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Chris Lee on Credit Sails – 28/5/09

August 19, 2010

My recent reference to the disastrous decision of Credit Sails to change its CDO portfolio after it had issued its prospectus has prompted a sensible response.

Many investors will now pursue discussions with the trustee.

No one can tell investors why the trustees, Dennis Church and Kathy Brennan of NZ Permanent Trustees, allowed the manager, Calyon Investments, to slip into the fund more Icelandic banks.

The trustee’s brief was to ensure that Calyon could not increase the risk to investors. The risk, Standard & Poor said, was of an AA instrument.

There was no point in Calyon raising the risk as the return to investors was fixed at 8.5%. Why would any investor, or the trustee, want the risk to rise if there were no changes to the return.

Yet Caylon, having allocated a fairly heavy 1.5% of the CDO fund to Icelandic banks (Iceland being over-represented at 0.5% let alone 1.5%), then, without explanation, tripled that risk to 4.5%, a figure every fund manager would regard as outrageous. What were they thinking!

Yet NZ Permanent Trustees seemed unaware of this and did not stop it.

The reason the fund collapsed, to zero value, was the failure of the three Icelandic banks.

Had the portfolio never been altered, losses to investors would be nil.

What should happen now, is that NZPT should seek the manager’s explanation and rationale for the changes.

Why did Calyon believe these changes improved the fund?

If there is no explanation NZPT, having failed to do this three years ago, should accept responsibility, advise its insurers of its negligence, and then seek compensation from the fund managers, if they cannot justify the changes.

Investors should write to NZPT, attention Dennis Church, P O Box 5069, Wellington, and ask whether his organization accepted responsibility for protecting investors against any breaches of the promises Calyon made. If, NZPT had no such responsibility, why did they accept a trustee’s fee.

If NZPT will not accept responsibility, the lead broker Forsyth Barr might stand tall and lead a class action against NZPT. And then there is Standard & Poor to consider!

This failure should not be allowed to fade away.

– Chris Lee (Project Resources Ltd) 28/05/2009

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