"... The review of the Fund's assets will be complete by the middle of October 2009. We also believe that arrangements in respect of the Fund's indebtedness to its financiers should be finalised at about the same time.
In the interim we will be establishing mechanisms for amending the Constitution to allow redemptions at the prevailing unit value. As most unitholders would understand the Fund currently has a fixed unit redemption price of $1.00. This is significantly greater than the current unit value and effectively prohibits any redemptions from occurring as this would have the effect of treating the remaining unitholders unfairly. ..."
http://http://www.balmaintrilogy.com.au/news_111009.aspx
I refer to 'fair value' as 'the value of a unit calculated from time to time as a portion of the total unit holder equity in the fund', that is equity is 600m held by 1b units, then 'fair value' is $.60c.
Members of managed funds seem to fall into one of three camps at this time:-
1. The liquid fund - in its normal state distributions are paid and members are free (within limits of liquidity) to redeem and invest. In the FMF the unit price ($1.00) was set by the constitution and provided a stable base for investment and redemption: that is, a member could not gain an increase or decrease in the value of the unit in normal circumstances so unit price was neither a deterrent to redeem, nor a deterrent to invest.
2. The illiquid (frozen) fund which is managed pursuant to the corporations act (illiquid provisions) - the constitution does not apply to redemptions. A manager may make an offer from time to time which members may accept of reject. The needy will take offers if they are dire straits, and the rest will remain in the fund in the hope the unit 'fair value' will improve (I refer to this as being hooked).
3. The listed fund where members rely on the market to set the value - Take the MFS Octaviar fund - which is now listed. The unit value was $1.00, but now that its listed the value is determined by market forces - it can be seen empirically that about 2% of members have taken very low offers (about 9c) for their once $1.00 units - but, the bulk (about 98%) have remained in the fund (they are hooked). Those remaining have not received income of any kind for two years, and it seems their fund is dwindling in value rather than increasing. They complain that promises made by the manager have not been fulfilled.
I realise that 'fair value' no longer represents $1.00 and that is has not done so for some time.
My complaint about Trilogy unilaterally amending the constitution falls on the ground that I do not wich to invst in a fund with a variable unti price, that is ,a 'fair value' unit price as determined from time to time (and it can only be from time to time as all accounting is done - gee, looking at how long it's taken Trilogy to do the books this time, it would seem that it might be months between calculations of 'fair value').
The MFS experience shows that, when faced with lower offers than members perceive their units to be worth, members will not sell. In fact, 98% of members have not sold while those in dire straits were prepared to accept $.9c for their once $1.00 units. Promises from the manager seem to have been a strong inducement for members not to sell.
This will happen in the FMF too - when faced with a choice, then only those in dire staits will take any offer, because the remainder will stay in (be hooked), especially if the manager purports that the fund will be strong in the future.
So, how would the manager make the FMF liquid? Well, the first step would be to amend the constitution to 'fair value' so that the units could be traded on a fair basis, but of course the fund would have to be paying interest (distribution) in order to induce investment at any price - and that is unlikely.
The FMF's consitution provides that at the discretion of the manager (in consultation with the auditors) the manager may pay 'distirbutions' to captial - given the impairments, it would seem that the manager would duty bound to direct any 'income' to capital, and not to members in the form of distributions.
If we assume that it is possible for the fund could operate as liquid (which is unlikely given the fact that members want their money back), then how would unit 'fair value' be calculated? Clearly the time between valuations would not be short since the fund holds a range of assets and the assets would be sold at variyng times and for varying prices, and expenses would calculated and paid at different times, and valuations have to be made - and of course, audits have to be made.
Where would this leave members in the fund? Well, I believe in a similar position to being in a illquid fund, or being a member of a listed fund - in a very uncertain position - always being hooked into retaining money in the fund in the hope things will improve. One should also remember that valuing is not a science, it's really estimating - a guess - may be up to 20% out.
It might be that things might not improve and it might be that they will - where is the evidence one way or another? Look what the accruals accounting system and valuations did for us with City - just consider how much of our grief come from valuations. If it worked one way, then isn't it possible to work the other way?
MFS members won't sell and they've got nothing for two years, the FMF hasn't paid anything for about 15 months and won't see anything this side of smas 2009, so why would members want to live on promises for more time?
We always have to keep in mind that the manager's interests are not ours - the manager want's the cash cow to go on and on - so did City (and City said so). The manager has already pubicly expressed views about long term business ventures and given promises about tenure to occupants of Grande Pacific, yet has promised that it would be members who decide whether the fund should go on or wound up: the manager is at best, inconsistent.
The reality is that the $1.00 unit will stop the manager from even thinking about making the fund liquid because, with a unit value of $1.00, the fund IS illiquid because 'fair value' is less than $1.00.
In this way the onus is on the manager to (1) call a meeting of members to determine the future of the fund, (2) disclose a clear strategy for the future, and (3) provide members with a comprehensive report on all facits relevant in making a proper decision about the fund's future.
Now, after members have decided and if the evidence support the fund moving along, then an informed decision can be made and amendments made by consent.
On the other hand, the fund should be wound up in a sensible way.
The manager has already expressed the view that it would wind up the fund if that is what members desired (BRW spiel, per Mr. Griffin).
Amending the constitutional basis for calculating the unti price is not a mechanism that relates to redemptions, it relates more to an attempt to make the fund 'liquid' - to lock us up as if listed.
If members allow the manager to do what it has done (or is doing) wrtamending the unit price calculation , then we will end up no better off than if we had listed the fund.
In this world of equality (as envisaged by the manager) the needy will always be disadvantaged, and the remainder will always be hooked.
IMO.