Re: Octaviar MFS Premium Income Fund PIF
Thanks for the comments to date, and the additional material. I am involved in the Eureka Report, writing articles for them.
I had planned to focus this article on the poor quality of disclosure of borrowing around the PDS, and the ridiculous loan to Living and Leisure Australia. I also want to make comments about the 'capital protection mechanism' - a big part of the marketing but the reality was that it was simply not disclosed.
I have attached the article last written about the MFS Premium Income Fund (from May 12). I have tried to make it very small font so as not to take up too much page. Feel free to delete it if it stuffs up too much of the thread.
Cheers
Scott
The MFS Premium Income Fund was a key fund of the MFS group (since renamed Octaviar). The name implied it offered investors (including NSW Bookmakers Super) a strong income stream, presumably so that they could sleep comfortably at night. An investor update from November 2007 showed that the target rate of return was 9% a year for a 24-month investment. The fund was popular and had more than $770 million of unit-holder funds.
Lots of funds have reassuring names such as "cash plus" or "income" (even "premium income"), and the troubles the MFS Premium Income Fund got itself into is a reminder that investors should understand what is happening in every investment. Underlying the MFS fund was a small minority of cash and fixed interest investments; the majority assets were a series of property and "asset backed" loans.
The NSW Bookmakers Super Fund invested an estimated 8% of its members' money in MFS. The investment rating company Lonsec assessed the MFS Premium Income Fund as "investment grade"; in a fund review, although to be fair that was a review done about 18 months ago, in October 2006.
A key characteristic that investors should understand about the MFS Premium Income Fund is that it borrows to invest, something investors should treat with caution. As soon as a fund borrows to invest it increases its underlying risk. Borrowing to invest has been a considerable problem for the fund - earlier this year it defaulted on its loan, a $184 million facility that was payable to a third party bank.
The loan was repayable on demand as at December 31, 2007. This is where the fund started to struggle, and a series of letters to investors in the Premium Income Fund slowly highlighted the extent to which the fund was in difficulty.
A letter dated January 29, 2008, said that due to an "unprecedented" level of volatility in investment markets, no investors would be allowed to redeem their investment in the MFS Premium Income Fund for the next 180 days, adding that the fund "expects to continue paying distributions at the target rates".
This expectation about paying distributions seemed optimistic given that MFS Premium Income Fund managers should have known they were in default of the $184 million loan. It seems unlikely that any reasonable bank that was owed $184 million would say, ?Sure, we are owed a bunch of money and you have defaulted on the terms of the loan, but we are happy for you to keep paying distributions to investors while we wait for our money'. Banks tend not to work that way.
And they didn't. In another letter to investors on March 19, the fund advised investors it was in default on a loan and that "under the terms of the standstill agreement with the bank" the MFS Premium Income Fund was not permitted to pay distributions to unit-holders without the approval of the bank.
And just when MFS Premium Income Fund investors felt it was safe to go back to their letterbox, a letter dated the April 14 announced that redemptions had now been deferred to 360 days "as stated in the Fund's constitution", and that ?unit-holders will not receive interest payments during the period of the cessation, nor will any interest accrue".
So what is the cost to investors such as the NSW Bookmakers Super? As at February 29, an "investor update" listed the gross assets of the fund as $890.1 million, the loan of the fund at $184 million and the number of units on issue in the fund at 755.2 million. This gives a value per unit of 93 ¢, effectively a 7% loss on a $1 application price. Investors have now been without distributions for three months. Based on a 9% distribution, this is a "loss" of 2.25% (a quarter of 9%) - bringing the total "loss" to date to nearly 10%. Keep in mind that a good term deposit is currently yielding above 8%, so any money tied up in the MFS Premium Income Fund could be earning that in a low-risk term deposit with a bank.
A blatant example of a conflict of interest was the widely reported February drawdown on the unsecured $66 million loan facility made by the MFS Premium Income Fund to Living and Leisure Australia (a MFS/Octaviar subsidiary, whose primary activities are owning and operating ski fields, aquariums and property development).
The MFS Premium Income fund had already told investors that redemptions had been ceased; its managers should have known that the fund was in breach of the bank loan, and yet they (apparently) still thought the best way forward for investors in the MFS Premium Income Fund was to lend more money to Living and Leisure Australia, a company that had breached its own loan agreements in September 2007 (that is, Living and Leisure had already defaulted on the debt it owed).
The loans to Living and Leisure Australia are primarily in the form of unsecured loans, which means the investors in the MFS Premium Income Fund wait at the back of the queue behind all the secured creditors if Living and Leisure Australia collapses.
MFS/Octaviar Premium Income Fund investors - or anyone whose super fund was involved in this investment - should be furious about this misuse of the $66 million unsecured loan facility to prop up the Living and Leisure Australia trust.
The results suggest that the MFS Premium Income Fund was a risky fund. It borrowed money to invest. It invested in many related-party loans and tried to pay an ongoing income stream to investors while investing in assets that did not pay regular interest. All in all it stands as a good reminder that investors need to understand what is happening in their fund rather than assume that reassuring name like "premium income fund" provides any promise about risk and return.
Through all the "investor updates", investor letters, media articles and ASX announcements that I read, I could not find one that said that MFS/Octaviar had stopped taking fees from investors. Surely that is the ultimate insult: having to pay for that sort of "investment expertise" when you can't even get your money out of the fund!