I regularly take on the management of investment portfolios for clients, either where they have been disappointed by returns or let down by their existing advisers. Surprisingly often in the offshore market, an expats investment portfolio will contain a portion of their money tied up in suspended funds – usually sold by advisers for the commissions they generate. These funds have redemptions suspended, meaning that the money invested into them cannot be recovered at the current time and in most cases there are serious issues with the underlying assets within the fund meaning the money may never be returned or only a very small percentage of your initial investment will be returned.
In total over £4bn of savers’ money is tied up in funds that currently have a “closed” sign since 2009. The most common “suspended” funds I have found investors to hold are: Four Elements Apollo, Axiom Legal Financing fund, Centurion Defined Return , Life Settlements fund and Argent Fund, CF Arch Cru Investment and Diversified Funds, Connaught Series 1 Income, EEA Life Settlements Fund, Harlequin Property, LM Investment Management, Managing Partners Limited Traded Polices Fund, Mansion Student Accommodation, Strategic Growth, The Glanmore Property, and Quadris Fixed Rate Distribution. All of these funds currently prevent investors withdrawing their money.
Most of the funds above invest in specialist or obscure types of asset, such as “traded life insurance policies”, loans or in various types of property. The specialist assets in investment funds like this are often difficult to sell and difficult to value, however, they were all open ended funds meaning, in theory, investors had access as and when required. This causes problems if many investors want their money back at the same time as assets need to be sold off quickly, usually below value or withdrawals must be restricted.
Several funds above, including Managing Partners Traded Policies, Centurion Defined Return, Life Settlements and Argent and EEA Life Settlements ran into difficulty after investing in second-hand life insurance policies where the buyer receives the insurance payout when they original policyholder dies. Often sold as “low risk”, a combination of policyholders living longer than expected and an inability to sell the policies when investors in the funds wanted to cash in their holdings created major difficulties. Alternative assets held in the suspended funds above range from student property (Mansion Student Accommodation) to forestry (Quadris Fixed Rate Distribution), and in Arch Cru’s case, a Greek shipping company. Often allegations or investigations concerning fraud led to the suspension. This is the case for Axiom Legal Financing Fund, LM Investments and Harlequin Property. Axiom Legal Financing fund lent money to law firms, while Connaught Income Fund Series 1 invested in firms making bridging loans.
Will clients ever get their money back from the investment?
One of the biggest difficulties with these funds is getting any information on the status of the funds and the assets underneath after the closure. Investors who have money tied up in these funds face wait to find out if they will have their money returned. Out of the funds above, just one has currently given investors an indication of when they will reopen the fund for redemptions. For investors in the Quadris Fixed Rate Distribution fund it looks even worse. The fund, which invests in “forestry growth cells”, could remain suspended until a rather ridiculous 2026 “or at the very latest 2032”.
Where there is no current repayment date, there is still a chance investors could see some money back from the investments at some point in the future, once the hard to sell assets have been liquidated, however, rarely will investors not surfer some form of cash loss on the redemption compared to their initial investments, purely due to the costs associated with liquidating these funds. For funds subject to criminal investigation like Axiom Legal Financing, LM Investments and Harlequin Property its unlikely investors will receive much, if anything, back at all.
These funds have things in common that you should look out for when making investment decisions in the future. They often promise consistent returns (often with an almost straight line on the performance graphs) and usually offer returns in excess of 10% per annum. The funds are often issued by “unknown” investment companies that run only one or two funds. These funds often hold very niche assets or very specialist assets. All the funds above paid the advisers a commission on the sale of the fund into your portfolio. Ask your adviser if they are receiving a commission or speak with the fund directly .When a fund needs to pay an adviser to place business with them, there is often a reason why they cannot attract funds under management in the normal way. When a potential investment ticks all these boxes you should be extra careful.
How to deal with suspended funds in your portfolio.
There are instances where compensation has been paid to clients invested in suspended funds, in particular investors in the Strategic Growth Fund and Arch Cru Investment funds where mis-selling has been proven and compensation received but this is often difficult.
In the meantime, I would suggest that you instead focus on trying to generate real returns within the remaining liquid money in the portfolio – both to try and claw back some of the value tied up in your suspended funds but also to enable your investment account to begin growing again as it is supposed to do.
The key things when building a new portfolio will be to ensure all assets not currently suspended are invested into funds and assets that are run by large, well-funded institutions (the Fidelities and JPMorgans of the world) and that the funds hold real assets underneath (for example some funds and etf’s (exchange traded funds) track their index by buying option and futures rather than buying the actual underlying shares within that index). By buying funds underpinned by real assets you will participate in the movements of the prices, while retaining 100% liquidity at all times so that should you need to make any changes, you can.
A good mix of funds and assets should be added to the portfolio. ETF’s can be a good option to add a low cost layer to your portfolio. The key to a successful investment strategy is simple – buy high quality assets that produce income, diversify the assets you buy and take a long term view. If you do that you will not go too far wrong.