Notes From A Native Son: Four Seasons, The End
The scandal over the national insurance scheme’s so-called investment in the stalled Four Seasons hotel and villa complex has now run its rational course. There is clearly no business or economic case for the investment, despite special pleading from Professor Avinash Persaud, the public face of the development, and a moribund government anxious to make as show of competence before the next general election. The decision to go ahead with the BDS$60m investment, on top of the rest, is political and not economic. It is also quite clearly a failure of the NIS’ fiduciary duty to scheme members and to future generations of claimants.
Recently, according to some reports, Professor Persaud, executive chairman of the troubled project, has been putting his case, with the articulacy that one would expect of one of the brightest economists of his generation. But, as has been the case all along, he has failed to convince that the so-called investment is one that the National Insurance Scheme should have been involved in.
Before looking more closely at what is alleged to be Professor Persaud’s case for the defence, I want to take a closer look at what the NIS should be, and what it is not.
As a national insurance scheme, its principal role is to provide long-term retirement income for its members and other eligible beneficiaries.
Its investment horizon should stretch across the lifetime of its members and beyond and this fiduciary duty should be summed up in a publicly available policy on responsible investment. This should be rooted in a carefully considered risk management policy, based on actuarial assumptions, as to longevity and returns on investments, with the aim of maximising returns without undue risks.
A scheme with such a profile would normally have a rather cautious asset allocation outlook, which all investment experts tell us, is the best guarantee of Beta returns. In short, a national insurance scheme’s investment policy should not be based on high-risk Alpha returns. The other key to responsible investment is diversification: not only across industries, but also markets.
So, to give an example, if the NIS has equity investments in the hotel and tourism industry, furniture manufacture, commercial property, and so on, it would be wise to invest in markets such as Barbados, for obvious reasons, Caricom, as good Caricom members, in more developed markets – the US, Canada, UK, Europe, Japan – and some fast developing markets – China, Brazil, Indonesia, Chile, and others. The simple economic reason is that if there is volatility in one market, it is unlikely to be in others, so investments may still give Beta returns, beating any determined benchmarks, with out the high risks. But, asset allocation must also be fine-tuned through stock picking. In other words, a decision may be made by the investment committee to invest in US equities, but the actual choice of company, I believe, must be made by experts who are in hourly contact with the markets. More so, fund managers talk to CEOs, finance directors, production staff and to other market participants and know what is going on.
With due respect, an investment team based in Barbados is not in a position to carry out the necessary research, talk to analysts and visit plants all over the world, if due diligence is to be carried out. On these grounds alone the so-called investment by NIS in Four Seasons goes against the grain of sound investment theory. Further, there should be at least an annual audit of the scheme’s equity portfolio, called the rebalancing date on portfolio performance, looking at market volatility and the predictions for the coming months.
Equity investments, however, in a contributory scheme based on the long-term, is, or should be, mainly for growth and income. The fundamental policy should be based on those long-term liabilities and this is prudently covered by investments in gilts and corporate bonds. To give real meaning to this jargon, a good long-term investment portfolio would look like: 50 per cent in equities, 40 per cent in fixed income such as bonds (or gilts), five per cent property, three per cent alternatives such as hedge funds and two per cent in cash. But deciding on the amount of cash to invest in bonds or equities or keep in cash is far more important to the long-term return of the pot than deciding on stock picking, such as which company to invest in.
So, if the NIS’ investment committee decides to invest in the hotel and tourism sector in Barbados, that will be good, since the obvious outcome is to keep Barbadians in jobs. This is the key to successful long-term investing. However, to decide to pump money in to Four Seasons or any other individual project will take a lot more thought and analysis. This is not the case with Four Seasons at present.
The other key investment strategy is to know what you are aiming for before creating an investment roadmap. Having done that, it is important that all stakeholders know and understand the scheme goals, the amount of risk the scheme is prepared to take, the investment horizon (investing is a long haul, i.e. about five years, so selling shares every two months is a waste of money).
As I have said, there is no case for a state investment in Four Seasons. As things stand, it is a pitch in the dark that a so-called premium class hotel will attract ultra and high net-worth clients. Where is the evidence?
In any case, the room occupancy rate of the top class hotels we already have is not encouraging. Further, the global macroeconomic evidence is not there. In the four months since September 2011, US$2.75 trillion of cross-border capital, including bonds, equities and banking flows, have flown from developing markets, the biggest outflow since the 2007/8 banking crisis.
This means that the investors who would normally be interested in investing in Barbados are more cautious and are holding on to their money, because most experts are predicting a massive global slump. Even the super-rich feel the pain at times like this.
But there are other questions that still have not been properly answered:
Was Professor Persaud paid a fee of US$4m following the UD$60m loan the project received? If so, was this for consultancy over and above his position as executive chairman? Was it paid to him personally or to a private company? Is that company domiciled in Barbados, Britain or some other offshore jurisdiction?
Is it true that the interest rate on this loan was 13 per cent, meaning that government/Four Seasons must repay a further BDS$15m?
What is his salary as executive chairman and does he have any other commercial arrangements with the management of the project?
Is it true that sales revenue of BDS$170m was generated in the first 18 months of the project, if so how was this money spent? Were there any defaults on payments by any of the villa purchasers?
Taxpayers also want to know if reports that leading QC Peter Evelyn chaired a committee advising the government and resigned prematurely are true, and if so what were the reasons?
(The questions are too long for a short blog and if you want to read the full list please email me).
Analysis and Conclusion:
Taxpayers have a moral and legal right to know how their taxes are being invested. This is best done through the NIS posting on its website a Statement of Investment Policy, a Statement of Scheme Governance, every triennial actuarial report it has ever received, the CEO’s/board’s annual statement/report, and a statement on the investment committee and the names and locations of any fund managers, and their charges.
Taxpayers also have a right to know if the investments are actively or passively managed, so that they can determine if the charges are reasonable.
To give an example: an actively managed investment fund means that fund managers are making decisions every day about the portfolio and for each trade, as they are called, there is a charge. So, the scheme would be charged an annual management charge by the fund managers, of about 0.5 per cent to three per cent, which is the going rate, although it is not unusual to find some extortionate managers charging up to seven or eight per cent.
They may also produce an outline of charges called in the trade a Total Expense Ration (TER). However, as already pointed out, this does not include the ‘trades’, which can be massive. This is important, since if a manager charges 0.5 per cent of an investment pot of $100, he will get only 50cents. But if it is 0.5 per cent of a pot of £1bn, he will be getting $5m, which is a lot of money.
To put all this in simple terms, if the person negotiating on behalf of the scheme does not understand financial economics then s/he is in danger of signing away millions of taxpayers’ dollars in charges.
Equally, if someone is an academic and has no real experience of the fund management world, s/he can be baffled with hocus pocus. It is also important to remember there is no secret about which investments the scheme has made, all that is available on public records.
It is of course confidential what investments the scheme is considering making, which is not the same. Risk assessment and risk management are at the very heart of investment policy. A competent investment committee would identify risks and work out strategies for avoiding or mitigating those risks – strategic, legislative and regulatory, operational and reputational.
A clear strategic risk is the immediate and medium-term prospects for the Barbados tourism and hotel sector. Another clear operational risk, which we know from the failure of the NIS to get its annual accounts in order, according to the Auditor General, must be implicitly embedded in the running of the NIS. In any case, it is important that investments decisions for the scheme are not made by government. In fact, the NIS should be a stand alone agency, outside the civil service, reporting to parliament annually.
In the final analysis, this is a case for the courts. Trade unions, the guardians of workers’ rights, lawyers and other concerned Barbadians should pool resources and challenge this decision in court.