I was intrigued by the float a few weeks ago of the US Masters Residential Property Fund by Dixon Advisory & Superannuation Services Ltd.
This fund was created to invest in properties in Hudson County New Jersey. According to the fund’s balance sheet (as at 31 December 2011) it has $A18.7m invested in properties in Hudson County and another $A77m in cash, total assets were $A96.7m.
The directors of this entity (none of whom have any experience in the management of property) believe that residential property prices in Hudson County are very low and this was the premise on which they created this fund.
What I was taken aback by was the fees that the fund will pay to the responsible entity (which is controlled by directors of the fund). The responsible entity has the right to charge the fund 2.5% of the value of gross assets (including cash!). The responsible entity is “only” charging 1.59% currently. In addition there is also a “leasing fee”. Oh and I forgot to mention that the responsible entity also received up to 4% of the value of funds initially raised as “structuring and handling” fees.
But let me put that in perspective. If you owned a rental property that was valued at $400,000, would you be prepared to pay someone $6,360 per year to “manage” it for you? You wouldn’t? Well 1.59% of $400,000 is $6,360 and 2.5% is $10,000! And that’s what anyone who has invested in the US Masters residential Property Fund is paying and it’s even worse because they will pay that fee on any cash and other non-property assets the fund holds!
Would you also be prepared to hand over $16,000 if they bought that $400,000 property on your behalf (with your money) as a structuring and handling fee? Of course not, you would have to be mad to do that.
I’m really sick of seeing these sorts of fee structures. The fact that the fee is charged on gross assets rather than net assets also allows the fund to increase debt at some point in the future and take a higher dollar fee. It’s a totally wrong incentive.
It’s also not the type of fee structure that should engender confidence in investors. If the responsible entity took its fees as a percentage of the increase in net asset value and income that it can generate for the fund, I would have far more confidence. But they are effectively saying to investors we have no confidence in our ability to increase net asset value or generate high income from the fund, therefore we will just sit back and take a percentage of gross asset value.
I can rule out this investment for me (at the current price) on six grounds:
1. In my opinion, the directors do not have sufficient property experience;
2. The directors live in Australia, not the US (let alone New Jersey);
3. The fund is not adequately diversified in terms of geography;
4. The fees are excessive;
5. Fees on gross assets incentivize managers of the fund to use debt in order to increase gross assets and generate higher fees;
6. Fees on gross assets get paid on non-property assets like cash. Who pays fees on their own cash?
Please note that as always, none of the above constitutes financial advice. You need to do your own research and consult appropriately qualified people for advice (where necessary).
Sunday, August 5, 2012
Saturday, June 23, 2012
Alan Kohler takes advantage of Newscorp’s stupidity
The news on Wednesday that Newscorp had paid just under $30 million for Australian Independent Business Media (AIBM), a company majority controlled by Alan Kohler, Mark Carnegie, John Wylie and Eric Beecher was nothing short of astonishing.
AIBM’s only properties are the Business Spectator web site and the investment newsletter The Eureka Report. AIBM made only $237,000 last year (and no, I didn’t leave a zero out). In its five year existence, AIBM has only been marginally profitable. Realistically the company is probably worth $1 to $2 million. Stephen Mayne’s higher profile crikey.com sold for about $1 million a few years back.
There has been talk that Newscorp will use Business Spectator stories in The Australian and also put the site behind a pay wall. I will tell Newscorp’s Kim Williams right now that you cannot successfully put marginal “brands” behind pay walls, because when you do, 90% of your readership will evaporate. Or put another way, nothing you can find on the Business Spectator site is 1) worth paying for (or) 2) can’t be found elsewhere for free.
Alan Kohler has used his profile on the ABC television network (a public broadcaster) to create a business venture that largely exists only because of that ABC profile. Perhaps he should now be sharing some of his spoils with the ABC?
This year Kohler also changed the format of his Inside Business program on the ABC in order to give some of his co-investors in AIBM (like Stephen Bartholomeusz) a media profile which they previously didn’t have. It was all building up to a sale of AIBM.
The Business Spectator site itself is of mediocre quality. For starters, many of the stories that appear on the site are lifted straight out of the Australian Financial Review (i.e. they are not original stories). The opinion pieces written by Kohler, Gottliebsen and Bartholomeusz are of very limited value because the “spectators” are just that – spectators, not real financial market players.
As for The Eureka Report, what sort of people take financial advice from journalists (and money managers with dubious track records)? Answer: People who are very inexperienced and naïve.
