Discretionary Fund Managers

The Perils of Discretionary Fund Managers

By The Enforcd TeamThe Enforcd Team

Discretionary Fund Managers occupy a sort of no man’s land between independent Financial Advisors shoving their customer’s SIPPs into UCIS, and providers of those UCIS.

A trawl of the FCA Register has identified three firms which illustrate the particular perils of DFM.

Between 2008 and 2015, Norfolk based DFM Vantage Investment Group Ltd. was running a unitised fund which traded contracts for difference, and advising clients to place their money in it via their IFA, Taylor and Taylor Associates. Based on an interview with Hedge Week, in 2009, at least some of these CFDs were bets on the price of crude oil.

In November 2015, the FCA imposed a requirement upon Vantage. This required it to cease carrying out any regulated activity, sell off any derivative positions, and transfer these and any sums in the trading account to the client money account. It was told not to satisfy any client redemption requests, and forbidden from making any disbursements to shareholders and employees. It was also told to communicate the FCA’s requirements to its clients. At the time, the fund held over £4mn.

By March 2016, the Financial Services Compensation Scheme had declared the IFA in default, and paid out £3.4 mn to 119 claimants. Norfolk Constabulary charged the Taylor brothers (Alan and Russell), with 7 counts of fraud each.

In November 2016, Greyfriars Asset Management LLP was told by the FCA (in a similar requirement appended to their Register entry), to cease accepting new money into Greyfriars Asset Management Portfolio Six, and all other discretionary portfolios. They could accept redemptions, but make no other distributions.

The fund invested in ‘mini’ bonds issued by (amongst others), the Resort Group, Lanner Car Parks, and the Olmsted Series (which had a 3-5 year term). These were short-term interest bearing corporate loans. They were untraded and not covered by the Financial Services Compensation Scheme.

The Resort Group developed hotels and resorts in Cape Verde (like Stirling Mortimer), and was the focus of a BBC Panorama episode in 2016. Lanner bought parking spaces, (hints of StoreFirst, which built and sold individual storage pods), and Olmsted bought US real estate.

A 2015 client brochure touted a gross performance of between 8.3% and 12%, and gave example investments as:

URBAN STUDENT PROPERTY BOND (4-year term with semi-annual coupons paying 7% p.a.) ENVIROPARKS BOND (7-year term with quarterly coupons paying 7.73% p.a. rising to 9.73% p.a). Its purpose was developing a Waste Management site in South Wales with contracts already in existence with Local Authorities and Biffa. The money raised is being used to create a plant that will turn household waste into biofuel pellets, which can be burnt to generate electricity.

ABC IV (4-year term with annual coupons of 8.25%, paid on a quarterly basis and a bonus of 2.95% paid on maturity). Alpha Business Centres is a company offering serviced office accommodation in the UK, UAE and Malawi.

LATERAL ECO POWER (15-month term with an annual return of 8.77%). This financed the conversion of an existing coal fired power station on Anglesey, currently mothballed, into an eco-friendly, carbon neutral electricity generating plant. In the short term, waste Teak (from the furniture industry) from Africa will be imported to fuel the station being replaced by a sustainable willow forest after 3 years.

A presentation marked not for distribution, and dated January 2016, set out a number of similar investments, promoted by Greyfriars’ owners, Best international.[i] The Financial Ombudsman Service has issued a few decisions about Greyfriars, one following an introduction by IFA St James’s Place. The others involved high charges and SIPP churn, and poor inheritance tax mitigation advice.

The company behind ABC Corporate Bonds I-IV, ABC Alpha Business Centres UK Limited appointed an administrator in 2017. Its Director was listed as Bradley James Lincoln, Corporate Director at Best Asset Management Ltd, part of the same group as Greyfriars[ii]. The whole thing was operated by Alpha Business Centres LLC, out of a room in Dubai. That was owned by The Property Store in the United Arab Emirates. As with Vantage, an uncomfortably close link between the Discretionary Fund Manager, and the product provider. As Mazars, the insolvency practitioners have discovered “the Company has no physical assets and minimal funds”.[iii] £34 million was sucked out of it by Alpha using a revolving loan agreement, in exchange for debentures covered by a floating charge.

Magnificently, The Property Store provided the initial asset pool for the Lanner Car Park fund (another investment offered by Best, and held by Greyfriars Portfolio Six).

Finally, we come to Beaufort Securities Limited. It bought the assets of Hoodless Brennan, fined twice in three years by the Financial Services Authority. It too has been required to cease its DFM activities, and disburse no monies.  Internet rumours are that a fund manager was receiving commissions of 30% for investing client money with another IFA.

However even if individual fraud had not been committed, their Ombudsman Service record shows that they place their customers’ assets in AIM listed companies. For one of their clients, their DFM service generated a £71k loss. One of the selected investments was Eastbridge Investments (LSE:EBIV, suspended), an investment vehicle operated by one Greg Collier. Collier a non-executive Director of Etaireia described by Offshore Alert as an out-and-out fraud.

ISDX-listed Etaireia Investments plc (ETIP) company put out the following statement:

On 14 August 2014, Etaireia released an announcement regarding land at Bridgend Mills, Tofts, and Dalry that the Company had acquired in May 2014. The announcement stated that the Company  had  obtained additional  planning  permission  for  the site, such that  the  site  now  had  permission  for  152 residential units, an increase of 129 units. The announcement went on to say that, following  receipt of the increased planning permission, the Company had commissioned an independent report which placed an indicative value on the Bridgend Mills site of £1.3 million. 

There is in fact no planning permission currently in place at the Bridgend Mills site.

Whilst not named, the ombudsman (the 70k DFM loss above) referred to another investment listed on the ISDX Growth Market.

The moral of the story? Perform as much due diligence on discretionary fund managers as on the investments they put you into.