Sorting Out Investment Problems

Over the years we have seen many examples of investors having a portfolio full of rubbish.  In some cases it is of their own making.  In other cases they have used an adviser.  Unfortunately by the time they come in to see us, it is often too late to do much about it, other than to salvage what is salvageable and then restructure the portfolio as best as we can while coping with constraints caused by assets that are unsaleable.

We thought that by now the worst of it would have passed by with the damage being known.  With the finance companies in receivership and those in moratorium it should only just be a matter of time.  Obviously investors who held investments in finance companies know that there is a problem.  Those in receivership have invariably been provided with a range of expected recoveries.  Those who hold investments in companies that have a moratorium in place, most likely have been provided with an optimistic recovery rate.  Unless the property market, especially in the Queenstown Lakes District, recovers dramatically, we expect there will be major losses.

Finance company losses are bad enough.  Everyone knows why they happened – greed, fraud, too concentrated lending etc.  But the “problem” investments we are finding in the portfolios of investors, who are seeking a second opinion from us, are often completely different.  On one hand we are seeing portfolios from the same advisory company.  There seems to be one set of investments used being a combination of syndicated property, and failed “Exclusive Investments”.   Unfortunately given that there is virtually zero liquidity in this scenario there is very little that can be done to improve the situation. 

A less common situation is when no in house investment products have been used.  Instead it appears there has been an unfortunate choice of investments, and most disturbingly an inappropriate choice given the investors risk profile.  Readers of this column will remember that we refer to one of the keys to investing is the appetite for risk that an investor is prepared to accept.  It follows that a low risk investor should not make risky investments.  “Client A” appears to have been assessed on the basis of the questionnaire that they completed for the adviser to be Conservative/Defensive.  The recommended asset allocation in November 2005 was 60% into Cash and Fixed Interest, with the balance being into what would be considered growth investments.  The allocation to cash and fixed interest seemed to be appropriate. 

Where the adviser went wrong was in individual product selection and levels of exposure to each investment.  When we are reviewing a situation like this, we have the benefit of hindsight.  Sure most of the direct shares were not good choices, and may have been chosen at the time as they tended to be high dividend yielding shares.  We all know that the share market has fallen considerably since the investments were made so it is understandable that there would be losses in what was the growth area of the portfolio. 

The really surprising area of the portfolio was the 30% allocation to one investment, namely the ING Diversified Yield Fund.  This was the only ING product in the portfolio.  The adviser was not aligned to ING.  A 5 – 10% allocation may have been closer to the industry norm for those non ING advisers who used the product.  But there was also a 9% exposure to another CDO based investment.  So “Client A” had almost a 40% exposure to CDO funds.  This was hardly appropriate for a conservative investor.  Then there were the 9% exposures to single finance company debentures.  To make matters worse, the adviser subsequently invested 9% into a capital guaranteed bond that has defaulted several times on its coupon payment.

So for “Client A” it is no wonder they are changing advisers.  For these people around 49% of their investment capital has been seriously impacted by inappropriate investments.  Overall their investment capital is down by around a third.  This will make it difficult for them to meet their retirement goals.