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John Paulson has lost nearly $ 500 million betting on Sino-Forest

Paulson & co and many other fund management companies have been caught by the markets after the revelations about Sino-Forest real wealth. Is it a lesson taught to the funds invested in shares of companies expected to capture growth in emerging markets ?

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The company Sino-Forest has lost as much as $ 3,5 billion in market capitalization since Muddy Waters LLC, a financial analysis firm founded by Carson Block, expert in short selling, released a report showing the logging company from Hong-Kong and Mississauga now based in Ontario has overstated its holdings of Chinese wood.

" It now seems very likely that it is a fraud », said Jaap van der Hart, a fund manager at Robeco Groep NV in Rotterdam, which owns 627, 100 shares of Sino-Forest, having sold 272,900 shares in June. "The key question now is what is the extent of fraud and if there is still potential in this value."

Sino-Forest has denied all allegations and has set up an independent committee of directors to examine suspected fraud and to clarify. Stan Neve, a spokesman for the group, based in New-York said in a telephone interview yesterday that the company would not comment on the allegations until the investigation is completed.

In a letter to the attention of investors, Paulson & Co, which held about 12,5 percent of the logging company, said it sold all its shares and the drop in the share price made him lost nearly 500 million dollars

Other managers have also suffered. John Goldsmith, fund manager of Montrusco Bolton Investments based in Toronto has also closed all of his positions related to Sino-Forest, after reviewing data published by the company following the report of Muddy Waters. "We lost money, but it would have been foolish to keep such a paper » said John Goldsmith.

This is not the opinion of some investors who see it as an opportunity. Wellington Management Co., an investment company based in Boston, said last July it held 11.5 per cent in Sino-Forest.

New Zealand billionaire Richard Chandler, who ten years ago, has amassed a fortune by remaining a shareholder in the South Korean Group while managing to reform it, is hoping to succeed at the game the same way with Sino-Forest. He increased to 19 percent his stake, becoming the largest investor in the forestry company according to data compiled by Bloomberg.

Among the other major investors who have kept their stakes in Sino-Forest, there are Davis Selected Advisers LP, second largest shareholder with 13 percent of the capital, Ivy Investment Management with 6.1 percent of capital funds through its Ivy Global Nature Resources and Robeco. However, Jaap Van der Hart, fund manager of de Robeco Groep indicates that the impact of Sino-Forest on Robeco has been limited because the logging company is only 0.3% of the assets held by the management company, which manages 10 billion euros (13.7 billion) in emerging market equities.

"Nevertheless, this episode sounds like a zero cost warning for fund management companies that will get involved with closed eyes in this booming sector of emerging market equities" warns a fund manager from Paris. the risk are numerous. In 2009, Satyam, the fourth Indian IT services, was accused of accounting fraud. The share price of this SSII had fallen by 78% in a single session. The CEO Ramalingua Raju had admitted falsifying the accounts of its business, regularly inflating operating margin and revenues. Manipulations that have resulted in increased earnings and thereby increasing regular cash reserves completely fictitious.

"It will probably be necessary to build very large portfolios, that can withstand the collapse of a company and having analysts able to comb through thousands of documents in order to reconcile the figures announced by some companies in emerging countries » concludes the analyst

Steve Tui , September 2011

Article also available in : English EN | français FR

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