If you want to see what kind of advice Kohler was giving in a December 2007 ASX publication (just prior to the full-blown effects of the GFC), read my 2008 article on this site: Old lessons to be learned from the Panic of 2008. Although I didn’t name him in that article, the respected business commentator I referred to in that article was in fact Alan Kohler. The advice he gave and opinions he expressed couldn’t have been more wrong.
As for Newscorp, Kohler had been a strident critic of both Rupert Murdoch and Newscorp. However, when enough cash was dangled in front of his face, he was willing to immediately jump into bed with the most disreputable media organization in the world. The Leveson Inquiry has clearly shown us just how unethical Newscorp has been. Enough said.
Newscorp doesn’t understand the online world and has lost vast amounts of money on previous investments such as MySpace. They will watch most of their $30 million for AIBM disappear too.
AIBM’s only properties are the Business Spectator web site and the investment newsletter The Eureka Report. AIBM made only $237,000 last year (and no, I didn’t leave a zero out). In its five year existence, AIBM has only been marginally profitable. Realistically the company is probably worth $1 to $2 million. Stephen Mayne’s higher profile crikey.com sold for about $1 million a few years back.
There has been talk that Newscorp will use Business Spectator stories in The Australian and also put the site behind a pay wall. I will tell Newscorp’s Kim Williams right now that you cannot successfully put marginal “brands” behind pay walls, because when you do, 90% of your readership will evaporate. Or put another way, nothing you can find on the Business Spectator site is 1) worth paying for (or) 2) can’t be found elsewhere for free.
Alan Kohler has used his profile on the ABC television network (a public broadcaster) to create a business venture that largely exists only because of that ABC profile. Perhaps he should now be sharing some of his spoils with the ABC?
This year Kohler also changed the format of his Inside Business program on the ABC in order to give some of his co-investors in AIBM (like Stephen Bartholomeusz) a media profile which they previously didn’t have. It was all building up to a sale of AIBM.
The Business Spectator site itself is of mediocre quality. For starters, many of the stories that appear on the site are lifted straight out of the Australian Financial Review (i.e. they are not original stories). The opinion pieces written by Kohler, Gottliebsen and Bartholomeusz are of very limited value because the “spectators” are just that – spectators, not real financial market players.
As for The Eureka Report, what sort of people take financial advice from journalists (and money managers with dubious track records)? Answer: People who are very inexperienced and naïve.
If you want to see what kind of advice Kohler was giving in a December 2007 ASX publication (just prior to the full-blown effects of the GFC), read my 2008 article on this site: Old lessons to be learned from the Panic of 2008. Although I didn’t name him in that article, the respected business commentator I referred to in that article was in fact Alan Kohler. The advice he gave and opinions he expressed couldn’t have been more wrong.
As for Newscorp, Kohler had been a strident critic of both Rupert Murdoch and Newscorp. However, when enough cash was dangled in front of his face, he was willing to immediately jump into bed with the most disreputable media organization in the world. The Leveson Inquiry has clearly shown us just how unethical Newscorp has been. Enough said.
Newscorp doesn’t understand the online world and has lost vast amounts of money on previous investments such as MySpace. They will watch most of their $30 million for AIBM disappear too.
Sunday, January 15, 2012
Caledonia Investments: The Legacy of John Darling
It was revealed this week that Caledonia Investments intends to short sell stocks for the first time in their history. A definite sign that buy and hold strategies are no longer generating sufficient returns (as I mentioned in my article on algorithmic trading).
Caledonia Investments was formed in 1992 as a vehicle to manage the inherited wealth of 20 or so members of the Darling family. These family members own 28% of Caledonia Investments (which manages approximately $A2 billion). In 1998, Caledonia was opened to outside investors.
The Darling family fortune was created by John Darling, a 19th century Scottish immigrant to Australia who founded a wheat and flour milling business. Apparently, by the 1880s, this business was Australia’s largest wheat exporter.
Current members of the Darling family that have taken prominent roles at Caledonia Investments include Michael Darling, his cousin Ian Darling and Ian’s father David. Like Rupert Murdoch, Michael Darling attended Geelong Grammer School and Oxford University. A privileged upbringing to say the least.
Ian Darling is also a documentary maker. Hhe produced the excellent Woodstock for Capitalists, a documentary made at the time of the Berkshire Hathaway AGM in 2000. If you haven’t seen it, go and get a copy.
Caledonia has tried to emulate Warren Buffett’s investing philosophies, which is why their announcement of their intention to short sell stocks is so interesting.
Caledonia does not disclose on their web site what the returns have been for each of their funds. Obviously, the move to short sell indicates to me that recent returns have not been sufficient. Media reports always refer to “excellent returns” achieved by Caledonia, but where do outsiders find the proof of this?
