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Make sure exactly what is in the tin

The recent suspension of six Arch cru funds is a cautionary tale for advisers and investors about the dangers of investing in illiquid assets.

Cru chairman Jon Maguire spent last year brashly rejecting the strong concerns of many advisers who were unhappy with how internal valuations were being carried out and worried about potential liquidity problems.

Advisers warned publicly about investing in funds without knowing enough about what was being invested in but despite this, around £400m of retail money went into the heavily marketed funds. The suspension has left investors worried about how much they will get back.

The firm says Maquire returned to the UK from Malawi last week, where he has been working on his Africa Invest fund business. He must now face the music and address the concerns of advisers, clients and the regulator.

The cru board does not believe the funds will be able to be successfully marketed once the suspension has lifted and the priority must be to avoid a fire sale of assets in the funds.

If the unit prices of the funds were a proper reflection of the underlying investments the process of returning money will be easier if this is the outcome. Maguire must also be clear about the relationship between cru and his Africa Invest proposition and ensure cru clients are his top priority. An internal Africa Invest presentation claims over 700 IFA firms are looking to back the fund but in the aftermath of the suspensions, this number will have undoubtedly shrunk.

There could also be some interesting questions being asked by the FSA. In a speech last week, FSA asset management sector leader Dan Waters warned that fund managers must consider the liquidity of underlying investments, in response to the Arch cru suspensions.

Waters told delegates that fund suspensions must only be used in exceptional circumstances and not as a “convenience” to deal with problems caused by poor liquidity.

The FSA will be interested to hear how well the funds were stress-tested to deal with large redemptions and will be taking a close look at the clarity of marketing material.

Once again during the current economic downturn, the episode highlights the importance of looking under the bonnet of a product to make sure you understand its investment mechanisms and potential downsides and ensure this is properly explained to the client.

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  1. I invested in Arch Cru in September 2008, six months before the funds were suspended,on the advise of my IFA. His advise was that my investment would be in a low risk fund. I am interested to read that some IFAs were already worried about Arch Cru at the time of my investment.; I would be interested in knowing more about these IFAs and when they started to feel uneasy about advising their clients to invest in Arch Cru. Do you have any information please?

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