NEW ZEALAND: Kiwi investors caught in global credit crunch

Half a billion dollars of small investors' money is frozen in two funds managed by ING - the biggest local fallout in the global lending crisis. By MARTA STEEMAN CANTERBURY, New Zealand (The Press) | Monday, 31 March 2008 Hundreds of investors who have nest eggs in two funds managed by ING are hoping that not all is lost. Three weeks ago ING, New Zealand's largest manager of small investors' funds, froze indefinitely $520 million of small investors' money. ING can give no idea when the funds will open again and investors can take their savings out. It will keep paying the interest investors are due, it says. Several investors who are close to retirement or retired have told BusinessDay they were steered into the funds by ANZ advisers who persuaded then to take money out of term deposits at ANZ. They are bewildered that investments which they had thought were low-risk have come to this. A few had invested over $100,000 and others $25,000 to $50,000. ING is 49 per cent owned by ANZ National. For managing these two funds ING earns 1.4 per cent a year on the value of the funds ($7.3 million on funds of $520 million) and shares 0.5 per cent of that with the adviser who persuaded investors to buy into the funds. Despite the funds' freeze, ING and the advisers will still get their fees. The fees are clocking up and will be taken when the funds are unfrozen or wound up. The two funds are the ING Diversified Yield Fund and the ING Regular Income Fund. The last value of the Diversified Yield Fund on ING's website was 78.6 cents a unit on March 20, compared with $1.10 in the middle of last year. The Regular Income Fund was valued at 69c a unit at March 20, compared with $1.04 a year ago. Some investors say ANZ advisers told them the funds were low- risk. One 72-year-old said risk was not discussed by the adviser. He got his money out late last year, losing about $13,000 on the investment. Another said an adviser described the investment as like a term deposit. Yet another said he told the adviser he did not want to buy into investments that could fluctuate in a market, but was not told that these investments were subject to market fluctuations. His investment has lost $100,000 in value. One woman wanted to get her money out of the funds last August but was continually put off by an adviser who said she was worrying about nothing. She pulled her money out in January and lost $10,000 on her original investment. An elderly couple have written to ANZ complaining that they were not informed that their $100,000 investment was falling in value. Last week it was worth $87,000. The Diversified Yield Fund has most of investors' money and did well for the first four years. But its fortunes turned in the middle of last year when the global credit crisis started to unnerve large international investors. ANZ National was asked by BusinessDay if it still considered these funds to be low-risk; who schooled its advisers on the investments they were pushing; and what response it had to the claim that it misrepresented the degree of risk. ANZ sent a written reply. "We understand this is a difficult and uncertain time for all investors in the two suspended ING funds and we are disappointed that the unusually sharp global market downturn has had such a significant impact on the performance of these two ING Funds." It shifts the onus to ING, saying: "Our financial advisers sold these funds in line with the risks and benefits outlined in the fund provider's investment statements. "Therefore, ANZ remains confident that it has recommended the ING Regular Income Fund and Diversified Yield Fund to clients in the appropriate manner." Other banks and financial advisers had sold these investments also. It would not place clients in investments that they had "an aversion" to. The financial plans of clients were reviewed by an adviser's peers. And all ANZ clients receiving financial advice were required to have read and understood its standard disclosure agreement, which is explicit in not providing a guarantee of their capital. Its advisers were salaried and the bank ensured that their pay was not influenced by the products that they recommended to clients. Investors in ING's two frozen funds who consider ANZ bank advisers misrepresented the risk of the funds may go to the banking ombudsman with a complaint. The funds are invested in complex debt investments in the United States and Europe. Their value has plummeted because international buyers and sellers of these types of investments are not trading them because they don't know their true value. The buyers and sellers are large institutional investors and they are hoarding their cash for fear of a US recession. Banking ombudsman Liz Brown says the key questions are whether the risks of the investments were properly explained, whether people understood what they were putting money into and whether the recommended investments were suitable for the purposes customers wanted. Investors must first make their complaint to the bank. If they think the bank's response is not satisfactory they can then take the complaint to the banking ombudsman's office. She can investigate claims worth up to $200,000 and she can award payments of up to $6000 for stress, anxiety and other factors. If customers do not accept her decisions they can take further action through the courts. ING's chief executive in New Zealand, Marc Lieberman, agrees the investments in the funds are not like a term deposit. He explains the investments as a package of bonds and loans - technically called collateralised debt obligations and collateralised loan obligations - that the fund has invested in. The bonds and loans are primarily in the US and European markets to large corporations and organisations. Collateralised debt obligations and collateralised loan obligations are arcane names that mean nothing to small investors, but they have been the subject of huge debate in the past year. Some see them as a scourge on the global financial community, hiding bad loans among the good. Others call them innovative instruments that have helped to spread risk in the world's financial community and thereby made it more stable. Mr Lieberman stresses that none of the bonds and loans has defaulted on interest payments. Only about 6 per cent of them are related to the subprime end of the lending market. The problem, in his view, is liquidity. None of the usual buyers and sellers wants to trade the bonds and loans. ING's trustee froze the funds to protect remaining investors after about 400 cashed up their investments. © Fairfax New Zealand Limited 2007.