LM Investment Management - Lack of confidence

I would like to contact fellow investors in the LM First Mortgage Income Fund (FMIF), to arrange a forum for us to discuss the proposal by LM to change the Constitution of that Fund.

There is presently no ability for investors to discuss the proposal amongst themselves, and develop other recommendations/proposals to be put to a members vote as is their right under the Fund Constitution. I have tried to make constructive suggestions about how LM can facilitate such a process but is seems none will be adopted by LM. Given this, and LM's refusal to provide me with a copy of the members' register, I can only conclude LM seeks to discourage direct investor interaction in order to restrict investors' focus to only those matters promoted by LM.

While on the surface LM's proposal appears to be simple, it seems to me the implications of the proposed changes to the Constitution are profound and will likely have significant impact on the value of my investment.

While there may be benefits to LM, in my view LM has failed to provide sufficent information to demonstrate that its proposal is in my best interests as an investor eg. where is the information about other options that were identified and analyzed, and why are they not preferred?; Where is the financial modelling of all options?; Has the bank financing facility been secured and do the terms and timeframes place any limitation on investors' position? etcetcetc

In the absence of such, I have concluded there is insufficient information for me to make a informed decision on the LM recommendation being put to members' vote. I see this as being unsatisfactory, as it seems investors will be pretty well locked into the LM process if the vote is passed, and I will have to blindly gamble on what may give me the "least worse" outcome.

In my view, the vote scheduled for 16 May should therefore be postponed until sufficient information is available.

If there are other like-minded investors in the LM FMIF, I suggest we urgently act to:
* discuss LM's performance to date, including whether LM should be removed and replaced as the 'responsible entity'
* discuss the changes to FMIF Constitution proposed by LM, so that we can all be better informed (I see this as especially important given my understanding a significant proportion of investors are elderly and may rely on the opinion of the advisors who introduced them to LM and whose independence may be questionable if there are trailing commissions)
* identify any information deficiencies, and request such information be provided prior to the vote
* discuss the need for LM to hold Investors Forums - also prior to the vote - to provide members with the opportunity to discuss and question LM on its recommendations
* identify alternative options to be put to those Investors Forums and/or to a vote by investors

Fellow LM FMIF investors please provide urgent feedback on these thoughts.

LM First Mortgage Income Fund - have you been shortchanged on interest?

It seems there are many investors in LM First Mortgage Income Fund whose interest payments were treated as 're-investments'.

The Financial Statement for Y/E 30 June 2011 records that over A$12 million in interest was treated by LM as being 're-investments' in the Fund.

I assume that many/most of the investors due that interest would be very unhappy with such treatment (and the impact of the consequent +20% haircut applied to unit prices).

In my circumstances, I believed the PDS indicates that interest should be paid in the period subsequent to the submission of a redemption request and that LM's treatment was not supportable.

I took the matter up directly with LM and after extended and extensive effort had them agree to rectify the situation (despite LM stating there was no liability to do so).

Any unhappy FMIF investor in similar circumstances can contact me and I'll provide full details.

LM Currency Protected Australian Income Fund - Calling

I hold 2 investments in the LM Currency Protected Australian Income Fund (CPAIF), which is one of a number of feeder funds for the LM First Mortgage Income Fund (FMIF).

CPAIF investors should be aware that LM is proposing changes to the FMIF Constitution that I believe will have a substantial impact on investments in those feeder funds.

Despite this, at present LM will not allow feeder fund investors any input into those changes. This is unacceptable to me.

As Responsible Entity, LM holds those CPAIF units on my behalf. While LM will rightly will not use those Units to vote (as it recognizes the clear conflict), given the extraordinary circumstances it should afford investors in feeder funds the opportunity to vote on the proposal on the basis of their FMIF indirect investments.

In my view, CPAIF members should request a special meeting to thrash this issue out with LM and have it corrected - with the FMIF vote to be suspended until that is done.

I'd welcome any thoughts from feeder fund investors especially in the CPAIF.

Dinga, I share your concerns and am surprised that no public forum activity has occurred before, for frustrated LMFMIF investors. The limited detail in their proposal to split the fund, before requiring members to decide whether to support this proposal, is lamentable. As a member of a feeder fund, I have no vote and I find this very unfair.

There was an article in the AFR on 28 April about LM's proposal, but it mainly set out the facts and included the criticisms of one investor.

