Irresponsible entities

In Australia we have things called MISs - which is an acronym for Managed Investment Schemes. An MIS collects money from a variety of people and invests it in a long term farming or forestry enterprise.

An MIS is organised and managed by something called a Responsible Entity or RE. Turns out these companies would be better named IEs - for Irresponsible Entities. Quite a number of them have failed - part way through their projects. RE's for MISs sold by Great Southern, Timbercorp and EnvironInvest have run out of money and passed into a most complicated insolvency situation.

In the end though, who is really at fault? There are at least 3 candidates:

• the scheme promoters - who usually also own the RE
• the government that set up the regulatory framework
• the investors

I remember looking at the MIS option when I first considered investing in forestry. In 1998 the flaws were already pretty obvious:

• They were sold using discounted cash flow (DCF) forecasts of return in a set of circumstances where costs were near and certain and income distant and uncertain. In such circumstances DCF is mildly interesting, but basically useless - as an investment analysis tool. Seeing how the sales material focussed on forecast IRRs made me very nervous.
• The scheme structures involved promoters taking their returns early and investors getting their returns later. This violates a common sense principle that you try to understand and verify the value of what you're buying before you hand over your money.
• Of course investors did get one source of immediate value - a current year tax deduction. Now I value a legitimate tax deduction as much as anyone, but the way this was done was another warning bell. Investors' dislike of writing a cheque to the ATO was being manipulated - and they ended up writing cheques to spivs promising returns over a decade later.
• The regulation that governed MIS clearly didn't do what it purported to do. It held out that it could protect the interests of investors - when Blind Freddy should have been able to see the structural flaws.

This was all reasonably clear right back at the start of all this. Obvious enough for me to avoid them myself - even though I've invested a heap of money in plantation forestry over the same period.