MISmanaged

Matt Brennan Managed Investment Schemes (MISs) were very popular for almost a decade after their inception back in 1998, a golden egg laid by the Howard administration. The concept grew from opportunistic industries being identified by the recently elected Howard government of the time; in particular the forestry sector, but capitalising on these opportunities may have shifted the budget into a deficit position in the short term. Enter the retail (independent) investors, whom the government chose to partner with to acquire the necessary capital in exchange for healthy tax concessions, such as fully deductible borrowing and subscription costs. This strategy attracted the high net worth individuals, whose tax rate was 47% for income over $50,000. These investors funds were then pooled together (in a similar manner to a hedge fund), and profits were shared on a pro-rata basis. In 2008, this golden egg suffered a similar state to humpty dumpty, with all the retail investors left to pick up the pieces. There are two fundamental reasons for this down-turn, the first is the wellpublicised financial crisis, which MISs were impacted, but not too greatly as they are essentially backed by the government and investors would deem it unlikely that an entire country could venture anywhere near bankruptcy (this was before any downgrades in Icelands and Greeces credit ratings). The second critical reason for the demise of MISs was due to poor management. Timbercorp (bankrupted to the tune of $500 million in 2009) and GUNNS (which is currently under receivership, enter GNS as the ASX code to find out more), who failed to produce meaningful proceeds since the mid 2000s, had the most brazenly obvious overpriced supply chains. Timbercorp was the main offender, as they ruthlessly out bided rural farmers in Victoria for water during the drought using taxpayer money (timbercorp paid over $1000 per mega litre in some instances). What is most striking when looking through the list of failed MISs, is that the government even attempted two schemes in Australias premier wine regions, Margaret River and the Barossa Valley. The government wold have been more likely to succeed had they sojourned to Italy and decided to open up a pizza place. From my personal research trip in 2010 where I conducted a rigorous and conscientious analysis of both the culinary and wine offerings within the Chianti region of Florence, Italy, I was fortunate enough to have been given a fully guided tour of the Ruffino winery by the owner. The winery had been in his family for generations and he mentioned the three most important aspects of running a successful winery: 1. The established connections and relationships built on quality and trust 2. A superior knowledge of the product, industry and a solid understanding of the climatic conditions 3. An ability to resonate with consumer tastes and preferences It could be argued that the government has half an understanding of point 2, with their access to specific bureau of meteorology data enabling them to assist an enterprise in planning a wine crop. But this knowledge is limited to the capabilities (or lack of) of the user, which is why Palandri wines went into receivership and changed hands (from the government to private enterprise) and Coonawarra wines in the Barossa valley just collapsed entirely.

Still Operating: A Photo of the Ruffino Wine Logo and a bottle of their Classic Chianti 2008 vintage.

MISs have borrowed somewhat from the Robin Hood philosophy, as they steal from the wealthier individuals within Australia, except in recent years have been returning nothing but broken promises and evasive responses to the string of lawsuits from disgruntled investors who discovered that the golden egg laid by John Howard was merely a regular egg painted gold. The list of failed MISs is quite extensive but has not been very widely publicised (until now), to view the complete list, follow or type this link and click on the relevant excel document. http://www.ato.gov.au/atp/PrintFriendly.aspx?ms=atp&doc=/content/00193782.htm This list mainly features mismanaged forestry efforts (Great Southern having a similar fall to Timbercorp), but includes endeavours such as the farming of tomatoes, citrus, and tropical fruit which adopt the nationalistic approach of buying local and avoiding imports. Citrus was another poor choice as there is already an oversupply in Australia and the world market, and due to strict anti-dumping laws, cannot be exported to other countries at a reduced price. Its morally questionable that these fruits cannot even be given away to fight world famine, that year after year citrus is dumped by the tractor load (bizarrely not even juiced) in holes in the ground, but what is most puzzling is that if the government did the necessary business environment or competition analysis for the citrus, wine and many other industries beforehand, how does this lead to the implementation of a MIS? Singapore is one of the leading nations when it comes to pro-active government investment. Singapore has capitalised on Australias nationalistic approach failures, buying up over 12,000 hectares of prime land with rights to hundreds of gigalitres of water when the almond plantation of Timbercorp inevitably collapsed. The Singapore government also spotted the bargain of Australias largest uranium company, Paladin energy (PDN) at 75c. Paladins slide to as low as 74c on the 16th of November was the lowest the stock has dipped to since January 2005. The Singaporean government quickly bought up a 5% holding valued at approximately $32 million. Paladin closed todays trading session at 1.065 (the realisable gain on this investment is 42% [before transaction costs] or nearly 13.5 Million AUD in a little under two months). Finally, Singapore offers strong incentives to invest in property and its attitude towards tax rates (Singapore doesnt even have Capital Gains Tax) lead cofounder of Facebook Eduardo Saverin to renounce his US citizenship prior to the IPO (initial public offering) and enjoy the financial benefits.

The role of the government as a hedge fund manager through MISs will continue to come under scrutiny, as the government has a responsibility, both of a utilitarian and of a non-interference nature in competitive markets, and by pouring money into sectors that are either not profitable or saturated not only irritates the wealthy investors who realise no proceeds from their investments, but the average voter who would prefer budgetary promises like the building of a new sports stadium being fulfilled. Unless the government adopts a MIS model similar to the shrewd discretion exhibited by the Singapore government, wealthy investors will begin to realise, if they havent already, that they can get the same tax deduction, generating the same amount of income (nil) through a variety of other means. The most noble of which is philanthropathic contributions (up to $10,000 p.a.) to charity, which not only generate positive PR, but also goes to a much worthier cause.