when fund managers turn predators

This in today's Australian

When fund managers turn predators

SHAREHOLDER: Stuart Wilson | September 09, 2008

HAPLESS investors in the Octaviar Premium Income Fund have a gun pointed squarely at their heads by the funds manager, Jenny Hutson's Wellington Capital.

This sick property fund is a remnant of the MFS implosion earlier this year, and has more than 10,000 small, income-seeking investors. It is circling the drain, with investors locked in limbo and distributions no longer flowing. Yet Wellington is using every tricky tactic in the book to wring out its fees.

Investors have few options. The proposal put forward by Wellington is to list the fund on the National Stock Exchange. This means that instead of redeeming their units for cash, investors will have to sell them on-market.

But as the number of sellers will likely heavily outweigh buyers, and with unitholders' dwindling trust in Wellington, the price at which PIF units trade is virtually guaranteed to be below the $0.45 value quoted in the documentation sent to investors.

If buyers have been scared off after experiencing Wellington's bullying tactics designed to lock itself in as manager, the market price could easily wallow under the somewhat rubbery $0.14 per unit investors are told they could receive on liquidation.

Wellington has some legitimate reasons for seeking changes to the funds constitution to effect the fund's listing on the NSX. To emerge as a listed vehicle, the whole structure of the fund would need to be overhauled to work properly.

In particular, the fund would need to become close ended, which means units would no longer be issued or redeemed. Rather, units would be purchased or sold on-market, and the price struck would be based on supply and demand rather the net asset value of the unit.

Unfortunately for the proposed new model, demand seems to be in short supply.

In addition, the existing constitution proclaims that the manager is entitled to any surplus income after unitholders have been paid. This clearly does not sit well with Wellington Capital, which has proposed a more traditional asset-based fee. The fee is steep and would provide greater certainty for Wellington. The benefit of this proposed change to investors is not entirely clear.

The most abominable, oppressive element of the Wellington proposal is that in addition to proposing changes necessary to ensure the NSX listing works, they have attempted to slip in a few clauses for their own benefit. In particular, in the event that Wellington was removed as manager -- even for poor performance -- it would be entitled to a massive termination payment, currently about $8 million.

It would be difficult to turf out Wellington anyway, as a separate proposed change to the way the fund's meetings are structured will effectively entrench Wellington as manager until there is nothing left to gouge.

One hopes that investors finally declare they will not be treated as fee-generating fodder any more. Although an orderly sell-off of assets and winding up of the fund is the simplest and most certain of available options, some investors may wish to take the risk of monetising additional value through an NSX listing.

If that is the case, they should propose alternative changes to the constitution (without the clauses that only benefit the Wellington mob), either before or after voting down the current scheme.

Stuart Wilson is CEO of the Australian Shareholders Association