Perpetual's mysterious loss
Perpetual shareholders will feel a jolt to the hip-pocket as the losses on one fixed-interest fund are magnified by a dividend policy change. They will want to know how it happened.
Bob Savage, the avuncular chairman of funds manager Perpetual, should conduct a board-level inquiry into how a single fixed interest fund cost Perpetual shareholders $60 million over 18 months while management watched and did nothing.
Savage should ask Phil Twyman, the former AMP chief actuary and head of Perpetual's audit, risk and compliance committee, to bring his forensic skills into play.
Perpetual shareholders, more than half of whom are retail investors, deserve some answers.
The $60 million in losses incurred by the Exact Market Cash Fund (EMCF) are small in the context of the global financial crisis (Long road ahead, February 18). But shareholders will feel a severe jolt to the hip pocket nerve because the impact of the losses is magnified by the company's change to its dividend payout policy.
Perpetual will only pay out 80 to 100 per cent of net profit instead of 90 per cent of operating profit after tax plus the equity remuneration and amortisation expense. In the first half of 2009 it meant a cut in the dividend from $1.89 a share to 40 cents.
Twyman's inquiry could start by quizzing Ivan Holyman, one of the architects of the EMCF, which was launched in 2005. Holyman is Perpetual's chief risk officer and the longest serving director of the EMCF's responsible entity.
The EMCF provides a return that matches the UBS Bank Bill rate. Perpetual guarantees the return through a total return swap. If it terminates the guarantee or fails to meet its obligations there is a $20 million back-up guarantee from National Australia Bank.
There is a nil management fee. Perpetual makes its money by earning a return in excess of the benchmark. This fee structure suited the good times when anyone could beat the bank bill rate simply by investing in mortgage backed securities.
It all started to go wrong in 2007 when the sub-prime crisis hit. When credit spreads widened the EMCF was hit with unrealised mark-to-market losses. Assets in the fund are recorded at market value so Perpetual was called upon to top up the fund to cover the losses and meet the guarantee.
Perpetual has been dribbling out mark-to-market losses for 18 months. But it was always with the promise that these losses, totalling $40 million, would reverse over time as the securities in the fund matured.
However, yesterday Perpetual chief financial officer Roger Burrows revealed that those losses may not be reversed at all. In fact, they might be realised as assets are sold.
At yesterday's analysts' briefing for the interim results, Burrows was given one of the more memorable hospital passes in recent memory by chief executive David Deverall – he left it to Burrows to explain why mark-to-market losses in the EMCF blew out by about $7 million in the month of December to $21 million.
Analysts were mystified as to how Burrows was confident of an EMCF recovery at a market briefing on December 3 and then three months later was examining options to restructure the fund.
In December Burrows forecast that $27 million in losses would be recovered over the next three years. Now, he says the blow-out in spreads on residential mortgage backed securities took Perpetual by surprise.
However, Burrows reassured analysts that the fund was earning more than it was paying out. The running yield was about 250 basis points above the benchmark return.
One peculiar aspect of the EMCF that has not gone unnoticed by investors obsessed with what Deverall calls the "dash for cash” is that the EMCF remains open for business. Applications in the 12 months to June 2008 were $1.6 billion, well ahead of the $1 billion in redemptions.
Investors will be tempted to invest now and get a return of about 6.5 per cent safe in the knowledge that the distribution will be guaranteed by Perpetual's shareholders or, if things get really bad, National Australia Bank.
Savage should ask Phil Twyman, the former AMP chief actuary and head of Perpetual's audit, risk and compliance committee, to bring his forensic skills into play.
Perpetual shareholders, more than half of whom are retail investors, deserve some answers.
The $60 million in losses incurred by the Exact Market Cash Fund (EMCF) are small in the context of the global financial crisis (Long road ahead, February 18). But shareholders will feel a severe jolt to the hip pocket nerve because the impact of the losses is magnified by the company's change to its dividend payout policy.
Perpetual will only pay out 80 to 100 per cent of net profit instead of 90 per cent of operating profit after tax plus the equity remuneration and amortisation expense. In the first half of 2009 it meant a cut in the dividend from $1.89 a share to 40 cents.
Twyman's inquiry could start by quizzing Ivan Holyman, one of the architects of the EMCF, which was launched in 2005. Holyman is Perpetual's chief risk officer and the longest serving director of the EMCF's responsible entity.
The EMCF provides a return that matches the UBS Bank Bill rate. Perpetual guarantees the return through a total return swap. If it terminates the guarantee or fails to meet its obligations there is a $20 million back-up guarantee from National Australia Bank.
There is a nil management fee. Perpetual makes its money by earning a return in excess of the benchmark. This fee structure suited the good times when anyone could beat the bank bill rate simply by investing in mortgage backed securities.
It all started to go wrong in 2007 when the sub-prime crisis hit. When credit spreads widened the EMCF was hit with unrealised mark-to-market losses. Assets in the fund are recorded at market value so Perpetual was called upon to top up the fund to cover the losses and meet the guarantee.
Perpetual has been dribbling out mark-to-market losses for 18 months. But it was always with the promise that these losses, totalling $40 million, would reverse over time as the securities in the fund matured.
However, yesterday Perpetual chief financial officer Roger Burrows revealed that those losses may not be reversed at all. In fact, they might be realised as assets are sold.
At yesterday's analysts' briefing for the interim results, Burrows was given one of the more memorable hospital passes in recent memory by chief executive David Deverall – he left it to Burrows to explain why mark-to-market losses in the EMCF blew out by about $7 million in the month of December to $21 million.
Analysts were mystified as to how Burrows was confident of an EMCF recovery at a market briefing on December 3 and then three months later was examining options to restructure the fund.
In December Burrows forecast that $27 million in losses would be recovered over the next three years. Now, he says the blow-out in spreads on residential mortgage backed securities took Perpetual by surprise.
However, Burrows reassured analysts that the fund was earning more than it was paying out. The running yield was about 250 basis points above the benchmark return.
One peculiar aspect of the EMCF that has not gone unnoticed by investors obsessed with what Deverall calls the "dash for cash” is that the EMCF remains open for business. Applications in the 12 months to June 2008 were $1.6 billion, well ahead of the $1 billion in redemptions.
Investors will be tempted to invest now and get a return of about 6.5 per cent safe in the knowledge that the distribution will be guaranteed by Perpetual's shareholders or, if things get really bad, National Australia Bank.
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