These statements relate to Money Box's story about Arch cru Investment Management funds, broadcast on
Saturday 6 February, 2010.
STATEMENT FROM ARCH
The strategy was one which we had employed since July 2006 within a more diversified portfolio. The funds were marketed to IFAs exclusively by cru. They were also given numerous examples in presentations by cru and due diligence visits to Arch of how the fund's exposure was obtained. It was at the request of IFAs and cru that we launched a separate fund which was diversified across the private finance sector.
The fund made all the correct legal, financial and regulatory notifications. Information disclosure on the underlying investments was made publicly on the Exchange and through periodic statements and factsheets. Cru also produced their own factsheets to IFAs.
Too much disclosure can actively hurt the investment strategy and therefore investor interests. For example a borrower paying 10% p.a. on a loan might be approached with cheaper financing from competitors, if such information was readily available to the market. In some cases non-disclosure agreements prevent information disclosure. For this reason, general rather than specific details were given for the underlying investments.
Michael Derks's views are personal ones and the DVD was produced by cru outside of the standard compliance process. Our agreement with cru states that they were to obtain the approval of Capita Financial (the authorised corporate director) for all promotional material. This was not obtained by Cru in this case.
The UK funds had exposure to investment companies that invested in asset-backed loans e.g. loans backed by collateral such as ships. The bulk of the Private Finance exposure was asset-backed loans, whether such exposure was obtained directly or through third party funds (which may be described as hedge funds). Asset backed loans are indeed lower risk in general when compared to say a typical bank loan.
Naturally, during the recent global financial crisis (the severity of which no one could have foreseen) many asset values fell from 100p in the pound to as low as 50p in some cases. In such circumstances the loan "cushions" become eroded and the loans fall in value. If such a crisis had not arisen, then the loans would most likely have remained as lower risk and valued at par (100p in the pound).
At that time virtually all bank funding disappeared, central banks were forced to step in, and international trade was heavily affected (and still is). This was an event of such magnitude that it should be no surprise that there were loan losses, alongside losses in virtually all stock markets, bond markets and other asset classes.
Even ultra low risk money market funds were falling significantly at this time, with the prospect of widespread bank defaults, so it is a little unfair to single out one lower risk strategy. Like all other funds in its sector this fund has suffered in the short term but was designed as a long term investment.
STATEMENT FROM ERNST & YOUNG
There are two sets of accounts that Ernst & Young audit - CF Arch Cru Diversified Fund and CF Arch Cru Investment Fund.
The last set of CF Arch Cru Investment Fund accounts that Ernst & Young audited were for the year ended 30 June 2008, prior to the onset of the financial crisis.
The last set of audited accounts for CF Arch Cru Diversified Fund was for the year ended 31 December 2007.
We have done no subsequent audits of either fund.
STATEMENT FROM CAPITA
We note the comments made by Mr Maguire. Whilst we do not wish to engage in a detailed debate with Mr Maguire about these issues, it is important to correct some of the material inaccuracies in what Mr Maguire has said.
There is a fundamental distinction between the management and operation of the UK funds (i.e. the CF Arch cru Investment Funds and the CF Arch cru Diversified Funds) and the management and operation of the Guernsey cells.
Capita Financial Managers Limited (CFM) is responsible for the management of the UK funds. In its role as authorised corporate director of the UK funds, CFM was (among other things) responsible for the prospectuses of the Arch funds and for ensuring that the investments of the UK funds complied with applicable FSA rules on investment and borrowing powers and met the investment objectives of the funds.
The investment by the UK funds in the cells was permitted by the FSA rules, the prospectuses for the UK funds and the investment objectives of the funds. The shares in the cells were listed on a designated investment exchange (the CISX), and the specified concentration limits set out in the FSA rules were met.
CFM was not involved in the management of the cells - the UK funds were simply shareholders in the cells. The investment management of the cells was undertaken by Arch Financial Products LLP, as the investment adviser to the cells, having been appointed to this role by the boards of the cells (not CFM).
It is simply not the case that the FSA, Ernst & Young (the auditor to the UK funds) and CFM were "the only people who knew or had access to
knowledge" regarding the assets of the cells. CFM was not responsible for the investment decisions taken by Arch as investment adviser to the cells. The scheme particulars for the cells indicated the intention to seek diversification within the assets of the cells, and it was the responsibility of the boards of the cells and Arch to ensure that this diversification and the objectives of the cells were met. CFM is concerned by the information that has only recently emerged regarding the shipping assets of the cells, which have declined significantly in value, and is pursuing this urgently with Arch and the boards of the cells.
The suggestion that CFM should have realised that the net asset values (NAVs) of the cells were "obviously wrong" is wholly incorrect. CFM valued the UK funds' investments in the cells using the quoted CISX share prices for the cells. These were provided to the CISX by an independent market maker. Up to the time of suspension of dealings in the UK funds in March 2009, the CISX share prices were consistent with the quarterly and monthly net asset value (NAV) information produced by the cells. These NAVs were produced by Bordeaux Services (Guernsey) Limited, an independent administrator, regulated by the Guernsey Financial Services Commission. The NAVs of the cells were also subject to periodic external audit by Moore Stephens.
We have already said to investors that we are concerned by the sudden fall in the NAVs of the cells since March 2009, and that we are concerned about whether the underlying assets of the cells were valued correctly prior to March 2009. At present, however, there is no proof that the cells (or, in turn, the UK funds) were incorrectly valued. CFM is pressing the cells and Arch for an explanation of the reasons for and timing of the falls in value.
It must also be remembered that investing in any fund involves taking market risk. In addition, the performance of the UK funds must be viewed in light of the recent global economic turmoil, a period in which virtually all investments have fallen in value, and which has even affected many investments which were once regarded as 'safe'.
We are disappointed, but unsurprised, by Mr Maguire's attempts to shift responsibility for the losses suffered by investors to parties other than Cru. Mr Maguire's comments fail to take any account of the fact that it was his company, Cru, which, with Arch, marketed, promoted and distributed the UK funds to investors. CFM had no role in the marketing or distribution of the UK funds. If investors believed that there was little or no market risk associated with investing in the UK funds, or did not know that the underlying assets were private market in nature, or if investors placed a disproportionate element of their savings in the funds, then one must question whether those investors were properly advised by their IFAs, and whether the marketing material used by Cru and Arch to promote the funds was clear, fair and not misleading. CFM is concerned by some of the language used by Cru and Arch in some of the promotional material, such as the DVD produced by Arch and Cru for the purposes of marketing the Finance Fund. Cru and Arch must explain their conduct in this regard.
BBC Radio 4's Money Box is broadcast on Saturday at 1204 GMT and repeated on Sunday at 2102 GMT.