Troubled Chinese Timberland Operator Faces Another Shareholder Lawsuit

(September 30, 2011) — Fund manager Northwest & Ethical Investments and Comité syndical national de retraite Bâtirente, a Quebec labor-sponsored retirement system, have sued Sino-Forest Corp.

The suit, filed on behalf of Sino-Forest Corp., shareholders is seeking class-action status on behalf of investors who purchased shares or notes in the Chinese timberland operator between Aug. 17, 2004, and June 2, 2011, Benefits Canada reported.

Sino-Forest has come under increasing scrutiny as of late. Early this month, two pension funds filed a $6.5 billion class-action lawsuit against the timber company, along with its head executives and auditor Ernst & Young. The suit was filed by trustees of the Labourers’ Pension Fund of Central and Eastern Canada and the trustees of the International Union of Operating Engineers Local 793 Pension Plan for Operating Engineers in Ontario. Both schemes purchased shares in Sino-Forest from March 19, 2007 to June 2, 2011, the period covered by the lawsuit, when the forestry firm raised more than $2.7 billion in the capital markets. During this period, the underwriters and auditors also earned large fees for their services, the suit explained.

The suit alleged that the officers and directors of Sino-Forest misrepresented financial statements, backdated stock options, and overstated forest holdings in China and elsewhere. Additionally, it claimed that former Ernst & Young partners and employees were among directors and management at Sino-Forest, and that Ernst & Young’s “independence was impaired by the significant non-audit fees it was paid” from Sino-Forest from 2008 to 2010, totaling nearly $3 million.

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“Since 2003, Sino-Forest has raised approximately $2.986 billion from public investment and/or debt securities issues, including four public offerings between 2004 and 2009, which approximately raised $1.05 billion,” the complaint said.

Late last month, the Ontario Securities Commission ordered that trading of Sino-Forest’s securities be halted. It stated that the company and some officers and directors appeared to be engaging in conduct “they know or reasonably ought to know perpetuate a fraud on any person or company.”

Sino-Forest has also been a top holding for John Paulson–founder and president of New York-based hedge fund Paulson & Co. In July, the Advantage Plus Fund, Paulson’s flagship, reported that it lost 11% in June as a result of huge losses with Sino-Forest. The firm dropped about 73% from its closing price on June 1. Paulson & Co. subsequently sold the entire stake in Sino-Forest as of June 17.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Sovereign wealth funds are reconsidering their investment strategies following low performance in equities against low-yielding fixed-income, a JP Morgan analysis reveals.

(September 28, 2011) — Sovereign wealth funds may soon be shifting out of equities toward alternative investments such as infrastructure and property.

“Ten-year returns on government bonds have been generally superior to those of public equities. However, these returns have been driven by large falls in bond yields,” Patrick Thomson, Global Head of Sovereign Wealth at J.P. Morgan Asset Management, said in a statement. “This fall in prospective government bond returns, combined with continued sovereign credit crisis and the ongoing volatility in equity markets, has encouraged many sovereigns to take a fresh look at the way they invest.”

Thomson continued: “Analysis of recent market events has also highlighted the fact that returns cannot be adequately modeled using normal distributions, therefore, investors need to consider the impact that ‘non-normal’ returns have on asset allocation.”

According to JP Morgan’s analysis, more than 50% of sovereign wealth fund assets are typically invested in publicly-listed equity. Meanwhile, 31% are in bonds and cash, with the remaining amount in alternatives, including hedge funds, commodities, property or infrastructure.

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Thomson concluded: “As one of the largest active managers of sovereign assets in the world, we are able to identify certain investment themes that have become more pronounced in recent times. These include an increased appetite for non-traditional investments such as infrastructure, real estate, commodities and private market investments. Even with recent volatility, corporate and emerging market debt assets have provided respectable returns and we continue to see opportunities in these areas.”

JP Morgan asserted that long-term investors such as sovereigns will be able to take advantage of attractive mezzanine financing opportunities, particularly with diversified companies with strong cash flows. Within equity portfolios, the firm asserted that it is recommending US equities with strong balance sheets and attractive dividends, as well as equities that derive a lot of their returns from emerging markets.

JP Morgan’s analysis echos findings from a March report by Preqin that concluded that sovereign wealth fund assets swelled 11% in the previous 12 months to about $4 trillion, fueled largely by intensified alternative investment programs.

“Following global economic stabilization, many sovereign wealth funds that had delayed plans to diversify their holdings as a result of the economic downturn have now resumed these plans,” Sam Meakin, Managing Editor of the 2011 Preqin Sovereign Wealth Fund Review, said in a release. “Therefore we expect the proportion of sovereign wealth funds moving into the various alternative asset classes, as well as the amount invested by sovereign wealth funds in alternatives, to continue to increase in the coming year. The significant collective assets under management of sovereign wealth funds means that they represent an important potential source of capital for fund managers across all asset classes.”

With their longer-term investment horizons compared to other investors, the report found that despite the challenging financial climate, sovereign wealth funds have been better able to commit larger proportions of their portfolios to longer-term and alternative investments.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742