How to spot a dodgy cash fund manager

The rise and fall of Mayfair Platinum contains an important lesson for investors looking for safe, simple fixed income investments.
Jonathan Shapiro Senior reporter,
In April 2017, I got an email from a public relations firm offering a catch up with the promoter of a new investment firm.
It was “part of the crop of alternative investment options targeting the lazy money sitting in bank term deposits” and would invest the funds across a “range of corporate finance transactions involving debt, equity and asset purchases both locally and internationally”.

An Instagram promotion from Liv Phyland for Mayfair 101’s Dunk Island relaunch. Mayfair’s marketing claims rang alarm bells for Jonathan Shapiro.  Instagram

So this groundbreaking product – called IPO Wealth – was positioned as a term deposit alternative that invested in private equity, or companies and assets not listed on a public exchange.

I had heard enough: IPO Wealth made absolutely no sense to me.

Term deposits are regulated, government-guaranteed investments. Cash is the safest and easiest to access investment and while the depositor agrees to commit to a term, the money is there.

In exchange for the safety and ease of access, the returns are generally quite low.

Private equity is the opposite.

The investor is committing their funds for a substantial period of time and must wait years for a return of their capital. In return for the riskiness and patience, the return should be extremely high.

For that reason IPO Wealth simply did not compute. There were few feasible ways this product could offer the security and ease of access of a term deposit by making the private equity investments it described. This was a glaring and dangerous mismatch, and worst of all, the returns weren’t even that high.

Birth of an investigation

I politely declined the opportunity to interview IPO Wealth directors or spokesmen. But I would come across their names and product with increased regularity. The fund became a frequent advertiser in our newspaper, and continued to do so after it rebranded its products to Mayfair Platinum.

While I had no place telling the advertising department my concerns, there was nothing stopping myself and my colleague, Liam Walsh, from reporting on this increasingly prominent and profligate firm.

So I attended a seminar to promote the product. Embedded in the audience, my long-held concerns about the lack of understanding of the investing public were confirmed.

It became apparent that the target investor had large sums of money they were willing to invest.

It was money they could not afford to lose but at the same time they needed it to work a little harder, with interest rates increasingly low.

So they were reaching for “yield” (i.e. return on investment) and doing so by taking on more risk.

In this case, they were looking beyond a term deposit held at the bank, and via an advertising or search word campaign, they came across IPO Wealth and Mayfair Platinum, which were offering higher rates and a compelling story.

It’s a decision that will cost these investors dearly. A term deposit alternative that invests in private equity simply does not work and the fund duly collapsed.

Regulators have their own theories as to how the interest could be paid when the actual investments themselves generated no income (spoiler: they were paid with funds raised from new investors).

So how can you avoid investing in the next IPO Wealth or Mayfair Platinum?

Well one way is to avoid heavily promoted products from previously unheard of providers.

If you decide to go off piste and invest in obscure opportunities, do as much research as you possibly can, and solicit as many opinions as possible. Even then you should still avoid them.

That’s because when it comes to the “fixed income” asset class, you are simply not being rewarded for being brave. The reach for yield should be done with extreme trepidation.

An investor that signed up with IPO Capital and committed $500,000 to earn 4.2 per cent for three years only earned an additional $6000 of interest a year above what could have been earned from an investment grade bond.

Yet they face an uncertain future and stand to lose all their capital.

Beyond Mayfair

It’s also important to understand the full universe of fixed income options, and their relative risks.

In a low yield world, investors are being forced to take risk. That is a reality. The key is making sure you’re being appropriately rewarded.

In the case of IPO Wealth and Mayfair Platinum, there were a plethora of alternatives that could be easily accessed on the ASX in the form of a listed debt security or via a managed fund that paid significantly higher returns and were much, much safer.

And they are by no means the only ones at it. The corporate cop, ASIC, is in the midst of a crackdown on unreliable marketing material by a number of fixed income fund managers.

Just last week, ASIC revealed shocking results of its analysis of 37 funds managing a collective $21 billion in assets, which found a full two thirds of them had been misusing the term “cash” in their marketing materials.

The single most important lesson to understand in fixed income is the asymmetry of risk.

When you buy a risky stock, you are putting down a little bit of capital in the hope of making a big return.

With fixed income, you are putting down a lot of your capital in the hope of earning a modest return.

So the cost of making a mistake is so much higher, as the victims of IPO Wealth have tragically come to realise.