When something looks too good to be true it often is

Analysis: A group of Irish forestry funds have failed to deliver for investors

When Lar Sheeran decided to invest in Irish forestry some 20 years ago, he had the long-term in sight.

With projected returns of almost 15 per cent a year on an annualised basis, and a tax free lump-sum projected at the end, he was hoping to turn his €25,000 investment with Irish Forestry Funds into a bumper €600,000-plus payout at the end.

With his money locked in, for a mooted 30-year term, he was waiting for the three decades to end to get his rewards. As the value of his shares was based on a final sale, he got no update on an annual basis as to how much his shares were worth, nor were any dividends offered during the period. What he did get however, and what he did check on an annual basis, were the fund’s company accounts.

“And there were never any indications that the original projections wouldn’t hold up,” he says.


But when investors got their cheques last Wednesday following the sale of the funds back in May, it was for far less than had been expected, with returns of the order of 2-3 per cent a year, or between 40-107 per cent in total over the period of the investment.

Now the former founding treasurer of ISME, and a former member of the IDA’s small industries board, is canvassing investors in the schemes, looking to create a group to take an action against the directors behind the funds.

“There is a big question over the actual sale,” says Sheeran, noting that the company’s accounts don’t include the value of the trees planted over the period of the funds; the sale price of the assets weren’t disclosed; while shareholders also weren’t asked to vote on whether or not to wind up the companies and sell on the assets. He also points to the question of why sell now, at such a level of return, when investors had locked in their money for up to 30 years, and could expect to hold out for longer for a better return.

For their part, the directors’ of the funds point to “significant risks” that couldn’t have been foreseen at the launch of the fund, such as Brexit and the US/China trade war, as well as climate change, falling timber prices, the spruce bark beetle infestation across Europe and the potential difficulties in the Irish economy.

“Experience demands that the company must avoid seeking to sell its portfolio during such recessionary times,” the directors said in the company’s most recent accounts.

And yet, if the environment is so tricky, it's a fair question to ask as to why an international player like Axa would see such opportunity. When the sale was announced in May, Christophe Lebrun, head of forestry at Axa IM Real Assets, for example, said that the 10,000-acre portfolio had an attractive income profile for its investors, while the chief executive of Gresham House Asset Management, which has been appointed by AXA as asset manager of the portfolio, spoke of the "massive opportunity" in Irish forestry.

Indeed returns across the industry have been higher than those obtained by Irish Forestry Funds. Consider the Irish Forestry Unit Trust, an institutional fund, which manages Irish pension and charity investment in forestry. It tells us that its return from January 1st, 1997 to May 31st, 2019 was 5.82 per cent on an annualised basis, or a total return of 245 per cent including distributions to unit holders.

Lessons learned

So it’s hard not to feel sympathy for the 12,400 or so investors who have received substantially less than they had hoped/expected.

The return some investors in the scheme have been rewarded with is less than inflation; for example, today’s “real” value (ie adjusted for inflation) of €630 invested in 1997 was actually € 1,184.49 at the end of 2018. But, depending on the fund invested in, they may not even have achieved such a return on their original investment.

Of course, it could also be argued that the outsize – tax free – returns that were projected back in the late 1990s, were perhaps too good to be believed. Fifteen per cent a year? Compounded? That’s more akin to hedge fund style returns – and only among the very best managers.

If one of the aforementioned investors had put their money into the S&P 500, for example, they would be up by 225 per cent or so over the period January 1997–May 2019, or 5.5 per cent on an annualised basis. If they had gone for dividends being reinvested, they would be up by 386 per cent, or 7.5 per cent on an annualised basis. So that €630 investment would have been worth €2,431. When looked at in this light, the expectation that a €630 investment could be worth almost €10,000 after 20 years (as it would have been if the projected returns had been achieved), or €37,000 after 30 years, looks like a significant challenge.

Now, apart from the aforementioned legal action, investors would appear to have little comeback. The Central Bank has confirmed that Irish Forestry Funds were neither authorised nor supervised by the regulator, which puts any claims of mis-selling out of the jurisdiction of the Financial Services Ombudsman, as it only deals with complaints "about the conduct of regulated financial service providers and pension providers".

But while lessons may have been learned, it doesn’t really change the predicament facing investors in the funds, many of whom were relying on the bumper returns to fund their retirement.

Sometimes perhaps, when something looks too good to be true, it often is.