Unit holders of the Ironstone Residential Fund have voted to wind up the managed investment scheme (MIS) after claims emerged that it is nearing insolvency due to poor management.
Last week, 84.8 per cent of unit holders voted in favour of a proposal by the fund’s responsible entity (RE) to commence a wind up.
On 30 March, Columbus Investment Services Limited (CISL) issued a five page letter to the fund’s unit holders calling for it to be shut down.
The letter, a copy of which InvestorDaily has obtained, outlines a number of reasons why CISL believes the fund should be wound up, among them, that the present cash resources within the fund are insufficient to meet future payments.
“The fund was launched at the time of the onset of the global financial crisis. The financial crisis had a material influence on the fund raising markets in Australia and on the Australian residential property market in general,” the letter, signed by CISL director Bleddyn Gambold, said.
“This has impacted significantly on the ability of Ironstone to attract meaningful inflows into the fund. The fund has assets of approximately $3.8 million and borrowings of approximately $2 million secured on the property assets.
“The cash resources within the fund will not be sufficient to meet the payment of the interest on the borrowings in the new future. Ironstone has confirmed that there is no expectation that there will [be] further inflows into the fund in the short to medium term without which it is not viable to continue with the fund.”
According to the fund’s 2011 financial report, the fund received $61,385 in rent from its four property investments though claimed to have spent more than $63,270 in management and performance fees.
In an Adviser Edge independent assessment of the fund, dated May 2011, the researcher questioned the ongoing fee structure of the fund stating it is “unfavourable when compared to peers” due to the “higher than average management expense ratio”.
The researcher also made mention of the fund’s possible financial difficulties. At the time of the assessment, Adviser Edge gave the fund a 3.5 star rating.
Meanwhile, the CISL letter went on to state that in light of the circumstances, CISL considers that the purpose for which the fund was established “cannot be accomplished and that the fund should be wound up”.
“Columbus considers that the winding up of the fund is in the interest of the unit holders,” it said.
It also said the CISL had withdrawn the fund’s product disclosure statement and notified ASIC of this decision.
As part of its proposal to wind up the fund, CISL will assume the responsibility for managing the fund’s assets, two investment properties in New South Wales, and two in Queensland.
Four days earlier on 26 March, another CISL director, Bill Tootill, contacted directors of Ironestone Funds, the fund’s investment manager, to inform them that the agreement between them and CISL was terminated.
Last week, CISL informed unit holders that it had sold both the Sydney properties and was in negotiations to sell the Queensland properties.
InvestorDaily understands that questions have been raised over the timing of the sale of the Sydney properties. It is believed that investors had an initial lock-in period of three years from the date of their investment to reflect the long-term nature of direct property.
The decision by CISL to sell the properties before the end of the lock-in period and, as InvestorDaily understands, both at a loss, has also raised issues.
InvestorDaily understands a series of complaints made against directors of the Ironstone Residential Fund and Ironestone regarding the management of the fund could be at the core of CISL’s actions.
It is also believed that a tenant arrangement involving a former fund director and one of the Ironstone Residential Fund investments was not an “arms length transaction”.
The allegation against the director was made in an ASIC complaint.
The complaint, a copy of which was sent to InvestorDaily, claimed that the fund’s investment property in Double Bay in Sydney was purchased for around $1.5 million in 2008 and subsequently rented at $450.00 per week which equated to “a yield of less than 1.48 per cent [or less than half the market value].”
“[The] property equates to half the total portfolio and such a low yield massively impacts overall portfolio yield,” the complaint said.
“The fund claims to maximize returns through the optimization of income and growth. Issues only raised internally in mid 2011 and not addressed”.
It also made allegations as to the experience and expertise of the fund’s senior management team of Fiona Herbert, Jason Isherwood and Sean Preece.
“No member of the manager’s senior management team have any experience whatsoever of managing financial assets or managed investment schemes, hence the need for an external [RE],” the complaint said.
“In this regard, the RE should have been particularly diligent and aware of any problems arising – especially when they are not paid their fees on time.”
A CISL representative declined to comment when contacted by InvestorDaily.
