Lessons from Graeme

ACCC chairman and DFO investor Graeme Samuel is clearly furious about the financial problems at Direct Factory Outlets. This morning he described the situation as “most distressing indeed because it affects the interests of my children and grandchildren as beneficiaries of my estate”.

Samuel is in a bit of sticky situation. As chairman of the ACCC, he was forced to put aside his business interests and place his portfolio at arm’s length. In the case of his investment in DFO holding company Austexx, the investment has been placed in a blind trust.

But while this has allowed him to dodge conflict of interest problems, it hasn’t protected him from a bad investment.

Samuel will be hoping Austexx’s position can be saved and at least part of his investment protected in the coming days. Let’s hope for his sake that happens, but in the meantime, here are a few lessons – with the benefit of hindsight – that we can extract.

Even blind trusts require careful watching

From today’s report in The Australian, it is clear that Samuel’s investment in DFO has been run through a blind trust, to prevent conflicts of interest with his ACCC role. That’s fair enough, but it also sounds like this blind trust arrangement has meant he has not been able to discover what was happening at the company until it was too late.

An arrangement where you only get “headline” information about a business that makes up the bulk of your investment portfolio doesn’t sound very helpful. The ACCC is always telling people to study the fine print, but that might have been tough in this case.

Diversification is crucial

It’s not clear how diversified Samuel’s investment portfolio is, but as he admitted today, the DFO investment is clearly the biggest chunk. That seems like an awfully big bet to place on one business and one sector, particularly when he is so hands-off.

Private assets are illiquid

Getting out of a poorly-performing investment is never easy, but when it’s a tightly-held private asset in the commercial property sphere, it’s almost impossible. Once again, putting lots of eggs in an illiquid asset is something expert always warn about.

Be careful who is looking after your investments

It appears that up until a few weeks ago, one of the trustees of Samuel’s blind trust was actually the CEO of the company that operates DFO. That’s been changed now, and Samuel says that he “changed a trustee to remove any potential conflicts and ensure they have one, and only one, mandate – to look after the interests of my children and my grandchildren.” Quite right, but with hindsight that move may have been made a bit too late.