ASEAN KEY DESTINATIONS
Home >> Daily News >> ASEAN ANALYSIS
Off the Rails
The last few years have at times felt like watching a train crash not so much in slow-motion but in freeze frame being advanced just one frame at a time. We’re referring of course to the proliferation of mark-to-model investments whose popularity has been just one side-effect of the financially repressive zero interest rate policies (ZIRP) that have pushed investors towards assets that wouldn’t usually feature on their financial radars. Having held together since the crisis, it seems as though there is a huge gathering of momentum now towards a catastrophic meltdown in this sector. The problem isn’t the underlying assets themselves (which is why all sorts of mark-to-model basket cases will now come out and loudly proclaim why they’re so different) but rather the use of an accounting method (usually signed off by big name auditors whose only remit is to check that the fund’s internal model has been followed however wacky it may be and not to comment on its basis in reality or not as the case may be) that publishes prices that are impossibly at variance with the realizable value of the underlying assets. The more opaque the underlying assets, the greater the scope for mischief before the discrepancy is realized. We warned about this in International Adviser in April - http://www.international-adviser.com/profiles-and-analysis/analysis/why-its-important-to-know-your-models
It is a cause of huge regret for us that our warnings are now coming to pass with so much money still trapped in such investments, whether in life settlements (http://www.international-adviser.com/news/products/managing-partners-suspends-redemptions), Australian mortgage funds (http://www.international-adviser.com/news/products/lmim-situation-severe-as-investors-face), resort developments (http://www.international-adviser.com/news/harlequin-admin-report-shows-86m-owed) litigation funding (http://www.international-adviser.com/news/products/axiom-legal-fund-report-reveals-misappropriation) or student accommodation (http://www.international-adviser.com/news/products/update-brandeaux-suspends-entire-fund-range) or in inevitable accidents that haven’t yet happened and the real warning here is that the knock-on effect will be calamitous for all other mark-to-model funds, especially in life settlements, student accommodation, litigation funding and property development but also beware agricultural or recycling models too or any illiquid assets. Because of the power of marketing departments and the yield starvation of the last few years, we’re increasingly acquiring new clients whose existing portfolios were arranged by their previous advisors and who change advisors because one of their mark-to-model funds has imploded. We’re tending to immediately sell the other mark-to-model holdings. Assuming that this is a widespread phenomenon and is happening with thousands of different clients at the same time then the failure of one M2M fund simply increases the pressure on all the others. Dealing departments must be getting inundated with sell instructions right now. This creates a stampede it’s better to be at the front of these queues than the rear.
These situations are all obviously very sad news for the investors who entrusted their savings into these funds but the best thing, on the principle that your first loss is your best loss (I prefer least worse), would undoubtedly be a swift liquidation and hopefully investors can get back some Cents in the Dollar. This should have happened back in ’08 and saved 5 years of pain.
Until we know the facts of any of the situations we shouldn’t point the finger too quickly at any individuals especially as Mark-to-Model appears to have become systemic now.
Maybe some good will come of this and instead of blaming bad luck/regulators who’ve blown the whistle/impertinent investors for actually wanting their money back, hopefully the industry will wake up and will stand up and take a look at itself – from advisors through to platforms and ultimately to fund managers. Mark-to-model will destroy our industry if it isn’t nipped in the bud – this debacle ought to be a salutary warning to anyone who still hasn’t realized that and if they haven’t why on Earth not? As a friend whose opinion I respect hugely commented yesterday –“the correlation between those that hold the rubbish that has already collapsed and the rubbish that will collapse is very high.”
Disclosure: MBMG Group and/or its related entities have not promoted the Brandeaux Funds (or any other mark-to-model student accommodation or other property funds), the EEA Funds (or any other mark-to-model life settlement or viaticals funds), the Harlequin Funds (or any other resort development funds) and the Axiom Funds (or any other mark-to-model litigation funds) although MBMG Group and/or related entities do provide advice to clients who have previously into such funds through prior arrangements with other advisors. In some cases MBMG Group and/or its related entities have not yet been able to satisfactorily arrange disinvestment because of the illiquidity of such funds. MBMG Group and its related entities did, prior to 2008, recommend a limited, investment into the LM Funds and other Australian mortgage income funds but has advocated avoiding/exiting such investments since that time.
MBMG Group is a multi-award-winning private client advisory practice and professional research that provides sound, intelligent and impartial advice to assist clients in protecting, building and maximizing their hard earned wealth. Over the past 15 years, MBMG Group has established a reputation for commitment in service and to maintaining the highest ethical and professional standards. For further information, visit www.mbmg-group.com
Further information and media queries contact:
Ms. Haidee Cadelina
75/56 Ocean Tower II, 26th Floor, Soi Sukhumvit 19, Klongtoey Nua, Wattana
Bangkok 10110 Thailand
Tel +66 2 665 2534-9 Ext. 107
Letters that do not contain full contact information cannot be published.
Letters become the property of AseanAffairs and may be republished in any format.
They typically run 150 words or less and may be edited
submit your comment in the box below