Agriculture funds hit by Sino-Forest fraud allegations
Agriculture and timber funds have been hit by their exposure to forestry firm Sino-Forest, which has seen its share price plunge by 75% after an analyst alleged the company was an "institutional fraud".
On 2 June, analyst firm Muddy Waters Research initiated coverage on Sino-Forest, a Toronto Stock Exchange-listed Chinese forestry firm, comparing the firm to Bernard Madoff and accusing the company of being “an established institutional fraud”, whose capital raising activities are “a multi-billion dollar ponzi scheme”.
On 6 June, Sino-Forest said the allegations were inaccurate and defamatory and added it was considering legal action. “This is a company that has taken out a major short position in our company and then issued a report designed to make them money by the decline of our stock,” Sino-Forest chairman Allen Chan said in a statement.
Hedge fund manager John Paulson’s $36bn hedge fund Paulson & Co held a 14% stake in Sino-Forest as at the end of April 2011, according to Bloomberg. Sino-Forest shares fell by 79% peak-to trough from its closing price on 1 June, before staging a mild recovery later this week. The share price at the close of trading on Thursday was 72% down on the 1 June closing price.
Impact
The $223m Pictet Timber Fund, a Luxembourg Sicav, had Sino-Forest as its largest holding as of 30 April 2011, accounting for 5.5% of the fund. A spokesperson for Pictet said it was too soon to comment on the matter.
Other funds have also held Sino-Forest of late: the First State Global Agribusiness Fund listed the firm in its top ten holdings as of 30 April 2011, though the company had dropped out of its largest holdings list as of 31 May 2011. The fund’s managers were unavailable for comment.
ETFs have also been affected: At 7%, Sino-Forest had been the fourth largest constituent of the S&P Global Timber & Forestry Index, tracked by the iShares Global Timber & Forestry Index Fund and other exchange-traded vehicles.
One offering likely to be less exposed is the Barings Global Agriculture Fund, which had Sino-Forest as its largest holding (3.3%) at the start of Q4 2010 but has since sold down its exposure.
On Tuesday ratings agency Moody’s put Sino-Forest on review for a possible downgrade, noting that the allegations could have a continuing impact even if they prove to be false.
“Moody's notes that Sino-Forest has been growing aggressively, and needs ongoing access to the equity and debt markets to continue such growth.”
"There is a risk that the current allegations will damage its ability to do so, or increase the cost of doing so,” the ratings agency said.