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17 Apr 2014

Requiem For A Dream

For many, the Foord Compass variable rate debentures were the dream investment of the past decade. Sadly, owing to changes in the tax legislation, debenture holders recently voted to have the debentures redeemed. This took place on 31 March 2014 and the debentures were subsequently delisted from the JSE’s mainboard.

Since inception just over 12 years ago, the Foord Compass debentures have provided investors with an annualised total return of 18.5%, of which 12.8% was paid as income. Incredibly, the annualised total return exceeded the exacting long-term benchmark of inflation plus 10% by almost 3% per annum. What makes these returns all the more extraordinary is that they were generated during a period blighted by some of the most challenging years in the South African (and, indeed, global) investment markets.

Over the same period, even the FTSE/JSE All Share Index could not match the performance of the Foord Compass debentures. South African equities enjoyed an annualised total return of only 16.6%, which included a dividend yield of approximately 3% per annum.

The hallmarks of an investment in the Foord Compass debentures were twofold. First, an investor was reasonably assured of a relatively stable and still appreciable income stream (made all the more significant in a period of very low interest rates across the globe). Second, the Foord Compass debenture demonstrated the benefits of a largely unconstrained investment mandate given to a skilled manager.

The income yield on the debenture's net attributable asset value (NAAV) (which of itself increased over time) was never less than 10%, and at times exceeded 16%. Indeed, the Debenture Trust Deed provided that 90% of all realised trading profits and investment income had to be paid to debenture holders. Combined with the obvious need to make the quantum of this payment substantial, the fulfilment of this requirement meant that the fund manager had to be all the more attentive to the portfolio. As such, and as is common to the management of all portfolios by Foord Asset Management, the risk of loss was monitored assiduously.

Except for the need to provide a meaningful income stream (which was never an objective to be taken lightly), the investment mandate underpinning the Foord Compass debentures was unconstrained as to asset class, geography or any other attribute. It truly represented the investment manager's very best investment view. It also meant that there was so much more for which the company and the investment manager could be held to account. Shortcomings in performance could never be blamed on a mandate, or constraints, or a benchmark. However, Foord Compass's track record vindicated the notion that a skilled fund manager can indeed do better for investors when unshackled.

That the debenture was listed not only afforded investors the discretion to add to or realise their investment, but also forced a high degree of transparency and the associated and imperative governance structures and protocols, giving even greater assurance for investors. With the bright lights of a public listing always on, there was no scope for the fund manager to simply close the fund or defer income payments during periods of market difficulty.

In many respects, the Foord Compass debenture was the perfect investment. However, and most regretfully, references to it are in the past tense. On 31 March 2014, all of the debentures were redeemed for cash, and the proceeds paid to a saddened corps of debenture holders. The decision to redeem the debentures followed amendments to the Income Tax Act which would have had the effect of taxing in the hands of Foord Compass the amounts of interest paid to debenture holders. Furthermore, these amendments also would have forced dividends tax to be withheld from the income distributions to debenture holders. The nub of this would have been that debenture returns would have been reduced by as much as almost 39%.

Before the amendments, Foord Compass was allowed a tax deduction for the debenture income payments, so enabling the return to be passed to debenture holders before taxation. The debenture holders would have paid (and, indeed, did pay) the tax themselves. Certainly, tax-exempt investors such as retirement funds had a particular appreciation for the receipt of regular, significant and untaxed income stream. However, the National Treasury and the South African Revenue Service have sought to put a stop to all similar structures. In doing so, the authorities have deprived investors of a very meaningful means of building long-term savings. One wonders whether this is an instance of cutting off one's nose to spite one's face.

In the confusing plethora that is the investment landscape, a truly excellent opportunity is a rare ideal so difficult to find, and even more difficult to sustain. For many, the Foord Compass debentures were that dream investment, both discovered and enduring. But instead of lauding the proven exemplary long-term performance of an investment, we find ourselves eulogising it, which makes the pity so much greater.

Darron West
Chairman: Foord Compass Limited

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