The IFA briefing session was held yesterday at the Regency Hyatt Churchill, followed by the inaugural Investor Committee meeting and a briefing with the trade press. We welcome fair and accurate reporting as we believe an open book resolution to the suspension is called for. Approximately 100 IFAs attended the briefing. This note provides an update on those discussions for those not able to attend and a record of the meeting for those that were. 

IFA briefing session

We believe the meeting was constructive and provided the opportunity for cru to provide a summary of the position, highlight the areas of concern, comment on the position of Capita and Arch and detail the action being taken by cru to ensure the best possible outcome for investors. Michael Derks, Chief Investment Officer at Arch, was in attendance and issued a written statement setting out his remit. This statement is set out below:

Statement to Investor Committee

Michael Derks, Chief Investment Officer, ARCH Financial Products

06 April 2009

My role here today is to listen and then convey investor’s interests regarding the suspension of the CF ARCH cru fund range to ARCH’s investment committee. My presence here today is intended to show that ARCH is in support of this investor’s committee, and is determined to find an acceptable solution to allow these funds to re-open.

The decision to suspend was taken due to a lack of liquidity in the Funds’ underlying assets. Since there have been no significant improvements in the liquidity of the underlying assets of the Funds, we feel that the suspension will continue to best serve the Funds’ investors. Capita has therefore confirmed that it is likely that the suspension which was announced on 13 March 2009 will need to be extended to at least the end of May.

Both Capita and ARCH continue to consider options for optimising the position of shareholders in the Funds. Capita areconducting a thorough and detailed review of all the underlying assets in the Funds. This review, which will be undertaken with the involvement of ARCH, the depositaries and the FSA, will take some time, but will ensure that shareholders are provided with the most comprehensive information about the Funds.

Regretfully, I am not in a position to answer any questions you may have today. Capita will handle all enquiries around the suspension of the Funds. We have fielded calls from a number of you, and I can assure you that at the point in time when ARCH is in a position to provide more information, we will do so. Until then, please direct all your enquiries on the Funds to Capita Financial Managers Technical Services on 0845 608 0958 or This e-mail address is being protected from spam bots, you need JavaScript enabled to view it .

My last point is to reinforce to all of you that finding a solution to the suspension of these Funds is our highest priority. Everyone at ARCH has worked, and will continue to work, tirelessly to find a solution that best serves our investors.

 Communications

The wall of silence from Capita and to a lesser extent Arch is a contributory factor to the concerns that IFAs hold, and these concerns are now being addressed by the Investor Committee. Chief amongst these are whether there are any assets in the fund and the issues surrounding those investors that were hitherto taking an income from their Arch cru portfolios.

On the first point, we were able to provide some reassurances. First, it was reiterated that the assets of the OEIC funds constitute equity holdings in underlying Guernsey Incorporated Cell Companies and those companies have produced annual audited accounts, the latest of which were filed on the Channel Islands Stock Exchange as at 31 March 2008 with a semi annual report produced by the Administrators, Bordeaux Services, as at 30 September 2008. This published information thus provides considerable comfort and Arch are reviewing what other information can be provided.

On the second point, this is clearly the most immediate concern that IFAs have to address with their clients. The feedback that we have received suggests that the vast majority of clients were invested into Arch cru portfolios with mid to long term investment horizons and thus welcome a long term suspension of the funds to allow an orderly wind up, possibly reinforced by an improvement in the general economy, in order to protect their interests. However, it is also clear that there is an expectation that some facility needs to be put in place to deal to deal with regular withdrawals and attention has been drawn to the New Star International Property Fund ( a UK OEIC) that has addressed this very issue through, we understand, some form of “gate” for income payments already in force. Cru, in conjunction with the Investor Committee, will investigate the New Star solution to est ablish whether this is a precedent and make the appropriate representations.

It is worth noting for the record that cru appreciates the difficult position that Capita and Arch are in with regard to IFA and investor communications. Given the scrutiny that the Arch cru fund are now under it is important that this matter is dealt with in the right way and we believe that Capita are working their way through this process with Arch. In addition, Capita has to keep a number of significant institutions involved in the process, including The Financial Services Authority, Bony Mellon and HSBC (the depositaries that are custodians of the assets), appointed auditors and also have to liaise with Bordeaux Services, the Administrators of the underlying Guernsey ICCs and with the Channel Islands Stock Exchange. Any solution that is decided upon must be credible, sustainable, be approved by auditors, lawyers and regulatory authorities.

Arch are also constrained in what they can communicate – both in respect of the suspension process and the wider responsibilities encumbent upon them as managers of the ICCs in that they need to ensure that any information provided to IFAs and / or investors in respect of those companies must equally be provided to the rest of the market. Arch clearly are considering what options are available and it was suggested from the delegates that posting relevant information on the exchange website and / or Arch website might be helpful. Arch will no doubt consider this.

