Guernsey investment fund directors must become more knowledgeable about the risks associated with asset classes and communicate better with shareholders, according to a major investor.
David Coombs, Head of Multi-Asset Investment at Rathbones Unit Trust Management, said that the type of esoteric asset classes commonly found in Guernsey funds were wrongly viewed as lower risk just because they were low volatility.
He said there was a danger that the risks were not being fully represented when the investments were sold, which was of concern to investors wishing to protect their capital.
“Funds are sold to buyers who don’t always fully appreciate the risks. If the risks are outlined fully and honestly, you will avoid having flaky investors on the share register,” he said.
Mr Coombs was speaking to an audience of Guernsey executive and non-executive directors (NEDs) at a funds conference co-hosted by Dexion Capital, Ernst & Young and UK law firm Dickson Minto.
“We want NEDs to look at the performance in the context of the risk the company is taking. Many investment companies are mis-sold as low risk, low correlation, but it’s not low risk if you’re marking to maturity and there is a default, for example. Look at marketing and sales material and check that risks are adequately stated,” he said.
Using forestry and art as examples, he said: “They are not low risk just because they are alternative. These asset classes are correlated to extreme market events, and the risks are not always expressed in this way.”
Mr Coombs said it was important that fund boards have the right mix of NEDs with technical expertise and appropriate skill sets. This was important when cross-checking the valuation of assets and that marketing materials correctly represented the risk involved.
He added that funds would benefit from more constructive communication with shareholders.
“We can work together to improve product design. We can tell you what people want to buy and where our demand is. We really want to know when anything is going wrong, whether we can trust the management and the questions they have been asking. It takes away the fear factor,” he said.
“There’s an appetite to buy more of these structures; but there’s not enough liquidity and the funds are not big enough. We need more liquidity and more professionalism.”
Ravi Anand, head of Corporate Finance at Dexion Capital plc, reflected on the success of Guernsey investment funds. He said: “There has been strong growth in alternatives in recent years with a current aggregate AUM of £32bn. in the main UK market, excluding long only equities, and the vast majority are Guernsey based.”
Douglas Armstrong, Partner, Dickson Minto, presented a regulatory update covering the Alternative Investment Fund Managers Directive, RDR and UCIS consultation.
The competitive tax position of investment companies resident in Guernsey and other offshore jurisdictions in relation to their UK resident counterparts was the focus of Peter Ames, Partner, Ernst & Young who highlighted that despite a number of significant improvements to the UK tax regime for investment trusts, REITs and other onshore fund vehicles, in many cases Guernsey resident investment companies remained highly competitive in tax terms and would in all likelihood retain this advantage for the foreseeable future.
Robin Fuller, a director of Dexion Capital (Guernsey) Limited said that FATCA, RDR, UCIS and the AIFMD would all result in more responsibilities for directors.
“The Directive will swing the spotlight around and focus on the investment and investment risk management process,” he said.
GIFA Chair Horace Camp, in summing up, said: “This conference has given us a different perspective. The person we don’t often get to deal with is the shareholder. For a NED life is not going to get easier; the risks are going to get higher. The things that we are supposed to known and need to know are growing like topsy.”
Category: Finance & Business