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LM Investment Management - Lack of confidence

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What a mess, indeed it is so!

When I met with two of the directors late last month, I twice asked this question and both the answers I heard to mean that the feeder fund investors would indeed get to vote on the Constitution changes. Recalling the biblical tale of the **** crowing thrice (forgive me but given the circumstances I found that recollection a little amusing), I asked the question for a third time - the final response making it clear that the feeder fund choices would be limited to either "hold" or "sell" only if FMIF investors approved the proposed changes to the FMIF Constitution (also earlier LM material stipulated that 'no choice' would be deemed to be "hold").

Given the uncertainties, and a lack of confidence borne from LM's past changes of position, I will be asking LM for formal advice to confirm the position. Wish me luck....
 

While you're there, why don't you ask them why the name of the fund includes "first mortgage" when they've lent on at least one second mortgage?

Ask them how they'll resolve the matter of the loans made by the fund whereby they're lent money (as manager to another fund) to that same asset on a second mortgage security (financials 30 June 2011 - page 32 - note 11):

"The LM MPF has second mortgages on loans that are first mortgages of the Scheme totalling $46,158,276"

Would that asset be sold off (since it's already impaired) even if the other fund loses its second mortgage loan?

Also ask why there was a need for a "priority agreement" since the securities rank in your fund's favour in any event.

"The company sometimes follows the fund with its own money, creating a second mortgage. "We can't end up behind a hostile lender," Mr Sullivan said."
http://www.heraldsun.com.au/busines...-at-city-pacific/story-e6frfh4f-1111114202243

It seems to me that not putting itself behind a "hostile" first mortgage holder meant that the first mortgage holder (the CPFMF controlled by City Pacific) would not act unilaterally to the detriment of the second mortgage holder - in other words, a safe place to be.

You might ask the manager why the manager put itself in such a situation.

Then there's the gem whereby the manager has taken over the receivers' tasks and all those millions are advanced to the manager (financials 30 June 2011 - page 32 - note 11):

"Loan management fees paid to the responsible entity for loan management and controllership services provided by the responsible entity on behalf of the Scheme in replacement of appointing external receivers. These fees are charged directly to the borrowers to facilitate future recovery." $5,381,516

"There fees are charged directly to the borrowers to facilitate future recover" - interesting turn of phrase.

Yes, the fees are debited to the borrowers accounts, but the money goes to the manager. If the loans are already impaired, then the $5,381,516 is an expense to the fund - an expense that seems destined to be lost.

You might ask the manager for an accounting (a list of expenses and corresponding amounts) of the expenditures to the various loans. I doubt if you'll get it, but you may as well ask.

There again, a nice little earner for the manager.

With all the fees on offering in this fund, it would surely be attractive for an alternative manager to have a look-see.
 

Excellent questions indeed - which have been included in the long list now being prepared.

Interestingly, your points contrast with direct quotes from the latest LM crock dated 22 June 2012 (RE. Liquidity Strategy - LMFMIF) ie. "As manager, LM has never deviated from its well documented lending on registered first mortgage..."

These guys can't lie straight in bed (along with a number of suffering fellow investors, I've moved well beyond the complementary assessment of 'lacking confidence").

Did anyone else note the following quote also from the same LM crock?

* "LM Investment Management Ltd is an unlisted public company and Fund Manager, not a property developer."
Damn right - and for a moment putting aside LM's unsatisfactory performance in its claimed core competency of 'funds management' - WTF is LM proposing to be for its recommended "Hold" assets, if not a property developer???? [I'm a simple bloke, but it's impossible to not get giddy, attempting to follow the LM spin/nonsense]
 
A couple of investors have expressed surprise to Dinga about some of the issues raised in this forum.

All the information posted to date has been gleaned from the fund's accounts, RG 45s, or communications from the manager to investors.

If the issues give rise to surprise, and you're an investor in LM's income fund, then it's time to do some reading and perhaps even to get some professional advice.

Nothing said on this forum should be taken as gospel - information contained in postings should be checked against source documents - in particular, the fund's financial reports and RG 45s.

It's not unusual for investors not to bother to read and understand the financial reports and RG45s. While such ignorance may be fine (but not recommended) in a fund that's paying dividends and not losing ground, it's not the same if you've an interest in LM's IF or feeder funds.

Everything posted in this thread has been disclosed by the manager - it's only a matter of looking for it, and finding it.
 

Sadly, you're right. I think most investors do not take sufficient care and scrutinize all of the available information prior to making investments. Also, I'm one of the investors who is now suffering because of the over reliance placed upon fund managers and IFA's - and the misplaced assumptions that:
* the best interests of both fund managers and investors must be the same, so therefore all actions by the managers must therefore be in the best interests of the investors
* on-going advice provided by the same financial advisors who introduced investors to the funds, and who continue to receive trailing commissions, must be independent and balanced - and in the best interests of the investor

These misplaced assumptions remind me of the oft repeated saying by an old work colleague that "in the race of life, always back self-interest because you know it's having a fair dinkum go".

However naive, I expect that information should be presented in a way that is clear and accurate. LM's advice dated 22 June 2012 included a table entitled "Retail Performance Comparison of $10,000 investment since inception" in which performance of FMIF is compared against two funds which LM considers 'comparable', and taking into consideration full performance and any unit price movements over time ie. Challenger Howard Mortgage Fund and Colonial First State Mortgage Income Fund

Putting aside for the moment a detailed comparison, this table shows the FMIF as having 0.00%; 2.50% and 4.83% performance over the last 1 year, 3 year and 5 year periods respectively.

