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Thumbs Down to Mr. Hobbs

Posted on: September 24th, 2007

Eddie Hobbs or Northern Rock?

Today is no time for investor heroics. Last week I pondered the eternal puzzle. I still have my SSIA money. Would I buy Northern Rock shares, take a punt in Eddie Hobbs’s Brendan Investments, or stick it into a deposit account?

On Thursday I woke up determined to buy shares in Northern Rock. They had fallen from a high of stg£12.58 to stg£2.57. Although the Irish and UK markets had rallied, Northern Rock had plunged by 16 per cent on Wednesday, making a three-day fall of 60 per cent. What a cheap buy.

It was all so simple: Northern Rock, backed by the Bank of England, was no longer in danger; a takeover was a certainty; a predator like Lloyds/TSB or HBOS would buy the bank; snatch the mortgage book and dump the brand; the words ‘Northern Rock’ would be brushed out of history, but its assets – sound as a bell – would work for the new owner. The stock was a snip.

My imagination began to run amok. There might even be two competing bidders. Perhaps there was 30 per cent profit in the short term? But I made one mistake. I told my wife. She had a canary.

Still, I thought that, unobserved, I might slip a few bob into the shares. So I rang a broker. He put the heart across me. For two decades now, no broker has ever resisted even my most hair-brained share purchases. This was a first.

“No way,” he said. “The dangers are still there; the deposits are safe as houses, but avoid the shares.”

“But are they still available at £2.57?” I asked stubbornly.

“They have just dropped below £2.00,” he replied. “A bid could come in as low as a pound. One client bought them yesterday and lost a hundred grand in half an hour.” Quite a sobering thought. I retreated, cowed by domestic tyranny and a nervous broker. What a wimp. One day I was a mad bull at stg£2.57; the next a domestically tamed bear at stg£2.00.

Anyway, a more seductive brand name is being touted. A new product is being flogged by Eddie Hobbs, the guy who reached iconic status about 18 months ago with his Rip-off Republic series.

The Hobbs brand is a winner. Everyone loves Eddie. He is crawling all over the sales pitch for a company named Brendan Investments. His picture is in every newspaper. His voice is constantly on the airwaves promoting the Brendan brand. Eddie is cashing in all that goodwill he captured when he became a TV crusader. Eddie did a wonderful job back then.

You may love Eddie, but you should avoid his investment vehicle even more vehemently than shares in Northern Rock.

Eddie’s property product is a no-no.

Eddie Hobbs is a walking encyclopedia of pure financial products. His knowledge of them is unmatched in Ireland. But there is no evidence that he knows more than a decapitated monkey about the target of this peculiar Brendan creature – property.

Brendan Investments is not just a property play; it is a pan-continental property play. It will invest your money in properties in the UK, Germany, Ireland and Portugal. As a piece of investment timing, it takes the biscuit. Irish property is the danger zone; we know little about distant continental property.

Ditto Eddie. So, very wisely, he has taken ‘expert’ advice. And Eddie just loves the advice. He commissioned CB Richard Ellis to write a property and economic report on a multitude of European countries. Indeed, the entire investment strategy in the Brendan prospectus is based on this well-researched work.

CB Richard Ellis is a reputable firm, with a first-rate economist, Marie Hunt. Her findings were predictably bullish. European property was the business. So far so good. On the basis of Marie’s report, Eddie and the lads have decided to sink the €50m they hope to raise into property in Ireland, the UK, Germany and Portugal.

Are you already raising your eyebrows? And so you should be.

The property game is over. Eddie’s timing is bad enough. Worse is to come. Eddie and his colleagues intend to borrow another €110m to buy €160m of properties. Brendan will be heavily in hock.

But the most arresting part of the prospectus is this little sentence: “The directors are advised that the prospects for the Irish investment property market for the foreseeable future are promising, with total returns expected to continue to remain in high double digits over the next five-year period on the back of rental and capital appreciation prospects.”

This is a key conclusion of the Brendan directors based on the CBRE report. So, if you buy Brendan Investments, you could be about to sink money into Irish property. You could be a hero. Broke. But a hero. The dogs in the street are barking that Irish property prices are in freefall.

A massive grenade lurks in the undergrowth. The report was written at the height of the property boom. It was commissioned over a year ago. It is hopelessly out of date. Yet it is only being released today. No explanation is offered.

So, Eddie is asking punters to invest in volatile property based on a 14-month-old analysis.

Worse still, authors CBRE have issued a new report, an update on the market in 2007! The message is markedly different. Less bullish. Nowhere in the Brendan prospectus is there a mention of the CBRE summer 2007 update. Ahem.

This Brendan business is beginning to look a bit ropey. Surely Eddie and his comrades are not in it for the fees? Perish the thought.

How much are the fees? The normal one per cent. So, if they raise the full €50m the lads will receive a gross fee of €500,000 per annum. Plus their salaries. Not excessive.

Not the full story, either. The Brendan boys will be charging the one per cent management fee on the full value of the company. When they have borrowed the extra €110m – which they intend to do – they will charge punters a fee on the lot. The total will be €1.6m a year, now over 3 per cent. Rich pickings.

So, the more they borrow, the bigger the management fee. Not to mention their 20 per cent bonus at the end.

This fund is beginning to look like a lot of others. The management become rich; the punters take all the risk and become poorer. But this is one is worse, its investment strategy is based on an out-of-date report. The entire property world has been turned upside down in the intervening year.

If I were forced to choose between Eddie and Northern Rock, I would opt for the bank.

No, not the shares, I would stick my SSIA into the bank’s 4.5 per cent deposit account. It is guaranteed by the Bank of England. Nothing comes safer than that. Not for heroes, but safer than houses.

Thumbs down to Mr Hobbs.