Reinvesting interest payments is unacceptable - I imagine most investors are retirees like me, who need the income. But my main concern is how LM will split its assets between those for sale and those to be held, once it knows investors elections (assuming the vote to split the fund passes). The list LM have announced already may be irrelevant and it is essential that sellers and holders are treated equally and the whole process is fully transparent.

It seems to me that LM will take the members approval, if this occurs, as rubber stamping all the changes in the constitution, some of which are very significant, and giving them carte blanche to continue managing the fund how they like, with less than adequate provision of information to members. With their ambitious plans for their other funds, I would suspect that the LMFMIF is an embarassment to them and they would like it cleared up ASAP.

I'm in the same boat as you with LMFMIF. There are certainly many unanswered questions re the current proposal. It would be great to get some independent advice on what an investor should do. I haven't seen anything from gurus of the financial media on this.

Re: LM First Mortgage Income Fund - have you been shortchanged on interest?

dinga said:

It seems there are many investors in LM First Mortgage Income Fund whose interest payments were treated as 're-investments'.

The Financial Statement for Y/E 30 June 2011 records that over A$12 million in interest was treated by LM as being 're-investments' in the Fund.

I assume that many/most of the investors due that interest would be very unhappy with such treatment (and the impact of the consequent +20% haircut applied to unit prices).

In my circumstances, I believed the PDS indicates that interest should be paid in the period subsequent to the submission of a redemption request and that LM's treatment was not supportable.

I took the matter up directly with LM and after extended and extensive effort had them agree to rectify the situation (despite LM stating there was no liability to do so).

Any unhappy FMIF investor in similar circumstances can contact me and I'll provide full details.

Click to expand...

Hi, could someone direct me to a link for the fund's financials as at 31 December 2011? I notice the return was filed with ASIC on 15 March 2012. I also note on 16 May 2012 that the manager lodged a notice of an amendment to the fund's constitution.

(I'm not an investor in your fund and have no financial interest in the manager or the fund's outcome)

Re: LM First Mortgage Income Fund - have you been shortchanged on interest?

ASICK said:

Hi, could someone direct me to a link for the fund's financials as at 31 December 2011? I notice the return was filed with ASIC on 15 March 2012. I also note on 16 May 2012 that the manager lodged a notice of an amendment to the fund's constitution.

(I'm not an investor in your fund and have no financial interest in the manager or the fund's outcome)

Click to expand...

I have a copy that I can send to you. But before doing so, I would like to know why you want it since you have no interest in the fund

Dudd said:

I'm in the same boat as you with LMFMIF. There are certainly many unanswered questions re the current proposal. It would be great to get some independent advice on what an investor should do. I haven't seen anything from gurus of the financial media on this.

Click to expand...

At last, an excellent article by a knowledgeable, financial journo.

http://www.smh.com.au/business/the-...-management-20120517-1ysnv.html#ixzz1v6ASmhu7

TIME TO GET RID OF THE BLOODSUCKERS

Re: LM First Mortgage Income Fund - have you been shortchanged on interest?

dinga said:

I have a copy that I can send to you. But before doing so, I would like to know why you want it since you have no interest in the fund

Click to expand...

Hi "Dinga", I sent you a private message in relation to your query (see "Notifications" at the top of the message page). Thanks.

As a matter of interest, you guys might like to browse the postings on the "Equititrust" thread here at ASF.

Just a year or so ahead of you guys, and a couple of years behind City Pacific's First Mortgage Fund.

The Adviser you have when you don't have an Adviser?

Well, I had a look at the PDS for the FMIF, and as far as fees go, it's wide as a barn door.

A management fee of up to 5.5% of net assets at the manager's discretion.

If one invests without an adviser, then 1.1% is skimmed off into management fees - unbelieveable! I guess that's for everyone to equally feel the pain of paying an adviser: the adviser you have when you don't have an adviser?

Even when the fund is performaning poorly, as far as I see it, the manager is able to take a fee of up to 5.5% of net assets!!

Coupled with the massive interest on fund debt, wow!!!!

Makes an elevator look slow..

Going down?

Just had a look at the "Liquidity Offer". Very interesting. Seems that in the end, after reserves for certain expenses and obligations, the residue is shared amongst the "Sellers" (SELL) and "Buyers" (HOLD). The Sellers share is gifted to the Buyers and then the buyers use that gift as well as their share to buy the units from the sellers. The Sellers end up with the net proceeds of the sale and the buyers end up with the units (on a pro-rata basis and according to Distributable Net Proceeds / Actual Unit Sale Price).