HOW CAN THIS BE SO?????????, given:
* the unit value has fallen 27% (to 73 cents) in the last 2 years
* no income has accrued since 1/1/2010
 
The latest LM 'update' dated 2 July 2012 is copied below. Particularly welcome comments on 2 aspects:

1. Until now, we poor investors have been variously promised "independent asset reports", "independent review of assets of the Fund", "independent property analysts are finalizing their asset review". In the below 'update', LM now says we will receive an expert analysis of the reasonableness of LM's views. To me, this is a clear departure from what was promised. My immediate reaction is that a 'reasonableness' opinion, starting with LM's clearly less than independent view of the worth of the assets, will be a far less meaningful and valid exercise than a rigorous bottom-up, independent analysis. To me, if LM's changed approach is NOT to the benefit of investors, who does it benefit?

2. LM states "LM has licensed intermediaries who wish to place new funds when the Fund is reopened" Does anyone believe this???????? If LM is to be believed, shouldn't this be great news? Doesn't this indicate that there is now yet another option for current investors? Sadly, without a lot me information to confirm this is a real outcome, within a realistic timeframe, I think it is a further deposit to the already brimming LM crock.




Re: Liquidity mechanism is the first step towards reopening LM’s closed mortgage fund

We are progressing as quickly as possible with the liquidity strategy. Harnessing the assets the LM First Mortgage Income Fund controls, the strategy meets the needs of investors to “sell” or “hold” (or a combination of the two), as they choose, and importantly progresses towards opening the Fund for new investment.

The investor vote result is a clear mandate that we are “on the right track” with this strategy.


The final steps to reopening the Fund are as follows:


Your decision: investment allocations – you can choose to stay or go, or a bit of both.
Investment allocations.
Drive a responsible sales programme across the “sell” assets for progressive realisation of investment for those investors who wish to redeem.
Commence the development programme for work on the “hold” assets to generate income and create value for the “holders” over the recommitment period.
Provide income.
Provide withdrawal periods for investors.
Reopen the Fund for new investment – LM has licensed intermediaries who wish to place new funds when the Fund is reopened.
Commence new lending in the Fund.

A Viable Market


LM has a diversified global business and through its various offices, on a daily basis, interacts with advisers and institutions about the LM product range, including this Fund. We have already received expressions of interest for investment in the LM First Mortgage Income Fund when it reopens.

The value proposition of the Fund will be represented in the asset information which is currently being compiled to provide to investors as part of the next step. We are putting together the most comprehensive information we can regarding the assets and prospects, to assist investors and advisers with making a fully informed choice regarding the investment. Please bear with us as this is completed, as we have independent parties involved for objectivity and third party, expert analysis of the “reasonableness” of our views. There are also many regulatory and accounting requirements to be met in the provision of this information for you.

We will also be consulting with ASIC for their feedback with respect to the presentation of this Fund information.

We will be providing more information on the steps above in our regular communication and we will shortly be communicating on timeframes around this for you.



Feedback


Thank you for continuing to share with us your opinions regarding LM and your investment. We have taken the liberty of sharing some of that feedback below.

“It gives me confidence that you have a long term vision for the Fund and have not become short sighted in a sell all approach.”

“I think LM has done amazingly in a most difficult period ...”

“I see you as a responsible / good manager but we need cash now and that's the only reason why we want to close......”



We thank you for your patience while we finalise the aforementioned asset information. If you have any questions, please contact your financial adviser or intermediary.


Yours faithfully,


LM Investment Management Ltd
The global pathway to Australian Investment Solutions
 
hahaha

Dinga, LM didn't include your comments or the comments of those who share your concerns. Why aren't I surprised?

The EIF is full of various classes - before members think that new investment is a good thing, they should keep in mind that while the manager must treat all members of the same class EQUALLY, the manager need only treat different classes FAIRLY.

Which 'new investor' would stand equally with existing investors or would stand behind existing investors?

I'd hardly think that possible.

I'd be asking LM for particulars about the new investor spruik.

While you're asking, you might like to ask for public disclosure of some of the comments running against LM's planned scheme.

Isn't it all so exciting? I'm sure many lookers-on such as myself are just as interested in the expert opinions as you are.

I'll end where I started: hahaha
 
Tks ASICK - I stand corrected, my education continues and I will indeed pose those questions to LM.

Information continues to coming thick and fast, from all directions - including the latest from LM (see below). As usual, I'm thinking that the more information that LM provides, the more questions that are raised (healthy situation, eh) eg.

* while FMIF windup has always been in the background, this is (I think) the 1st time that LM has explicitly stated this as being a possible outcome, depending on investors reaching a presently unspecified 'overwhelming' 'sell' level. Since it seems to me that an orderly windup would result in the most equitable outcome for all investors, and as LM has now put this on the table as a possibility, investors should be firstly given the specific option of winding up the fund(s) or amending the Constitution to allow continuation of the fund(s) and then subsequent specification of 'hold' or 'sell' alternatives.

