The trust that is stranger than fiction

Since launch at the very limit of the technology bubble in April 2000, investors in the Amerindo Internet fund have inhabited a bizarre world of fraud, horseracing and catastrophic losses.

From time to time, the fund industry chews up and spits out the private punters who make it pay. Such is the fate that befell many small shareholders in the Amerindo Internet fund. These investors both incurred big losses and suffered the indignity of watching the arrest on fraud charges of former Wall Street wizards Alberto Vilar and Gary Tanaka, the co-founders of Amerindo Investment Advisors, the firm that ran the fund.

Vilar and Tanaka, both in their 60s, have been charged with stealing client funds. By the middle of this month they were under house arrest after a spell in jail. Vilar, who was once said to be a dollar billionaire and has supposedly donated over $200m (115m) to philanthropic causes, is accused of stealing $5m. Prosecutors allege he used the client money to make donations and pay personal expenses.

Tanaka, a successful player in the world of horse racing, is accused of stealing millions of dollars of client money to buy a number of thoroughbred racehorses. A report in the Wall Street Journal, citing horse racing analyst Equibase, says Tanaka’s North American horse racing earnings came to $14.2m between 2001 and 2004.

There is some residual uncertainty about whether the Amerindo Internet fund was subjected to fraud, for instance in its portfolio of unquoted holdings. In June the investment trust’s chairman Martin Smith said the fund’s 29m worth of assets had been “accounted for and were in safe custody”.

Smith added: “Having considered the matter carefully, the board believes that the risk of any financial impropriety having taken place in either the quoted or unquoted portion of the portfolio is low. Therefore it is of the view that it would not be a justifiable use of shareholders’ funds to conduct an extensive and costly investigation into the historic integrity of the accounts, focused primarily on the unquoted investments, the main area of possible doubt.”

However, Smith said that the trust’s auditors had been “unable to satisfy themselves for the purpose of the audit that there has not been any fraud or other irregularity”. This was likely to lead to a qualified audit opinion in the fund’s annual report and accounts, he said.

Of course, both Vilar and Tanaka are innocent of any and all charges until proven guilty. Vilar, for instance, moved quickly to deny the accusations levelled against him. Yet their reputations are in tatters compared with the way their investment prowess was f鳥d in the late 1990s, a period when strong stockmarket returns allowed their funds to post very good performance, earning them rich rewards.

It was that earlier standing, together with the white-hot performance of technology stocks, that enabled the Amerindo Internet fund to raise 400m at 100p per share when it launched in April 2000. It was one of the biggest sums ever raised by an investment trust and one of many technology fund launches in 1999 and 2000.

Yet by April 2000 the tech market had already peaked and begun a long and tremendously painful slide. Today, the 29m Amerindo Internet fund has the worst five-year net asset value and share price performance of any investment trust. Its NAV is down 85%, while its share price is down 87%, according to data from Close Wins. The fund’s 15.8p share price, meanwhile, sits on a 22.6% discount to its NAV, the joint second-widest discount in the investment trust sector.

What lessons should be learned from such a sorry mess? One is to be very, very wary of “hot” periods when lots of one particular type of fund are being launched. Don’t believe the hype – the launches can be a contrarian signal, indicating the asset type in question, far from entering a new paradigm or golden age, has already delivered its best performance.

Another lesson is that investors have a responsibility to monitor closely the judgment and behaviour of the people who manage their money. For instance, in the months and years after the Amerindo Internet fund’s launch, its management team seemed to build a brick wall of bullishness to ward off the collapsing technology sector.

At the trust’s 2001 annual general meeting, by which time its shares had tumbled 70%, Vilar said the Nasdaq index was set to rally from the then level of 1732 points to 3000 points. In the event, the index fell to an all-time low of 1114 points in 2002 and currently stands at 2178 points.

The best fund managers will readily admit to doubt even in good times, let alone bad. Unswerving bullishness should ring warning bells, as indeed should unusual behaviour, such as pledging vast amounts for philanthropic causes. Investors should stand ready to “cut their losses” when enough investment and other warning lamps light up.

Finally, stories like Amerindo’s underscore once again the importance of asset class diversification. Back in 1999 and 2000, too many people invested only in equities. Within their equity exposure, they typically opted for a heavy weighting in technology stocks. As a result, the pain when funds like Amerindo’s began to suffer was severe.

A more balanced approach would have fared far better. Academic research suggests a portfolio well-diversified across asset classes delivers a higher return per unit of risk than a portfolio focused on just one class of investment. In many ways investors should adopt this finding as their principal principle.

So what of the future for Amerindo Internet fund? Its board plans to replace Amerindo Investment Advisors with a new management firm by September. Earlier this month, however, a New York-based arbitrageur, Millennium Partners, emerged with a 10.5% stake in the fund. It previously held a near-30% stake, and its pressure was instrumental in forcing a restructuring last year.

Arbitrageurs often buy into trusts at a wide discount before applying pressure for changes, a restructuring or a liquidation to realise their investment at closer to NAV, thus turning a profit. Given this, Amerindo Internet fund’s small size and the recent travails of Amerindo Investment Advisors, the investment trust may face a fight for survival.

l Patrick Collinson is on holiday.