Sunday Star-Times

Loss looms as $140m fund war intensifie­s

- By ROB STOCK

INVESTORS TRAPPED in the LM First Mortgage fund should brace for another unit price drop when its late financial statements are published, according to the fund manager which is fighting to stave off a takeover of the fund.

LM’s Peter Drake dismissed the fund’s failure to produce the annual report within the legal deadline of the end of September, saying loan valuation issues were behind the delays.

But Drake admitted the likelihood of the unit price being cut again from its current 73 cents.

‘‘It [late accounts] can be common, particular­ly in a fund implementi­ng an action and sale plan,’’ Drake said.

‘‘The financials for the First Mortgage Income Funds are almost complete. Delay has been due to finalisati­on of specific asset valuations that LM has called for in relation to the asset work and sale strategy of the fund. We believe that there will be downward pressure on the provision, but this will be clear when the analysis is complete.’’

Fund takeovers are rare due to the difficulty of gathering support from among large registers of unitholder­s, but they are vital to keeping fund managers on their toes. They are also bitterly fought and routinely involve both challenger and incumbent slinging mud at each other in a bid to win the hearts, minds and, importantl­y, votes of investors.

Nearly two weeks’ ago, Australian fund manager Trilogy began its tilt at the LM fund which halted redemption­s to investors in 2009 following a large number of its loans running into trouble.

LM dubbed the takeover bid opportunis­tic and Trilogy ‘‘pirates’’, but Trilogy says it was ‘‘shoulder-tapped’’ by institutio­nal investors who had lost faith in LM.

The war of words took a new turn last week when three ‘‘pirates’’ landed in New Zealand. Trilogy directors John Barry, Peter Arnold and Philip Ryan spent four days visiting financial advisers in Auckland, Hamilton, Wellington, Christchur­ch and Invercargi­ll to win support for its bid. The themes of its meetings were the late accounts, the 89 per cent of the loans in default at the end of May last year, LM’s lack of nonexecuti­ve directors, and the high fees charged by LM, which one independen­t observer called ‘‘egregious’’ and the ‘‘key’’ to the investors’ decision.

The Trilogy directors accuse LM of lacking transparen­cy – dubbing it a ‘‘brick wall’’, and promising greater openness should it win control in the November 1 investor vote. They also say they will slash fees.

When asked whether they believe the current offical unit price of 73 cents, they say no.

‘‘The concerns we have got is that not all of the assets have been valued recently and we suspect that’s part of the reason for the delay in the accounts,’’ said Ryan.

There is nearly $140 million of New Zealand investors’ money trapped in the fund, and LM has acknowledg­ed its frustratio­n by accelerati­ng asset sales and dropping its plan to split the fund into two to create separate windup and hold funds.

Drake turned fire on Trilogy, telling the Sunday Star-Times that LM doubted the claims Trilogy had for institutio­nal support, a serious claim because the support of sophistica­ted investors brings credibilit­y to Trilogy’s bid.

‘‘We do not believe that Trilogy has the support that they say they

‘We do not believe that Trilogy has the support.’

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PETER DRAKE

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