* Ref Independent expert reports by WMS and BIS Shrapnel: I think it is now even more important to know any past and current relationships between those firms and LM , especially as it seems 'reasonableness' is the level of opinion being sought

* Ref Current sales campaigns: need to refresh the memory, since I can't remember much in the way of recent updates in this regard (thought these assets were destinued for the 'sale' bucket, and the 2011 sales campaign had been pretty well unsuccessful). Also think investors may need more information from LM, especially - for example - in relation to (a) specific assets now being actively being marketed; (b) LVRs for each; (c) likely timeframes for sale, (d) expected sale prices Vs Book/Holding Values ie. possible/expected 'haircut', if any; (d) likely effect on unit prices, due to likely need to allow for additional provisions/write-downs on the book values of remaining assets; (e) relationship/relevance to DBank financing conditions

As always, greatly appreciate feedback on what I've missed or misunderstood.


RE: Liquidity Mechanism for the LM First Mortgage Income Fund


Activating the Next Steps


--------------------------------------------------------------------------------

We are progressing with the next steps to see the liquidity mechanism implemented across the LM First Mortgage Income Fund, LM Wholesale First Mortgage Income Fund, LM Currency Protected Australian Income Fund and the LM Institutional Currency Protected Australian Income
Fund as quickly as is possible.

Below, we provide a snapshot of the information which is being collated for you, which we anticipate to be completed and provided to you in August. From the snapshot you will see that it is comprehensive and thorough and as such, does take time to complete.

In addition to our report and commentary as Fund Manager, we have secured the services of BIS Shrapnel and WMS Chartered Accountants to provide their experienced, objective and independent input. They are well underway with completion of their components of the information. Our timeframe also allows for consultation with ASIC in relation to the information
being provided.


Information to be provided for Vote and Investment Allocations


--------------------------------------------------------------------------------

The information being compiled is to assist you in making fully informed decisions about the Fund, the vote and your investment allocation across:

A combination of “hold” and “sell”, or
”Sell”, or
“Hold”.
Information will be provided on all of the Fund’s assets; different financial modelling scenarios which comprise those assets and are relevant to expectations around the “sell” and “hold” pools; and updated information on the asset portfolio in general, such as the ASIC benchmark document
for mortgage funds (otherwise known as the RG45).



Financial Modelling Scenarios


--------------------------------------------------------------------------------

WMS Chartered Accountants was established in 1994 by two retired partners of Ernst & Young.

Their business offers a range of accounting services, including audit, corporate governance, corporate tax, due diligence, mergers and acquisitions, valuations. They complement their accounting services with corporate finance and legal support services.

We have secured their services to provide independent review of the financial modelling scenarios. Both the accounting standards and ASIC guidelines require that a high level of detail regarding assumptions and explanations be utilised in financial models. WMS is experienced in
the provision of financial modelling and their input will be beneficial in assisting investors understand the projections and assumptions around the models.

The assets will be weighted to each of the “sell” and “hold” pools based on the allocations received from investors.

The financial models to be provided will incorporate differently weighted scenarios, for example 50% sell / 50% hold; 70% sell / 30% hold; 100% sell; or 30% sell / 70% hold.

In the event that investors overwhelming select “sell”, then LM will wind the Fund up with an orderly sale of assets..




BIS Shrapnel – Asset Information


--------------------------------------------------------------------------------

BIS Shrapnel is recognised in Australia as a major provider of property research, analysis and forecasting. Their expertise is being utilised to supplement our report on each property the Fund has as a secured asset.

They are providing commentary around assumptions, taking into consideration product demand and trends, projected sales and operational revenues, sales rates and projected costs and sales escalations as they relate to the hold and sell pools. They are determining whether the variables
that LM has adopted are, in their opinion, fair and reasonable. Their work will incorporate macroeconomic and demographic information on the capital cities and the regions in which the assets are located.



Current Sales Progress


--------------------------------------------------------------------------------

Whilst we are preparing all requirements for the liquidity mechanism we are simultaneously continuing with the asset sales programme. As a result of prevailing market conditions sales are slow.

We have received tenders from major national sales and marketing agencies interested in the role of managing and driving the overall sales programme for the Fund with a refreshed strategy. We will have further news for you on this as soon as an arrangement is finalised.


We will continue to keep you updated. Should you have any questions or concerns, please contact your financial adviser or intermediary.

Kind Regards,

LM Investment Management Ltd
The global pathway to Australian Investment Solutions
 
For reference:
Trilogy's PFMF engaged PKF to produce an expert report and provide some tax information for the Explanatory Memorandum - cost to the fund? $214.5k! (PKF was the receiver for a number of the PFMF's assets - so, Trilogy didn't travel to far to find an expert).
http://moneymagik.com/PFMF_EXPERT_AUG_2010.pdf

THE LM FMIF - On top of the costs of the Sydney meeting for the LM FMIF which will turn out as a cost for the feeder funds, there'll be another meeting for each of them, and then the costs of the experts .. wow! won't that be fun?

Not only one expert, but two!

WMS Chartered Accountants - Financial Modelling Scenarios

Now, that's keeping it local (to the Gold Coast) - http://www.wmssolutions.com.au/s1.php?no=103

The business might have been started by two retired partners from Ernst & Young (Watter & McDermid), but the initiators don't seem to be on the management list anymore. http://www.wmssolutions.com.au/s1.php?no=20

Trilogy (as RE for the PFMF) commissioned an "Asset Review" (to some of us, aka "The Little Picture Book") at a cost of (as I best remember) over $200k but Trilogy limited the cost to no more than $100k to the fund (I'll update the exact figure if I can find it). Has LM limited the cost to members for one or both of the experts?

