Saturday, 24 November 2012

Business Trusts, "buyer beware" is not enough

This article in The Star of September 8, 2012 indicated that Malaysia might also allow business trusts to list in Malaysia. The start of the article is very optimistic:

Malaysia will soon have a new thrust that could promote vibrancy and excitement in its equity market. The framework for the listing of business trust in the country is in the works, and it will likely be unveiled by the Securities Commission (SC) before the year ends.

Several market observers expect business trusts to appeal to both the issuers and investors alike.

“For the investors, a business trust is an alternative investment that gives the comfort of a steady stream of return in the form of dividends; this is perhaps the biggest attraction of a business trust from an investor's point of view,” a corporate financier explains to StarBizWeek.

Take Singapore-listed business trusts. If they are of any indication, dividend yields of such an instrument could range anything between 3% and 10%.

But then, some very much needed dose of realism:

To that, several bankers say there is no need to hurry.

“It is not wise to rush into introducing business trusts in Malaysia just to play catch up. We should not worry about lagging behind because we can learn from the Singapore experience,” a banker says, pointing to the fact that most business trusts in Singapore have so far been performing badly, trading below the initial public offering prices, and causing some investors to suffer losses.

In an article "Time to tighten rules for business trusts" in The Business Times (Singapore) the following was revealed in the below table, aptly titled "Not a pretty sight"

Someone who would have invested $100 in each business trust would be sitting on an average loss (including dividends) of $23 for each investment. Only two out of eleven companies would have given a positive total return, but even in those cases they underperformed the Singapore Straits Times Index (STI). On average, the business trusts lagged the STI annually by 11.5%.

As the main reason, the article writes:

"The less rigorous regime of the business trusts allowes sponsors to exercise their boundless creativity. Caveat emptor is a fair argument to make in a market populated by highly sophisticated investors. In Singapore, the average investor is far from being sophisticated.

Given their atrocious performance thus far, there is a strong case for rules to be tightened for business trusts".

Associate professor Mak Yuen Teen of the NUS Business School responded the next day in a long letter to the editor. Some snippets:

"What are the true economic benefits of allowing increasingly diverse forms of business structures for listed issuers? Do they just end up transferring wealth from public investors to sponsors and intermediaries? Do they really give investors more investment choices or do they merely obfuscate? As we seek to increase retail participation in our markets, are these different structures too complex for ordinary investors to understand, especially as even so-called experts often have difficulty understanding these structures? Is it right to expose retail investors to such investments based purely on caveat emptor, and allowing sponsors and intermediaries to hide behind prospectuses that run into hundreds of pages?

We have also done almost nothing to improve the ability of investors to enforce their rights even as we become even more adventurous in the types of listings we allow.

There has been no substantive debate on contingency fee-based class action, litigation funding or other mechanisms which can improve the ability of investors to take action against issuers, directors, trustee-managers and other intermediaries. Cross-border enforcement by regulators remains a challenge, not to mention by investors.

A disclosure-based system based on caveat emptor ("let the buyer beware") can only lead to grief for investors if it is not accompanied by effective enforcement by both regulators and investors."

How true, and the above relates to Singapore, which scored 64% on enforcement while Malaysia scored a very disappointing 39%.

Another letter to the editor followed, written by Bobby Jayaraman, it can be found here. A snippet:

Despite their opaque nature, the reason business trusts still have a following among investors is the lure of high yields. Investors seem to forget the simple fact that yields only matter if the initial capital stays intact. In most cases, high yields simply provide cover for a fundamentally weak business.

Malaysia, given its weak enforcement, should really think twice before it wants to embark on business trusts. There is a lot to learn from the Singaporean experience with them. And that experience has, so far, not been that great, to put it mildly.

No comments:

Post a Comment