The questions we asked Arch and Cru

Or if they will get their money back??

Sometimes you wonder if the run isn't created by the journalism re; Robert Peston and Northern Rock.

Back in the 1970s recession the media was not so intense and investments had an opportunity to find their own levels - even recovering the losses.

Mike......how true.

I agree 100% with you, either liquidity or financial journalism has to change, I vote for journalism to the general public.

Media is now just the hangmans mob, anyone will do. Over dramatic rubbish with inncocent casualties caught up in the fall out, people doing normal everyday jobs.

It is hard to take anything Citywire has to report on this matter with any seriousness as they are clearly in "told you so mode" . Cru should be applauded for bringing to market innovative solutions that allow ordinary investors access to alternative investment structures. In the interests of balance there are many things I find offensive about Cru and Jon Maguire - but I would never criticise much needed innovation.

When there are no details available of assets, returns are too high compared to the rest of the market, you can see problems arising well in advance.

I am sure that there are many IFa's such as myself who did not touch this investment because of the obvious risks.

How are such bad products allowed to get to market?

Hopefully we will not have to pay yet more wasted money to the FSCS because of this

latest ill judged investment.

Is there any way the FSA can be informed of IFA's opinion of bad products - there were many who voiced concerns but to whom do we raise our concerns. I wrote to the FSA about another company of whom I have grave concerns and have not even received an acknowledgement.

Congratulations to all who raised concerns.

Huw Roberts

Well done to all those clever IFA's who saw it coming. Presumably they moved all client assets to cash before they took a hammering in the public markets.

I think that there are lessons which we can all draw from some of the recent fund blow-ups, whether or not we had clients invested in this one.

It really is important for us to understand what is inside the investment fund. The fund will always be liquid when people are investing, but often wont be when people are taking it out (property funds, private equity etc have this in common).

I'm not sure how relevant it is to this fund, but it has become clear that where a large proportion of a fund from discretionary managers/funds of funds, it is more likely to suffer large, swift redemptions. This was the problem for New Star International Property. Private, advisory investors are less likely to create a run on a fund - it takes time to make recommendations and send them in. Another risk warning missed by the FSA?

It would be very useful if funds were obliged to disclose how much of the fund is owned by discretionary/fund of fund managers. This isnt a problem in liquid markets like blue chips but it is where the underlying assets are illiquid.

I'd like to see an organisation like Citywire do just what Huw Roberts suggests - let IFAs out rubbish investment products so that the FSA and the public can see where we feel the risks lie. But will Citywire ever be brave enough to upset one of its bigger advertisers?

Isn't hindsight wonderful? You can use it to knock the media for being smartarses, or to justify the stand you want people to believe you took on issues such as cru.

I can't claim 20\20 vision on investments, I just don't recommend things I don't understand - and cru was one of these. I also don't like firms who call themselves by stupid names they can't spell, like thinc and cru (OK, just no capital letter). I can't put a finger on it, I just decided to ban my guys from investing in cru from Day 1. Don't know why, just call me lucky. Did the same for precipice bonds. Hope I keep lucky next time....

Yes, we told all our clients that there was the mother of all recessions coming back in August when quite a few people were denying it: http://www.intethic.com/comment_20-08-2008.aspx

I specifically pointed to the correspondence between the Chancellor and Governor of the Bank of England regarding the inflation target as evidence that most economic forecasts were wrong and misunderstood the nature of an inflationary boom - and hence the bust and how this would impact asset-prices generally.

Although most IFAs are sensible and avoid extreme asset allocation calls, plenty I know have suggested to me that they reduced their clients' equity exposures. Others tell me that they didn't think it was their job to make short-term switches, but they upped their risk warnings as to the long term nature of investing. Still others tell me stories about their remonstrating with mis-guided (heavily geared) buy-to-let investors back in 2006/7.

The plain fact is that some people in the investment management industry - so called experts - are too clever by half. Instead of sticking to good, honest collectives with some diversification, they try and defy gravity by presenting (often expensive) niche products as having general application, then wonder why things crash and burn around them.