The review caused the assets attributable to investors as at 30 June 2009 to be reduced to $426m (from $630m as at 31 December 2008 when City Pac was RE). That might have been the new valuations, but life goes on:

http://moneymagik.com/performance_PFMF_Trilogy_big.jpg
What was said in November 2010: http://www.moneymagik.com/295_million.mp3
(Balmain Trilogy Investment Management Pty. Ltd.'s Andrew Griffin at the PFMF Sydney Info Session in November 2010)
The upshot: http://www.moneymagik.com/yardy_yardy_yah.php

and we await the 30 June 2012 finanicals with a collective bated breath.

The LM FMIF - the "sell" / "hold" - and once you decide, you're locked in for a ride with LM and its up to 5.5% in management fees and the fees it collects for 'renegotiating' loans and fees it collects for acting as receiver for the deliquent loans including the loan which has a loan from another fund LM manages as second mortgage 'behind' it .. and how about the second mortgage loan LM lent? Now, that might be an interesting ride - what do you think Dinga?

BIS Shrapnel - Asset Information

Good luck with BIS's forecasting:-

21 March 2011 - "Property Market to Regain Steam: BIS Schrapnel"
http://www.aussie.com.au/mortgage-b...-analysis/property-market-to-regain-steam.htm

12 October 2011 - "Brisbane House Prices 'set to jump 16 percent'"
http://www.couriermail.com.au/life/...e-by-20-per-cent/story-e6frequ6-1226164654378

25 June 2012 - "... BIS Schrapnel Predicts the Property Market to Improve Over the Next Three Years"
http://www.multi-choice.com.au/blog...-market-to-improve-over-the-next-three-years/

And don't forget, the experts will disclaim their reports - just as did the very PDSs that got you guys hooked up in the funds in the first place - can you trust the experts any more than your original PDSs? I wouldn't think so.

I notice there's no reference to the experts speaking to new investment in the LM FMIF - why am I not surprised?

I wonder if a manager went to an expert and the expert didn't agree - would the manager tender that opinion to investors? Heck, has that ever happened?

From my experience in certain matters, for every expert held up by one side, there's an expert who is diametrically opposed for the other side. Of course, don't forget the old saying "Opinions are like a***h***s, everyone's got one"

While it's true that each fund will rise or fall on the quality of its assets - it's interesting to note that both the PFMF and Equititrusts IF (as your fund) were valued at about 60% -70% when things first started to look as if they were going pear-shaped, both the EIF and PFMF have a high-end expectation of recovering $0.28 (plus any recoveries by way of litigation) - the bottom end could be very little indeed. After 3 years, Trilogy has only repaid member $0.08 of their original investments.

It's worth having a look at the Equititrust thread on ASF.

I certainly hope your fund fares better than the others, but my guess is that it won't.

Here's another to add to the list:
http://www.smh.com.au/business/anxious-wait-for-provident-investors-20120702-21bmb.html
 
A stroll down memory lane:
http://www.lmaustralia.com/News/2011/LM-awarded-2011-Australian-Export-Awards-finalist-.aspx

"LM's total funds under management have also increased in each year of operation – totalling $809 million in FYE 2011, $757 million in FYE 2010, and $755 million in FYE 2009." - but I wonder how the feeder funds figure in the totals? (because they actual provide a total in themselves, as well as increasing the value of the fed fund (eg. LM FMIF))

Maybe the answers lie somewhere in the Documents here:
http://lmaustralia.com/Document-Library.aspx

Reminds me of the adage, "Yesterday's headlines, today's fish & chip wrappers" - perhaps that's why it's so oft disclaimed that "past performance is not indicative of future performance"
 
Since a number of other (than LM) Funds have been mentioned in the threads, thought the attached summary by IOOF might be of interest, since it provides a quick reference guide to the status of any frozen or illiquid investment options on the IOOF investment menus (LM Wholesale First Mortgage Income Fund being one of the 26Funds included).

http://www1.ioof.com.au/files/docsForms/Frozen_Fund_Summary_2008-12-15.pdf


IOOF says "Most investment managers have now re-opened frozen investment options to redemptions or have determined to terminate the investment option and redeem units automatically as funds become available".
Interestingly, where termination was determined, seems those decisions were mostly taken in 2011.

As LM seems to be recommending a different route, I for one am even more anxious to see the financial modeling that supports "hold" / "sell" elections rather than termination - which I (a) believe should be a specific option for investors, rather than a possible default outcome; and (b) assume will likely provide the most equitable outcome for all investors.

LM apparently is holding Advisor Forums around Australia between 23 July and 3 August to "... facilitate active discussion of the proposed liquidity mechanism for the closed funds, the processes involved, the fund assets and scenarios of the financial modelling regarding the “sell” and “hold” pools - as an opportunity for Advisors "...to develop further understanding prior to the investment allocation step, when you will be guiding your clients in relation to their allocations". Seems like we investors can shortly expect to receive the modelling - am hoping LM will repeat this exercise and provide investors with similar opportunities.
 

I suppose if you take the optimistic view, then it all sounds okay, and while I have no idea whether investors would be happy to continue to take the advice from investment advisors who advised investment with LM in its LMIF (or a feeder fund), being a skeptic by nature, I'd be surprised if they were, especially given the reduction in unit holder equity and the lack of an income stream.

