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Rob Hosking
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FundSource adds some light to finance company debate

Tuesday 13th of September 2005

Last week ASB Group Investments released a warning about some finance companies offering debentures.

FundSource – which raised similar concerns last year – says that such investments have their place but the trick is ensuring investors understand what they are taking on. Investors see two main advantages of such investments - a certainty of return because a rate is quoted, and higher returns than from other fixed interest investments.

“However, the risks are often not considered fully in comparison with alternatives like managed funds. Often the only thing compared is the return, with the investor not realising that the underlying assets are totally different and it is like comparing apples with oranges.”

Differences generally include greater diversification in fixed interest managed funds, whereas finance company debentures – “particularly those lending significantly to property development, which may, for example, be highly concentrated geographically”.

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Paul Flood: The danger is that the 'goalposts' (regarding what is acceptable or unacceptable adviser conduct) may be susceptible to change. Our 'Principles based' legal/regulatory environment lends itself to “prevalence-induced concept change” over time, perhaps not so much in the written laws and Code, as in the interpretation of the prescribed principles.
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