CF Arch Cru Diversified Funds – Shareholder letter 8 May 2009:
CF Arch Cru Global Growth Fund, CF Arch Cru Balanced Fund, CF Arch Cru Income Fund and CF Arch Cru Finance Fund (sub-funds of CF Arch Cru Diversified Funds, an Investment Company with Variable Capital) (the “Fund”)
We recognise that while the suspension continues, you may have questions about the future of the Fund. We have committed to provide you with as much information as possible in relation to the future of the Fund, and in as timely a manner as possible.
This letter provides you with a further update in relation to the current review of the Fund and explains the work being undertaken by us and the anticipated timescale for completion of the review. We hope that this gives you some assurance and also some insight to the issues being addressed during the review.
The review – background
In our letter of 3 April 2009, we informed you that we were undertaking a detailed review of the assets of the Fund, the liquidity of the underlying assets of the Fund and considering options for optimising the position of shareholders in the Fund. We also explained that we were working with our delegate investment manager, Arch Financial Products LLP ("Arch"), and specialist advisers to ensure that our actions best served the interests of shareholders.
Further information about the review
Capita Financial Managers Limited (“CFM”), in its capacity as Authorised Corporate Director (“ACD”) to the Fund, is conducting the review with a number of leading specialist firms to perform a full assessment of the Fund and the other 5 suspended sub-funds in the CF Arch cru range (the “funds”). This review includes an assessment of the value and liquidity of the assets held by the funds as investments, with a view to ensuring that any recommendations made for the future handling of the funds are made with knowledge of the relevant facts, and in the best interests of shareholders.
This work includes independently reviewing, analysing and assessing the value and liquidity of the Guernsey Incorporated Cell Companies (the “Cells”), which are listed on the Channel Island Stock Exchange, and in which the funds have invested. Given the lack of liquidity in the shares of the Cells, this valuation work will, where necessary, include reviewing, analysing and assessing the value of the assets held by the Cells themselves. In addition to the information in the public domain or already available to us, we are co-ordinating with a number of other parties for the purposes of this review, including Arch in its capacity as investment manager to the Cells, the Depositaries, the Cells themselves, and the Administrator, Custodian and Auditors to the Cells (who we understand are separately also to commence their annual audit of the Cells). This work is underway and includes a detailed assessment of the underlying assets of the Cells. As you may be aware the funds have investments of varying sizes in 23 Cells, which have themselves invested, directly or indirectly, in a large number of differing assets. You will appreciate that a detailed assessment of this nature necessarily takes time.
You will understand that, in view of the continuing illiquidity of the assets of the funds and whilst the review is ongoing, we are not yet in a position to provide you with information about the current value of those assets. There is a possibility that some of these assets may have deteriorated in value, and shareholders should take account of this possibility in their financial planning. The position will become much clearer once the review has been completed and we will of course keep you informed of material developments in relation to the progress of the review.
Annual report and accounts for CF Arch Cru Diversified Funds
As we have explained in previous correspondence, the suspension of dealings in the funds arose as a result of significant illiquidity in the assets of the funds. Given that illiquidity both we and the auditors to the CF Arch Cru Diversified Funds consider that further valuation work in relation to these assets is needed prior to completion of the annual report and accounts for the year ended 31 December 2008. Until this valuation is completed we, and the auditors, will not be in a position to finalise and issue those accounts within the previously anticipated timescale. We will of course keep you informed as to the status of the annual report and accounts.
The future structure of the Fund
CFM's duty is to consider how best to safeguard the interests of shareholders as a whole, in a fair and equitable way.
To enable us to determine how best to proceed in relation to the funds, we are considering the value, liquidity and future performance of the funds' assets under a range of conditions and over various time periods. We also have to give consideration to the legal, regulatory and tax implications of any new structure or revisions to the existing structure. As part of this, we not only need to consider what legal or regulatory requirements or constraints there are on a particular option, but also the way in which shareholders hold shares in the funds, so as to determine the different tax consequences for different types of investor under each of the options. For example, the tax implications may be different for those shareholders who have direct shareholdings (either retail or corporate) compared with those who have a shareholding indirectly, for example through an ISA, SIPP or other pension arrangement, or through an insurance bond (either onshore or offshore).
An immediate liquidation of the assets of the funds and return of their value to shareholders, described in the media as a ‘fire-sale’, is not currently regarded by us as a viable option that would be in the best interests of shareholders. We do of course recognise that different shareholders may have different liquidity expectations or requirements in relation to their investments and our work will take account of this as best we can, whilst recognising our overriding duty to treat shareholders as a whole fairly.
Can shareholders contribute to the review?
We are happy to receive shareholders' thoughts or proposals in relation to the future structure of the funds, and will take appropriate account of these when conducting our review and assessing the options identified during the review. You will understand, however, that options which might seem attractive and straightforward to one type of investor, might not be attractive or appropriate for another type of investor. As previously stated our duty and priority is to treat all shareholders equally and fairly.
In this regard, you may be aware that we have met with representatives of an Investor Committee. We understand that the Investor Committee represents the shareholders who invested in the funds on the advice of various independent financial advisers. In this meeting the Investor Committee explained its concerns and views to us and we will of course take these into consideration when determining how to proceed. We will continue to engage with the Investor Committee where appropriate.
What about shareholders who want to cancel their investment or who rely on the Fund for regular income?
As we have explained in our previous letters, the suspension rules mean that no dealings in shares of the funds can take place while the funds are suspended. This includes redemptions, whether of a regular or one off nature. We recognise that this may present difficulties for shareholders who are unable to receive income from their investment in the funds. We also recognise that the suspension means that we are unable at present to process the exercise of cancellation rights by shareholders who subscribed in the 14 day period prior to the suspension of the funds.
We are duty bound to seek to ensure that shareholders are treated equally and fairly. To lift the suspension to allow some types of shareholders to redeem, but not others, would obviously result in us treating some shareholders preferentially to others, which is something that we are not permitted to do. We are investigating whether any other steps can be taken to assist shareholders while the suspension continues, and will keep shareholders informed of developments.
Summary of the review and timescale
When we have concluded the review and formulated our proposals for the future of the funds, we will need to consult with the Depositaries to the funds and the FSA, to seek their views on those proposals to the extent necessary. Once that has been received, we will present shareholders with details of the proposals and how they may be implemented, including details of any shareholder consents that will need to be sought.
We are working as quickly as possible to complete the review and come back to shareholders with our proposals. However, as I hope you will see from the information given in this letter, a very significant amount of work is required to achieve this. It is likely, therefore, that the suspension will last beyond the end of May 2009, which was the estimated minimum suspension period identified in our letter of 3 April 2009. We will, of course, keep you informed of the progress of our work, the status of the suspension and/or any information regarding the future of the funds. Please be assured that the interests of shareholders in the Fund remain of paramount importance to us.
If you have any questions regarding the suspension of dealings in the Fund in the meantime, please contact us on 0845 6080958 or alternatively email us at technical.services@capitafinancial.com.