Seems the identity of specific assets isn't going to be disclosed - so, what will all the figures to be tendered by LM mean? My guess (and that's all it is), not much at all. To get a good idea of the value of an asset, one must find out each asset's location and identity and then ask a local agent.

I'd be minded to think that the local agents would be well aware of the owner of each respective fund asset that's been put up for sale. I think the only surprise would come to investors in the fund - from my experience it seems that fund investors are the very last to find out the particulars of a fund's assets. A good look over previous advertisements and knowledge of the period an asset's been up for sale would be extremely helpful.

If I was a fund investor I'd be wanting to know more about the loan whereby LM manages another fund holding a second mortgage 'behind' it - and I'd want to know more about that second mortgage from a so-called "first mortgage" fund, the LM FMIF? Things like the identity and location of the asset, and the value of the first mortgage.

I'd also be wanting to receive the audited 30 June 2012 return before going to the meeting - Methinks the fund's value as at 30 June 2012 might very well influence investor sentiment. Consequently, I'm particularly interested in whether the meeting will be held before the release of the fund's 30 June 2012 financials as well as the disclosed unit holder equity as at 30 June 2012.

Investors should keep in mind that they're the only ones who might lose in this fund - it doesn't matter what the manager says or what the experts say, if it's disclaimed then it cannot be relied on - your loss is your responsibility. It's always worthwhile to read all the disclaimers FIRST - after reading the disclaimers, then read the content of any explanatory memorandum or expert report, and then go back and read the disclaimers very carefully again.

Then think about all the spruiks in the documents and discount them by the disclaimers - while there may or may not be guarantees or indemnities for the manager, I'd be surprised if there'll be anything for investors, other than to continue to shoulder all the risk.
 
ASIC stirs:

http://www.asic.gov.au/asic/asic.ns...mpliance+areas+and+ASIC+guidance?openDocument

Topics:
1. Compliance with key AFS licence conditions including net tangible assets (NTA), base level financial requirements, professional indemnity insurance, external dispute resolution scheme membership and key persons
2.Inappropriate compliance arrangements for the nature, scale and complexity of the REs business and insufficient resources to undertake the compliance function
3. Poor risk management systems and plans
4. Insufficient measures to control and monitor the release of information to investors
5. Inadequate controls to manage related party transactions
 
Thanks to a member of the LM FMIF, here's the explanatory memorandum and supplemental deed poll (proposed constitutional amendments) spoken to in this forum:

http://www.moneymagik.com/LM_info_pack.pdf

Before reading the spruik, it's worthwhile reading all of "Important Notices" (pp 25 - 26), especially the following excerpt [emphasis has been added]:

"6.3 No investment advice
Information in this Explanatory Memorandum does not constitute financial product advice. LM is not currently authorised under its Australian financial services licence to provide financial product advice in relation to the Units and, in relation to the sale of Units under the Proposal, no cooling-off regime applies in respect of the acquisition of Units. No information in this Explanatory Memorandum constitutes “personal advice” within the meaning of that term under the Act and it has been prepared without taking into account your objectives, financial situation or needs. It is important that you read this document in its entirety before making any investment decision and any decision on how to vote on the Resolution. If you are in doubt as to what you should do, you should consult your legal, investment, taxation or other professional adviser without delay.

6.4 Responsibility for information
This Explanatory Information has been prepared by LM as responsible entity of the Fund. While all reasonable care has been taken in preparing this document, no person, including LM, accepts responsibility for any loss or damage howsoever occurring as a result of the use or reliance on this document by any person. This Explanatory Memorandum has not, and will not be, lodged with ASIC. ASIC takes no responsibility for the contents of this Explanatory Memorandum.

6.5 Disclosure regarding forward-looking statements
This Explanatory Memorandum contains both historical and forward-looking statements in connection with the Fund. The forward-looking statements in this Explanatory Memorandum are not based on historical facts, but reflect the current expectations of LM concerning future results and events and generally may be identified by the use of forward looking words or phrases suchas “believe”, “aim”, “expect”, “anticipate”, “intend”, “foreseeing”, “likely”, “should”, “planned”, “may”, “estimated”, “potential”, or other similar words and phrases. Similarly, statements that describe LM’s objectives, plans, goals or expectations are or may be forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, assumptions and other factors that may cause the Fund’s actual results, performance or achievements to differ materially from the anticipated results, performance or achievements expressed, projected or implied by these forward-looking statements. Deviations as to future results, performance and achievements are both normal and to be expected. Investors should review carefully all of the information, including the financial information, included or referred to in this Explanatory Memorandum.

The forward-looking statements included in this Explanatory Memorandum are made only as of the date of this Explanatory Memorandum. While LM believes the expectations reflected in the forward-looking statements in this Explanatory Memorandum are reasonable, LM does not give any representation, assurance or guarantee to Investors that any forward-looking statements will actually occur or be achieved. Investors are cautioned not to place undue reliance on such forward-looking statements.

Subject to any continuing obligations under law, LM does not give any undertaking to update or revise any forward-looking statements after the date of this Explanatory Memorandum to reflect any change in expectations in relation to those statements or any change in events, conditions or circumstances on which any such statement is based.

In relation to historical information, the Fund’s past performance is no indication of the Fund’s future performance."
 