The deal seems reasonable until one looks at the LVR table in the fund's RG.45, eg. August 2011:
23 LOANS, LVR RANGE 90.01% to 100%, LOANS TOTAL $388.3m
3 LOANS, LVR RANGE 80.01% to 90%, LOANS TOTAL $21.5m
1 LOAN, LVR RANGE 70.01% to 80%, LOAN TOTAL $30.5m
2 LOANS, LVR RANGE 60.01% to 70%, LOANS TOTAL $10.1m
1 LOAN, LVR RANGE <50%, LOAN TOAL $11.2m

LVR is indicative of underlying security (lower LVR, better security, and visa versa). As "oils aint oils Sol", neither are loans, loans. According to the table, some loans are better quality that other loans. Since good old ASIC doesn't require a manager to disclose the LVR for each loan and doesn't require each loan to be identified, any or all the loans which comprise each range could all fall to one end (say, 100% or 90.01%) or anywhere in between.

"Base Unit Sale Price: The Base Unit Sale Price is calculated by discounting the current book price of a Unit by a factor equal to the discount on the book value of the Sale Assets that are expected to arise when they are sold."

Does the Base Unit Sale Price tell you much about the quality of the asset? I don't think so, because it doesn't disclose the Book Value, the supported loan, and of course, the LVR.

If security assets supporting loans in the high LVR ranges are sold, then Sellers could find themselves in quite a mess because of the formula:

Distributable Net Proceeds / Actual Unit Sale Price (AUSP)

To my mind, the value of AUSP would rise or fall with the quality of the asset. Poor quality assets (that is, lower LVR, asset with little market appeal) might cause a greater number of units sold to the buyers for each $1.00 recovered - whereas good quality might create quite the opposite (and quite desirable) outcome, less units sold for each $1.00 recovered from the fund.

And what's good for the sellers is not going to be good for the buyers, and visa versa. (I refer here to the value of the units at the time of the sale - the buyers would like to get the units cheap and the sellers would like the highest possible value - only one side will win so only one side will be happy with the deal).

I just can't imagine the manager selecting all the good assets with nice market appeal to be sold for the punters who leave to walk away with the best outcome thereby disadvantaging those who stay (the buyers).

If the manager disclosed the value of the loan and the book value of the underlying security asset and confirmed the loan's LVR, then punters might have a good chance at making a well informed decision - but I'd guess if they did that, neither the sellers nor the buyers would be pleased.

My view only. (in an effort to encourage debate)

To my mind, the value of AUSP would rise or fall with the quality of the asset. Poor quality assets (that is, higher" LVR, asset with little market appeal) might cause a greater number of units sold by the sellers for each $1.00 recovered - whereas good quality might create quite the opposite (and quite desirable) outcome, less units sold for each $1.00 recovered from the fund.

ASICK said:

To my mind, the value of AUSP would rise or fall with the quality of the asset. Poor quality assets (that is, higher" LVR, asset with little market appeal) might cause a greater number of units sold by the sellers for each $1.00 recovered - whereas good quality might create quite the opposite (and quite desirable) outcome, less units sold for each $1.00 recovered from the fund.

Click to expand...

AH, ASICK my head is spinning with the greater realization that we poor investors in FMIF and its feeder funds are about to be much poorer. Many thanks for helping me muddle thought the numbers but I must admit to being mystified by the lack of input by other investors - WHERE ON EARTH ARE YOU???????

Am chasing LM for the February 2012 RG45 - that should really put a spot light on the current dire position (suspect it will be something like.....
* Net Assets: $354mio (fictional as pumped up by capatilized interest)
* B+gg+r all Cash receipts pa. - maybe $0.85 mio (no surprise since most of the mortgage securities pay no interest as LM has taken possession - my guess is around 75% of 'em)
* over 90% of the Loans will have LVR above 90% (probably closer to 100%)
* Continued (fire) sale of assets needed at a minimum to (a) pay DBank $13.5 mio by June 2012, to reduce the loan amount; (b) pay DBank some $9mio in yearly interest (rate of 18%); (c) pay LM its huge management and loan fees (say $12mio)
* expect further write-down / provisions to reduce security values (unit price is currently 73 cents - any predictions on where that will go next?)

