While ING is no doubt unhappy that the status of its credit funds have hit the headlines, I would have to say that it has been the sleeping dog of the industry all year.

Clearly from the amount of coverage the story has had, plus the responses to previous Blogs, it is something which has bothered many people. It’s also something, I suggest, may create a few fault lines within the industry.

Some may consider a previous Blog as putting the boot into ING. I can assure you that was not its purpose. The issue raised then was about its communications strategy – or lack thereof.

ING has acknowledged it dropped the ball here and has even apologised.

There are two other issues which are worth debating, namely how the funds were sold and the issue of unitholder equity.

On the first I put this question to ING chief executive Helen Troup: Were these funds mis-sold?

She “strongly refuted” this suggestion. Her response was in two parts. No, ING did not misrepresent the funds. Secondly, it had no control over how advisers sold the funds.

I accept the point that at the time the funds were promoted ING did not deliberately mislead advisers and clients.

My definition of mis-selling is where a company or person goes and deliberately misrepresents a product. I would suggest Bridgecorp was closer to mis-selling as it portrayed its business quite differently to reality.

With the credit funds, the issue here is two-fold. Firstly these were new, highly engineered products that no one really knew how they would perform, especially when the markets change.

It brings to mind that adage about only investing in things you really understand.

Secondly, is the question when the credit crisis started last year, did ING change its view on these funds and how they were performing, and did they communicate the situation to investors and advisers?

I can’t answer that question, but hindsight would suggest that it should have been changing its marketing tactics.

The other point is around investor equity. It seems that quite a few investors managed to exit these funds at, what now looks like, good prices between when the credit crisis started and the date of the freeze of redemptions in April.

This is something which is a bottom line issue. If the remaining investors get some tiny return of principal – say 15c in the dollar – then there is surely a case that the company should come to the party to some degree.

It’s no surprise to me that Hanover’s investor voted for the proposal.

The restructuring plan, roadshow and meeting were the easy bit. Now the hard work starts.
Recovering loans and repaying investors.

Hanover’s front people, shareholder Mark Hotchin and chief executive Peter Fredricson, have set themselves an ambitious target of returning 100c in every $1 invested.

The biggest factor in achieving this goal, and keeping the promise to investors, is what happens with the property market.

Should they have a favourable tail wind earlier, rather than later, then the job gets easier. The trouble is they don’t know what the conditions will be like.

One thing in their favour is the time frame. They have five years, with the bulk of repayments to investors, scheduled in the last couple of years. By then New Zealand’s property market should be well through its cycle.
A couple observations from the meeting.
One of the themes of the day, particularly from so-called shareholders’ champion Bruce Shepherd, was about the possibilities of litigation against the shareholders (quite ironic, really).

It was interesting that Shepherd wanted special treatment and the ability to ask more than one question plus one supplementary (the ground rules laid out by the chairman at the start of the meeting).
The chairman enforced his rule and Shepherd put his request to the audience, who turned him down.

I do get the impression that Shepherd has lost some of his mojo these days and wonder if it is time the Shareholders’ Association finds a new front man? (BTW: He gave an interview on NewstalkZB after the meeting which was incredibly condescending to investors and said he wanted nothing more to do with finance companies and their investors – ever again. I see there is a similar piece here).

There was much debate about taking legal action against the directors, particularly over the dividends paid over the past couple of years.

The idea being that this could recover a greater sum for investors than the restructuring plan.

My observation is that very few of these cases are ever that successful for investors.

The time, cost and complexity of such action is prohibitive. Investors were better to take the money offered from shareholders and get on with running the business.

Another theme was questions asking Hotchin why his Waiheke and Paratai Drive properties were not part of the deal. In the end he did admit Waiheke was in and he indicated that many other assets were being pledged which suggested he has personally put a fair bit towards this rescue package, when he could have just walked away from the company and let it fail.

My other observation from the meeting and the roadshow, is about ceo Peter Fredricson. I first met him when he ran Tower Managed Funds. During these meetings he has been impressive: Frank and honest. Seeing a guy like this being prepared to back the plan gives me a level of faith that Hanover will succeed.

This Blog is my observations on how finance companies and fund managers handle their own problems.

It’s a story which, no doubt, will ruffle feathers. But it’s also one which may surprise readers. It’s also a bit of a criticism of peers.

Since it is about comparisons I will start with a report I saw, or heard, somewhere which made a comparison between Hanover co-owner Mark Hotchin and Air New Zealand boss Rob Fyfe.

The guts of the comparison were that Fyfe was up their fronting up and Hotchin was skiving off having a 50th birthday party with his mates in Fiji.

The thought this commentator wanted to leave his audience with was that Hotchin was some rich, spoilt brat who had no interest in Hanover investors and their losses.
What a daft and unfair comparison.

For one, I don’t envy Fyfe; he has the hardest job in New Zealand at the moment. Also, as a journalist and seeing how Air NZ has communicated with the media, I would say that there is only one word to describe the company’s efforts: Outstanding.

Hotchin, to his credit has spent days fronting up to investors in locations all around New Zealand. Added to that he, and fellow shareholder Eric Watson, have $60 million tied up in the company and are pledging another $96 million in cash and assets.

These guys have more to lose than anyone else.

The key difference between them and investors, compared to commentators, is they have something real to lose.

But coming back to comparisons, the real one is between Hotchin and a group made up of other finance companies and fund managers.

Hanover is fronting with a plan. Hotchin is touring the country and so far has presented to around 3000 Hanover investors. He and Hanover chief executive Peter Fredricson have told, and sold, their story. Whether you agree with it or not is a different story altogether.

I sat in on the end of the session Hamilton yesterday. My observation is that investors are very angry, but they give the plan, the people and the company a fair go and, I suspect, will vote in favour of what is proposed.

Not many other finance companies have done what Hanover is doing.

More to the point, nor have fund managers.

It seems to the biggest manager with trouble is ING. It has a similar amount of money at risk through its diversified yield fund and regular income fund, as Hanover. (Around $500 million). However, ING could learn a lesson from Hanover.

Ever since it froze redemptions investors and advisers have pretty much been kept in the dark. No one has fronted. There is no sign of a rescue plan. The shareholders aren’t offering more capital. The valuations of the credit funds are as dodgy as those of some property assets. (Indeed many other managers are astounded at the valuation of the units. Most put the value around the zero mark).

This is in stark contrast to what groups like Hanover have done. What’s more Hanover is aiming to repay 100c in the dollar and has some assets which have value. This is not the story you hear about credit funds.

I suspect groups like ING are headed for trouble. I hear strong rumours that advisers are feed up. They have written to the company and are rallying support to put pressure on ING to front up. First it will be advisers, then they will target retail investors. It has the potential to be unpleasant.

ING’s parent company has had a bail out from the Dutch government, but there is little sign that there is much support coming back to New Zealand.

My guess is fund management companies are going to have to front up to these issues sooner than later. Otherwise there will be a further loss of investor confidence in managed funds. However, I will note that not all companies can be put into the same boat. For instance many haven’t ventured into this space. Some like NZ Funds Management and St Laurence has similarly stepped up to the plate and addressed their issues positively. There are others too.

Meanwhile, Hanover is suffering from the tall poppy syndrome, but getting on with its rescue plan. It’s now up to the investors to decide whether the plan is acceptable – not the commentators (many of whom have nothing at stake with the company).