Geez, I just realised that there's no example of the procedure set out in the proposed constitutional amendments, so I thought I'd have a go at it. This is my take on the proposed scheme:

Suppose a fund comprising 4 assets:-

Asset 1 – Original Loan (L) $60, Book Value (BV) $50, Expected Net Proceeds (NP) $30
Asset 2 – L $70, BV $60
Asset 3 – L $40, BV $30
Asset 4 – L $30, BV $20
Current Value (Unit Price $0.80 [200 x $1.00 units on issue] – this is also BP, book value unit price as at the invitation date)

Pursuant to proposed clause 9A.3, the RE must specify in a Investment Allocation Request the following items:

1. Offer Closing Date
2. The Sale Assets (Asset 1)
3. The Base Unit Sale Price (BUSP) (proposed clause 9A.2) 30 * .8/50 = $0.48
[$1.00/$0.48, or 2.0833 units per $1.00 redeemed]
4. The Expected Sale Discount (BUSP) (proposed clause 9A.2) (50 – 30)/50 = 40%

Let's assume the asset was actually sold for $40 (yes, it did better than expected). So, the Actual Unit Sale Price (AUSP) (proposed clause 9A.2) 40 * .8/50 = $0.64
[$1.00 / $0.64, or 1.5625 units per $1.00 redeemed]
Note: it's a tad confusing because the variable NP is used differently in both the AUSP and BUSP formulae: in the former, it's the actual sale price, and in the latter, it's the expected sale price.

Units would leave the fund at 1.5625 units per every $1.00 redeemed ($0.64/unit). If we assume that the whole $40 was redeemed, the number of units leaving the fund would be $40 * 1.5625, or 63 units.

Therefore 200 – 63, or 137 units now hold $110 in equity (Asset 1 now sold) with 47 units redeemed at 1.5625 units per $1.00.

Unit Price for those who “hold” is now increased to $0.803 per unit because of the reduced unit price for those redeeming in the “sell” pool.

Corporations Act 601FC(1)(d) requires that all members must be treated equally
http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s601fc.html

Those who stay will retain (and better) the $0.80/unit, while those who leave redeem at $0.64/unit. I wonder how this complies with s. 601FC(1)(d) Corporations Act?

The trouble (as I see it) it doesn't matter what the BUSP (expected unit price) is, it's the AUSP (actual unit price) that matters. I'd be surprised if the BUSP is too far away from the unit price (BP), but I wouldn't be too surprised if the AUSP is.

BUSP (expected unit price from asset sales) is NOT BP (fund unit price as at the invitation date), as the example discloses, a BUSP of $0.48/unit might return an AUSP $0.64/unit for those who “sell” and better the original $0.80/unit for those who stay.

Of course, there's a lot more to this story, because those who stay have to consider the market, any discount suffered by those who leave, and the ongoing costs of maintaining the assets. If AUSP is substantially reduced from BP, then that could very well scare the pants off those who stay. But, since the deal is struck and they have to hold on for a further 3 years under the terms of the deal, it could be quite a hair raising ride.

If you choose NOT to sign up in the “Sell” pool, then you're deemed to be locked up in the fund for at least another three more years in the absence of further Investor Allocation Requests!!

Also, as BP (in relation to AUSP) is calculated as at the invitation date, then if the invitation date for the unit sale program is quite some time earlier that the actual sale date (to calculate AUSP), then this very well might cause some real problems for those who stay and give a substantial benefit to those who leave (in the event that fund unit price has dropped during the period).

This is how I see the deal in the absence of any example to lead me to think otherwise.
 

THANKS ASICK

As seems to be the norm, your analysis is far in advance of what LM has provided so far to us long suffering, and it seems largely ignorant/apathetic , investors.

Already on my to-do list was to ask LM to provide examples of likely outcomes for the poor investors who were forced to allocate their diminishing investments into either 'buy' and/or 'sell' buckets. Your calculation example throws great doubt on how on earth the LM proposal can ever result in an equal outcome for we PBIs (to adapt a military expression).

I will finalize, and send, my request list (including this one) to LM this weekend - promise - and will post the request here.

BTW - I have been counselled about the sometimes colourful language and terms of expressions I have used here. On reflection, perhaps some posts could have been better expressed - but in my defence it should be understood they have been posted in circumstances where my LM investments have already suffered a 27% loss(and which I expect eventually will result in a total loss of 70%, at best), and where what remains of my money is managed by a firm in whom I have absolutely no confidence.

However, to make it pellucidly clear:
* all of my comments - bland as well as more colourful - in no way relate to individuals, alive or dead, but relate solely to LM as the RE, and my personal views as an investor in both LM FMIF and LM CPAIF
* I have no interest apart from self-interest, in trying to maximize the return of my investments, and minimize the time within which I am reunited with (whatever remains of) my money
* In particular, my inclusion of the link to the SMH article entitled "The Scarlett Pimpernel of Funds Management", should in no way be taken to mean that I (a) adopt any or all of the matters/views expressed in the article or reader comments; or (b) promote as correct any or all of those matters/views.
 
Hi Dinga, I know what it's like to lose in a managed investment fund and I can understand your frustration.

I look forward to seeing your request to LM for working examples - I'm sure they'll be able to clarify the situation.

