This morning we’ll take a look at one of the managed investment scheme (MIS) investments that are currently being flogged by accountants and financial planners.
Before you get the idea that your editor is completely opposed to these type of investments, we’re not. The idea of someone else packaging up a big project and offering it in bitesize pieces to smaller investors is actually quite a good idea…
However – and we don’t think we’re exaggerating here – we’re yet to see one we like. It’s not to say that the projects don’t have merit or that it won’t be profitable, it’s just that we can’t avoid looking at all the costs and thinking these MIS investments are just a ruse to charge hefty fees.
In fact it seems as though the return to the investor is secondary. The notion that you would invest, say $10,000, pay around $3,000 in fees and then hope to make a $2,000 profit just doesn’t make sense.
Could you imagine your stockbroker calling you to say you should buy ten grand’s worth of BHP Billiton today, charge you $3k in brokerage and then tell you to sell the same shares in two years time for $15,000?
If you’re like me you’d tell him to get stuffed. So why can MIS spruikers get away with doing exactly that?
Ah, because of the tax incentives of course. Tax incentives most of us wouldn’t understand anyway. Which for the spruikers is a good thing, because if it was easier to understand, investors would realize it really wasn’t worth the hassle.
Anyway, before I get onto the reader mail a quick refresher on something I wrote in Money Morning on 22nd May:
“The first incarnation will be the protected equity or capital protected form of investment. Expect the investment banks to start spruiking those by the end of this year. When they do, keep well away.”
To be honest we don’t know what we were thinking, “by the end of this year” – were we mad for writing that? We must have been, because Wednesday’s Australian Financial Review (AFR) explains:
“A couple agrees to a protected loan of $100,000. As it is protected, all the borrowed money can be invested in a share portfolio, but the protection premium costs $32,360 for a five-year term in addition to interest costs of 5.85 per cent a year.”
Wow! An insurance policy that charges 32% of the amount covered. Plus you’re paying $5,850 a year in interest. Before any tax deduction that’s a whopping $61,610 in fees.
The article claims that after the tax break, the cost is only $23,012.
So, just for a moment forget the tax deductibility. Remember, you should never make an investment based purely on the tax incentives provided by an investment.
First, because if that’s the main selling point, the chances are the actual investment is rubbish. And second, the tax breaks rely on the government of the day not changing the rules – example: superannuation.
So again, look at the numbers and ask yourself: If your stockbroker told you the commission on buying $100,000 worth of BHP shares was $61,610 would you go ahead with the transaction?
If your answer is yes, then I suggest you stay clear of any stockbrokers!
The Commonwealth Bank has a bunch of similar products in various disguises. As I’ve stated before, I’m not completely opposed to leveraged investments, but anything that has an effective commission charge of 61% before a tax deduction is just a little too rich for me.
But on to those MIS products. We think the ‘best’ one we’ve seen this week is for MyATM. It was forwarded to us by a Money Morning reader who had received it from, a (hehem) real estate agent…
The subject line to the email read: “20% Returns Guaranteed for 5 years!”
Again, Wow!
The quick two-minute sales pitch for the investment is along the lines of: If you’re fed up of the banks charging you fees, don’t beat them, join them!
According to the blurb, there is a shortage of ATMs in Australia. As of June 2008 there were only 25,658 ATMs, which has grown at an average rate of 11% since 1991. That’s not bad, but it gets better because ATM numbers have increased by 70% since 2002.
That’s one way of looking at the numbers. You could also say they have grown by less than 10% in total between June 2004 and June 2008… if you look at the RBA stats.
And as for ATM usage, well MyATM tells us usage has increased from “29 million per month to 78 million per month” between 1994 and December 2008.
Again, if you look at the numbers from the RBA you could also say that ATM withdrawals have remained reasonably consistent between 65 million and 75 million between March 2005 and March 2009.
But here’s the deal they’re offering – if you buy five ATM machines for a total cost of around $66,000 you’ll not only get a guaranteed 20% ROI, but you’ll also get to write-off against your tax 150% of the amount you invest.
Even better than that, you only have to stump up a 10% deposit because one of our conservative banks will lend you the other 90%.
Now we’re sure your accountant will tell you what a fabulous opportunity this is. But even if we ignore the bona fides of the investment, doesn’t it show you how ridiculous the tax system is? That you can get a 150% deduction on an investment.
In other words, even if you don’t invest directly in MyATM, you’ll be making an indirect investment by virtue of you having to pay extra taxes to subsidize the tax not being paid by these investors.
It’s bizarre.
But any investment that ‘guarantees’ a return has to be approached with caution.
Put it this way, if our conservative banks are not able to guarantee your savings are safe without government support, how can MyATM guarantee to give you a 20% return when the revenue hasn’t even been booked yet?
Simple, because it’s based on the notion they will buy exactly the right amount of ATMs to sell to investors (we all know that businesses never buy too much inventory!), and that ATM usage will increase by the same percentage as it has done previously, and that MyATM doesn’t end up using all the investor capital to pre-purchase ATMs which no-one wants to buy.
Put it this way, if MyATM were to enter into purchase agreements to buy the 5,000 ATMs they claim are available, any shortfall in their ability to sell those onto investors would have an impact on their ability to pay the guaranteed returns.
In other words, you’re not really investing in an ATM, you’re investing in the balance sheet of MyATM and whether you think it can meet its obligations.
There is little difference in this type of investment to any other kind of infrastructure fund or MIS. They are almost always built on leverage. They are almost always built on overly optimistic growth projections. And in most cases they rely on paying investor “distributions” from cash flow generated by new investor funds or borrowings against projected cashflow.
Of course, we’re not allowed to give personal advice on these things. For that you need to see a financial adviser. A financial adviser who can go through a full risk profile analysis and then – only then, will they work out how much commission they can make from you.
So rather than that, we’ll just say we wouldn’t invest our own money in anything like this, but you’ve got to make up your own mind…
Or you can speak to your financial adviser!
Other Stuff on the Markets
The S&P/ASX200 climbed by 0.57% yesterday, while on Wall Street the Dow Jones Industrial Average added 31.9 points. In Europe the FTSE100 gained 25 points.
The price of gold in Australian dollars is trading at $1,165.14, while in US Dollars it trading at $955.75.
The Aussie dollar strengthened versus the US dollar and Japanese Yen, trading at USD$0.8187, and JPY79.95.
Further strength for Crude oil overnight, closing at USD$72.25.
For the biggest movers on the market yesterday click here…
And today on the economic calendar we have nothing locally, and the University of Michigan Confidence number in the US.
Cheers.
Kris.