One rather indirect method of determining how successful Caledonia has been is to look at the wealth of the Darling family over time.
In 1990 the Darling family were worth approximately $A330m and are now worth in the vicinity of $A600m – that’s a compound return of about 3% per annum over that time period. This obviously compares unfavourably to many other rich Australians.
For example, over the same period of time, Kerry Stokes went from approximately $A150m to $A2.5 billion (14.3% compound), Lindsay Fox went from $A50m to $A2 billion (19.2% compound), Frank Lowy went from $A550m to $A5 billion (11.1% compound) and Stan Perron went from $A260m to $A1.9 billion (9.9% compound). I could quote many more.
If the Darling family had compounded their wealth at 10% per annum over the period 1990-2011, their fortune would now be approaching $A2.5 billion, the fact that it’s nowhere near that is revealing for a family that now manages money for outside investors.
The Darling family’s investment prowess also doesn’t compare favourably to two of the great investing families of Australia – the Hains family and the Millner family.
The Millner family also inherited great wealth but seem to have made many astute investments, one of the best being New Hope. You can actually invest alongside the Millners in one of their listed companies such as Milton Corporation (and the management expenses are miniscule compared to fund managers like Caledonia).
Senior figures at Caledonia Investments seem to have a wide variety of extra-curricular interests such as acting as trustees for various non-investment related bodies. I don’t like to see this, if you are managing my money, I want you absolutely focused on that without outside distractions.
Individuals will need at least $A250,000 to invest with Caledonia, with some funds requiring a minimum investment of $A500,000 and individually managed accounts requiring $A10 million(!).
Caledonia Investments was formed in 1992 as a vehicle to manage the inherited wealth of 20 or so members of the Darling family. These family members own 28% of Caledonia Investments (which manages approximately $A2 billion). In 1998, Caledonia was opened to outside investors.
The Darling family fortune was created by John Darling, a 19th century Scottish immigrant to Australia who founded a wheat and flour milling business. Apparently, by the 1880s, this business was Australia’s largest wheat exporter.
Current members of the Darling family that have taken prominent roles at Caledonia Investments include Michael Darling, his cousin Ian Darling and Ian’s father David. Like Rupert Murdoch, Michael Darling attended Geelong Grammer School and Oxford University. A privileged upbringing to say the least.
Ian Darling is also a documentary maker. Hhe produced the excellent Woodstock for Capitalists, a documentary made at the time of the Berkshire Hathaway AGM in 2000. If you haven’t seen it, go and get a copy.
Caledonia has tried to emulate Warren Buffett’s investing philosophies, which is why their announcement of their intention to short sell stocks is so interesting.
Caledonia does not disclose on their web site what the returns have been for each of their funds. Obviously, the move to short sell indicates to me that recent returns have not been sufficient. Media reports always refer to “excellent returns” achieved by Caledonia, but where do outsiders find the proof of this?
One rather indirect method of determining how successful Caledonia has been is to look at the wealth of the Darling family over time.
In 1990 the Darling family were worth approximately $A330m and are now worth in the vicinity of $A600m – that’s a compound return of about 3% per annum over that time period. This obviously compares unfavourably to many other rich Australians.
For example, over the same period of time, Kerry Stokes went from approximately $A150m to $A2.5 billion (14.3% compound), Lindsay Fox went from $A50m to $A2 billion (19.2% compound), Frank Lowy went from $A550m to $A5 billion (11.1% compound) and Stan Perron went from $A260m to $A1.9 billion (9.9% compound). I could quote many more.
If the Darling family had compounded their wealth at 10% per annum over the period 1990-2011, their fortune would now be approaching $A2.5 billion, the fact that it’s nowhere near that is revealing for a family that now manages money for outside investors.
The Darling family’s investment prowess also doesn’t compare favourably to two of the great investing families of Australia – the Hains family and the Millner family.
The Millner family also inherited great wealth but seem to have made many astute investments, one of the best being New Hope. You can actually invest alongside the Millners in one of their listed companies such as Milton Corporation (and the management expenses are miniscule compared to fund managers like Caledonia).
Senior figures at Caledonia Investments seem to have a wide variety of extra-curricular interests such as acting as trustees for various non-investment related bodies. I don’t like to see this, if you are managing my money, I want you absolutely focused on that without outside distractions.
Individuals will need at least $A250,000 to invest with Caledonia, with some funds requiring a minimum investment of $A500,000 and individually managed accounts requiring $A10 million(!).
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