I've been looking at the definition of Actual Unit Sale Price (AUSP):

http://www.moneymagik.com/LM_info_pack.pdf
(Schedule 1, proposed clause 9A.1)

"Actual Unit Sale Price means, as at any Trigger Date for a Unit Sale Program, the price per Unit
calculated in accordance with the following formula:
(NP x BP) + NID - SD
(BV
where:
NP means the amount in the Net Proceeds Account as at that Trigger Date,
BV means the Book Value of the Sale Assets whose sale contributed to the Net Proceeds held in the Net Proceeds Account as at the Invitation Date of that Unit Sale Program,
BP means the Book Price of a Unit as at the Invitation Date of that Unit Sale Program,
NID means the Net Income Distributions as at that Trigger Date divided by the number of Sale Units (where that number is as adjusted under clauses 9A.4, 9A.21, 9A.22 and 9A.23),
SD means the duty (if any) payable to any Office of State Revenue on the transfer of a Unit under the Transfer Facility as at the Liquidity Date for that Trigger Date;"

I note that each of BP and BV are calculated as at the invitation date. I had previously noted that if the invitation date was quite some time before the actual sale occured that those who "sell" might benefit, but it seems that probably will not be the case because the ratio of BP/BV might probably stay the same if all assets reduce/increase in value at the same rate over time. However, if the assets being sold were to devalue at a faster rate over time than those assets in (as you say) the "hold basket", it will be those who "sell" who will incur a loss which is greater than they otherwise might have expected.

You might care to ask LM how the proposed scheme complies with Corporations Act s. 601FC(1)(d) since those who leave will redeem units at a price which will be less than the fund's current value (NTA/units on issue).
 

Great - thanks ASICK. These questions will indeed be included on my list, requesting LM to clarify.
 
I've just asked LM to please clarify/respond to the following matters:


1. In the last advice from LM, it was stated that the funds will be wound-up if there was "overwhelming" support by investors for the 'sell' option. What is the trigger point (eg. asset value level, total unit percentage - whatever) at which LM will wind up all of these frozen funds?


2. My recollection is that investors have only ever been informally asked whether they preferred capital preservation or income receipt, and those indications were the basis for the proposed FMIF Constitution amendments. It seems that many investors have already concluded the best and most equitable outcome is to have an orderly wind up of the funds and that investors should be given the opportunity to vote on that clear option - it should not be a default outcome, based on some decision by LM. I therefore request that we investors:

(a) Firstly be asked to vote for EITHER (i) Orderly wind-up of the funds; OR (ii) approval of the proposed FMIF constitutional changes;

(b) If the vote approves the constitutional changes, only then should investors be asked to allocate to 'hold' or 'sell'

Please confirm that LM will ask specifically ask investors whether or not they want to wind up the funds, as suggested.


3. I now also ask that LM:

(a) Provide investors with the Pros and Cons of winding up the funds together with the relevant supporting financial modeling.

(b) Advise why it does not consider that winding up the funds offers the best outcome to investors, since it addresses virtually all of the Potential Disadvantages of the Proposal.


4. I now ask that LM provides investors with detailed information about the investment offers LM says is being received when the Funds re-open eg:

(a) detailing the likely conditions, especially in relation to guarantees

(b) identifying the likely impacts on current investors


5. Together with the financial modeling, please confirm that LM will provide investors with example calculations showing the effects of the proceeds of asset sales for both "sell" and "hold" investors.


6. The following is an attempt to see the possible outcomes, in the absence of any examples being provided by LM:

* "Actual Unit Sale Price means, as at any Trigger Date for a Unit Sale Program, the price per Unit calculated in accordance with the following formula:
(NP x BP) + NID - SD
(BV
where:
- NP means the amount in the Net Proceeds Account as at that Trigger Date,
- BV means the Book Value of the Sale Assets whose sale contributed to the Net Proceeds held in the Net Proceeds Account as at the Invitation Date of that Unit Sale Program,
- BP means the Book Price of a Unit as at the Invitation Date of that Unit Sale Program,
- NID means the Net Income Distributions as at that Trigger Date divided by the number of Sale Units (where that number is as adjusted under clauses 9A.4, 9A.21, 9A.22 and 9A.23),
- SD means the duty (if any) payable to any Office of State Revenue on the transfer of a Unit under the Transfer Facility as at the Liquidity Date for that Trigger Date;"

Note that each of BP and BV are calculated as at the invitation date. The ratio of BP/BV might probably stay the same if all assets reduce/increase in value at the same rate over time.

Suppose a fund comprising 4 assets:-

Asset 1 – Original Loan (L) $60, Book Value (BV) $50, Expected Net Proceeds (NP) $30
Asset 2 – L $70, BV $60
Asset 3 – L $40, BV $30
Asset 4 – L $30, BV $20
Current Value (Unit Price $0.80 [200 x $1.00 units on issue] – this is also BP, book value unit price as at the invitation date)

Pursuant to proposed clause 9A.3, the RE must specify in a Investment Allocation Request the following items:

1. Offer Closing Date
2. The Sale Assets (Asset 1)
3. The Base Unit Sale Price (BUSP) (proposed clause 9A.2) 30 * .8/50 = $0.48
[$1.00/$0.48, or 2.0833 units per $1.00 redeemed]
4. The Expected Sale Discount (BUSP) (proposed clause 9A.2) (50 – 30)/50 = 40%

Let's assume the asset was actually sold for $40 (yes, it did better than expected). So, the Actual Unit Sale Price (AUSP) (proposed clause 9A.2) 40 * .8/50 = $0.64
[$1.00 / $0.64, or 1.5625 units per $1.00 redeemed]
Note: it's confusing because the variable NP is used differently in both the AUSP and BUSP formulae: in the former, it's the actual sale price, and in the latter, it's the expected sale price.

