Financial journalist Edmund Tirbutt, who has been burned by the Bulgarian property market, on why you should stick to FSA-regulated schemes
It felt satisfying to certify myself as a "sophisticated investor" to take advantage of what appeared an opportunity of a lifetime back in October 2005. After writing up a talk about Bulgarian property for a newsletter, my 20 years' experience in the financial services industry assured me it was a suitable home for some of the proceeds of my recent flat sale.
Jonty Crossick, director of property managers Ready2invest, had proved a highly persuasive speaker. Although he paid due attention to the risks, the returns he had made previous investors were mind-boggling and many seemed to come back for more. Bulgarian property prices had increased by 22% during the last year and by 49% in hotspots, and EU membership was beckoning.
A few days' later my wife, Helen, and I excitedly thumbed through the prospectus for Crossick's R2R Bulgaria Property Fund, a Jersey regulated closed-ended umbrella unit trust. We reasoned that it was well worth chancing our arm with the minimum investment of �21,000 ? only 10% of our available capital. It could make a significant difference to us if it lived up to expectations, whereas no investment opportunities regulated by the UK Financial Services Authority (FSA) seemed to offer any real potential.
Nearly six tortuous years later I am not feeling so sophisticated. Barclays Wealth, the current managers and trustees of the fund, has finally stated that it no longer views our selected Arkoutino sub-fund as viable and estimates that its net assets are worth around 8% of the money originally invested. As the winding up process is complex and expensive we could receive back nothing at all.
The problems began soon after launch as it became clear that Ready2invest did not get on with Equity Trust, which acted as the fund's managers and trustees through different subsidiaries divided by a Chinese wall. After only a year, Ready2invest had been removed as property managers by Equity Trust. After another year the Jersey Financial Services Commission had commenced proceedings to replace Equity Trust because of concerns ranging from serious conflicts of interests to failure to produce audited accounts.
The in-fighting and general chaos has been almost beyond belief, and it would be hard to imagine this could have occurred with an FSA-regulated fund. The Jersey Financial Services Commission, however, merely invited us to consult a lawyer ? which we couldn't afford to do.
Ready2invest's Jonty Crossick says: "It was at the higher end of the risk scale but before the credit crunch there was no reason to suppose it was underfunded as it was not unreasonable to expect us to get loans. Culturally we didn't get on with Equity Trust and I didn't appreciate how much control they'd have when we brought them in as trustees and fund managers."
Nevertheless, my experience seems to give weight to many of the warnings by investment experts about the perils of investing in non-FSA regulated investment vehicles, whether in property, wine, stamps or foreign exchange funds.
Kelly Wheble, partner at national independent financial adviser (IFA) Positive Solutions, says: "With an FSA-regulated fund there should be far less scope for the various parties running a scheme to fall out, as there is already a well-established structure governing how they interact. FSA regulated funds are also far more transparent and afford less scope for conflicts of interest."
With the benefit of hindsight, I could perhaps have paid more attention to another danger. Because these funds start off by being relatively obscure, they tend to come to the attention of most investors only once they have built up the track records capable of generating them publicity. This can mean that people pile in at exactly the wrong time, in a similar way to which they can buy shares at the height of a bull market.
Chris Cole, senior client partner at national private client wealth advisers Towry, says: "Historically investors may have had particularly good returns but you tend to only see the marketing hype when the clever people have made their money and got out. If someone does choose to invest they should make sure it's a small piece of their overall wealth, something to have fun with but which isn't going to ruin their future."
Source: http://www.guardian.co.uk/money/2011/oct/21/i-lost-bulgarian-property-fund
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