Saturday March 16, 2013

Oil palm interest schemes

Money & You by YAP MING HUI

DUE to global market volatility during the past three to four years, many investors have opted to diversify their investment portfolio which traditionally consisted of unit trusts, shares or bonds and step out of their comfort zone in search of alternative investments.

In many cases, investors leant toward more tangible asset classes that provided a much-sought-after sense of security. Palm oil, fish-rearing and swiftlet (birds' nest) farming are all alternative investments that have attracted public interest in recent years. The “guaranteed return” interest schemes that such investment promises require investors to buy an interest in the venture. The thought of “owning” part of the business coupled with a “guaranteed return”, draws the public like bees to honey.

So when Country Heights Grower Scheme (CHGS) in Gua Musang, Kelantan recently folded after just five years due to its management company having ran out of funds to pay the minimum guaranteed dividend, surely we must question “when does guaranteed mean guaranteed”?

Why do we consider oil palm interest schemes?

Some of the allure of oil palm grower schemes arises from their low entry level, as they allow investments of as little as RM5,000. Undeniably, the prospects of profiting from this golden crop look attractive, as it is a mainstay of the Malaysian economy and is familiar to the public.

Investors may also feel reassured that interest schemes are registered under the Companies Commission of Malaysia (CCM) and have an appointed trustee, as required under Section 90 of the Companies Act 1965.

Investors' enthusiasm for these schemes is also due to the returns they offer, which are higher than the interest for fixed deposits.

CHGS paid a guaranteed return of 8% per annum for the first three years, and 12% for the next two. Under its terms, plot buyers would receive 12% each year from the fourth year onward on the amount invested if the palm oil price averaged above RM2,100 a tonne. As the palm oil price had settled above RM2,300 a tonne for some time, there appeared to be little reason to doubt that the scheme would pay the expected returns. However, when the management realised that it could not sustain this payout rate, it proposed to terminate the scheme.

Naturally, the public's expectations about the CHGS were due partly to its confidence in its founder Tan Sri Lee Kim Yew, a well-known tycoon who could be assumed to use his business acumen fully in the venture.

So, what went wrong? Its management company Plentiful Gold-Class Bhd has blamed a range of causes from poor soil to the steep terrain and uncontrollable pest damage to bad weather. The CHGS episode shows that investors cannot take such schemes at face value but need to look more closely at their risk exposure before committing.

What you must know before investing in an oil palm interest scheme?

Time Horizon

The investment is illiquid meaning the buyer may have his money tied up for 10-23 years unlike an investment in shares which allows the investor to sell his shares at short notice. In addition, there is no ready secondary market for grower schemes plots, so opting out may not be easy. Investors need to learn how different grower schemes compare to unit trusts or shares. Many wrongly think that they are equivalent.

Management Capability

The schemes' success depends on the management's ability to manage the oil palm business efficiently and profitably. This involves factors such as manpower, soil quality, terrain, managerial expertise, seed quality, estate management, the oil palm price, and the effect of taxes and regulations. All these factors affect the management company's ability to deliver the guaranteed return.

What happens if the management fails to deliver the guaranteed minimum return? In the case of the CHGS, investors voted to accept the company's offer of an early termination with money back. This outcome is fortunate, it could have been far worse. Investment Capital Protection

While the Securities Commission closely monitors unit trust firms, the management of grower schemes is not obligated to share much data with the CCM. The CCM does not have the SC's stringent audit requirements. Furthermore, there is no third party guarantee on the investment.

Shareholders of public-listed companies can remove a management that performs poorly, whereas investors in grower schemes do not have that power. In unit trusts, the trustee holds 100% of the underlying asset, but that is not so in some growers schemes.

In the light of these factors, grower schemes pose significant risks to naive investors. The danger for retail investors is that many focus on returns, but not liquidity or the management's track record. Therefore, if you are a low-risk investor, it is better to avoid this investment segment. As a rule of thumb, investors should not put more than 3% of their total investable assets in such schemes. It would also be advisable not to borrow to invest in these schemes.

In conclusion, while it is important to diversify your investment portfolio, do note that although these schemes may look, sound and feel like unit trusts they are not.

> Yap Ming Hui (yap@yapminghui.com) heads Whitman Independent Advisors, a licensed independent financial advisory firm which has helped people to optimise their wealth and achieve financial freedom since 2000.

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Saturday March 16, 2013

Oil palm interest schemes

Money & You by YAP MING HUI