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FundSource and the Liontamer

FundSource proves to be a thorn in the Liontamer's paw.

Monday, July 7th 2003, 5:50PM

by Philip Macalister

Liontamer director Michael Lodge is “incensed” about a research report FundSource has prepared on its first capital protected investment.

He claims the report is inaccurate, potentially damaging to his business and he alleges it was done secretively.

“What they have said is wrong,” he says. “They have made too many assumptions.” Liontamer’s first fund, which closes at the end of this week, is offering investors returns linked to that of the MSCI plus a capital protection.

One of Lodge’s main concerns is that the front of the report says that Liontamer provides the capital protection. He says if that was the case people wouldn’t be interested in fund, as no-one knows who Liontamer is.

Rather the capital protection is provided by Morgan Stanley.

“Morgan Stanley have a market capitalisation of US$40 billion, total assets of US$529 billion, assets under management of US$400 billion and an A+ credit rating as published by Standard & Poor’s.”

FundSource executive chairman David van Schaardenburg says there was one “minor inaccuracy” in the report.

A new version of the report has been issued to clients, he says.

“It would surprise me (if it was hurting his business),” van Schaardenburg says. “There is one minor inaccuracy all the other things in the context of the report I am totally comfortable with.”

One of Lodge’s other concerns is that FundSource didn’t sit down and talk to Liontamer about the fund, and didn’t get the contents of the report checked before it was distributed.

He says an analyst rang up, asked a few questions, and didn’t disclose he was from the research house.

Van Schaardenburg disagrees with this saying the analyst followed due process. He says FundSource never show reports to fund mangers before they are published.

He says that Lodge “seems to be making a storm in a teacup” and suggests he doesn’t fully understand the research process. The two parties also disagree over the expected returns of the fund because of its tax status.

FundSource have calculated a pre-tax return of 4.78% assuming the index is up 50% over the 7-year term.

Lodge says this is not a pre-tax return as the for the majority of investors it should be net, due to the Australian unit trust structure.

Lodge also says this calculation removes the 1% annual income that is paid by Liontamer.

He says, assuming the index was up 50% investors would get a net return of 5.77% annually.

“In order to compare this with a taxable investment, it must be grossed up, to reflect its true worth. The equivalent pre-tax return is in fact 8.6% pa,” he says.

Lodge also has concerns with FundSource’s analysis of what the capital protection costs and also comparisons made against passive index funds.

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