Below the Daily Telegraph named 9 of the most infamous toxic investments that have left investors bitterly disappointed. Should Providence [click here] be added to the nine most toxic investments ever?
OSTRICH FARMS
The first toxic investment in our list highlights an important lesson: it does not matter how obscure an investment idea is, some people will still part with their cash.
In the mid-Nineties, around 3,000 investors put money into the Ostrich Farming Corporation.
The sales pitch, which sounds absurd now, was that “mad cow disease” would result in ostriches becoming more popular on the dinner table.
Savers were persuaded to part with their cash to fund a farm but, instead of buying ostriches, it was put into offshore accounts. Millions of pounds were lost.
The two men behind the scam were jailed in June 2000.
Ostrich meat is low in calories and high in protein, but is not a healthy investment
CARBON CREDITS
One scam that has reappeared over the years is overpriced “carbon credits” sold through “boiler rooms”, the highly aggressive sales teams that target victims with phone calls.
Businesses need the credits to offset their carbon emissions, and they can be sold and traded legitimately by reputable firms.
In the worst cases, however, returns more than 10pc a year are offered, with high pressure sales techniques used to encourage purchases.
Victims are told of the schemes’ ethical credentials to win them over.
Justin Modray of Candid Financial Advice said: “There is, in theory, a market for trading carbon credits. However, scammers might sell these at massively inflated prices and investors may find it very difficult to sell their credits at a reasonable price, since markets are usually only interested in handling large volumes.”
‘LAND BANKING’ SCHEMES
The City regulator, the Financial Conduct Authority, estimates that these scams have cost investors as much as £200m.
Investors are sold plots of land with the promise of a fast fortune once they are developed. However, there is usually little chance of planning permission being granted or development taking place.
This can leave investors with land that is practically worthless.
‘DEATH BONDS’
Savers ran into difficulty after investing in funds that bought second-hand life insurance policies that had originally belonged to American pensioners.
The pensioners would agree to sell their policy for a lump sum that was lower than the potential pay out that would be triggered in the event of their death.
The buyer of the so-called “death bond” would then receive the insurance pay out when they died.
These investments were widely touted as offering “low-risk” returns. However, a combination of policyholders living longer than expected and an inability to sell the policies when investors in the funds wanted to cash in created major difficulties.
‘RARE EARTH’ METALS
Another popular boiler room scam involves salesmen promoting investments in “rare earth” metals, chemical elements used in the manufacturer of computers, mobile phones, satellites and wind turbines.
Like other schemes on our list, the investments are unregulated, and it is hard to know whether the commodity being sold exists.
FORESTRY
We have all heard the saying “money does not grow on trees”, and this was never more true than in the case of teak plantations being sold as a get rich quick scheme.
It is an illiquid asset, meaning there are few ready buyers if you want to get your money back.
Quadris Fixed Rate Distribution, a fund that invests in “forestry growth cells”, was suspended last year. The firm warned investors that the fund could remain suspended until 2026 “or at the very latest 2032”.
Monterey – or radiata – pine forests, such as this on South Island, cover 1.6 million hectares of New Zealand
STRUCTURED PRODUCTS
Among the most toxic investments sold by banks, these stock-market-linked bonds were marketed to cautious savers as a way to obtain higher returns than on cash accounts without the risks usually associated with shares.
The bonds were complex. Returns typically depended on a series of stock-market targets being met. Some promised as much as 60pc over five years, but merely returned savers’ original capital.
Santander, Credit Suisse, Norwich & Peterborough Building Society and Lloyds have been fined for mis-selling.
Not all structured products are poor, but spotting the good ones requires a trained eye.
Esoteric overseas property investments
Financial advisers warn against pension savers being lured by promises of high returns from esoteric overseas property developments.
The schemes target the wealthy, offering generous tax relief and high returns. However, they are often based on unrealistic assumptions and can fall foul of local planning and development problems.
STORAGE PODS
Last on our list is an alternative investment that is becoming more prevalent.
In theory, there is a market for self-storage. Investors buy a long lease on a storage unit or pod, and the self-storage company handles renting it out and maintenance, in return for a fee.
However, the message from financial advisers is “steer clear”.
Storage pod investments are unregulated. Advisers flagged concerns of a lack of evidence to support the high rental yields that are promised.
Martin Bamford of Informed Choice, the financial adviser, said: “We have seen recent examples of investments in storage pods which has all of the hallmarks of a toxic investment which is wholly unsuitable for retail investors.
“In my professional opinion, all non-mainstream investments are potentially toxic. The main features of toxic investments I have seen in the past are typically low liquidity, massive borrowing to invest, high and complex charges, and obscure underlying assets.”
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