What do people think of Steve’s the US Passive Income Fund?

Hey Benny,

Think of currency gains like capital gains. Some are realised when ‘sold’ (‘real gain’) whereas the others sit as unrealised (‘paper gain’).

Often for smaller investors gains are not recorded until realised, but the Fund is a reporting entity and has to apply International Accounting Standard (IAS) 40 which says:

“Investment property is remeasured at fair value, which is the amount for which the property could be exchanged between knowledgeable, willing parties in an arm’s length transaction. [IAS 40.5] Gains or losses arising from changes in the fair value of investment property must be included in net profit or loss for the period in which it arises. [IAS 40.35]”

So, in our case we need to record movements in fair market value. The basis we use is an independent appraisal by a third party expert.

In the case of currency movements, we need to apply IAS 21. This accounting standard draws a difference between monetary items like cash in the bank (where exchange gains / losses must go to the P&L) and non monetary items like property (where exchange gains / losses go to an equity reserve). This means that gains / losses on USD we have in the bank goes to the P&L, whereas exchange gains made on US property goes to the equity reserve (rather than the P&L).

For the bean counters, the journal entry for a realised gain is:

DR: Bank (Balance sheet)
CR: Profit (P&L)

But for an unrealised gain – as required by accounting standards, it’s:

DR: Asset (as its value is increased)
CR: Foreign Currency Translation Reserve

The bottom line is this: unrealised currency gains on non-monetary items are included in the unit price calculation, but the gain is sitting as equity rather than profit, up until the asset is sold.

Hope this helps.

– Steve

Steve,
Thanks for your replies in relation to this fund, however by the defensive and condescending tone used in your replies rather than simply a fact based reply, I am only further convinced that all is not as it seems.

Steve McKnight wrote:

Hi,

The appraised values shown in the accounts are independent, not internal, and values are recorded as required by Australian Accounting Standards.

There is a big difference between a valuation and an appraisal and I notice you have mixed both terms very loosely in your webinar/financial report. At least in your reply you have used the term Appraisal. From your own Financial Report – “Investment properties are properties which are held either to earn rental income or for capital appreciation, or for both. Investment properties are stated at fair value. The Fund has an internal Director’s valuation process for determining the fair value at each reporting date.”

Your own FY14/15 report states an internal Director’s valuation process? If you are supposedly using Capright then even better for fund transparency but are these paid independent valuations that come with verified reports or are they free appraisals done every 6 months used to estimate properties for Fair Market Value assumptions? To state that my analysis is incorrect, displays a fairly arrogant response to a supposed fact signed of by yourself in your own financial report.

The appraised values are done by Capright and updated every six months. Appraised?

Critical judgements are made by the Responsible Entity in respect of the fair values of investment properties. The fair values of these investments are reviewed regularly by the Responsible Entity with reference to external independent property valuations, recent offers and market conditions existing at reporting date. The Fund continues to obtain independent valuations of properties at least once every three years. Every 6 months or every 3 years?

So, are these appraisals or valuations? There is a very big difference…………and independent or external? Your own financial report states internal but you seem quite offended by that position.

The Redemption Price vs Buy In Price seems to be heavily waited to ‘adjustments’ which once indicates to me a significant discount to ‘true value’. Either way, the redemption price still indicates a very healthy return since the life of the fund so hopefully those results are realised in the long run.

In the end, I have no interest in the fund myself so good luck to those invested. I will watch this fund with interest and my concerns about the critical judgements and assumptions made by the Responsible Entity and the current reported financials do not stack up for me in terms of ‘realised gains’ and reported ‘investor returns’. Will this eventuate in the long run? Time will tell but I am happy to be an observer. My initial concerns about about the fund were genuine in that I had more answers than questions from an outside observer looking in and I have no desire to engage in a slinging match between myself and you, the fund manager. You are of the view that my analysis is incorrect and you are entitled to that view however your own reporting seems to contain conflicting information……is that my issue?

Watching the webinar on your website was truly bizarre and your constant need for adulation from your subscribers on ‘unrealised gains’ was
a bit disturbing. I just hope investors ‘realise’ the gains which are currently being reported and that this not another managed fund where management fees are the big winner.

In conclusion, my concerns about the fund are summed up in your own financial report:

The Fund makes certain estimates and assumptions which, by definition will seldom represent actual results.

Good luck with the fund.

Gurtofen

Most of stsevs reply’s are covered in my posts here https://propertychat.com.au/community/threads/passive-income-fund-usa-commercial-property-steve-mcknight.7489/page-2 go to post 24 and 30 – as I say, its simple due diligence, i’d prefer if you contact the fund manager direct, however you are encouraging discussion of accounting principles on a public board which is fine and Steve has provided his views as you have. Please remember its a managed investment scheme regulated by corp law – if the accounts are misstated then the auditors are in deep shit as are the directors. I have seen a heap of these over the last 18 years of investment management and its probably too early to tell here. Like I said elsewhere, currency is hard to predict – derivative overlay is a effective stratgey for most managed funds, maybe steve et al will continue to persue this with the AUD v USD coming down to $0.60-).65 in coming months.