Background to suspensions

The delegates were also looking for some insight as to the reasons leading up to the fund suspensions. It was reiterated that the pattern of suspensions on the 13^th March was that the Investment Portfolio and Specialist Portfolio were initially suspended and later in the day the remaining 4 funds in the Arch cru range were suspended, including the recently launched Finance Fund. This could lead to the conclusion (as previously highlighted) that there is no liquidity problem on these funds specifically (i.e. they hold cash within expected tolerances). The reason for the subsequent suspensions, one could speculate, was more to do with concerns that a loss of confidence in the range would create a run on the funds that were still open leading to subsequent suspension in any event – so the suspension of the full range was probably prudent.

There was some delegate concern as to the role that the launch of the Finance Fund might have played in the suspension process, given that IFAs appear to have moved investors from the Investment Portfolio to the Finance Fund. It is worth reiterating the rational for the launch of this fund:

·         IFAs could access the underlying Guernsey ICCs invested in private finance with a minimum investment level but were pressing for an OEIC alternative for retail investors.

·         The platform range included three funds, the income fund being predominantly allocated to private finance and it made sense to “mirror” this complex both on and off platform to ensure consistency of proposition

·         The fund was very much of its time – given the credit squeeze and the opportunities that lay within private finance as a result.

Although we are not aware of the reasons for the suspension it may well be that as IFAs de-risked portfolios by moving already invested assets into the new fund that some liquidity pressure may have been created. Arch, as managers, were fully aware of this possibility and thus would have taken this into account when managing the funds. There were many other factors that no doubt were taken into account and if this was a factor, it will only be one of many and it is impossible to say how critical a factor it was. Our view is that the crisis in investment markets proved the decisive factor in this case.

Ongoing management and value of assets

Attention was also focussed on the continuing management of the fund. The point here is that the existing book of assets is being managed on a continuing basis as this is clearly part of Arch’s remit. Although we cannot say with any certainty, we very much doubt whether any new investments are being pursued as the remit presently is to create increased liquidity.

The underlying value of assets is also a matter of some concern – and one of the key issues that will be investigated by the Investor Committee.  The values of these assets can be established by an analysis of the following published information:

·         The share price of the Guernsey ICCs (published daily on CISX and determined by the Market Maker, Winterflood Securities)

·         The Net Asset Value of the ICCs determined on a monthly basis by the Administrators, Bordeaux Services

·         The Fair Value Estimates, published as a guide by Arch to take into account information they are aware of but not yet factored into the NAV.

What options are being considered

Finally, delegates wanted some indication of the options being considered and timescales involved. Given the circulation of the latest investor letter from Capita, stating that suspension would continue to the end of May, this suggests that it will take some time for a resolution to be agreed upon, which will probably extend beyond May.

We have speculated in the past on possible resolutions and are on record as calling for some form of “gate” to allow as a priority income payments to investors relying on the funds for this and second, for investors that wish to redeem some of all of their holdings the opportunity so to do. Such a structure had the overwhelming support of the 100 IFAs that attended the event and the Investor Committee, as mentioned previously, will drive this forward.

Other potential solutions that we can speculate on include securing support for the market in the underlying Guernsey ICCs through Institutional Investors (a market that has evaporated following the global economic crisis), some form of partnership or acquisition by another investment group looking to acquire the funds, refloat them and gain exposure to private market investing, pursue a “technical listing” for the Guernsey ICCs to remove trading in the secondary market to facilitate orderly wind up and stabilise the NAV (i.e. remove the dislocation from the share price). It should be emphasised that this is all speculation on the part of cru and we have no knowledge of any of the options being considered by Capita and by Arch.

Investor Committee

The Investor Committee met immediately following the IFA briefing. It is important to draw a distinction between the roles of cru and the Investor Committee. The IC represents the interests of investors. cru will be invited by the IC to attend meetings as an advisor. In addition, cru will take on responsibility for addressing other IFA commercial issues, such as payment of trail commissions, tax and product issues, relations with product providers that have links to the funds, etc.

Kevan Ward has been appointed by the IC as its chair and spokesperson and will circulate shortly an update on the IC. This will also set out a timetable for proposed meetings with Arch, Capita and the regulators.

The representations that the IC and cru can jointly make will, we believe, be instrumental in ensuring a satisfactory resolution. Part of this process is to gather information that will be useful in evaluating each option being considered and to this end we are preparing a questionnaire with the input of the IC and Arch and Capita. This will be circulated as soon as possible.

Conclusion

The meeting was hosted at the Hyatt Regency London – The Churchill. The notepads provided by the Hotel carried the following quote from Sir Winston Churchill:

                “For myself, I am an optimist – it does not seem to be much use being anything else”.

We concur.

I will communicate with you again as soon as I have anything further to report but trust you find this update of value. I have been asked by a number of IFAs to make available the PowerPoint presentation used at yesterday’s meeting and this has been posted on the cru website.