Have I Got a Deal for YOU!

The efforts by managers seem to comprise (1) divide and conquer, and (2) maintain or better the manager's income stream. If a manager is compelled to sell off the fund's assets, then down goes the manager's income. But the speil is always to provide liquidity for those who want to leave, and accommodate those who want to stay. It's all about "choice" - or is it?

Interestingly, the LM Explanatory Memorandum doesn't affect the manager's rights - the 5.5% management fee as well as other fees (see Constitution Cls. 18.3 - 18.5) stand firm even though members (who want to stay) are asked to stay in for three years before being able to submit a valid withdrawal notice (other than hardship cases) even though such a notice would be futile in the event the fund remains frozen.

Members are asked to give ground, to extend what's left of their respective investments, but the manager is asked to give nothing! Same old, same old.

Keep in mind that there is no compulsion for the manager to issue a further Investment Allocation Request/s (proposed clause 9A40)

So, it's likely that unless market conditions change radically for the better, the fund will continue on as a frozen fund in three years time - after three years of heaps of fees and costs sapping away the fund's value.

And then there's the facility debt - The City Pacific FMF(now Trilogy's PFMF) has a 10% LVR covenant on its CBA loan and the manager (Trilogy) returned money back to investors in priority to the CBA debt, but this move (and fund impairments) caused the forced repayment of that amount of the facility debt necessary for the fund to comply with the 10% LVR convenant - one such forced repayment of the facility in March January/February 2012 was $5.5m!

The interest on your fund's loan is quite extraordinary but I have no idea of the LVR on that loan - do any of you?

As a fact, if the fund's value drops to a certain level (by repayments to members or impairment/losses) then the facility will have to repaid at a faster rate - that in turn reduces the amount of money that's able to go back to investors (proposed clause 9A11(a)) - repayments to hardship will also reduce that value (proposed caluse 9A11(b)) - expenses including management fee (proposed clause 9A(e)) will also reduce the value.

It seems to me that if the manager's proposal is accepted, then the sale of assets to return money to investors (sellers) will cause further losses, losses only the sellers will suffer (those who remain will be insulated from such losses, but not from further impairments on assets that are held, and of course, not insulated from the impact of the loan, and the ongoing fund expenses, including the massive management fees)

It doesn't take too much imagination to realise that if the good assets are sold first, those who leave would gain, and if the rag assets are sold first, those who stay would gain.

So, if you want to get out, the choice is to sign for the deal and hope the good assets will go to the chopping block first, otherwise you might wish to hadn't signed up.

If you want to stay, the choice is to sign up for the deal and hope the assets sold aren't the good ones, and that the massive fees and interest charges aren't aided by a ever deceasing value in the assets.

"Choice" is wonderful - go for it!

In my view, the only fair outcome is to sell the assets off and distribute on pro rata basis (according to unitholding) to all members.

Lastly, proposed clause 9A11(d) "the amount required for feeder fund payments for distributions and expenses allowed under the Deutsche Bank Facility Agreement,' - are the feeder funds permitted a better deal for their respective investments in the fund?

An excerpt from the PIF action group update:-

"LM FIRST MORTGAGE INCOME FUND - NOTICE TO INVESTORS

Dear PIF AG members, if you are also an investor in the LM First Mortgage Income Fund (another Gold Coast property fund which like the PIF was frozen in 2008) and are feeling helpless in dealing with the continued huge unit value loss, there may be some real help available:

Tony Martin SC and Greg Drew are our barristers for the PIF class action, and have indicated that they would be happy to talk with you about LM First Mortgage - as they believe that there may be a practical way forward to recover your losses. Tony and Greg have been looking closely at LM FMF for a considerable time and are aware of the problems with the fund.

Greg Drew and Tony Martin are ideally experienced in compromised mortgage fund matters and are very approachable. Act now - give them a call

Contact as under:
Greg Drew (Barrister) Tony Martin SC
Selborne Chambers Sydney Selborne Chambers Sydney
Areas of Practice: Areas of Parctice:
Commercial Commercial, Conflict of Laws, Contracts
Equity Defamation, Equity Inquests, Tribunals
Banking & Financial Services Insurance, Intellectual Property
Life Insurance Appellate Banking, Building and Construction
Intellectual Property Professional Negligence, Royal Commission Tribunals
Phone: 02 8915 2117 Phone: (02) 9233 5188
Email: gdrew@selbornechambers.com.au Email:asmartin@selbornechambers.com.au "

dinga said:

At last, an excellent article by a knowledgeable, financial journo.

http://www.smh.com.au/business/the-...-management-20120517-1ysnv.html#ixzz1v6ASmhu7

TIME TO GET RID OF THE BLOODSUCKERS

Click to expand...

