Military Super fails to outflank $8m fee

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 Melbourne-based hedge fund.

By InvestSMART · 6 Sep 2011

By InvestSMART ·
6 Sep 2011

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But 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$150 million in the Agora Absolute Return Fund II it formally committed to paying "up to 5 per cent" if the assets were withdrawn.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 at the discretion of Agora.

Concerned about poor returns under Agora's management prompted Military Super to request in December a redemption of all its $152.18 million, which represented 95 per cent of all 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.

Justice Jennifer Davies has ruled 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 assets summary shows that of the $962 million it had invested in Australian shares at June 30, $142.94 million was invested in the Agora Absolute Return Fund.

In the nine months to March, Military Super's investments in Australian shares returned 12.5 per cent. Its annual report will be published in October.

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Frequently Asked Questions about this Article…

What happened when Military Super tried to withdraw its investment from Agora Asset Management's hedge fund?

Military Super requested redemption of about $152.18 million from the Agora Absolute Return Fund II after concerns about poor returns. When the money was repaid in May, Military Super found $7.89 million had been deducted as a withdrawal (exit) fee. The fund manager, Agora Asset Management, refused to allow the redemption to be cancelled unless Military Super agreed to keep some investments with the fund, and the dispute went to the Victorian Supreme Court.

Why was Military Super charged an $8 million exit fee by Agora?

When Military Super invested in the Agora Absolute Return Fund II in 2007 it agreed to terms that committed it to pay 'up to 5 per cent' if the assets were withdrawn, with the actual amount at Agora's discretion. The court found those constitution and information memorandum terms entitled Agora to charge the $7.89 million withdrawal fee.

Did the Victorian Supreme Court find Agora acted improperly in charging the withdrawal fee?

No. Justice Jennifer Davies ruled that the fund documents specifically entitled Agora to charge the fee and to withhold consent on reversing the redemption. The judge said Agora 'did not act other than in accordance with its fiduciary and contractual duties.'

Could Military Super cancel its redemption request after realizing the fee size?

Military Super’s chief executive, Michael Seton, tried to cancel the redemption, but Agora’s managing director, Peter Apostolopoulos, told him Agora would not consent to the cancellation unless Military Super agreed to retain some investments. The court upheld Agora’s right to refuse consent under the fund’s governing documents.

How large was Military Super’s original investment in the Agora fund and what share of the fund did it represent?

Military Super originally invested $150 million in the Agora Absolute Return Fund II in 2007. The redemption request in December was for $152.18 million, which represented about 95 per cent of all units in that fund.

What does this dispute mean for everyday investors and superannuation funds?

The case is a reminder to read the fine print. Fund constitutions and information memoranda can allow managers to charge substantial exit fees and exercise discretion on redemptions. Investors and funds should check withdrawal terms and fee clauses before committing capital to hedge funds or similar investments.

How much of Military Super’s Australian shares exposure was in the Agora Absolute Return Fund?

Military Super’s assets summary showed that of $962 million invested in Australian shares at June 30, $142.94 million was invested in the Agora Absolute Return Fund.

Who were the main people and organisations involved in the Agora–Military Super dispute?

The dispute involved Military Super (managed through the Commonwealth Superannuation Corporation), Agora Asset Management (the Melbourne-based hedge fund manager), Agora’s managing director Peter Apostolopoulos, Military Super’s chief executive Michael Seton, Military Super’s chairman Tony Hyams (who did not return calls), and Justice Jennifer Davies of the Victorian Supreme Court.