Indeed as the stench of the New Star debacle still resonates around the industry, today’s news from cru Investment Management over the suspension of the Arch cru fund range due to liquidity problems is another timely reminder that if something appears to good to be true, that usually is the case.
The Arch cru fund range has been the topic of much debate for some time. On the one hand, some of the funds had been delivering outstanding returns in a tumultuous environment. The £264m CF Arch cru investment portfolio is currently 5 out of 117 funds in the IMA cautious managed sector in the past 12 months, having fallen only 3.8 per cent.
However advisers have always been quick to question the long-term plaudits of such funds, pointing to exposure to private equity and how that in turn is valued.
Comments from Hargreaves Lansdown head of research Mark Dampier last summer kicked-off a huge row between himself and cru chairman Jon Maguire, who was quick to write an open letter claiming that the pre-IPO market has some “absolute diamonds backed by owners of businesses who understand that you do not sell into public markets when your profits are enjoying a vertical take-off.”
Seven months later and the IFA’s duty of care to their clients to look carefully at any potential investment has never been so apt. No doubt a few will be biting their nails.
The situation itself smacks of yet more confusion in an industry that is in desperate search of order. Another shock was that cru Investment Management was unaware that authorised corporate director Capita and Arch had suspended the fund range.
Instead the firm was subjected to the embarrassment of being called by IFAs who were unable to place deals, though in the light of what is happening those IFA will not exactly be shouting from the rooftops that they were investing with the firm.
Capita determined that liquidity in secondary markets was inadequate for the funds to continue to operate given the level of redemptions.
A statement from the firm reads: “After consideration of all relevant circumstances relating to the Funds’ assets, we have, in conjunction with Arch Financial Products LLP, the delegated investment manager, come to the conclusion that current market conditions have led to the significant illiquidity of the assets of the funds and in light of this we consider it is in the interests of all shareholders in the funds to suspend the issue, cancellation, sale, redemption and transfer of shares in the Funds.
“During the period that share dealing is suspended no requests to redeem, purchase or transfer shares in the funds will be accepted. We are currently reviewing the options for the funds and we will keep all shareholders appropriately informed about the suspension, including its likely duration.”
In fairness to Maguire he was quick to highlight a “breakdown in communication” between the parties. He stated that cru believed that liquidity funds was managable pointing to it being Capita’s domain in terms of cash positions and flows.
cru says that it will fight any fire-sale of underlying assets in a bid to raise liquidity but it is understood the firm will have no role in the rescue process. Yet more haze surrounding a problem looks set to continue for some time.
A statement on cru’s website reads: “Naturally we regret this development but we will work to ensure that investors are protected against a fire-sale of assets into a practically non-existent market. Capital markets are chasing liquidity and in this environment the value of assets, the value of almost anything, becomes deeply uncertain. We do not believe it is the time to be forced to sell assets to meet investors looking to exit the funds because those who remain potentially face a substantial and unnecessary loss as the result. This matter will be impressed on both Capita and the FSA.”
You could forgive Dampier for having an “I told you so” attitude to this event but his view – like so many others – is that in reality this is another indictment of an industry that needs to roll its sleeves up in terms of communications, action and most importantly of all, understanding.
He says: “So many people have gone into these products and today’s news will come as a surprise to so many. You do have to ask why these products were performing so well yet they suffered heavy redemptions?
“This is another shocking advert for the investment industry and it is not welcome at a time when everything and anything is being scrutinised. All this does is give private clients another excuse to steer clear. We’ve seen liquidity problems across the board in the likes of property funds and there is no reason why private equity should be any different. It is another wake-up call for IFAs to look at precisely what it is they are investing in.”