Director MBMG Investment Advisory
Making the right choices
Finance can be a complex business. That may not be the
most controversial statement you read today, but it is something frequently
To start with, there is no single catch-all solution that will meet a
person’s objectives. That’s largely because everyone has their own financial
goals and these are not fixed - they tend to evolve over time. If you add to
that the fact that there are so many products and solutions on the market
nowadays, values fluctuate, plus the complexities of being a global citizen,
Salvador Dali would have been proud of it.
Of course, with complexity comes potential minefields: those
investment schemes that look like good prospects on the face of it are not
nearly as attractive as they first seem. Recently I warned many of the
region’s leading advisors, bankers and asset managers attending the Asian
Wealth Management Forum in Singapore of the risks hidden beneath the surface
of many structured products. I quoted the dictum of CFA Institute’s Paul
Smith that if you can’t explain to a 10 year old, in less than 10 seconds,
how such a product works, then it probably means that you don’t understand
Meanwhile new fund offerings came across our desks recently that started
alarm bells ringing. They were built around the concept of providing funding
to construct residential property. Investors stand to gain based on the
rental income and/or increases in the future value of the planned
Shares, bonds, commodities and currencies all have regulated markets with
quoted prices which can be verified and referenced live in real time. This
is called price discovery. We know at any time at what value these assets
can currently be sold.
However, in cases of properties that have yet to be completed, price
discovery is somewhere between very limited and non-existent. There is no
readily verifiable market value that can be tracked on Bloomberg screens. In
the absence of price discovery, the promoters and managers of such funds
make projected returns on investment, they use a model. Hence such
structures are known as mark-to-model schemes.
Varied types of mark-to-model
There have been many schemes promoted in recent years, promising
investors a steady rate of return. Because the return is based purely on the
model, the price goes up in a straight line no matter if, in reality, the
underlying assets are appreciating or deprecating in value.
Sadly there is rarely any guarantee that the assets will achieve the
predicted value, and therefore when investors want their money back, such
funds are often unable to meet all the redemption requests. Initially they
might try to pay out by attracting new inflows (an idea largely attributed
to a certain Mr. Ponzi), if this doesn’t work they might temporarily suspend
investors’ rights to get their own money back and hope the problem blows
over. If not the fund may be forced to close, sell the assets at market
price and the investors may take very significant losses because of the
discrepancy that can arise between the reported value of the investment and
its real, realisable value.
Property in general suffers from this issue - new housing projects in places
where there is a perceived high demand. Student accommodation has also been
funded by mark-to-model schemes. It may seem to calculate how much return
will be made, but the model calculation of a student hall of residence ties
in with the market value of such a specialized asset that there is little
way of making an accurate comparison. By listing on a recognized market as a
property company or a Real Estate Investment Trust (REIT), such assets can
be wrapped in a liquid structure and can encompass price discovery. Which
begs the question as to why you would structure things in any other way.
That said, there are many other examples of mark-to-model schemes other than
with property. Some have used litigation funding schemes, where the fund’s
value increases on the assumption that lawyers will win civil cases that
have been funded using money borrowed from the fund. Thus, an investor’s
return is based on a series of judicial decisions, for which the percentage
chance of being successful is unquantifiable.
Other mark-to-model schemes have involved life insurance policies sold off
prior to maturity: put crudely, a bet on how long a selection of people will
live. Again, this cannot be compared against a market as practically any
result is possible. Many professional and institutional investors might also
invest in similar asset classes but not usually through these kinds of
Avoid these schemes
It would be inaccurate to say that every fund of this nature is
doomed to failure. However, the survival rate of these structures seems to
be very low. All things considered, the best way to avoid any problems with
this kind of fund is to stay well away from investments that don’t have
verifiable, transparent price discovery. If you’ve seen an interesting
investment fund advertised but you’re not sure if it is viable, it’s best to
seek advice from a licensed, fee-based independent advisor.
Please Note: While
every effort has been made to ensure that the information
contained herein is correct, MBMG Group cannot be held
responsible for any errors that may occur. The views of the
contributors may not necessarily reflect the house view of MBMG
Group. Views and opinions expressed herein may change with
market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and
locals within the South East Asia Region with services ranging
from Investment Advisory, Personal Advisory, Tax Advisory,
Private Equity Services, Corporate Services, Insurance Services,
Accounting & Auditing Services, Legal Services, Estate Planning
and Property Solutions. For more information: Tel: +66 2665
2536; e-mail: [email protected]; Linkedin: MBMG Group;
Twitter: @MBMGIntl; Facebook: /MBMGGroup
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