There are some major problems around the corner for the many financial planners who have been putting clients into exotic investments in recent years – especially infrastructure funds and hedge funds. Listed and unlisted infrastructure funds alike have a big problem with valuation. Many of the listed funds are now trading at significant discounts to their published net asset backing, as calculated by directors. As a random example, Macquarie Alliance Capital Group, launched in 2005, is now trading at less than half directors’ valuation.
It has four investments – in aged care; European directories; media services and broadcast play-out in the UK and Australia; and pumping up car tyres in Europe. MACG shares are selling at $2.16 on the ASX, versus a directors’ valuation in the interim results statement of $4.58. Following a 30c distribution in March, that would now be $4.28. That means the market is saying the directors of MACG are 56 per cent out in their valuation of the underlying assets of MACG. This issue is being repeated dozens of times on the ASX, but the question for those who have invested in MACG, including Macquarie itself, is: what figure to use when calculating returns?
Auditors would presumably insist that the investments should be “marked to market” unless there is a very good reason not to do so. But if its shareholders are valuing MACG at less than half of what the directors are valuing it at, surely those directors are left high and dry, awaiting litigation or the sack? Do they know something the market does not know, and are therefore in breach of continuous disclosure, or does everyone just put it down to aberrant market conditions that will soon get back to normal? Maybe they will, but at what point do the directors – who include some pretty high profile independents, not just Macquarie functionaries – conclude that their valuations of the underlying assets are wrong and the market is right?
In recent years there has been a move away from listed funds towards unlisted ones, partly because the flow of fees to the managers is much more stable and controllable. These have often been marketed through financial planners. Whereas the fees of listed funds (base and performance) are generally calculated as a percentage of market capitalisation, with unlisted funds they are calculated on directors’ valuations. Macquarie has about a dozen unlisted infrastructure funds investing in a variety of assets around the world. All investment banks are running unlisted closed end funds, some of them containing very large infrastructure assets, and charging very heavy fees against the directors’ valuations of those assets.
How do the big managed funds and direct investors now value their investments in unlisted infrastructure funds? The other big problem with “alternative” investments is undisclosed hedge fund fees: it is extraordinary that the Australian Securities and Investments Commission (ASIC) has not cracked down on this already. Warren Chant, of the super fund measurement firm ChantWest, has revealed in a fee survey that with the “fund of funds” approach that super funds and financial planners take in investing in hedge funds, only the lead managers’ fees are disclosed. He says this means that the typical undisclosed amount of fees on these vehicles is 6 per cent, while the disclosed fee is typically 2.3 per cent. That is, the typical gross fee on these hedge “funds of funds” is 8.3 per cent, according to Chant, of which nearly three quarters is not disclosed.
Warren Chant says he has discussed this issue with more than a dozen super fund chief investment officers, and all agree that this understatement of fees is taking place. He says none of them wants to take the lead in disclosing it because it would put them at a competitive disadvantage. If that’s the case, then the only answer is for ASIC to step up and enforce disclosure; in fact, they should be doing it already. {mos_fb_discuss:20}
