Capita has exposed its shortcomings as administrator for the disastrous Arch Cru funds in a statement to BBC Radio 4’s Moneybox programme.
Capita’s statement paints a picture of a company that simply didn’t know enough about the funds it was being paid to administer as authorised corporate director. It is now reacting with misplaced outrage when confronted with some of the astonishing investment decisions that were made.
So it highlights what we revealed was a £92 million investment Arch made into a fleet of seven ships through the Guernsey cell companies in which the Arch Cru funds invested. Only now is it looking for answers:
‘CFM [Capita Financial Managers] is concerned about 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 board of the cells,’ it states.
Recently emerged? As Citywire made clear when we revealed the investment last month, Arch first started putting money into the fleet back in 2007. But Capita told Citywire it only became aware of the assets when it commissioned a review of the assets of the Arch cru funds following their suspension.
How could Capita have remained ignorant about an investment that accounted for a quarter of the funds that they were administering for so long?
But as the statement to the BBC makes clear, Capita amazingly didn’t see it as their role to know what the Guernsey cells were invested in.
‘It is simply not the case that the FSA, Ernst and 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,’ it states.
‘CFM was not responsible for the investment decisions taken by Arch as investment adviser to the cells,’ it says, adding that it was responsible only for the management of the UK Oeic funds.
Surely it beggars belief that Capita didn’t see it had any responsibility to know what the cells were invested in, given that it was through those Guernsey companies that the Arch Cru funds secured their private equity and private finance exposure. After all if you don’t know what the cells are invested in, you don’t know what the Arch Cru funds invested in.
Knowing that the funds, managed by Arch Financial Products, were invested in Guernsey cells also managed by Arch, is meaningless – the cells were just vehicles through which Arch could manage money.
It was this structure that lies at the heart of so many of the problems with the Arch Cru funds. It meant the flagship Arch Cru Investment Portfolio, for example, could be placed in the IMA Cautious Managed sector, despite most of the fund being exposed to private equity and private finance. As a non-Ucits retail scheme, it was only allowed to have 20% exposure to off-market assets like this. But by making those investments through cell companies listed on the Channel Islands stock exchange, its private equity and private finance exposure could be classed as ‘listed’ assets, enabling it to exceed the 20% limit.
It also meant the funds could bypass some of the reporting requirements placed on UK retail funds. Look at any other fund, and they will disclose their top 10 holdings on a monthly basis. With the Arch Cru funds, however, investors only ever saw a list of Arch cells in the top 10 holdings. Technically that was accurate, but it failed to tell investors anything meaningful about where there money was, as those cells did not in turn reveal where they had exposure.
Capita’s stance in the BBC statement implies that it was enough for it to know just as little about the cell’s underlying investments as the ordinary investors who were kept in the dark.
It points to the responsibilities of the boards of the cell companies, and Arch, for the management of the cells. ‘The scheme particulars for the cells indicated the intention to seek diversification within the assets of the cells,’ it reads. It seems that Capita was happy to simply see those words and then leave it to Arch and the board to make sure that was happening.
All of which leaves us in the position we are now in. It is simply unbelievable that the authorised corporate director for funds that were once worth £400 million didn’t know where they were invested.