This article first appeared in Forum, The Edge Malaysia Weekly on February 6, 2023 - February 12, 2023

Very rarely do investment schemes pay out a double-digit return annually. If there were such schemes, they would be a dream come true for most people, especially those hitting 60 years of age and retirement age.

There are many, especially professionals and retirees, who are looking for a place to put their money and enjoy 12% or more in returns every year. It essentially is 1% per month.

Banks give low single-digit returns on fixed deposits while yields on property are hardly 5%. The other risk-free place to put money into is the Employees Provident Fund (EPF), which has been steadily paying out returns of more than 5% in the last 17 years, except for 2008.

So, if there are schemes that promise to pay out double-digit returns every year — especially ones that have supposedly been given tacit approval and are supervised by the authorities — they tend to receive a good response.

One such company, founded by two individuals, promised a 12% payout on investments annually. Its model was to lend to private companies, particularly property developers that were unable to obtain loans from conventional banks. With a band of ex-bankers on its payroll, the company claimed that it was able to assess risk much better than conventional banks.

Its selling proposition was that its unique business model allowed for more flexibility in processing loans and decisions were made quickly compared with conventional banks, hence facilitating the speedy disbursement of funds. The investments were put in a wide range of areas, especially property development secured with land.

Because the company provided services to the unserved in the financial sector, it contended that customers in return were prepared to pay more than 12% interest per annum on loans. Hence, giving a return of more than 12% was within its ability.

Although the company’s marketing brochure highlighted risk factors such as the returns being dependent on the performance of the company and that there was no assurance that the targeted returns could be achieved, it managed to pull in millions.

The investors ranged from professionals to retirees seeking yearly payouts. And 80% of these investors had investment experience.

The first few years were good as the borrowers were repaying their loans, which in turn helped this particular company meet its obligations towards its investors. This generated more retailers that ploughed their money into the company.

But after five years, not all borrowers were able to repay their loans. By the fifth year, investors were clamouring for their principal and returns.

The company concerned is UK-based peer-to-peer lender, Lendy Ltd, which came under the radar of the Financial Conduct Authority of the UK in 2019.

Lendy promised to pay its investors 12% annually on their investments. It used the money to lend to property developers at a hefty interest.

It lent out 70% of the value of the properties, which it felt was sufficient to recover the principal if there was a default. Initially, Lendy only had exposure to completed property projects, where the risk is much lower.

A few years after it started operations and making regular returns, it attracted more money from retailers and professionals, more money than it could handle.

With more funds in its hands, Lendy started providing bridging loans to uncompleted property projects, which proved to be its downfall. When the projects ran into delays, it required more money.

But Lendy’s funds were drying up fast as it scrambled to pay out the annual returns to investors. Also, the units in the uncompleted projects could not be sold on the secondary market.

By 2019 — seven years after it started — Lendy was in trouble and, in 2021, it was placed under administration. According to reports, it had £160 million in outstanding loans, of which 55% were in default.

Investors with money to invest and who seek a safe place for returns that are better than what is being given by the banks or EPF, should ask themselves some questions before venturing into more risky investment schemes.

When there are schemes that promise double-digit returns, the first group of people to place in their money are fund managers and private investors managing money for their family and friends. If the returns are so good and there is a high degree of preservation in capital, even the EPF would place its funds into such schemes.

If proven fund managers are not putting their money into such schemes, why should you?

Just remember that in most private placement initiatives or investment schemes, retailers get crumbs.

Other questions that retailers should ponder over are where would the money be invested and would the recipients of such funds be able to meet their obligations towards those that had placed their money with the company?

Legal money lending activities allow up to 18% interest to be charged. But more often than not, the borrowers are not able to fulfil their obligations.

Funds operating in the private equity space are able to give hefty returns of more than 20% on an annual basis. But there are prerequisite conditions that investors have to be aware of.

First, the money invested has to be locked up for a few years without returns because the managers of the fund place their money into growing businesses. When the business starts to grow and make money, the smart money exits with hefty returns that are easily a few times more than the amount invested.

Investment in the stock market is never certain. There are good and bad years. Getting consistent double-digit returns every year is difficult, unless a portfolio of dividend-yielding and growth stocks is built over the years.

A diversified portfolio should be able to manage decent returns of 10% or more in most years. But the key is not to expect such returns every year and to build it over several years. Investing for sustainable returns is always a long-term venture.

When there are schemes offering double-digit returns consistently right from the start, it warrants deeper scrutiny. They are just too good to be true.

And as the adage goes, something that is too good to be true is often just that.

M Shanmugam is a contributing editor at The Edge Malaysia

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