Tower funds safety

By MARY HOLM

Q. I take issue with your column (Weekend Herald, November 9) assuring Tower investors their investment funds are safe.

While you may be right, my experience has been that as soon as any uncertainty of getting your money back arises, investors want their money back.

And I have no doubt, because of the long-term nature of some of these investments - as Tower will have invested clients' funds on their behalf in worldwide equities - any sort of a run on Tower funds locally will require the withdrawal or cancellation of some of those overseas investments before maturity dates and while overseas sharemarkets are at a horrendous low.

So, while the repayment of funds is fine for those withdrawing now, what about those in the bottom 20 per cent of Tower investors? Will there be enough left for them? Losses must have occurred to the capital sums invested.

Tower long ago gave away the tremendous cash flow generated from life insurance premiums in favour of the (to them) perceived glamour of fund management.

Where now do they make their money? Where does their profit come from?

Investment returns for clients have to be returned to those clients. Tower is merely investing on behalf of clients. It is not their money.

A. Right. And they can't take it

Tower's investment funds are set up as unit trusts, group investment funds (GIFs) or superannuation funds.

Their assets aren't owned by Tower. They are held in the name of a custodian who is answerable to a trustee. And, under the trust structure, the beneficial owners are the investors.

The trustee's job is to protect the investors' interests.

What happens when investors want out? "Each fund has usually got a liquidity portion, of 5 or 10 per cent in cash, for withdrawals", says Richard Baker, Tower's general manager of marketing, risk, health and investment products.

If there's a run on the fund, and that cash runs out, the fund would have to sell some of its investments, as you say.

At that point, the trustee has to balance the needs of investors who want to exit and those who want to stay.

If the assets would be sold below their fair market value, investors remaining in the fund would be hurt.

To prevent that, "trustees normally can freeze or limit withdrawals", says Baker.

So far, there has been no need for this. And there shouldn't be. As I said last week, the fortunes of Tower affect its share price, but shouldn't affect the value of its investment products.

Bailing out of a Tower fund would, as Baker puts it, be like throwing away your mail because you don't like the mailman.

The trustee of most of Tower's unit trusts is the Public Trust. For the superannuation funds and GIFs, the trustee is Tower Trust.

That's part of Tower Corporation, but "there are powerful legal obligations for the trustee to act in the best interests of the scheme", says Baker.

What's more, GIFs must also have a statutory supervisor, which in this case is Perpetual Trust, an entirely separate organisation.

"It looks over what the trustee is doing," says Baker. "It's an extra layer."

You ask how Tower makes its money.

Basically, it's by charging management fees for running its investment funds. The fees come out of investment returns, whether they are positive or negative.

Market forces keep them in check. "We could charge more, but then nobody would invest in our funds," says Baker.

He notes that Tower didn't get out of the life insurance business, as you say. "We've still got the life company. What's happened is that the market increasingly moved towards unbundling (life insurance and investment products). We decided to go where the growth was."

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