Did they have security at the meeting? I'm not sure I could have restrained myself if I was one of the poor bastards trapped in this fund.

http://www.abc.net.au/news/2012-05-30/asic-wants-warnings-of-self-managed-super-risk/4041794

"The corporate regulator has suggested that self-funded retirees be required to acknowledge that they are not covered by the prudential regulator's guarantees for theft or fraud.

The move comes after investors in Trio Capital discovered they were not eligible for compensation when the company collapsed in 2009.

The parliamentary report into the Trio collapse highlighted an "expectation gap" among many Trio investors, who wrongly believed that their self-managed funds were covered and guaranteed by the prudential regulator APRA.

Investors quickly discovered they were "swimming outside the flags", and that managing their own super carried a much higher risk and no compensation."

dinga said:

At last, an excellent article by a knowledgeable, financial journo.

http://www.smh.com.au/business/the-...-management-20120517-1ysnv.html#ixzz1v6ASmhu7

TIME TO GET RID OF THE BLOODSUCKERS

Click to expand...

Here's the link to another article about the LM "meeting to have a meeting"

http://afr.com/p/personal_finance/s..._frozen_fund_investors_3lKdZ6kbAIJfLyvAommpAJ

Re: LM Investment Management - RG45 Extraordinaire

dinga said:

Am chasing LM for the February 2012 RG45 - that should really put a spot light on the current dire position (suspect it will be something like.....
* Net Assets: $354mio (fictional as pumped up by capatilized interest)
* B+gg+r all Cash receipts pa. - maybe $0.85 mio (no surprise since most of the mortgage securities pay no interest as LM has taken possession - my guess is around 75% of 'em)
* over 90% of the Loans will have LVR above 90% (probably closer to 100%)
* Continued (fire) sale of assets needed at a minimum to (a) pay DBank $13.5 mio by June 2012, to reduce the loan amount; (b) pay DBank some $9mio in yearly interest (rate of 18%); (c) pay LM its huge management and loan fees (say $12mio)
* expect further write-down / provisions to reduce security values (unit price is currently 73 cents - any predictions on where that will go next?)

Click to expand...

An update on the RG45 issue - which I find completely extraordinary (but I guess not really surprising given the continuing littany of LM disappointments)

Under ASIC Regulatory Guide 45, LM is required to provide updated RG45 disclosures at least every 6 months or more frequently to explain if material changes occur earlier.

The latest RG45's for the FMIF and CPAIF (and I assume WFMIF) were issued in August 2011, with the accompanying Portfolio Update as at 31 May 2011.

When I asked to be provided with a copy of the February 2012 updates, LM advised that "ASIC only requires RG45 documents to be completed as and when there has been a 'material change' to the funds, the last time was in August 2011."

When I asked LM to reconsider that extraordinary advice (since there had clearly been many material changes since May 2011/August 2011 including LM's radically changed strategy; arrangements with Deutsche Bank; write-down in unit values; liquidity position; LVRs etcetc), LM simply said "We are preparing an updated RG 45 to accompany the further financial and asset information to be sent to investors with the voting information and their invitation to elect investment allocations".

I find it very disturbing that financial information of critical interest to investors has not been updated for over a year.

Of even more concern to me is that in May 2012 LM was asking investors approve major changes to the FMIF Constitution (with profound implications for their investments) without the benefit of updated/current information.

I also think it is completely unacceptable for investors to now have to wait another 2 or 3 months before receiving such information (assuming the new vote occurs in August/September) 2012.

I have raised these concerns with LM but don't hold much hope of success since an email to me from the CEO (Mr Drake) himself was that "we are hardly in the mood to respond to your ongoing deluge of demands".

Is this behaviour typical of that exhibited by REs of other frozen funds????

Any tips/suggestions on what we poor investors can do to best protect our interests?

Looks like the hallmarks of another Equititrust... Gold Coast at its best...