Military fund trapped by fine print

THE superannuation fund charged with looking after $3.1 billion of retirement savings for Australia's armed forces has been stung with a bill for $8 million after trying to withdraw its $152 million investment in a poorly performing hedge fund.

By InvestSMART · 6 Sep 2011

By InvestSMART ·
6 Sep 2011

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The Victorian Supreme Court has ruled that the hedge fund, Agora Asset Management group, was fully entitled to charge Military Super the $8 million exit fee - even though Military Super, aghast at the size of the charge, cancelled its redemption request.

In what amounts to a sobering lesson about reading the fine print, the court found that in 2007, when Military Super invested $150 million in the Agora Absolute Return Fund II, it formally committed to paying "up to 5 per cent" if the assets were withdrawn.

The actual amount would be entirely at the discretion of Agora.

Concerned about poor returns under Agora's management, Military Super requested in December a redemption of its entire investment of $152.18 million, which represented 95 per cent of the units in Agora's Absolute Return Fund II.

The investment was repaid in May but Military Super was stunned when it realised it had been docked $7.89 million as a "withdrawal fee".

The court heard Military Super's chief executive, Michael Seton, then tried to cancel the redemption but was told by Agora's managing director, Peter Apostolopoulos , that Agora would not consent to it being cancelled unless Military Super agreed to have some investments with the hedge fund.

Military Super, through Commonwealth Superannuation Corporation, sued Agora and accused the fund manager of capricious conduct and breaches of its duty.

But Justice Jennifer Davies ruled that the terms of the constitution and information memorandum for the Agora Absolute Return Fund II specifically entitled Agora to charge the fee and to withhold its consent on the redemption reversal.

Justice Davies said "Agora did not act other than in accordance with its fiduciary and contractual duties".

Neither Mr Seton nor Military Super's chairman, Tony Hyams, returned calls yesterday.

Mr Apostolopoulos declined to comment and suggested it was "a private dispute".

Military Super's latest summary of assets shows that of the $962 million it had in Australian share investments as on June 30, $142.94 million was invested in the Agora fund.

In the nine months to March, Military Super's investments in Australian shares returned 12.5 per cent.

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Frequently Asked Questions about this Article…

What happened between Military Super and Agora Asset Management over the hedge fund investment?

Military Super invested in Agora’s Absolute Return Fund II in 2007. Concerned about poor performance, it asked to redeem about $152.18 million (95% of its units) in December. When the money was repaid in May, Military Super found it had been charged a $7.89 million withdrawal (exit) fee. Military Super tried to cancel the redemption, but Agora refused to consent unless Military Super agreed to keep some investments with the fund. Military Super (via Commonwealth Superannuation Corporation) sued, but the Victorian Supreme Court ruled Agora was entitled to charge the fee and withhold consent.

Why was Military Super charged an $7.89 million withdrawal fee by the hedge fund?

When Military Super invested in 2007 it formally committed to pay “up to 5 per cent” if assets were withdrawn. The fund’s constitution and information memorandum gave Agora discretion over the actual amount. The court found those documents entitled Agora to charge the $7.89 million withdrawal fee.

Could Military Super cancel its redemption request to avoid the exit fee?

No. Military Super’s chief executive tried to cancel the redemption, but Agora declined to consent to the reversal unless Military Super agreed to maintain some investments with the hedge fund. The court found Agora was entitled under the fund documents to withhold consent, so the cancellation did not avoid the fee.

What did the Victorian Supreme Court rule in the dispute between Military Super and Agora?

Justice Jennifer Davies ruled that Agora acted within the terms of the fund constitution and information memorandum, so it was entitled to charge the withdrawal fee and to withhold consent to the redemption reversal. The judge said Agora did not act other than in accordance with its fiduciary and contractual duties.

What lesson does this case offer everyday investors about hedge fund exit fees and fine print?

The case is a reminder to read and understand fund constitutions and information memoranda before investing. Exit fees, discretionary withdrawal charges and consent provisions can be legally binding, so investors and trustees should check redemption terms and potential fees up front.

How much of Military Super’s Australian share investments remained in the Agora fund after the dispute?

According to Military Super’s summary of assets, as at June 30 it held $962 million in Australian share investments, of which $142.94 million was invested in the Agora fund.

How large is Military Super and how did its Australian share investments perform recently?

The fund responsible for Australia’s armed forces’ retirement savings was reported as looking after about $3.1 billion. In the nine months to March, Military Super’s investments in Australian shares returned 12.5%.

What legal claims did Military Super make against Agora in the lawsuit?

Military Super, through Commonwealth Superannuation Corporation, accused Agora of capricious conduct and breaches of its duty. The court, however, found Agora’s conduct was consistent with the fund’s contractual and fiduciary obligations and ruled in Agora’s favour.