Is it ethical for fund managers to continue to get management fees on funds that have been frozen?

Fund managers should not get paid management fees – or at best should have them severely discounted – for the period the funds are frozen.

It is immoral that trapped investors are forced to contribute to the profit of their tormentor, against their will and with no option to get out and prevented from making new investments of their choice.

Further, a fee cut would serve as a disincentive for fund managers to get in that position or to keep funds closed.

Currently it is quite attractive (especially in a bear market) to close funds indefinitely. This forces investors to withdraw from other liquid investments or when rebalancing, funds have to come from elsewhere.

It also retains a handsome profit for incompetence.

Maybe a receiver should be appointed to determine if the manager continues?

It seems incredible that investors are still trapped after three years in mortgage funds, infrastructure funds and other hedge funds etc, and with no say whatsoever and paying full fees for non-performing investments.

Regulators could include in the new legislation that fund managers who fail to provide the liquidity promised should forgo profits.

In many cases, when funds are frozen management fees are fixed at the old high levels. That’s not right.

Of course the corollary would be that advisers should not assess fees on frozen funds – and certainly not at moratoria value, not that many of those are left.

Moratoriums didn’t work did they?

The poor suckers who invested then voted for the perpetrators to stay in the existence to manage something they couldn’t manage in the first place – another bite at the cherry.

I was having a good weekend until Sunday night when I read two politicians publicly getting into the ING CDO debate and arguing the offer made to investors was unfair.

To get straight to the point, this posturing from Peter Dunne and Lianne Dalziel is absolute cheap, political garbage.

I have publicly stated before, and I will say it again: Good on ING and ANZ for fronting up and putting up to $400 million of their own money into this problem. Show me another similar company who has been prepared to do something like this?

You can’t because there isn’t one.

The closest is Hanover.

If the politicians had any interest in investor protection they would have made and enforced rules to stop some of the shonky finance companies even getting off the ground. If they did their job some of the directors of these shonky companies would be in jail now – for a long time.

Jeez the US has already locked Madoff up for the rest of his life. His ponzi scheme came to light well after some of ours fell over.

Dalziel and Dunne have been lawmakers for a long time. One is, and has been, Revenue Minister for some time and the other Commerce Minister.

They could have made a difference. They didn’t.

Today’s announcement makes them look silly.

Around 95% of investors have accepted the ING offer. They knew what they were getting into as there has been ample publicity around the offer and the indemnity.

If it was such a bad deal they had the chance to say no. They haven’t. They had the choice.

As an aside there seems to be some great irony here. If the Frozen Funds group thought it was so bad then they shouldn’t have accepted it. Seems to me the bulk of them have (the only other conclusion is the group’s membership isn’t that big).

Let’s get this argument straight. While the indemnity bit of the offer leaves a lump in the throat, it’s not an unusual offer. If I was the one stumping up with the money I would do the same thing – wouldn’t you?

If you look at all the other carnage out there in the past few years this is the best and the most generous offer put on the table.

These blokes running finance companies still have their flash houses and cars and haven’t offered diddly squat to their debenture holders.

Let’s have a reality check, get politicians to do important things, and move on (and never-ever make a CDO fund again).

As a young lad solving the puzzle of the Rubik’s Cube was one of those frustrating things that took me quite a bit of time and effort.

ING’s attempts to solve the puzzle of its CDO-backed funds, DYF and RIF appear to have the same characteristics. Long and slow.

The company’s roadshow around the nation this week, in tandem with its joint venture partner ANZ Bank, has generated plenty of media attention. Seemingly every day there is a new story doing the rounds and each one tries to find a more sensational angle than the last. We’ve had the stories about how much ING NZ boss Helen Troup gets paid, whether the company is for sale and a raft of other stories which appear to be more fiction than fact.

My guess, from what I have seen and heard, is that the Frozen Funds group of dissatisfied investors is behind a lot of this. They remind me of the sort of protest group that turns up at a rally, just for the heck of it. Rent-a-crowd type thing.

I have heard others describe them more like Al-Qaeda in their approach.

Having debate about the offer and what is happening is fine, but it would be nice if the protestors kept to the issue than go off on all sorts of tangents and spread rumours.

You might think I am being a little harsh, possibly I am. These people have suffered a big hit, and many are feeling, rightly or wrongly, they have been duped somewhere along the line.

One of the most sensible comments I have heard all week came from an ING executive who said everyone has to take a look at themselves and accept some blame. ING, ANZ, the regulators, advisers and investors.

I totally agree. What’s more, as the week has gone on ING and ANZ have fronted up (besides with cash) and acknowledged mistakes were made.

It’s about time advisers and investors did the same thing.

I, like many others, have been asked what I think of the offer. My view, (and I am not an investor in these funds because I couldn’t understand them) is that it’s a good one. There are three choices and the cash offer looks pretty attractive. A term deposit at 8.30% is highly attractive and way better than carded rates at the moment. Also the ANZ TD is currently government guaranteed – a fact passed over at present.

The bit about waiving legal rights is a tricky one. From ING and ANZ’s perspective it makes sense and is a reasonable quid pro quo for the amount of money they are putting in. As for the bit about having no guilt attached, that appears to be the reality of these types of commercial deals, love it or loathe it.

If I was an investor I would probably like it because it brings the matter to an end and gives me some certainty.

Holding on for a better offer looks even less likely than winning Big Wednesday this week – it didn’t happen.

Likewise, holding on for rulings from the Securities and Commerce commissions and hoping they make ING and ANZ produce a better offer is something I wouldn’t put a wager on.

However, I would suggest Troup is pretty good at solving the Rubik’s Cube and will have all the squares lined up soon. Some though may be a little battered.

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.

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).

The credit crunch is pretty horrible and sad (especially if you or your clients are exposed to it), but you can have a laugh too.

Over recent weeks we have been sent a number of humorous takes on how the credit markets work, from a ditty to the lyrics of a Queen song, through to a very funny slide show.

View the slide show here.

As I mentioned in today’s Weekly Wrap the indefinite closure of ING’s credit funds is likely to galvanise attention onto this sector of the market and away from finance companies (unless we have another big one fall over).

All these credit products have been having trouble for a while and what is possibly not recognised is the amount of money in these products, or the size of the hits being taken.

The list of firms who played in this space is lengthy and filled with some well-respected brands. Besides ING, there is Macquarie, NZ Funds, Absolute Capital, Forsyth Barr and Basis Capital. In total, there is many hundreds of millions of dollars.

Up until now the status of the listed funds such as Macquarie’s Fortress, Absolute Capital’s PINS funds and others, has been apparent. The ING announcement this week brings the unlisted offerings into the light.

One comment made to me yesterday was worrying. It was from someone with a quasi-finance company type product, and he said to the public all these things look the same. That is, the public doesn’t make much of a distinction between credit funds and finance companies.

That doesn’t surprise me as it had been clear for sometime than many of these credit funds were sold as alternatives to finance companies and in many cases term deposits.

In the early days many stories were told that ANZ had been selling credit funds to customers who wanted term deposits. This is a worrying story that has been sitting below the surface for some time now. In reading today’s Business Herald it is clear that the story will gain prominence.

Judging from the mainstream media reports, the credit fund issues maybe dealt with in the same manner as finance companies.

If there is a plus to this, this is it. I imagine most of the money that went into credit funds was adviser-directed. Consequently, the client should have a well-diversified portfolio and credit funds will only have a small allocation, as opposed to the horror stories we have heard of punters having all their money spread across three or four of the worst finance companies.

Let’s hope I’m right on that!