The Cru crisis: questions for the FSA and IMA

This approach was always a time bomb waiting to happen. A multi-asset solution is the real answer. It comes with some ups and downs, but gets the job done - and provides real liquidity. CRU approach was illiquid instruments that appeared not to go up and - and thats because there is no market. It didnt take a genius to know that what John Maguire was selling as a positive, was actually a huge negative. I am surprised they lasted this long. I thought q4 2008 was going to be the end.

CRU should be forced to cancel the mgt fee while it is suspended - so should property mgrs - that would incentivize them to provide liquidity again. Instead they keep their assets captive, and charge a big fee.

I friend of mine Richard - posted a comment on if CRU knew what a ponzi scheme was on june 23 2008.

i think CRU's clients now know

http://www.citywire.co.uk/adviser/-/blogs/the-new-model-adviser-blog/content.aspx?ID=300109

As I have previously posted, look back, I have not used Cru funds, I am not going to place know all comments like some other advisers.

This is a really bad element of our industry.

They appear to ASSUME that the advisers who have used these funds have overall portfolio losses greater than theirs!!!!

Maybe even if the worst happens they will not? Or are you looking at no losses on your portfolios???

We need diversification, we need fund managers and investment houses to try out new ideas, anyone can come unstuck, otherwise all of this mob attitude is going to kill innovation and progression in our industry, the amounts people are willing to invest for their futures is so small we need to keep pushing the boundaries which will create problems now and then.

Odd things are happening at the moment a fund which has never returned a negative month and would prosper in the current economic conditions was hit by the media tidal rush and currently has almost a 40% 'penalty' imposed so it survives, penalties may have to be applied to everything while the media tidal wave hits companies if this sort of practice continues, possibly the second something appears in the press have a months penalty imposed? Allow processing of existing encashements then send a warning letter to those requesting encashements. Liquidity is to liquid it appears!!

My high risk portfolios (relative) have hardly any damage whatsover, my lowest risk portflios excluding cash are harder hit, up to 35%, all of what we know and what we are told is being teasted and much of the regulatory and educational material is flawed.

We need people with big ears and eyes and small mouths carrying out level headed autopsies, not these amazing people who always know everything yet still have portfolio losses, it gets us no further forward.

I wonder how much of this problem was also media induced?

"Told you so" articles are unhelpful and are just written to fan the ego of the author.

However do we not want our press to investigate questionnable processes and opaque information? We are accountable for our recommendations and need all the help we can get and yes if there is a fund manager using smoke and mirrors and or producing fool's gold by hiding behind confidentiality agreements, then I want to know about it.

To come back to the subject heading. What did the FSA know. Is this another case of the FSA yet again joining the "told you so" brigade? Were they protecting the consumer? Can they regulate?

Whilst I hope that this does not become a substantial loss for investors, the problem is that as advisors the buck will stop with you when the clients complain. Regardless of your due diligence clients will perceive that you are to blame and you will have to spend time and money on answering complaints.

Too often in this industry we have fund managers that do not necessarily do what something says on the tin. If it is beans it should mean beans and not spaghetti.

Cautious means cautious balanced means balanced and they should firmly comply with their mandates.

We have just gone through a similar debacle in the splits sector and even the With Profits sector of the life industry.

When will we learn as an industry. Believe you me receive 40 or 50 comlaints against you for a debacle like this and you will soon learn as the Madhoff investors have to their cost. If it looks too good it generally is too good and if it is not transparent then it probably is a problem. Remember Peter Young Morgan Grenfell, shell companies and the like!!!! Say no more

Robert,

I understand where you are coming from, but advisers who are happy to recommend investments to clients and of course receive remuneration for so doing are responsible for the quality of their recommendations.

There is nothing clever in the comments stating that "we told you so". It was obvious.

Any CAUTIOUS investment holding around a third in private equity and producing smooth returns in the most volatile markets seen in decades was clearly to be avoided.

No adviser can claim now that the fund manager was not doing what he should have. Rather, the adviser should have seen right through the scam.

The literature, the arrogant claims by Mr Maguire that we were all wrong told you all you should have needed to know, but by looking even slightly deeper into the portfolio breakdown it became obvious that these funds were to be avoided.

This is curious - all the perfect hindsight and I told you so's.