IFAs are neither economists nor financial engineers. IFAs do not (in the main!!) exist to do Fund Managers' jobs for them. But their healthy scepticism of investment gimmicks - combined with how the IFA sector's disparate nature negates provider product pushes - will have saved a fair few people quite lot of money in some areas.

Well put.

Funds such as Cru in away have become a victim of their own success...whilst equity funds have fallen sharply over the last six months funds like Cru have held up their valuations. As a result when advisers and investors have needed capital or income, it is my guess, that they have taken capital from those areas that have been least affected by the economic down turn...

The problem with this is if there is a run on the fund (for whatever reason) liquidity becomes an issue... I have had my fingers burn't with Brandeaux Funds, Cru, Protected Asset TEP fund. I understand that certain fund of Hedge Funds also have suffered from the same problem...

So the biggest learning point for me is that liquidity in these uncertain times is everything!

As commented on a previous blog remember Peter Young of Morgan Grenfell European Fund where everything appeared to be hidden in shell companies and either Morgan Grenfell hadn't a clue.

How on earth are advisors to look through such opaque funds!

'Caveat Emptor'

So when will the "life settlement funds" story blow up? Have a look at fund literature to see the perfect geometry of a curve that goes up 8% a year. You couldn't make up (well you probably could!)

Don't invest in things you neither trust or understand until such time as you do, if it is client money I would suggest you need to trust and understand even more.

Investment fragility during recession/credit crunch will always find the weak spot and what we are seeing is a sucession of weak spots being exposed. This has very little to do with the press and an awful lot more to do with poorly thought out investment processes, surely IFA's cannot begin to bleat that exposures of this type are all created by the press.

New investment systems are not always bad but the Cru proposition was a high risk option in a rapidly failing market, it could only end this way. I suppose that the only questions now are was anyone at fault legally and who will pick up the tab for the failiure and unfortunately I think I know the answer to both.

And yes hindsight is a wonderful thing but so is research, professionalism and experience.

Just a minor point but one that nonetheless needs to be made.

When this blog started yesterday if I am not much mistaken the author was Charlie Parker. It also contained what can only be described as a very personal attack on Jon Maguire.

Some subtle overnight editing therefore appears to have been made !

I thought the original version was very poor form from a professional organisation like CityWire irrespective of any personal disagreement that Charlie Parker appears to have with Jon Maguire.

By all means lambast perceived failings by Arch cru, but personal attacks on individuals are childish and unbecoming of this forum !

Very Interesting comments, fortunately i have no clients with this organisation, but have been bombarded by their literature, and on the face of it the returns from these portfolio's looked excellent.

Indeed their philosohy looked fine, and who is to say private finance cannot produce decent returns over the medium to long term.

The issue for them has been liquidity, not necessarily the assets they hold or the philosphy.

If it was not for our money then some of the High Street Banks would now be bust, these really are unprecedneted times, and I think many comments on this Blog are clearly given with the huge benefit of hindight.

Unfortuantely there is no such thing as the Hindsight Fund, and if there was we would all be investing in it,.

James,

The blogs have not been edited over night nor has the name of the author been changed.

I have written one blog on the subect which you can find on the Wealth Manager Edition.

Citywire have done a good job with this story. If they want to move it on they should pursue both the IMA and the FSA, not just Arch Cru. The funds have been in the wrong sectors since launch. They are basically open ended venture capital trusts and from an investment point of view probably make a lot of sense. As with a VCT a lot of the money raised is invested in the debt/asset backed loans of the underlying companies not the equity, and for very sound reasons. However the IMA doesnt classify VCTs as cautious managed sector investments, despite the fact a lot of their investments are “fixed interest”, and neither do VCTs seek to raise money on that basis. This is because although the money is invested in bonds, they are still very high risk and illiquid investments. Of course its much easier to raise money if you can describe something as cautious with a large percentage of fixed interest investments rather than very high risk with a long investment time horizon, and therein lies the problem. I am truly dismayed by a few of the comments here which seem to suggest this is nothing but a witchhunt done with the benefit of hindsight. The concept, as one person has written that Cru should be applauded for bringing to the market innovative solutions makes me want to laugh and cry simultaneously. This is innovative for all the wrong reasons: Go and buy a well run VCT from a reputable manager if you want to access this kind of investment profile for a client.

