One arena where the unsuspecting investor can quickly lose a lot of money is in unregulated alternative investments, such as artefacts, wine, foreign property or land.
Essentially, anyone can set up an operation trying to make money out of these investments. Very often the more aggressive firms hire salesmen on hefty commission to flog these investments, and they will make exaggerated claims for their potential returns.
A typical pattern is for the marketing operation to focus exclusively on selling one investment scheme over a period of six to nine months and then turn its attention, wholesale, to another investment scheme. In the worst cases, the first investment scheme will then fail or be dissolved, taking the investors’ money with it, with none of the safety net that the Financial Services Authority provides for authorised investments such as unit trusts and pensions. The marketing firm will then move on to a third scheme, while the second is left to flounder, and so on.
One of the trickiest investments to verify completely is foreign property. The law on purchasing property differs very significantly between countries and there is the ever-present risk of currency fluctuations going against you. Unless you know the intended area of investment very well, it is also unlikely you will be able to fully appreciate the advantages and disadvantages of a particular location.
One Money Observer reader who contacted us has had a difficult time with an investment in a hotel share scheme in Slovenia. In May 2009 Andrew Durrant purchased a share in the Gora Hotel, in the Podljubelj Valley (also known as the St Anna Valley), near Trzic in the Gorenjska region, through the firm Room to Invest, after reading about it in a flyer in another financial magazine.
Under this type of arrangement, investors buy a fraction of a hotel and share in the income the rooms generate. Durrant took up the offer, which was sold to him though a London firm called Capital Alternatives, and invested £3,900, which was near the minimum accepted. The investment guaranteed an income of 9 per cent for the first year, plus a capital return, and also conferred rights to stay in the room for free for a period every year. Durrant thought that at some stage he would like to use it as a base for skiing. The firm was also marketing a hotel in Marrakesh, Morocco.
After sending off his cheque, Durrant heard nothing for 18 months and then tried to contact the firm to query why he had not been sent any statements or income. He was repeatedly told that the cheque was in the post. However, it was only when Money Observer became involved in the summer of 2011 that he eventually received the certificate of ownership he had asked for, and a cheque for £400.
Unbeknownst to Durrant, the company that had owned Room to Invest, called Capital Ideas, had gone into liquidation and Room to Invest and its other assets had been bought out by some of the management in November 2010.
Then, in November 2011, Durrant was surprised to receive another letter from Capital Alternatives saying that Room to Invest had turned out to be a poor investment and the advisers therefore suggested he switch his money into something else – Agri Capital, a scheme investing in farming land in Sierra Leone, which they claimed was paying out 12 to 13 per cent a year.
The letter worried Durrant because it offered to switch his Room to Invest funds across directly, without his involvement, and asked for a further £1,950 to buy three acres of land in this project, largely based on the fact that it had won Best Alternative Investment Product 2011 at the Overseas Property Professional awards.
Durrant contacted Money Observer again, and we contacted the PR firm working for Capital Alternatives to verify the Slovenian hotel’s existence. It didn’t help that the marketing literature sent to Mr Durrant and appearing on the company’s website consists almost entirely of ‘artist’s impressions’ of what the hotel should eventually look like.
Paul Quade, better known for his position as the one-time personal press officer of the late Robert Maxwell, told us that the Gora Hotel is currently being refurbished and, before it closed for refurbishment, occupancy levels were around the 66 per cent mark. We also managed to track down the real estate agency that had sold the hotel to Capital Ideas.
Jacqueline Stuart, the founder of Slovenia Invest, based in Ljubljana, told us that she had acted for a local businessman, Wilhem Romih, when he sold the hotel to Capital Ideas d.o.o., a Slovene company, in 2008. She says she ‘currently acts for Capital Ideas in collecting the rent from the tenant. The hotel is complete, and open for business with a tenant in situ’. As Durrant says, it would be interesting to know whether there are other investors still waiting for their income cheques.
The more we dug into the case, the more alarmed we became at the number of companies linked by one or more directors which subsequently were dissolved or frequently had their names changed. Many of these companies are registered at Sophia House, 76-80 City Road, London, EC1Y 2BJ, which appears to offer short-term office space.
Capital Alternatives is the standalone sales and marketing company that markets products on behalf of third parties including Room to Invest and the agriculture scheme Agri Capital, now known as African Land. Capital Alternatives shares two directors – Richard John Lyon Henstock and Renwick Haddow – with Room to Invest and Capital Ideas.
Before it went into administration Capital Ideas had been previously known as Leisure Ventures plc and Hallco 650 plc. The names Monument Property Partners Ltd and Bannerplate Ltd are also associated with it. It was listed on the Alternative Investment Market but delisted in March 2009.
The letter sent to Durrant recommending he switch out of Room to Invest was signed off by Henstock, the former director of Room to Invest. Henstock has had a colourful career in smaller companies quoted on the Alternative Investment Market, including as chief executive of the now defunct Viatrade. Altogether, Henstock has had 34 company director or secretary appointments, including well over a dozen that have failed or been dissolved, such as Eurokey Properties Ltd and Centurion Exploration & Mining.