Units would leave the fund at 1.5625 units per every $1.00 redeemed ($0.64/unit). If we assume that the whole $40 was redeemed, the number of units leaving the fund would be $40 * 1.5625, or 63 units.

Therefore 200 – 63, or 137 units now hold $110 in equity (Asset 1 now sold) with 47 units redeemed at 1.5625 units per $1.00.

Unit Price for those who “hold” is now increased to $0.803 per unit because of the reduced unit price for those redeeming in the “sell” pool.

Those who stay will retain (and better) the $0.80/unit, while those who leave redeem at $0.64/unit.

(a) This simple example indicates that 'sell' investors may well redeem units at a price which will be less than the fund's current value (NTA/units on issue). Is this a valid potential outcome?

(b) If this is so, how does LM's proposed scheme comply with Corporations Act s. 601FC(1)(d), which requires LM to treat the members who hold interests of the same class equally?


7. I understand that LM has advised other investors that audited 2011/2012 Financial Statements for FMIF and all of the feeder funds will be provided in advance of investors being asked to approve the proposed changes to the FMIF Constitution. Clearly investors will need a reasonable period within which to consider the audited financial information - I submit that a minimum period of one (1) month is needed, and request you confirm that investors will be given such a period.


8. I understand that LM has also advised other investors that full detailed information about all of the funds assets will be provided, including but not limited to (i) Book Value of each asset, including the latest valuation date; (ii) initial loan amount; (iii) outstanding loan amount; (iv) Actual individual LVR; (v) income received during 2011/2012 - with amounts capitalised or received in cash specified; (vi) expected income per year for each of the next 3 years.

In addition, I ask request confirmation that LM will also:

(a) Identify which assets are subject to a 2nd Mortgage held by a related party, and the amounts of those mortgages

(b) Identify which asset(s) are subject to a 2nd Mortgage held by FMIF, and the amounts of that/those mortgages

(c) The rates of interest being paid/accrued on every Asset

(d) Identify which assets have been subject to active marketing, together with the detailed history on feedback/offers

(e) Identify which assets are currently being marketed, together with likely sale prices and timeframes for sale

(f) Provide a detailed breakdown of expenses applied to every loan/asset


9. In relation to the DBank arrangements, I request that LM provides updated information about:

(a) Conditions to be met by LM, particularly any LVR covenant

(b) Did LM make the $13.5 mill payment by 30 June 2012? If not, what additional conditions/penalties have been imposed by DBank?


10. No doubt LM has provided other investors with information, in answering specific investor queries. I request:

(a) All of such information should be provided to other investors

(b) In the interest of openess and investor benefit, LM should circulate negative - as well as positive - feedback that investors have provided to its proposals.


11. I have previously raised my objections that feeder fund investors were not to be given the opportunity to vote on the recommended changes to the FMIF Constitution. I understand LM is currently considering the steps that will be taken in respect of the approval of the liquidity mechanism by the feeder funds. Please advise when LM will reach a conclusion on this very important matter.


12. I understand LM is holding 12 Advisor/Intermediaries Forums around Australia, commencing on 23 July 2012 to "...facilitate active discussion of the proposed liquidity mechanism for the closed funds, the processes involved, the fund assets and scenarios of the financial modeling regarding the "sell" and "hold" pools. This will be an opportunity for you to develop further understanding prior to the investment allocation step, when you will be guiding your clients in relation to their allocations".

(a) I understand LM has refused Investors' request to attend these forums on the extraordinary basis that LM is not licensed to provide advice for investors (surely LM is not providing investment advice to the Advisors, who may then pass that onto the investors?). Will LM allow my nominee to attend one of these forums? If not, why not?

(b) I would have thought it obvious that investors should be given the first priority to 'develop further understanding'. Does LM intend to hold similar forums for Investors, prior to the next vote on the liquidity mechanism? If not, why not?


13. Fee levels advised by LM - especially for the Feeder Funds - seem extraordinary. Assuming the true fees are to be totalled (ie. Feeder Fund plus FMIF), this apparently means my CPAIF fee hit has been:

* 2008: 1.21%
* 2009: 5.92%
* 2010: 2.17%
* 2011: 4.93%

Please advise:

(a) Are these amounts correct?

(b) If correct, why have the fees been so high for the CPAIF?

(c) Why were there such large increases in 2009 and 2011?

(d) What is the basis for LM calculating its fees?

(e) What is the basis upon which LM judges the fees to be 'appropriate'?


14. In relation to the 2nd mortgages held by related parties, perhaps there is a possibility that the best outcome for FMIF and feeder fund investors is that those assets be now sold. Presumably such an outcome may well not be in the interests of LM MPF investors.

(a) How does LM manage what clearly could be a conflict of interest between those two categories of LM investors?

(b) Given that LM is the RE of both FMIF and MPF, why was there a need for FMIF to have a 'priority agreement'? What are the terms of that agreement?


15. In relation to WMS Chartered Accountants and BIS Shrapnel, please advise details of any past and current relationships with LM entities.


I'm very much looking forward to LM's responses to these matters, and will post them here.
 
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