Friday 24 April 2009

If a tree falls in the forest and the manager is in administration, will I get paid?

Timbercorp (TIM.AX)today announced that it has gone into voluntary administration. It has about $500m in assets and owes about $600m - sounds like it's gone bankrupt. It cites the changes to the tax rules regarding agricultural investments, the GFc etc. etc. for going broke - the usual 'the dog ate my homework' excuses that managers everywhere use to explain why it isn't really their fault that a company has gone bust. (Otherwise how could CEOs and top management move on to their next highly paid job with big 'performance' bonuses?).

I have about $22,500 invested in managed agribusiness investments - $12,500 in hardwood (Eucalyptus) forests via Timbercorp, and $10,000 in Tea Tree and Sandlewood plantations managed by Rewards. I've valued the investments at the amount originally invested as the projected incomes from agricultural investments are always sky-high but highly risky. In theory my tree plantation investment managed by Timbercorp should keep most of it's value, as I own the trees and pay the management,insurance and land rental fees annually (which from now on should be handled by the administrator). But when the trees mature and require logging, the value of the timber may be greatly reduced as Timbercorp was supposed to harvest the trees using in situ chipping technology to maximise revenue from the timber. Although wood chip prices have held up well to the end of 2008, I think the $12,500 'book value' for my timber investment may prove to be optimistic.

Year ..... GTP Wood Chip Index
1992 ..... 159.36
1993 ..... 159.36
1994 ..... 161.44
1995 ..... 171.89
1996 ..... 176.89
1997 ..... 173.47
1998 ..... 176.89
1999 ..... 165.51
2000 ..... 162.67
2001 ..... 170.63
2002 ..... 169.49
2003 ..... 177.46
2004 ..... 180.87
2005 ..... 184.28
2006 ..... 184.28
2007 ..... 189.40
2008 ..... 207.40

Aside from charging huge management fees, I've found that many 'alternative' investments have very poor risk mitigation. In the good times investors get very modest returns while the management companies skim off most of the 'excess' profits, and in the bad times the investor is left with a worthless investment shell. The management company goes out of business and the managers keep all the bonuses paid out in previous years. Ideally the investors should be able to 'vote with their feet' by investing with managers that offer good value - but there don't seem to be very many alternative investments around that provide good value. We'll see whether or not investing with two different managers and three different agricultural products was sufficient diversification in this area. Fortunately the agribusiness investments only account for around 3.% of my net worth, so even a total write-off of these investments would have little impact compared to the vagaries of the Australian and international stock markets.

At least I didn't buy shares in Timbercorp itself (ASX code TIM). After hitting a high of $4 a share in 2006, they fell all the way down to 4c a share before a trading halt was imposed prior to the announcement of going into voluntary administration.

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