I have less than a dozen client ISA's in Cru, and yet according to most posters am an ill informed, poor adviser because of it.

Despite this, and armed with the same brain and market knowledge, I put all new, and quite a chunk of existing client funds into cash starting in April 2007 because the markets looked massively overvalued and the system was clearly unstable. These were not invested in cash for the long term and are reviewed every month.

Who has committed the greatest stupidity - me for putting £50,000 into Cru, or everyone else who has lost millions upon millions for clients because they didn't see the global market collapse coming?

I presume that the people who are mentioning the fact that this fund was in the cautious sector arent advisers they are members of the public??

The sectors only relate to percentages of various holdings within funds, nothing else.

Anyone using sector guides as measures of risk will be making some horrendous investment decisions.

What are you doing in the property sector?

I went to two of their seminars last year and raised exactly this concern. Each time, a room full of IFAs looked at me as though I was thick and just didn't get it. Weren't the illiquidity and valuation issues glaringly obvious? It seems to me our industry is blinded by performance figures every time. The banks have been insolvent for years (ref. Jonathan Comptons various writings over the last 6 or 7 years), property has been a classic "bubble" and Cru and the hedge funds are only one step above a Ponzi! If a fund offers impossible returns, the returns are impossible! Wake up everyone!

Am I a "tiresome smart a**e"? Maybe, but equally, I've been investing clients money in simple diversified, balanced portfolios for over 20 years, through several cycles, and I've yet to do anything as plainly stupid as to buy this sort of marketing hype!

There has been a lot of misinformed comment on this thread and other blog threads on the same issue.

Firstly "packed full" of private equity is slightly wide of the mark - most of the Cru funds have had no more than 25% in private equity for some months now. They have also been investing in private finance, which are loans of anything from a few months to 2/3 years, have held cash balances of anything from 10-25%, property, and publicly quoted equities and funds (e.g. the Global Fund held two equity income unit trusts totatalling 10% of assets). If this is not multi-asset Rick, what is?

One comment that has been made is that the Cru funds might have suffered from the fact that investors who wanted to realise some cash, having seen the devastation wreaked on their other more mainstream holdings, have opted to withdraw from the fund that has not gone down.

As to those criticising the main Cru fund for being in the Cautious sector, what about Insight's Diversified Target Return Fund, New Star Managed Distribution, or Credit Suisse Multi-Asset Distribution Fund (& others) - all of these and others in the sector have successfully cautiously diversified their investors to losses of 20% plus over the past year!

We have to accept that liquidity comes at a price, as anyone who has looked at closed-ended funds in the property sector will know where discounts to NAV are 50% plus. It is not just the closed ended sector either. Corporate Bond funds seemingly offer the prospect of good returns going forward because institutional investors sold at any price in the final quarter of 2008 with the knock on effect that many Corporate Bond investors suffered losses of 15% upwards. Not bad for a cautious asset!

I started using Cru 12 months ago, but only for a maximum of 10% and only for clients investing for 5 years plus - so personally I will wait for Capita and Arch to put forward proposals - after all we have seen this with Property funds and no doubt will see it with others before this current economic crisis plays out.

How true that the vast majority of advisors have been losing clients money for nearly 3 years.

Indeed almost to the point in time when the Arch team started warning those of us who would hear, that severe problems were on their way.

How unfortunate that Insurance Companies continue to fail with their Balanced Managed Funds but as Standard Life said when found out about their "Cash" fund - we are Standard Life everybody still supports us..

Most of the comments on this and other blogs strike me as less 'told you so' and more emphasising that if something is not relatively easy to understand, it is best avoided or confined to the margins.

I have also seen the same phenomenon of 'low risk' portfolios losing more than 'higher risk' portfolios during the current problem (my previous firm). As I see it, current literature on investment fundamentals still has some useful insights but really *assumes monetary stability*.

Unfortunately, its this massive caveat that seems to screw things up. The general level of asset prices follows money supply growth - likewise, it can mess with the relativities and seems to feed manias as well...returns are not random, normally distributed around the mean but perhaps might be subject to cause and effect...and though things like Stochastic modelling/Monte Carlo might be a useful *indication* of risk, you can never model the 'unknown unknowns', just the 'known unknowns'.

But I do not see that this means WE have to throw away the rulebook on investment fundamentals. More that Governments, Central Banks and Regulators should stop generating monetary instability and doing far more damage than any 'mis-selling' ever could.

