future

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The Government has breathed new life into the troubled managed investment scheme (MIS) sector. A new plan to allow MIS investments to be traded on the open market from July 1 this year is expected to attract more investors to sector. Many subscribers are among the estimated 160,000 investors in MIS schemes – enjoying the tax breaks associated with these investments and accepting the long-term nature of these products.

Now investors will be able to buy and sell their investments in a much shorter timeframe as a “secondary” market for MIS investments is launched.

The first stage of the plan will only MIS investments to be traded after they have been held for four years, but the ultimate objective is to allow many types of securities. It is believed that several of the major banks are actively creating new products to sell into the market when it launches later this year.

MIS investments are popular with retail investors because the investments are tax-deductible, often in advance. Value investors are also attracted to the stable returns from the sector which average between 4.5% and 8.5% per annum, depending on the success of the scheme.

However, as today's video interview with Marcus Elgin, managing director of the Australian Agricultural Group reveals, the new plan excludes non-forestry investments, which already face uncertainty. The MIS sector is preparing a test case against the tax office, in which the sector will try to get non-forestry investments treated in the same way as forestry investments.


The interview

James Kirby: This week’s budget did not actually give us many surprises, but one positive surprise of course was the announcement of a secondary market, a public market for MIS agricultural trading schemes. Could you tell us how it might work?

Marcus Elgin: Yeah, it was excellent news for investors in those projects but let’s be very clear about this, it’s a secondary market for forestry schemes and only forestry schemes so those people that are invested in bluegum wood chip programs, longer rotation, structural hardwood timbers in bluegum and other timbers, softwood such as pine – those people that are in forestry projects will be able to now trade their interests after a minimum holding period of four years. Four years is a critical point. After that time – and this is backdated, so if you have had an interest in those projects that have been planted from, say 2003, in 2007 you are now able to enter that secondary market.

So it’s more good news for forestry related investments and non-forestry related investments are left once more in limbo. Is that right?

Absolutely. They continue to be in this period of structural hiatus, if you like. The ATO has made its position clear, the Government’s made its position clear; the industry has a diametrically opposed view, not surprisingly. On the other hand, you have an increasing level of security around the timber part of the industry and, of course, the liquidity that’s been created by a secondary market is very strong news.

So let’s talk about the forestry side of things. This new market then will introduce liquidity if you like to the MIS forestry investments. How much will people need to trade in the market? Do you think it would be big amounts of money?

Given the scale of money that’s gone into these projects over the last 10 years, well over $2 billion has been invested in trees, establishing well over 800,000 hectares of new forest, then the scale will be from $3000 upwards. The $3000 represents about the minimum interest that any particular investor may have had in one of these projects and of course multiples of that are according to how much you own. Quite a number of investors have been making regular investments in managed investment scheme forestry of $50,000 to $100,000.

So at the moment it’s relatively limited. You have to have held your investment for four years, but this will change. How do you think the market will evolve?

A secondary market as a concept needs some structure around it to enable the buyer and the seller to come together. Now whether the seller, and I imagine that there are plenty of sellers out there, people who have had a change of circumstance who just want to free the capital up to invest somewhere else and there are plenty of buyers in this market; other professional forestry companies; institutions who are looking to control some of this timber revenue in the future; companies that want to secure future timber resource so end market users; people who want a carbon sink may all be buyers.

So there’s clearly an opportunity here to match buyers and sellers but there is no effective market that’s created yet. There’s a concept. So I would believe that there would be other institutions, financial institutions. We know of a couple right now that are talking to us about that to say, ‘Let’s work with a couple of industry players to create the mechanism for a secondary market to operate efficiently’.

So the next step might be that financial institutions will actually create products for the market. Maybe the banks?

Yeah, absolutely. I think certainly the banks will be interested in that and other financial institutions, and let’s not forget that the people that package these products up, the REs, the Responsible Entities, the promoters of these schemes, may now start thinking about, well if there’s likely to be a secondary market opportunity for investors at year four, why don’t we start thinking about incorporating some of that into our product development?

So perhaps we’re looking for a faster rate of growth in the early years to maximise the value for an investor who exits at year four. On the other hand, if we’re looking for a carbon-oriented product, do we need to be in high rainfall areas or do we need to start thinking now about a long-rotation, slower-growing tree that can be in perhaps a less high rainfall area. Which starts to create all kinds of environmental opportunities, which may well play into the bigger picture that the Government environmental organisations are seeking to achieve here.

Talking about the bigger picture, how might this new market interact with the forthcoming market for carbon trading?

We’re likely to see the development of a carbon trading system that involves trees within the next few months. If I was a betting man, I’d say just prior to the election. And we know that young trees sequester carbon so they take carbon out of the atmosphere because their carbon is the essential building block of a tree and when you establish a managed investment scheme in timber, what you’re doing is establishing young seedlings and growing young fast growing trees capturing carbon.

What we’re talking about here is creating a mechanism where people who are polluters who need to acquire a carbon sink can now enter the market and acquire from managed investment scheme investors the means to acquire that sink.

Marcus, it’s good news again for people investing in trees, in forestry-related investments. But is there any compensation for those who are in the other areas?

It’s certainly no compensation for the non-forestry boys. And remembering, of course, that many of the forestry players are also non-forestry players. It raises the stakes somewhat for the non-forestry players and it says that if you cooperate with us, us being the tax office and the Federal Government, look what wonderful things might happen for you.

This financial year is very secure for investors in any form of our cultural MIS. It’s the 2007-08 financial year where these issues will be decided and the Federal Government, the tax office and the managed investment sector will come to conclusion.