The recent suspension of the ARCH cru Investment funds on 13th March has received considerable comment in the IFA press. Investors are prevented from selling their holdings because of liquidity problems with the funds’ underlying investments. These underlying investments are predominantly Guernsey listed closed ended funds which themselves invest in unlisted private equity investments.
What has struck me from cru’s recent press releases is the following point from the release of 31 March as stated by Mark Ainscough, the cru Managing Director.
This is in contrast to their marketing material. The CF Arch cru Investment Funds brochure of February 2009 states:
The question which I asked myself when I first attended a cru presentation was; if the underlying investment concept was attractive, why not cut cru out of the loop and go straight to ARCH? Why pay for crus marketing efforts? I did in fact decide to utilise one of the ARCH Guernsey listed funds for an element of client portfolios.
cru receive a 0.9% per annum fee on the total value of the ARCH cru funds (in addition to a 2% initial fee). IFAs may also receive a 1% per annum renewal commission as well as a 4% initial fee. These commission levels are not low.
Paying for professional investment management is a necessary cost, but many investment related costs are unnecessary. Minimising costs is one of the most successful methods to improve your net investment returns. You should not pay for the privilege of having funds marketed to you. It begs the question, ‘why do investments need marketing?’ Surely good investment managers/advisers will proactively select the best investments rather than be swayed by fund company salesmen?
The reality of the investment industry is that considerable sums are allocated to the marketing department. The marketing message is often directed at naïve investors and advisers who do not have the experience, investment knowledge or innate scepticism required to sort the wheat from the chaff. Few heavyweight private client advisers would have considered investing in the ARCH cru funds, but the cru message was mainly directed at smaller impressionable IFAs.
The cru brochure states:
A public market listing does not change the ‘value’ of an investment, but simply provides liquidity and a mechanism to effectively price investments in the real world. This real world valuation basis does not always tally with the valuations utilised by managers of unlisted securities. Liquidity issues are likely to disappear if the sellers are willing to accept a lower price – this is what public markets do, bring sellers and buyers together at the market price. This is a lesson that cru and IFAs utilising their funds are learning the hard way. There is no magic in private equity investments. This does not mean that they do not have a place in an investment portfolio, just that they should not compose the majority of a private client portfolio.
I sincerely hope that the ARCH cru fund suspension debacle is resolved in a satisfactory manner for the benefit of the fund investors, the people that matter. Whilst the suspension of the ARCH cru funds may not turn out to be disastrous for investors, it will surely prompt many IFAs to rethink their framework for making investment recommendations. Consumers would also be well advised to consult advisers whose remuneration is not set and paid for by the investment fund company that they recommend to clients.
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What has struck me from cru’s recent press releases is the following point from the release of 31 March as stated by Mark Ainscough, the cru Managing Director.
“cru Investment Management plc is retained to distribute the ARCH cru Fund range to UK Intermediaries. cru has played no part in the underlying investment process, this being the responsibility of ARCH Financial Products LLP. The legal responsibility and accountability to the Financial Services Authority rests with Capita Financial as Authorised Corporate Director and administrator.”This statement confirms one of my main misgivings on the Arch Cru funds – exactly what does cru bring to the investment process. According to the MD of cru, absolutely nothing.
This is in contrast to their marketing material. The CF Arch cru Investment Funds brochure of February 2009 states:
"The CF ARCH cru Investment Funds are managed by ARCH Financial Products LLP and they also benefit from our direct input regarding asset allocation and underlying holdings."In reality, cru was simply a marketing company who were paid handsomely to persuade IFAs to recommend the Arch cru funds to their clients. With the fund suspension cru have laid off all their staff.
The question which I asked myself when I first attended a cru presentation was; if the underlying investment concept was attractive, why not cut cru out of the loop and go straight to ARCH? Why pay for crus marketing efforts? I did in fact decide to utilise one of the ARCH Guernsey listed funds for an element of client portfolios.
cru receive a 0.9% per annum fee on the total value of the ARCH cru funds (in addition to a 2% initial fee). IFAs may also receive a 1% per annum renewal commission as well as a 4% initial fee. These commission levels are not low.
Paying for professional investment management is a necessary cost, but many investment related costs are unnecessary. Minimising costs is one of the most successful methods to improve your net investment returns. You should not pay for the privilege of having funds marketed to you. It begs the question, ‘why do investments need marketing?’ Surely good investment managers/advisers will proactively select the best investments rather than be swayed by fund company salesmen?
The reality of the investment industry is that considerable sums are allocated to the marketing department. The marketing message is often directed at naïve investors and advisers who do not have the experience, investment knowledge or innate scepticism required to sort the wheat from the chaff. Few heavyweight private client advisers would have considered investing in the ARCH cru funds, but the cru message was mainly directed at smaller impressionable IFAs.
The cru brochure states:
“The key point for us is that private market investing can offer higher returns with less risk than public market investments.”The idea that private market investments as an asset class can provide higher returns than their publicly listed equivalents seems illogical. Even if this were the case, one of the few immutable laws of economics and finance, is that returns go hand in hand with risk. The credit crunch has once again laid bare the fallacy that you can generate high returns with low risk. It may be possible to achieve this for short periods of time, but the relationship between risk and return invariably reverts to the long term norm.
A public market listing does not change the ‘value’ of an investment, but simply provides liquidity and a mechanism to effectively price investments in the real world. This real world valuation basis does not always tally with the valuations utilised by managers of unlisted securities. Liquidity issues are likely to disappear if the sellers are willing to accept a lower price – this is what public markets do, bring sellers and buyers together at the market price. This is a lesson that cru and IFAs utilising their funds are learning the hard way. There is no magic in private equity investments. This does not mean that they do not have a place in an investment portfolio, just that they should not compose the majority of a private client portfolio.
I sincerely hope that the ARCH cru fund suspension debacle is resolved in a satisfactory manner for the benefit of the fund investors, the people that matter. Whilst the suspension of the ARCH cru funds may not turn out to be disastrous for investors, it will surely prompt many IFAs to rethink their framework for making investment recommendations. Consumers would also be well advised to consult advisers whose remuneration is not set and paid for by the investment fund company that they recommend to clients.
Email Christian Ward
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