On the demise of a fund 

Let it be clearly understood, at outset, that I am not in favour of the kind of fund I'm about to describe.  For as many years as my rapidly-declining memory is able to access, ValidPath have maintained an unwavering emphasis on the use of diversified, backtested, risk-modelled, accessible investment solutions - and that kind of focus almost necessarily excludes the use of such options as the Quadris Environmental Forestry Fund (QEFF) which met its ultimate demise in 2017.  To put it another way, the kind of adviser who feels that this kind of stuff makes sense, is the kind of adviser who operates outside of the ValidPath programme.  Or to put it yet another way, if you believe certain sorts of things about investment, then other sorts of things are necessarily beyond the pale.

But, as it turns out, the circumstances surrounding the demise of QEFF are less straightforward than some would have us believe.  A FOS adjudication in 2016, points to the 'suspension' of the fund in June 2010, which fact is used to justify the argument that the client affected (in that judgement) had no opportunity to disinvest, and should therefore be compensated - despite the Adviser having advised the client to disinvest, which presumably means that the opportunity existed at that time.  I have seen copies of litigation letters which take the same kind of approach, although the exact date of the supposed suspension appears to vary, depending upon the source.

On the other hand, we have the QEFF financial statements for the year ended 31/03/2012 - some two years after the critical deadlines in relation to suspension.  Admittedly, these statements are hedged about with caveats from PWC, the auditors, but then the markets were in a state of some turmoil, following the credit crunch, and perhaps it was less than straightforward to establish the kinds of valuation bases for essentially illiquid assets, that would have soothed auditor concerns.  Nevertheless, it is clear that, at that point in time, the activities of the fund had made a profit, and that profit had been allocated to reserves.  It is also clear from the report that the Directors had been accepting and dealing with redemption requests, and had put in place alternative capital structures to help facilitate the exit of investors:  a note to the accounts shows the working of 'Fixed Rate Distribution Cells' which had been functioning, adequately, up until the end of the 2011 financial year, which implies that there had been at least some limited opportunity for disinvestment a good year or so after that initial notification of suspension.

Or, to put it another way, the wonderful world of regulatory reporting has a distinct tendency to present the facts in a manner which is binary and reductionist, presumably in the interest of creating the kind of narrative which will support redress presuppositionalism.  This is not an accurate reflection of the data, as 'suspension' means quite different things in relation to trading and redemptions.

QEFF was a peculiarly illiquid investment fund, in that its 'only' assets were specific kinds of forestry plantation (growing hardwoods, for which there is substantial global demand) which have a very specific gestation period.  If the fund managers were ever going to be able to support the outflows required by disinvestors, then they would require new, incoming investors to help fund liquidity.  Unfortunately, the (then) FSA's growing dislike for UCIS was about to cut the ground out from beneath the Director's attempts to treat their investors fairly.  This much is clear from the then Chairman's comments in the report.  Whilst appreciating the natural human tendency to find justifications to excuse ourselves, it is plain to see the frustration in John Bourbon's judgement, that the very people that he and his colleagues were trying to help were being actively disadvantaged by the Regulator's actions.  And, as intermediaries are all aware, the manner of the FCA's addressing the risks associated with UCIS in 2013 completely invalidated PII cover right across the marketplace.  

These may have been 'unintended consequences', but they were certainly not impossible to anticipate.  The FCA's 2013 policy decision rang the death knell for QEFF and yet it somehow limped on until 2017 - with perhaps the Directors hoping against hope that their strategic actions back in 2012 might yet bear fruit.  It is a strange combination of factors, that regulatory actions of this nature usually seem to assume the existence of appropriate insurance to feed the inevitable demand for redress, whilst acting in such a way as to invalidate those very provisions.

I hope the reader will understand that I am not attempting to defend the use of this fund.  Even in the 2012 Report, the Chairman is referring to a 'maturity gap' of six to eight years, so investors buying shares in 2009, were faced with locking their capital away for 10-11 years, and in my experience one encounters that kind of investor very infrequently indeed.  Nevertheless, this sad tail is an exemplar of the negative reinforcement which arises when illiquidity, dysfunctional investor behaviours, adverse market conditions and short-sighted regulation coalesce at a moment in time.


Kevin Moss, 07/12/2018