FSA: Investors warned over Connaught Income Funds

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The FSA has published the following information for consumers:

If you have invested in Connaught funds (Series 1 and 2) offered by Connaught Asset Management, we advise you to consider speaking with your financial adviser or stockbroker to ensure that the investment is suitable for you. These funds are advertised as low risk and could be misleading to investors. Here we explain our concerns.

What are our concerns?

In the literature we have seen, the Connaught funds are described as ‘very low risk’ and ‘low risk’. It makes comparisons between investing in them and putting your money in high street bank and building society accounts. We believe this is misleading.

Connaught’s marketing material compares the returns on its funds with fixed-rate notice bank and building society accounts. However, customers need to be aware that these bank accounts have stronger investor protections should anything go wrong and offer lower risks to your money than there is investing in the Connaught funds.

Furthermore, these funds offer a quarterly ‘fixed income payment’. Although, the probability of you receiving this payment depends significantly on the performance of the investments within the funds. We believe this is not explained well enough to investors.

Connaught also offers an ‘additional guarantee on the income’ within the funds, but it is unclear if investors would be able to understand what this guarantee is.

Who does this affect?

Consumers who are considering investing, or have invested in the Connaught funds, whether directly, though a Self Invested Personal Pension (SIPP), Small Self Administered Scheme (SSAS), an investment bond or an offshore investment bond.

What should you do next?

  • Make sure you and your financial adviser or stockbroker understand how the funds work and what investing in them means for your money.
  • Always make sure your financial adviser is qualified and regulated by the FSA (please check the FSA Register).
  • Discuss with your adviser whether there are any other products that would meet your needs and give you the protection of the Financial Services Compensation Scheme and Financial Ombudsman Service.

Investing in these funds is only appropriate if you are comfortable with the particular risks involved.

March 2012 update

On 7 March 2012, Connaught Asset Management, which are not regulated by us, decided to suspend its Series fund 1. The fund will be suspended whilst a review is completed to establish the true value of the fund and determine whether there is any shortfall in money held in the fund.

On 13 April 2012, Connaught contacted its investors to inform them that the fund was unable to pay the scheduled quarterly interest payment to investors.

If you have any further questions at this stage you should contact the adviser that sold you the investment.

Mike Davies, Chairman of Connaught Asset Management, said:

“Following our decision to suspend applications into, and redemptions out of, the Connaught Income Fund Series 1 in March we wanted to avoid further speculation regarding the Fund.

“We were recently advised by the Specialist Partner that the last quarterly interest payment would be delayed, resulting in the distribution to investors not being paid on time as expected.  However, unlike many investments, the Fund does have direct security taken over every property with a current loan on behalf of the Fund, additional Guarantee and Debenture Agreements and, furthermore, additional direct security on unencumbered property with the full support of the Specialist Partner to further protect investor’s interests.  To ensure that the appropriate next steps are taken the General Partner has already commissioned an independent review to specifically confirm the General Partner’s view with regard to the most suitable next steps for the Fund to ensure these agreements are used with the full co-operation with the Specialist Partner to ensure investors have their monies returned.  This report will be completed very shortly.

“Also, to avoid any speculation and uncertainty it has also been decided to temporarily suspend the Connaught Income Fund Series 2.  The loan books and monies for each fund are ring-fenced and the Specialist Partner has always paid the quarterly distributions on time and it is expected this will continue into the foreseeable future. This is seen as a very prudent decision to protect the interests of investors while it awaits the results of the independent report to confirm the fund model.  Connaught Asset Management (Guernsey) Ltd and the Investment Manager are using this period to set up an additional process for provisioning up-front for future investor distribution payments and for quarterly independent reporting on the continuing robustness of the Fund models to ensure that going forward there is no doubt regarding the Fund’s ability to secure both the income and capital for investors.

“The Asset Manager anticipates that the report will confirm that the Specialist Partner can meet its obligations to investors.  In particular the temporary suspension of Series 2 is intended to ensure all investors’ interests are protected while this report is being prepared to provide certainty in the future.  The Manager expects the Fund to resume normal dealing by no later than the mid-month dealing day of 14th May.

“I would like to personally thank both IFAs and investors in general for the huge support we have received regarding this process and review period, and we will continue to work solely in the best interests of investors.

“I would also like to stress that this does not have any effect at all on any other Funds managed by Connaught.”