No more, says Gore

As investors and regulators turn against mortgage investment companies WPS Capital, a financial services company linked with Queensland tycoon Craig Gore, is considering closing its mortgage trust business.

Gore, the chairman of the property and investment services company, Wright Patton Shakespeare Mortgage Trust, told Eureka Report: “We're thinking about closing our doors. It's all too hard.”

Gore says a recent string of disasters in the mortgage trust business – with a potential $1 billion in combined losses from Westpoint, Fincorp and ACR – has “soured the industry for everyone”.

He has also become the first senior executive to publicly attack the industry regulator, the Australian Securities & Investments Commission (ASIC), which is already under pressure from small investors for allowing the a succession of mortgage trust failures in less than two years.

According to Gore: “I just don't see the point in participating in this industry. We're considering closing our doors. I find it extraordinary that people invest in unsecured notes and don't know what that means. I am amazed that ASIC allowed it, it was negligent to allow that occur."

Gore, one of Australia’s richest people (he appeared in the recent BRW 200 with an estimated worth of $180 million), runs a diversified property and investment service empire from the Gold Coast. Although WPS raises money from investors to back construction activities, investors are not exposed to unsecured loans.

Gore's WPS group has strong links with City Pacific Mortgage Trust, a mortgage trust backed by another Queensland tycoon, Philip Sullivan, who is valued at more than $300 million and is a director of ASX listed City Pacific group. City Pacific was one of the mortgage trust companies covered earlier this year when Eureka Report published High yields: a review of companies in the Fincorp space.

At April 30, 2007, $15 million of the $28 million WPS portfolio was invested in the City Pacific Mortgage trust.

City Pacific has been in trouble with ASIC in the recent past. In 2005, ASIC challenged the claims that City Pacific had made about investors’ ability to withdraw money. City Pacific had described accounts as being "at call", whereas they actually required a 90-day redemption period and were never "at call" as represented.

City Pacific has moved on since that intervention by the regulatory authorities. It has not had trouble from ASIC since the intervention two years ago.

However, Eureka Report has examined WPS Capital's Product Disclosure Statement for its WPS Mortgage Trust No 1, a business which may soon shut its doors according to its owners.

Despite Gore’s outburst against the regulator, WPS exhibits several of the most problematic features common to mortgage trusts including higher risk for lower rewards, higher fees and lack of diversity compared with some larger listed property trusts. (see tables below).

Gore's Wright Patton Shakespeare No. 2 Mortgage Fund is widely advertised in the print media and offers a return to investors of 10% for a 24 month investment term.

Meanwhile investors in the average listed property trust enjoyed returns of 15% on average last year, while there was no requirement to lock in money for any set period.

With 5% management fees, the level of expenses charged by Wright Patton Shakespeare No. 2 Mortgage Fund are very high – roughly two or three times the fees of an average managed fund, and more than three times the fees charged at a comparable trust such as the Challenger Howard Mortgage Trust, a subsidiary of the $21 billion Challenger group.

WPS has a substantial part of its portfolio sunk into the operators of Sullivan's City Pacific Group. In fact more than half of its portfolio is in City Pacific. In turn, City Pacific has its funds invested in Queensland subdivisions. City Pacific's group executive, operations, Gary Sladden, told Eureka Report that City Pacific has no intention of quitting the mortgage trust business.

The stock prices in City Pacific, a diversified financial service group with more than $1 billion under management, have slumped from about $5 at the start of the year to less than $4 today.