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CF Arch Cru Global Growth Fund, CF Arch Cru Balanced Fund, CF Arch Cru Income Fund and CF Arch Cru Finance Fund, the sub-funds of CF Arch Cru Diversified Funds, an Investment Company with Variable Capital) (the “Fund”)

In our letter of 8 May 2009, we provided you with an explanation of the work that we were undertaking following the suspension of dealings in the Fund on 13 March 2009.  We and our advisers have continued to progress that work over the last few weeks.  The purpose of this letter is to provide you with the latest information about our review of the Fund and the timescale for completion of the review.  This letter also contains some important information about how we are proposing to deal with a number of issues pending the outcome of the review, including the fees and charges that would ordinarily be drawn from the Fund.

The review of the Fund

In our letter of 8 May 2009 we informed you that we were undertaking a detailed review of the Fund and the options for optimising the position of shareholders in the Fund.  As we explained in that letter, the review was being undertaken by Capita Financial Managers Limited ("CFM") in its capacity as Authorised Corporate Director ("ACD") to the Fund, in conjunction with a number of leading specialist firms.  The review includes the following key elements:

A substantial amount of progress has been made in relation to the review.  However, as you will appreciate, a detailed review of this nature takes time.  Not only is CFM working with its own specialist advisers in relation to the review, but we and our advisers are also co-ordinating with, and accessing information held by, a number of other parties.  These other parties include Arch Financial Products LLP ("Arch") in their capacity as our investment manager delegate, the directors of the Cells, the depositary to the Fund, and the administrator, custodian and auditors to the Cells.  Much of the information required for the review is held in Guernsey, and protocols have had to be established with the assistance of the regulators to ensure that all information relevant to the review is taken into account.  The underlying asset profile of the Cells is also complex and varied, and has had to be carefully reviewed by our specialist advisers.

Although we have made considerable progress in relation to the review, it is not yet complete.  Once we have received our advisers' findings in relation to the valuation of the assets of the Fund, we will need to consider these in detail and discuss them with Arch, the depositary to the Fund and with the Financial Services Authority ("FSA").  We will provide shareholders with a substantive report in relation to the outcome of the review as soon as possible thereafter.

You will understand that until we have received and reviewed the findings of our advisers' valuation work, it would not be appropriate to speculate on the current value of the Fund's assets.  As we indicated in our letter of 8 May 2009, however, it is possible that the underlying assets of the Cells, and therefore the value of the assets of the Fund, have fallen in value.  Shareholders should take account of this possibility in their financial planning.  If you are in any doubt about the implications of this, please discuss the matter with your independent financial adviser ("IFA").

The future options for the Fund

As we explained in our letter of 8 May 2009, we have been considering a number of possible options for the future of the Fund.  Our overall duty is to consider how best to safeguard the interests of shareholders as a whole, in a fair and equitable way, and we have been assessing whether the various options that might be available to us would fulfil that duty or not.  As well as considering what would be in the interests of shareholders in principle, we must also consider the legal, regulatory and tax implications of the various options.

The process of analysing the various options for the future of the Fund is complex work.  As with the review of the assets, we have achieved a substantial amount, but there remains more to do.  We have made considerable progress in narrowing down the number of feasible options for the future of the Fund, and held preliminary discussions with the depositary to the Fund.  Before our proposals can be advanced further and the viability of them tested, however, we must await the outcome of the review of the value of the assets described above.  The revised valuations of the assets of the Fund and the anticipated performance of those assets under a range of conditions and over a range of time periods needs to be taken into account before we can formulate proposals that can be discussed with shareholders and their financial advisers.  It would be premature for us to commence detailed discussions with shareholders regarding the future of the Fund until we have taken account ourselves of the outcome of the valuation work that is currently underway.

Once we have considered the findings of our advisers in relation to the valuation of the assets of the Fund and discussed them with Arch, the depositary to the Fund and the FSA, we will write to shareholders with our preliminary views on the impact of the valuation on the future options for the Fund.

Dialogue with shareholders

In the meantime, we are continuing our dialogue with an Investor Committee, which is seeking to represent shareholders who invested in the Fund on the advice of various IFAs.  We understand that the Investor Committee has conducted a survey of shareholders to gauge their views regarding the future options for the Fund.  We have asked the Investor Committee to share the detailed results of this survey and other relevant information with us, so that we can take it into account in our assessment of the future options for the Fund.  We are currently waiting to hear from the Investor Committee on these points.

We would in the meantime be happy to receive information or comments from other shareholders regarding the future of the Fund, and will take account of them when assessing the options identified.  Shareholders wishing to provide such information or comments can email us at cfarchcru@capitafinancial.com, or write to us at Arch Cru Investor Feedback, Capita Financial Managers Limited, 2 The Boulevard, City West One Office Park, Leeds LS12 6NT.  As we explained in our letter of 8 May 2009, however, CFM has an overriding duty to treat shareholders as a whole fairly.  This requires us to balance the interests of shareholders who may have different expectations or requirements in relation to the investments, and you will therefore understand that an option which may be attractive for one shareholder might not be so for another shareholder.

Given that we are not yet in a position to recommend a particular proposal for the future of the Fund to shareholders, it is not possible for us to indicate to you at this stage what the process and timeline for implementing any changes to the Fund will be – e.g. what votes may be required from shareholders, and how long it will take to implement any revisions to the Fund.  Please be assured that we will present all relevant information on our proposals to shareholders as soon as we are able to, and all shareholders will be given a full opportunity to give their views on the proposals.