Standard Life compensated all of their investors in their cash fund:

http://www.citywire.co.uk/adviser/-/news/pensions/content.aspx?ID=329673

Will Dave Harvey compensate his clients for placing 100% of their money with Arch Cru, despite holding out his investment strategy as very low risk?

http://www.nebusiness.co.uk/business-news/latest-business-news/gazette-business-news/2009/03/09/safety-pays-off-for-finance-specialist-51140-23098801/

I'm no insurance company apologist - I think they have failed their investors. But the fact that they have in no way excuses your incompetence.

There is a wider problem here is innovation to be shut down because of failure?

If this is the result then we will all be worse off in the future.We need innovation otherwise we would still be walking the African plains.

What we need is as I have suggested before and others are now, product regulation so that these can be judged by a panel of practising peers and then placed (in the correct sector) and marketed in the "right" way. Perhaps some products only being available to fully the qualified?

I agree totally John, I can see fund choice reducing over the future years and innovation halting.

I personally do not see any problem with an adviser using a fund such as these in small percentages of 5 0r 10% and even if they lose the whole of the fund value providing their returns are similar to other advisers with similar risk portfolios it really doesnt matter.

It is refreshing to see other advisers with comments which have some thought given to them rather than advisers adding to the frenzied attack.

If ANY adviser has placed ALL of their clients fund in ANY single fund ANYWHERE and there is a problem then they have taken a chance with their clients money and have to take the consequences of their actions, but I do not think there will be many advisers in that situation.

You do not need a compicated fund to lose money, try a basic deposit fund in an offshore bond and the devastation can be far worse.

Hopefully if there is any blame the overall portfolios performances are taken in to consideration too. Otherwise yet again there could be compensation paid to people who havent suffered financially in the first place compared to other clients.

I helped to set up the Arch cru model, as I was a non-executive of the company responsible for asset allocation. I would largly refute what is currently being bounded about on various blogs as I believe that the funds are victims of their own success.

The funds have been profitable, unlike the majority of main stream OEIC's and Unit Trusts and individuals would much prefer to take income from profits as opposed to taking income from items that have lost some 40% over the last 15 months.

It is always the same when an organisation tries to do something different, jealousy creeps in on the back of "why did I not think of that" etc. However I am quite convinced that, under normal circumstances, these fund would have produced steady and consistant returns which is what they were designed to do. No one that I know in the industry could have predicted the extent of the devastation that has been caused by sub-prime debalcle, even though some pundits did predict a downturn which incidentley Robin Farrell of Arch was one.

Mrs Lumsden, there is no need to bring into this sad event politics. I too have fallen out with Jon Maguire and I won't be the last, however I will not slag off the product and I hope that the authorities will have the common sence to let liquidity build up within the funds, which might not take that long.

Also Rick , a ponzi scheme it aint.

Rather than picking on people who did invest in these funds, isnt it better to consider how best to avoid something like this happening in the future.

There's been a failure of regulation here - those funds which cannot practically offer daily redemptions (sorry, but I dont know what liquidity Arch purported to offer) should not be allowed to market themselves as offering it. This applies to property funds, the Arch funds, life settlements and, I suspect, to many corporate bond funds (particularly those in the high yield sector, where the market is often illiquid), futures and options, hedge funds and many others. It applies to managed funds and any fund which can own this sort of asset.

Now I'm just one adviser on my own who's managed to work this out - why hadnt all of those clever people at the FSA thought about it and done something about it? Just because a manager says that a fund is liquid, it doesnt mean that it is.

Surely somebody should be saying that a fund with something illiquid in it can only really offer frequent redemptions if more people are putting money in than taking it out? Arent documents for UK regulated funds supposed to be fair/not misleading?

With all of these comments comes one simple question which is, who is left with the job of explaining what went wrong to the client.

Apparently, cru has made almost all their staff redundant this week and Mr Maguire has left the country, so no moral or corporate responsibility there then!

Capita and ARCH have now been silent for over a week, long enough now surely to have made a decision that the best thing for investors is to keep these funds closed until investors can get back a reasonable amount of their original investment, not conduct a fire sale to a vulture firm.

So once again it is going to be advisers, who are left to deal with all the issues.

When will the fund management industry stand up and take responsibility for its actions.