Jon Maguire responds to our questions

Jon Maguire, non-executive chairman of Cru Investment Management, has replied to the questions we posted on the blog on Monday before the Cru investor meeting to discuss the suspension of the Arch Cru funds on 13 March.

We are not endorsing his answers, indeed we have this morning sent him further questions arising from his comments below. However, we do believe he has the right to reply.

Here are Jon's answers in full:

Citywire: Please describe the sequence of events, as you understand them, leading up to the suspension of the funds on 13 March.
JM: The funds have always maintained adequate liquidity in terms of cash (circa 10-15%), allied to advice from Arch that some 70% of the total fund values were liquid within 28 days. In fairness to Arch, these statements were made pre-October 2008. In December 2008, a number of intermediary firms, who were big supporters, pulled out of the funds. Some supporters did this for change of ownership reasons, and we believe a number of others did so for year-end portfolio window dressing ie, the only fund that has performed becomes the fund to be sold to boost client portfolio liquidity. Furthermore, hedging of currency exposure across the industry caused significant liquidity strains, particularly on US$. Whilst the effective hedging is neutral in terms of asset values it certainly became very negative on liquidity with substantial margin call. In addition, Arch were confident of a US$100 million cash injection into the funds from a partnership they were forging with a bank in the Middle East.

The situation relaxed considerably in January, with the funds starting to recover net inflows. Whilst Cru remained concerned about falling performance, we were relaxed on liquidity. On Friday 13 March 2009, I was entertaining at Cheltenham and was advised, over lunch, by my Cardiff office that an IFA had phoned stating that the funds were suspended. Neither Arch, nor Capita had the common sense, or decency, to advise us that this was the case. Neither of these two parties has offered an apology. The situation, relating to the funds is that there was, and still is, £25 million in cash, and we therefore believe it was not liquidity alone that forced the suspension. We suspect that the underlying Guernsey companies were being re-registered between the underlying funds to deal with liquidity issues arising in the flagship fund, the Investment Portfolio Fund, and that Capita would have known this and started to consider the role of these Guernsey companies at individual fund level.

On the sharp end of this is the Africa Invest Fund, managed by Arch, which raised £7.2 million in May and September 2008 to fund the development of the Africa Invest Malawi business. This business is rapidly emerging as a model agri-development business to help resolve, through enterprise, the issue of Africa’s rural poverty (see www.africainvestfm.com). The capital expenditure of this business has been brought to a standstill because Arch have reneged on a £2 million pledge from another Africa Guernsey fund that they manage, and worse still have stuck £650,000 into one of their finance funds which we are now told faces no prospect of going to cash until at least 2010. Quite how I was expected to tell the suppliers of tractors, combines and irrigation systems that UK finance has locked up has been far from an easy task. However, we have positive support from commercial banks in Malawi and outside of Arch we can find a way forward, but you have to question why this fund has now got caught up in long-term investment issues that have nothing to do with Africa.

Citywire: The Arch Cru Investor Committee has been set up to consider the history of fund pricing and net asset valuations before the suspensions and to consider ‘whether there has been any regulatory breach by Arch or Capita.’ Please tell us more about your concerns in these areas.
JM: Capita are in an unenviable position in respect of the valuation of the Guernsey cell companies and, therefore, the Arch Cru fund range. Until suspension, the pricing of the funds was based on the listed price on the CISX of the Guernsey cell companies and cash on deposit. Winterflood Securities are the market makers and you only have to phone them up to see the problems – there is no secondary market and the likelihood is that the moment the Arch Cru funds became cash negative ie, outflows exceeded inflows, the only ongoing buyer of the Guernsey cell companies had withdrawn ie, Arch were no longer able to continue to support the share prices.

Arch have consistently stated that the relationship between net asset value and the listed share price was extremely close. Clearly, the share prices are offering a daily price, yet many of the underlying holdings are only priced monthly eg, third party finance funds. Whilst this could be a cause for concern, Cru took comfort from the fact that Bordeaux Services, in Guernsey, have to agree the valuation of the Guernsey cell companies. These cell companies in turn were audited by Moore Stephens, Capita had to be satisfied with the underlying value of the Guernsey cell companies, along with auditors to the fund, Ernst & Young. We suspect that the events of October, in financial markets globally, and the huge liquidity squeeze that has gone on since then, dislocated the valuation point. Arch are correct to point out that the safest way forward is by agreement on a fair value of assets rather than a reliance on a listed price at Guernsey level or a net asset value that tries to assume a value if you had to sell the asset today. Cru agrees with this. We are not saying there has been any regulatory breech, but given the wall of silence from Arch and Capita they should come out and tell us exactly what the position is in respect of underlying assets. The investor committee appointed yesterday [Monday] will make this point in no uncertain terms and there is no way, on God’s earth, we are going to wait until the end of May to get a statement from Arch and Capita on this point.

Citywire: Has there been a breakdown in your relationship with Capita, the funds’ ACD, and Arch, the fund manager? If so, why?
JM: We have never had a relationship with Capita, only with Arch. There has been a complete breakdown between Cru and Arch’s managing partner, Robin Farrell, and his head of fund platforms, Robert Addison. That said, we have great confidence in chief investment officer, Michael Derks. As long as he stays involved we will continue to back Arch. However, if he leaves, then our advice to all investors is to seek the removal of Arch as investment managers and we will encourage Michael to establish a new investment firm to take over management of the Arch Cru funds. We have had absolutely no discussions with Michael on this.