A particular reason why VCTs are closed, not open ended, is to avoid the need to sell underlying investments in the event of people wanting to get out, thus protecting the portfolio itself and the remaining investors who hold out until the investments become mature, the price just goes to a discount to NAV. The Arch Cru funds being open ended dont have this protection and were completely reliant on not having negative cashflow for the first few years of their life. This is why they are now desperate to avoid a fire sale. Had they been described and classified correctly from the start there would not be a story here, most likely because they would not have raised anything like the kind of money that they have, but sadly that is not the case.

The blog I read yesterday specifically made reference to a meeting that Citywire (either yourself or Gavin) had with Jon Maguire.

I cannot find mention of this in any blog on here although if I am wrong I stand corrected.

The general point I was making though is that attacks on someone's character are not becoming of a forum like this.

Clearly there is no love lost between yourself, Gavin and Jon Maguire, but is this really the place to be venting those views ?

I'd like to say a quick word of thanks to the CityWire journalists for their hard work on Cru.

You save me a lot of us (and more importnatly our clietnsd) from these funds.

As nother contributoor to this blog has mentioned above - life settlement funds next? I love the theory, but the major problem I have is that the manager/actuary running the fund also prices it. Now if that's not a massive conflict of interest I don't know what is.

It's all in the valuation method. most of them have stopped using actuarial methods to value their funds - so when someone dies, the entire value of the payout is put through to the nav.

This has the effect of front loading returns (whereby certain providers can take a 75% performance fee), whilst leaving intact the longevity risk. So they'll keep going up until such time as either a) inflows stop or b) the pace of early deaths slows.

BEWARE

I thought you were describing a Ponzi scheme when you were talking about life settlement trusts!

As they say if you or your client don't understand it fully, don't do it. The principle then also applies that of the cost of getting the client to understand will take longer and cost more than the advantages of the particualrly service, then don't even consider the scheme for the client based on complexity alone. To some extent that is the justification a la FSA for USP not being suitable for clients with smaller pots, i.e. it is the extra time required to explain and get the client to understand USP as oppossed to an annuity which means that an annuity may be selected for smaller pots when they could both hold exactly the same investments (Gilts and corporate bonds), but the advice cost/time would reduce the benefit of the USP.

I was party to a meeting with some Cru personnel back in 2006 at which they outlined the business partner/ buyout plan they offered whilst entreating my then employer to add these funds as links on an Open Architecture product platform offering Life and Pension plans

As part of the buy out package, The IFA was "encouraged" to place all new business via the Cru funds and also to shift their entire back book wherever possible into these vehicles (hence the need for product links)

I hate to think how many IFAs did just that....

We declined the links on a number of technical grounds:

1. at the time they did not value daily

2. some of the portfolios had double digit initial charges

3. some of the portfolios held Life Settlement investments which were not permitted investments for L&P funds under FSA guidelines.

4. when the Life Settlement investments were sold , I heard they were replaced by loans to a Cayman Islands hedge fund ( i don't know how accurate that rumour is)

all in all, there were too many issues for any reasonable Life company to consider building links... and yet we STILL took stick from IFAs who felt it was our duty to offer these funds...

Life Co's are not perfect, but credit were credit is due...none of them got caught did they???

TLG

I still have a post it note (cutting edge of technology as always) from when they first started to look in to these funds!! Still havent got round to it.

Lets see who we can all pick on next!!

I dont see why youre worrying about life settlement funds - that's just a small sector.

Have a look at what is in most high yield corporate bond funds - much bigger sector, better publicised, but not a lot more liquid.

Canada Life, Canada Life International, Merchant Investors, Lombard and Scandia all had linked life products with cru

As well as being available on most platforms, Standard Life, CoFunds, FFN etc, which are also mostly owned by Life companies.

Never mind just about every Off Shore Bond provider.

Not sure that your righteous, Life Companies are better than you mere IFAs approach cuts much cloth here.

With all of these comments comes one simple question in my mind 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.

no idea what to do, when it re opens ? do stay or pull out?

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I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Ann

http://largepet.info