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Letter from Marc Ainscough (MD Cru)
We would like to set out the views of cru Investment Management plc about what
is needed to re-establish an orderly market for the CF ARCH cru Fund range.
We believe there is a need to reduce the pressure to sell the funds'
assets, so as to ensure that liquidity issues do not keep re-emerging with the
risk of ongoing suspensions. The secondary markets for many types of asset have
collapsed, unless on a deeply distressed basis. Currently, whilst we do not have
information on the portfolios in the CF ARCH cru Fund range specifically, we can
say in general that it is a bad idea to sell anything into a non-existent
market. For instance, ignoring land value, a property may cost, say, £100,000 to
build. One would have to say that its value is therefore £100,000. However, the
conventional valuation methodology states that the value of this property is
only worth what someone is prepared to pay for it. Say then, there is only one
bidder for the property and he is prepared to pay £1. Does that mean that the
market value is £1? This is an over simplification to make the point that, until
demand for assets re-emerges, it is a dangerous task to seek to price
them.
Unless liquidity can be created for the Funds at fair value, there is
the risk that quality assets will disappear into the numerous so-called "vulture
funds" that have been set up to take advantage of chronic illiquidity in asset
markets.
cru is therefore proposing a revised structure for the CF ARCH
cru fund range, that we believe would create an orderly market for both
subscriptions and redemptions, whilst protecting long term value for investors.
We propose the following changes to the operation of the Funds;
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i)
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Subscriptions
The Funds
should move to a monthly subscription
basis.
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ii)
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Redemptions
A
redemption gate should be put in place based on three months notice and limited
to 5% of assets on each redemption date. If redemptions exceed 5% of assets,
then all redemptions will be pro-rata. The extent to which redemptions couldn't
be met will be treated as priority redemptions at the next redemption
day.
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iii)
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Tax
Many
investors have invested through tax structures, such as ISAs and off-shore bonds
and it is important that any changes to the operation of the Funds do not
undermine qualification rules for existing investors into these tax
products.
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A
letter to this effect has been submitted today to ARCH, Capita and the FSA.
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