Time to get serious about managed investment scheme reform

This time we need to be fair dinkum about managed investment scheme change, writes Anthony Abraham.

There has been significant interest recently about the issues faced by the Retail Agricultural Funds Management sector.

This is long overdue, because some serious structural flaws in the sector have existed for quite some time.

However, they have only recently become apparent to a broader audience.

Many commentators have wrongly asserted that the global financial crisis (GFC) was the driving force behind the failure of various providers in the sector.

The reality is that the structural flaws were in place well before the GFC. During good economic times the flaws were hidden from sight as sales each year grew and equity markets provided fresh funds to fuel the machine.

The arrival of the GFC changed the market environment, leading to lower sales and less access to debt and equity.

As a result, the models adopted by these companies were finally tested and many companies failed.

Sadly, the consequent impact on investors has been significant — and in some cases brutal — despite repeated cries by the so-called market experts following earlier collapses that this should never happen again.

But it appears that memories are short-lived. When I appeared at the Ripoll Inquiry into this subject in 2009, I pointed out that we were reliving the same events that last played themselves out in 2001, a mere eight years beforehand.

For those who have forgotten, let me remind you that in 2001 Australia Plantation Timber, the then leading promoter of Retail Agricultural Funds Management Schemes, went into administration.

They were not alone. At that time a number of other major players were also placed under significant pressure and only a few survived.

The failure of these companies came hard on the heels of a share market crash (the Tech Wreck) and falling sales.

Starved of these essentials, companies got into trouble and either failed or had a near-death experience. Sounds familiar, doesn’t it?

At that time, people said we should never let this happen again, yet history seemed to repeat itself. This time, we need to be fair dinkum about it.

The industry — the providers, the research houses and the financiers — must be vocal and vigorous about driving change in the sector.

Without change and improved transparency, investors will simply stay away — and no amount of promotional materials will bring them back.

It would be a pity if Australian retail investors were deprived of the opportunity to make an assessment of this asset class based only on disappointing past experiences. For this reason, we believe that changes must be made.

More broadly, the marketplace refers to this sector as managed investment schemes (MIS). At Macquarie we believe the industry should be recognised as the Australian Retail Agricultural Funds Management sector.

This is because the focus should be first and foremost on funds management and not just a sales and marketing exercise carried out in the frenetic period leading up to 30 June each year.

With the application of a true funds management discipline to this area governing project selection, promotion, ongoing management and transparency, we believe that a better class of project would be promoted with better investor protections and outcomes.

Funds managers would be more inclined to become involved in the area rather than being crowded out by sales and marketing operations which, to date, have done little more than tarnish the sector.

To make this happen, a complete change of mindset is required.

While people speak bravely of self-regulation, we do not believe this will be adequate in this sector as it has consistently demonstrated an inability to see its own deficiencies and act on them.

Regulated changes that mandate funds management type behaviour is what is required to transform the sector over time.

These changes make it more likely that the sector will attract the attention of other funds managers as interest in agricultural investment continues to develop.

These funds managers will either develop their own agricultural operating expertise or partner with experienced external operators to manage properties in the professional and responsible manner rightly demanded by investors.

One of the other realisations in both 2001 and during recent incidents is that size does matter. Agriculture is a capital-intensive business.

It requires significant investment. If the money is not readily available, the pressure on the companies can lead to behaviour that is counterproductive.

Excessive gearing creates pressures on cash flows requiring sales to be high and stay high.

This pressure can override otherwise sound project selection and promotion protocols as companies become hostage to sales to maintain their business model.

Well-capitalised entities are not subject to these pressures. The investment selection and promotion protocols of these companies are less likely to be subject to these pressures and will therefore be less likely to fall victim to some of the behaviours that have led to the issues now being faced by investors.

Over time, action in these key areas will lead to a change in the structure of the sector as a greater number of well-capitalised funds managers become more actively engaged. Investors will become the rightful winners.

Anthony Abraham is executive director at Macquarie Global Agriculture.