That’s chicken-feed compared with Haddow, who has had 70 company director or secretary appointments, again with a startlingly high failure rate. His less successful ventures include Capital Ideas plc, Capital Ideas Financial Planning, Charolais Investment Company, Capital Mint, Undervalued Assets, Capital Ideas Investment Management, Arc Property Nominees and Arc Fund Management.
Haddow is also director of another company registered at Sophia House – The Capital Organisation Ltd. David William Waygood, born in November 1950, is also a director of The Capital Organisation Ltd alongside 132 other appointments, of which at least 25 have been dissolved or gone into administration, such as Capital Mint.
And so it goes on – a tangled web of names that keep cropping up as directors of dozens of smaller companies, many of which had short and chequered histories.
It is not illegal for companies to sell unauthorised investments, but these products are not covered by the Financial Services Authority’s compensation scheme, and the so-called advisers who sell them need have no training. These operations also usually involve quite hard sales tactics and reward those staff well with your money – Capital Alternatives at one stage advertised that it pays its salespeople some 25 per cent commission.
Capital Alternatives’ hard sell approach has now turned to selling investments in memorabilia. It has referenced data from Fraser’s (a division of Stanley Gibbons, the respected philatelic specialists), that shows the performance of autographs has proven extremely resilient. For example, the price of a signed (undedicated) photograph of Muhammad Ali has increased in value by 442.9 per cent from 1997 to 2008, and is expected to increase even more significantly after his death.
Fraser’s compiles an index (the Fraser’s Rarities Index) of autographs with values that show the average price movement of a number of sportsmen, artists and musicians such as Jim Clarke, George Harrison and Andy Warhol. Over the 10-year period from 1998 to 2008 this index grew from £95,905 to £306,500, an increase of over 200 per cent, the marketing firm said.
Until recently, Capital Alternatives offered what it called ‘MultiAsset Portfolios’, splitting each investment equally among four assets – gold, fine wine, income-producing property and rare memorabilia. It promised guaranteed returns of 12 per cent over three years, 25 per cent over five years and 60 per cent over 10 years, with ‘no limit on the upside’, claiming that historic performance over five years has been just under 15 per cent a year.
Capital Alternatives also said that those investors who were first in have received payments ranging between 6 and 18 per cent. When we asked about the performance of this portfolio, we were told it is now closed for business.
Many of these investments sound convincing and tell a compelling story. The current big sales drive is for African Land, another brainchild from Robert McKendrick, who has been a director of 20 companies including Trafalgar New Homes plc and London Wall Mining. Rice in Sierra Leone is in short supply and the company says it is introducing Western farming methods which has increased yields per acre. One nice touch to the story is that they have been crushing sea shells to deal with the soil’s acidity, rather than shipping in limestone, which would have been too expensive.
Investors in the land pay a minimum investment of £1,950 for the title to a one-acre field, which includes a £600 cultivation fee. African Land suggests investors will be able to bag capital growth of 50 per cent once the land has been prepared for production and is estimating an annual income of 15 per cent from the harvest. Not long ago, Capital Alternatives was pushing a carbon credit generation scheme in Sierra Leone, leasing plots of one hectare for a term of 45 years, provided by Climate Care Global.
Such alternative investments – fashionable as they are – are completely unregulated. To the uninitiated, for example, the phrase ‘Sippable’ may suggest that an investment has been vetted in some way, but all it actually means is that the asset is not prohibited from being held in a self-invested personal pension by HMRC.
A glossy brochure or an upmarket website provides no indication of the quality of a firm or the investments it sells, and besides, like the salesman’s exorbitant commission, ultimately it will be investors who pay for this promotional fluff.
Alternative investments are usually physical and, that being the case, our advice is to locate them and see for yourself what exactly you are considering buying.
Don't be snared by pushy commission-hungry salesmen
Caveat emptor, or buyer beware, is a warning that is particularly applicable to investment schemes such as those promoted by Capital Alternatives. As companies specialising in alternative investments are not regulated, it is often difficult or impossible to ascertain the quality of assets you are buying. You are taking it all on the basis of a brochure or phone call from a commission-hungry salesman.
If such companies are limited and fail, investors have almost no recourse. In theory if you are owed more than £750 you can demand the winding up of a company, but in practice if the situation has got to that stage, then it is rare to find any money remaining.
The warning signs
• If an investment firm sells only illiquid assets, then there is nothing with which to compare the price and the firm can therefore value the assets as it likes.
• This also means historical performance can be fabricated as there’s no reference to compare it with.
• Be wary if the adviser gives you excuses as to why the assets cannot be visited.
• Check the firm’s Companies House entry, which will often reveal any name changes.
• Look out for poor grammar. It is surprising how often scam communications are written in children’s standard English.
• Has the firm sent you an article from a magazine that recommends the company or its investments? If so, check whether the magazine is published by the same or an associated company.
• You should also look at the investment websites and who initiates online chats about its products.
And as always
• If it looks too good to be true, it almost certainly will be.
• Check whether or not the adviser is FSA-authorised on its register at www.fsa.gov.uk.
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