Blue chip investment giant Perpetual Ltd’s flirtation with trying to enhance the return on its boring cash funds has come home to bite it badly with a sharp rise in losses in the past few weeks to $18 million. That’s a trebling in the $5 million estimate for the loss at the AGM at the end of October.
It’s the sort of thing that has hit the likes of Citigroup, Bank of America, UBS, Barclays and a host of other financial groups around the world, but on a much smaller scale.
Perpetual is one of the most conservative of Australian fund managers, emphasising value and corporate governance, as well as a safe pair of hands. Its main Australian equities business has had some notable successes this year under fund managers led by John Sevior. Most notable was the billion dollar profit taken on the stake in Rinker that was taken over by Mexican cement giant, Cemex.
But while the local equities business has done well, its boring cash funds have been caught up with the impact of America’s sub-prime business.
The problem was first disclosed to investors at Perpetual’s annual meeting at the end of October. The losses then known caused the company to drop its profit growth guidance from 15% at the time of the result in August, to 10%. Even though the latest loss will be a significant item, the bottom line will be no profit gain this half year for Perpetual.
Perpetual said today that one of its guaranteed cash funds has booked mark-to-market losses of about $18 million.
The company said in an ASX statement that prices of securities in the Exact Market Cash Fund (EMCF) had been impacted by the continued deterioration of global credit markets since early this month.
Perpetual guarantees a return to EMCF investors in line with the bank bill index. It underwrites or derives income from the difference between the performance of the underlying portfolio and the bank bill index.
“As a result of its guarantee, Perpetual has mark-to-market losses of approximately $18 million before tax (one per cent of the total fund) for the period from 1 July,” it said. This is an increase of $13 million over the amount disclosed by Perpetual at its annual general meeting of shareholders on October 30.
“Approximately $5 million of the losses were sub-prime related and are not likely to be recoverable,” Perpetual said.
“The portfolio originally held less than 0.5 per cent of direct exposure to sub-prime — there are now no further exposures to these securities in the EMCF.
“The balance of the losses are substantially unrealised, and relate to the sharp widening of credit spreads across the broader market during November.”
With the exception of the sub-prime related securities, Perpetual said it expects to recover the majority of the unrealised losses as the balance of the securities held in the fund mature. The weighted average term to maturity of the portfolio is approximately 1.5 years.
“The volatility in the market underlines the value of the product for investors, whose capital and returns have been unharmed by the recent market conditions,” Perpetual said.
The actual loss at December 31 will be treated as a significant item in Perpetual’s first half earnings report and for the year to June 30, 2008. Perpetual is like a host of UK groups, like Legg Mason and Bank America, that had guaranteed returns to investors in cash management accounts through the convention known as “breaking the buck”.
It means you can’t allow investors to see that the original investment of cash is now worth less.
There was news overnight that a Florida State administered cash fund for all the cash surpluses of local government bodies had lost $US8 billion in the past month because nervous school and town councils and boards and other groups withdrew money because of losses reported on sub-prime and other dodgy securities.
Because Perpetual has guaranteed the return, it had to put up the losses. It reckons it will recover them over the next 18 months, but the company was confident the losses wouldn’t have worsened back at the AGM on October 30. They more than trebled from $5 million to $18 million.
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