TFS – the New Great Southern?

A company that specializes in short selling (Glaucus Investments) has issued a Research Report about the sandalwood producer TFS.   The effect of the Report is that TFS has characteristics of a Ponzi Scheme and that it is a matter of time until it fails.

What interested me about the Report is its assertion that TFS will be the latest in a long line of MIS schemes to fail – as it says: TFS is one of the last remaining publicly-listed agricultural Managed Investment Schemes (“MIS”), a dangerous Australian investment structure beset by bankruptcies, investor losses and fraud.  Other notable Australian agri-businesses which relied heavily on MIS investors such as Timbercorp, Great Southern, Environinvest, Palandri Wines, Arafura Pearls, Australian Bight Abalone and Forestry Enterprises Australia, collapsed amid allegations of fraud , misleading marketing or Ponzi-like behaviour.  The collapse of these MIS companies resulted in over AU$ 2 billion in aggregate losses, mostly suffered by Australian investors. A least a couple more could be added to the list – Willmott Forests and The Rewards Group.

I don’t know whether the Report is correct in what it says about TFS.  However, from a financial planning perspective I wonder why financial planners recommended it to their clients.  The particular issue being that investors in schemes operated by TFS are required to make an initial payment plus substantial yearly payments in circumstances where a return would not be received for 15-20 years.  There is obviously a huge amount of risk (that derives from multiple sources – the most obvious being uncertainty about what the price of sandalwood will be in 20 years time) in investing in such a scheme such that the number of clients where this investment was appropriate must be very small.  Moreover, there can’t be that many clients where a structure whereby they pay substantial fees each year in the hope that they will receive a return on their investment in 15-20 years time, would be appropriate.

In thinking about suitability for clients an issue that needs to be kept in mind is that TFS paid a 7% up front commission to financial planners who recommended its products to their clients and it paid an additional 7% of the substantial yearly fees that must be paid by the client.  I suggest that this is the place to start in thinking about why this investment was sold to clients of financial planners.

 

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