The case for getting rid of trustees from managed funds
The collapse of most of New Zealand’s debenture-selling finance companies exposed the fact that their trustees had been mere ticket clippers and box-tickers and provided investors with little in the way of practical protection they were being paid to provide.
In fact, I would argue that having trustees supposedly overseeing managed investment schemes is worse than no protection at all because it gives investors a false sense of security by holding out that there’s an entity that exists only for their protection.
But unfortunately, the Government balked at doing away with trustees, opting for the much softer option of requiring trustees to be licensed and renaming them “supervisors,” although supervisors are in effect trustee companies.
And it’s those same trustees that dominate the short list of today’s licensed supervisors.
Two of them, Perpetual Trust and New Zealand Guardian Trust merged after entrepreneur Andrew Barnes bought them in 2013 and 2014 respectively, and Guardian Trust is the only one of the two now licensed to oversee MISs.
Perpetual Trustee presided over Provincial Finance, Nathans Finance, Capital + Merchant, Lombard and many more.
Guardian Trust was trustee for Hanover Finance and at least eight other failed finance companies and investment funds.
Covenant Trustees oversaw the Bridgecorp disaster and about 14 other entities including one of the few survivors, the now NZX-listed Geneva Finance.
Bridgecorp’s last prospectus updated in April 2007, a little over two months before it went into receivership in July of that year, contained details of the trustee’s role, including its statutory duty to “exercise reasonable diligence to ascertain whether or not there has been any breach of the terms of the trust deed.”
Journalists like me had known for years that Bridgecorp was dodgy as – in 2004, I wrote that “I found getting to grips with Bridgecorp's financial affairs a rather slippery affair.”
That was because Bridgecorp operated a birds’ nest collection of companies and in 2002 it moved the ultimate holding company, which owned all the others, to Australia.
To understand the real position – or as real as one could get, given subsequent history having proved its officers and directors had been lying about the true picture – one needed to read Australian domiciled Bridgecorp Holdings’ accounts.
For instance, the New Zealand subsidiary, Bridgecorp Ltd, appeared to be reasonably healthy and reported equity of $55.7 million at June 30, 2003. But the holding company’s equity at that date was a much slimmer A$23.6 million supporting a little over A$500 million in assets, small enough to ring alarm bells for anybody taking the trouble to look, even disregarding the fraud.
Before the holding company moved to Australia, though, Covenant had been the trustee when it had previously issued debentures, so it can’t have been ignorant of its existence.
But somehow Covenant allowed Bridgecorp to continue on its merry way for several more years, trapping ever more “mum and dad” investors.
Covenant is currently Goodman Property Trust’s supervisor but I would argue the fact that Goodman itself has forged a strong reputation for doing the right thing by that trust’s investors is down to Goodman and has nothing whatsoever to do with Covenant.
Trustees Executors was most famous for being the trustee for Allan Hubbard’s South Canterbury Finance but these days it acts as supervisor to the only other remaining NZX-listed property trust, Vital Healthcare Property Trust.
The Trustee Corporations’ Associations of New Zealand, which represents all these trustee companies, is obviously jealously guarding their patch.
In its submission of phase two of the Reserve Bank Act review, TCA said “the supervisors’ ability to frequently and closely interact with and tailor supervision activities is crucial to ensuring that idiosyncratic risks are addressed.”
It says that “we submit that the benefits of independent supervision by commercial and licensed independent supervisors with separate and significant fiduciary and legislative duties to depositors of each regulated product or licensed entity should not be overlooked.”
The trustee supervisory model offers “hands-on micro supervision” and trustee companies “are close to the market, have a good knowledge of the areas they supervise, have good working relationships with issuers, advisors and regulators and have a long history of trustee and supervisory experience through various regimes and regulation,” the TCA submission says, while taking care not to mention that “long history.”
That’s cold comfort to Vital Healthcare’s investors; Canada-based and Toronto-listed NorthWest Healthcare Property Real Estate Investment Trust bought Vital’s management contract in 2011 for $11.5 million.
NorthWest pocketed about $100 million in gross fees between then and June 30 last year, a gross return before expenses of 870 percent.
Over that same period, distributions to unitholders have risen from 8.1 cents per unit to 8.56 cents, a 5.7 percent increase.
While investors amply demonstrated their ire at this state of affairs at the December annual meeting, even worse profit gouging awaited.
NorthWest’s gross fees for managing Vital jumped to $22.1 million in the six months ended December, up nearly 75 percent from a year earlier, at the same time as net distributable income fell 18.7 percent.
Despite the fall in earnings, NorthWest caused Vital to borrow so it could pay an increased first-half dividend of 4.38 cents per unit, up from 4 cents the previous year.
Trustees Executors has “supervised” this performance and there’s precious little evidence it has lifted a finger to try to curb NorthWest’s rapacious behaviour.
Trustees Executors evidently doesn’t include answering a journalist’s questions as part of its duties.
I have tried repeatedly to get answers to questions, including where NorthWest got the authority to charge some of the fees levied in Vital’s latest first half.
For example, on top of its usual management and so-called incentive fees, NorthWest charged an “acquisition fee of $8.2 million for purchasing property from ASX-listed Healthscope, a transaction that hasn’t happened yet and to which Vital isn’t yet a party.
NorthWest is proposing to repay only $5.2 million of this if the Healthscope deal falls through, but Trustees Executors won’t say why it is allowed to do this.
On top of that, NorthWest borrowed A$81 million from Vital to buy a stake in Healthscope last year, a stake which NorthWest has argued gave it a seat at the table for when Healthscope’s assets were carved up.
Trustees Executors won’t say where NorthWest got the ability to borrow from Vital and Vital’s Statement of Investment Policy doesn’t list that type of lending among Vital’s authorised investments.
After two failed attempts at persuading Trustees Executors to answer these and other questions – of course, NorthWest also refused to answer them – I asked the Financial Markets Authority, the regulator of supervisors, what it makes of the situation.
The FMA – which clearly took time to talk to Trustees Executors first – answered that it has been following developments relating to Vital Healthcare over the last few months.
“The FMA continues to engage with the supervisor to ensure it is monitoring the manager’s compliance with its obligations under the Financial Markets Conduct Act and the Trust Deed, including its obligations regarding disclosure of fees,” the FMA said.
“The FMA is receiving updates on TEL’s work as the front-line supervisor of Vital Healthcare as a Managed Investment Scheme and Northwest Healthcare Properties Management as the MIS Manager.”
Encouraged by this evidence of communication, I tried again, submitting the same list of unanswered questions to Trustees Executors chief executive Ryan Bessemer for a third time.
“As the supervisor our primary focus is protecting unitholders interests,” Bessemer replied.
“We continue to work with the manager to ensure that the fees charged are in accordance with the trust deed.”
Trustees Executors isn’t powerless here, but one wonders how bad matters need to get before it exercises the powers both the trust deed and the Financial Markets Conduct Act give it.
The trust deed refers to section 185 (1) of the Act that allows Trustees Executors to remove NorthWest if it believes “that it is in the best interests of scheme participants.”
Several other clauses deal with the trustee’s right to remove NorthWest, including for “breach of its obligations under this deed” and if “the manager fails to carry out its duties to the satisfaction of the supervisor.”
Indeed, the FMC Act also directly deals with the conduct of the manager; it must “act in the best interests of the scheme participants” and “not make use of information acquired through being the manager in order to (i) gain an improper advantage for itself or any other person; or (ii) cause detriment to the scheme participants.”
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