Cheers to all Ivan

When the Fund started people found reasons why they didn’t want to invest, one of which was a lack of Fund’s management experience.

Now, nearly four years on, I have to shake my head at the prospect that people think the returns are too large to be true.

I guess that’s the best backhanded compliment I can expect from the peanut gallery.

Don’t make this Fund about me. Make it about our ability to consistently execute our investment strategy as outlined in the PDS.

Time will tell, but so far so good.

Steve

Gurtofen wrote:

Surely being a RE expert you are able to differentiate the difference between an Appraisal and a Valuation? You have consistently intermingled both terms as if they are one and the same.

Well, in my defence, here’s how dictionary.com defines appraisal:

“an assessment or estimation of the worth, value, or quality of a person or thing See also performance appraisal. 2. a valuation of property or goods.”

In truth an appraisal or a valuation can be something basic, like a broker’s price opinion, desk valuation by a banker, or frankly – anyone’s BBQ opinion. Or it could be something more structured and elaborate, like that given by a member of Australian Valuers Institute (who give valuations) or the American Society Of Appraisers (who give appraisals).

What’s not in dispute is this… the appraised value of the US properties in the Fund, as adopted by the Director’s, are based on the independent third party arm’s length valuations provided by Capright, who employ qualified and experienced appraisers.

– Steve

Whoah !! There’s the clue:-

Or it could be something more structured and elaborate, like that given by a member of Australian Valuers Institute (who give valuations) or the American Society Of Appraisers (who give appraisals).

Is it simply a matter of semantics (US vs Aus)?

Does Australian Valuation = American Appraisal? And vice versa?

Could that be the crux of this whole dispute?

e.g. I have heard that an Australian in the USA, if wanting legal representation, should ask for a Lawyer and not a Solicitor. Apparently, in the USA, a solicitor is a hooker!!

Benny

PS I recall my wife and a new friend (from Chile) having a verbal tussle over whether they should discuss something, or argue. The Chilean didn’t want to discuss anything – too much violence and bad feeling. He wanted a nice, quiet, peaceful argument about things instead. On the other hand my wife wanted a nice peaceful discussion. Each wanted the same thing, but their language differences had them at odds.

Semantics has a lot to answer for !! ;)

Gurtofen wrote:

Steve,Once again, you know the difference between an Appraisal and a Valuation and basing FMV on each method would/could have a very different outcome. Your post below intermingles both terms once again. Anyway, if there are paid third party arms length valuations these would be easily made available if you wished to do so.

Good Golly! You’re like a dog with a bone on this. The definition I quoted, and the fact that I drew upon the varying names of the professional associations was a gentle nudge that in the real world of investing the terms can both have the same meaning, and my use of including them in the same paragraph was deliberate. It seems my attempts at being subtle have failed.

As for your account being deleted, you can unsubscribe but we don’t delete accounts.

Benny – is this an argument, or a discussion, we’re having? I’m confused!

– Steve

Steve,
I had no intention of posting anything more on this discussion or argument (which ever one you and Benny prefer), however I believe in manning up where it is required. In this case, you are absolutely correct that in the US, the term Valuation and Appraisal can be one and the same…..this is not the same here in Australia where both terms have very different standings with respect to property values. For that I unreservedly apologise.

Due to the fund being managed here in Australia, led me to believe that you would refer to the same terms as used here in Australia and although I did look into that briefly, it would not have taken much to ascertain that the terms can be interchanged in the US by some further research. Yes, you obviously had tried to indicate that to me in previous posts so can understand your frustration with respect to that and an apology is warranted as far as I am concerned.

However, my main concern with the fund is still the reported increases in FMV on many of the properties in the fund, which I did not believe was based on true Valuations (in the Australian sense) from the information contained in the PDS and EOFY Reports….especially the reference to internal Director’s assessment. You have now stated that the fund is going above and beyond and having the Valuations/Appraisals done every 6 months. As I have said previously, kudos to you if that is what is occurring but I would imagine that is quite expensive to conduct on 6 monthly basis.

Are these Valuation/Appraisal reports supplied to the fund members for their own transparent analysis? There was no reference to any valuation reports in the EOFY webinar or on the funds website but this maybe something that is provided privately to fund members? Transparency here is the key and that is what I was hoping to have answered by members invested in the fund to address my concerns.

Now this really will be my last post on the matter (I thought the apology needed to be addressed) but I will check back and hope that my final questions listed above can be answered, which would more than likely address my main concern with the fund and its reported performance over the last 12 months.

Good luck with the fund and tackling the US market.

For anyone invested in the fund and is reinvesting their distributions, at what point do you think it’s best to take the cash instead of redistributing?
I’m assuming there will come a point when reinvesting at a higher unit price could eventually not provide as good a ROI as taking the distribution as cash.
Obviously it’s all a matter of opinion as it depends partly on how high you think the unit price will go etc.