Suspension of listing of the Cells

As you will be aware, the Cells are listed on the Channel Islands Stock Exchange (CISX).  It was announced on 27 July 2009 that the listing of the shares of the Cells on the CISX was being suspended.  The suspension of the listing means that the Fund cannot trade shares in the Cells on the CISX while the suspension continues.  Given that these investments were already illiquid in nature (this illiquidity contributed to the original suspension of dealings in the Fund in March 2009), we expect that the suspension of the CISX listings for the Cells is unlikely to significantly impact the Fund's ability to realise their investments.  We believe, however, that the suspension of the CISX listing of the Cells may assist in providing some stability in relation to the Cells while the issues we are addressing in our review of the Fund and its assets are resolved.

Annual report and accounts

As we explained in our last letter, preparation of the annual report and accounts for the Fund for the year ended 31 December 2008 has been delayed.  Ernst & Young LLP ("Ernst & Young"), the auditors to the Fund, are in the course of conducting further work in relation to the valuation of the Fund, and are liaising with Moore Stephens LLP ("Moore Stephens"), the auditors to the Cells, for the purposes of completing their work.  The findings of our review in relation to the assets of the Fund and their value will clearly also impact on Ernst & Young's audit work in relation to the Fund.  Given that Moore Stephens' work in relation to auditing the Cells is still underway, and given the likely timescales indicated above for completion of our review, it will not be possible for Ernst & Young to complete their audit in the near future.  As soon as we are able to give you an indication of the likely date by which you should expect to receive a copy of the annual report and accounts for the Fund, we will of course do so.

Position of Arch Financial Products LLP

Although dealings in the shares of the Fund are suspended, the investment management of the assets of the Fund has been continuing.   Given the lack of active trading in the shares of the Cells in which the Fund is substantially invested, the amount of investment management activity required since suspension has been relatively limited.  Further, for the time being, Arch has agreed with the FSA that it will not perform the regulated activities of advising on investments, arranging deals in investments, dealing in investments as agent, making arrangements with a view to transactions in investments and managing investments without the prior written approval of the FSA.  This includes Arch’s investment management of the Fund.  In the circumstances, we believe that this arrangement will afford shareholders some additional comfort while the suspension of dealings in the Fund continues and the issues around the valuation and future options for the Fund are reviewed.  If the position in relation to Arch's regulatory permissions changes, we will keep you informed of such changes.

As ACD to the Fund, we are also continuing to scrutinise closely Arch's investment management activity for the Fund, and are in regular dialogue with Arch in relation to the Fund.

Fees & charges payable out of the Fund

Over recent months, CFM has been actively considering with the depositary whether it is appropriate to continue to collect certain periodic charges which are ordinarily payable out of the Fund and which are calculated by reference to the net asset value of the Fund.  These charges include, among other things, the annual management charge payable to CFM (the majority of which is in turn paid on to Arch), as well as the accounting fee, depositary fee and custody fee.  Given that:

we have concluded that the collection of the annual management charge from the Fund to CFM, and the onward payment of a portion of that charge to Arch, should be suspended for the period from 1 April 2009 onwards.  Arch and the depositary have been informed of this decision.  The depositary has also agreed to suspend collection of payment of the depositary fee and custody fees which are calculated by reference to the net asset value of the Fund for the same period.  The collection of the accounting and register fees by Capita Financial Administrators Limited, the administrator of the Fund, will also be suspended for the same period.

The payment by CFM to IFAs of the annual commission which IFAs earn from amounts invested by their customers in the Fund (often referred to as renewal or trail commission) is also calculated by reference to the value of investments in the Fund.  In light of the uncertainty around that value and the suspension of collection of the annual management charge payable to CFM, payment of renewal commission to IFAs will also be suspended, for essentially the same reasons as those set out above.  The monies that would otherwise be used to pay these other charges will remain in the Fund.

We are aware that this may result in a temporary loss of income to IFAs.  However, our priority has to be the needs of shareholders and we believe that taking this step is consistent with our duties to safeguard the interests of shareholders.  We do not think that shareholders would consider it justifiable for IFAs to continue to receive renewal commission and for fees to continue to be paid out of the Fund while shareholders themselves are unable to access or realise their investments, and we have taken steps accordingly.  We recognise that IFAs may be spending more time advising shareholders in relation to the Fund at present, but do not consider that this justifies the ongoing payment of renewal commission given that the value of that commission cannot be accurately calculated at present. 

Moreover, we do not think it is appropriate to continue to collect the other fees mentioned above from the Fund while dealings remain suspended and while the outcome of our review is still pending.

We will re-assess the position in relation to each of the fees outlined above once the outcome of our review of is known - including, if appropriate, payment of outstanding fees that may have accrued and be payable in respect of the period from 1 April 2009.

Conclusion

I hope that this letter has provided you with a useful update in relation to the work that we have been undertaking to address the current position of the Fund.  We are working with our advisers to progress our review and present to shareholders proposals that reflect the findings of our review, are viable from a legal/regulatory perspective and which meet the approval of the depositary.  A very significant amount of work has been undertaken and, although we have made substantial progress, there is still further work to be done.  Taking account of the time it will take to implement any changes to the Fund, it is likely that the suspension will continue for a number of months.  Again, we would recommend that you discuss the continuing suspension with your IFA if you are in any doubt about its implications.

We will, of course, keep you informed of the progress of our work and any material developments in relation to the Fund.  The interests of shareholders in the Fund remain of paramount importance to us, and CFM is committed to ensuring that these interests are safeguarded.  The proactive steps we are taking that are described in this letter are a demonstration of this commitment.

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

Capita Financial Group is a trading name of Capita Financial Group Limited ("CFG"), registered in England Number 3669630, registered office 17 Rochester Row, London, SW1P 1QT.

Full FSA regulatory information and registered details for CFG, its affiliates, subsidiaries and associated companies, is available within the Legal Statement.