks, the risks of costs blowing out - while Great Southern simply collects an ongoing series of annual fees.
Perhaps the final "slap in the face" for investors in this discussion of risk is that there is one part of a traditional agricultural scheme that does appreciate in value in a reliable way over long periods of time: the land itself. Investors are only leasing land from Great Southern Olive Land, so if the value of the land increases over the project's lifetime, it is the company that benefits, not investors. The investor pays rent to Great Southern Olive Land for the use of their land - perhaps not the greatest arm's-length transaction in the history of capitalism.
Borrowing to invest
With the potential conflict of interest between Great Southern owning the land and managing the agricultural scheme, it is worth commenting on the financing arrangements that were offered by Great Southern Finance. At the start of September 2007, it was offering finance for investors at 10.5-11.50%, which was more than 4% above the official cash rate of 6.5% at the time. As well as these relatively high interest rates, investors were also charged application fees.
The role of advisers
Once again the question of financial planners and commissions has come to the fore. Could it be that the 10% upfront commission paid by some agricultural schemes has biased their recommendations toward these investments? There certainly was some money available for planners - with the 2008 Great Southern Annual Report stating that more than $136 million was spent on "Commissions, Marketing and Promotions" over the previous two years.
An interesting aside to this question of commissions - which has been broadly acknowledged as being 10% upfront for Great Southern schemes (and which I have myself seen on their promotional materials to financial planners) - is that I was not able to find any mention of their commission until page 88 of their 2007 and 2008 Great Southern Diversified Olives Income Project PDS. I could not see any mention of commissions and "marketing fee" in the section on fees. This seems inconsistent with ASIC requirements to have commissions transparent and readily available to help investors understand where commissions were being paid.
Is there anything left in the sector worth looking at?
On balance, the lack of performance history, the lack of liquidity and the concentration of risk means investors should be very cautious about investing in any remaining schemes.
Perhaps that is why it takes 10% commissions - hidden on page 88 of the PDS - to get financial planners to recommend them. Surely a good quality investment can sell itself.