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.

Subscribe to Enough Wealth. Copyright 2006-2008

Fixed the interest rate on part of our home loan

Most (90% or so) of home loans in Australia are variable rate, and fixed rate loans are generally only available for terms up to 5 or 7 years. My parents had a 30-year fixed rate home loan when they bought a house back in the early 1960s, but Australian banks moved to the 'standard' variable rate loan during the high inflation (nearly 20%) period of the 1980s.

We fixed the interest rate on our investment property loan for five years when rates started to climb about four years ago. And we will probably end up paying about the same average interest over the five year period as if we had stuck with a variable rate (due to the recent record low interest rates).

We had been hoping to change part of our home loan from variable rate to a fixed rate this year, and I had expected the fixed rates on offer to keep dropping during 2009 as the RBA keeps cutting the official interest rate. However, the last rate cut by the RBA didn't result in much change in the variable rates of the 'big four' Australian banks, and yesterday the Commonwealth and Westpac banks announced a RISE in their fixed rate loan interest rates. So today we took advantage of my day off to do the paperwork for moving $270,000 of our home loan to a fixed rate of 5.34% for three years. There is a $500 fee involved, so over three years the effective fixed rate will be around 5.5%. This is higher than the current standard variable rate (with a 0.7% negotiated discount), but may save us some money over the next three years if the economy starts to recover towards the end of 2010 and interest rates start to trend up again.

We still have the other $230,000 of our home loan at the negotiated variable rate, so we're hedging our bets.

Subscribe to Enough Wealth. Copyright 2006-2008

When is a target not a target?

The Reserve Bank of Australia (RBA) has an official inflation target band of 2%-3% "over the economic cycle". Apart from the difficulty of determining exactly what time period defines an "economic cycle", the target also seems to only affect RBA behaviour when it's broken on the upside. When inflation had spiked above 3% due to the oil and commodity price bubble, the RBA was intent on preventing inflation getting out of hand, raising interest rates in 2007 even when the US sub-prime crises was apparent.

At the moment inflation in Australia as just dropped back within the "target band" - dropping to an annual rate of 2.8% with the release of the latest 0.1% rise in CPI for the March 2009 quarter. This was lower than expected (0.5% was the consensus), and follows on from a -0.3% decline in the previous quarter.

With the past two quarters producing a drop in CPI of -0.2%, and the global economy not yet showing much sign of recovery, I can't imagine the next two quarters will show CPI increases of more than 0.5% each. That would see annual inflation drop to below 1% by the end of 2009 - well below the RBA target.

And yet despite the definite prospect of inflation dropping below 2%, the RBA seems more worried about cutting interest rates too far and creating excessive inflation pressures once the economy starts to recover. Indeed, the RBA only seems to show concern if there is a prospect of deflation. If that's the case, why not set the inflation "target" as 0%-3%, rather than having a target that isn't fair dinkum?

Subscribe to Enough Wealth. Copyright 2006-2008

Bought some new mobile phones

We've been using two Sony Erikson K608i handsets with our $28 shared plan for just over three years now. Aside from the recent problems with being charged for unwanted 'premium SMS' messages being sent to DWs phone, we've been pretty happy with the plan and the handsets - enough to get rid of our land line last year.

However DWs handset has been dropped a few times too often while looking after DS1 and DS2, and had started having problems. The charger plug was a very loose fit, which sometimes caused the phone to stop charging if it was nudged during a charge. And today the mouse-stick controller suddenly stopped working. So we dropped into the nearest retail outlet of our phone service and I signed a new two year contract. The service plan remains the same ($28 a month for the two phones) and we got two new Sony Erikson G502 handsets for $14 a month with a $10 per month credit. So, in theory, my monthly bill for the next two years should now be $32 rather than $28. However, I'll have to check this on the next phone bill - the $5 'credit' might turn out to be additional included call credits rather than actually reducing the monthly handset payment to $2.

If the credit is applied in the way it was explained in the shop, the total cost of the new phones should be $48 each. If we decide to cancel our phone service within two years we would have to pay out the balance of the full cost of each handset ($168).

Subscribe to Enough Wealth. Copyright 2006-2008