Behind the freeze
If there's one feeling a fund manager doesn't want, it's the feeling after your mate pawns the guitar you lent him and blows the money on a 10 to one tip in the 3.20 at Trentham.
There will be a hope of a happy ending, overpowered by fear of separation from your 1973 sunburst Fender Tele.
Unfortunately it appears there's a bit of that feeling in the air at trans-Tasman investment firm Van Eyk, which runs a series of funds under the Blueprint banner. A week ago it suddenly froze its A$100 (NZ$110) million Blueprint International Shares Fund, claiming one of its underlying fund managers had invested a big chunk of money in unauthorised, illiquid assets.
The fund manager was London-based Artefact Partners, a boutique outfit owned and run by New Zealander Richard Boon.
Artefact has said its investments were always within the parameters of its prospectus and the underlying value of the fund had not been affected.
"Artefact is in discussions to facilitate Van Eyk's redemption request in an orderly manner," it said last week.
Chalkie must therefore tread carefully, but there are some curious aspects to this that suggest an appalling standard of disclosure to Blueprint investors.
First some background. Although its funds are marketed here, Van Eyk is not well known in New Zealand. That may change with its purchase in March 2013 of Pyne Gould Corporation's Perpetual Portfolio Management and Perpetual Asset Management businesses. The Perpetual units have been renamed Van Eyk Advice and Blueprint Investment Management respectively.
Van Eyk, which reportedly administers about $1 billion of investor funds, was also part-owned by PGC until February this year. Australian disclosures show Van Eyk is now about 36 per cent owned by Australasian Wealth Investments, an ASX listed company with interests in a range of financial advisory services. In its half-year presentation, AWI noted its "intention to move to control [of Van Eyk] if possible and opportune".
One of AWI's biggest shareholders, and its chairman, is Andrew Barnes, an Englishman who cropped up in New Zealand last year with his purchase of Perpetual Trust from PGC.
Barnes' company Complectus also bought New Zealand trustee business Guardian Trust, so it looks like he's aiming to build a trans-Tasman one-stop shop covering advice, funds management and trustee services.
So what we have here in Van Eyk is a business aiming to get a decent piece of Kiwi action that could end up as a significant financial services player. Chalkie was therefore keenly interested when it announced the freezing of a major equity fund. Although we can hope the freeze is only temporary, it is bad news for investors and there should be great concern about its causes.
The official line from Van Eyk is that Artefact "elected to invest in a portfolio that was not in line with [the Blueprint fund's] strategy and objectives."
About 32 per cent of the Blueprint fund was under Artefact's management. As of June 30 the fund's factsheet gives its net asset value as A$99.4m, which implies Artefact was running about A$32m.
The Blueprint fund's accounts for the six months to December 2013 show a sum of A$30.9m "due from underlying investments", an amount Van Eyk's managing director Mark Thomas confirmed as referring to the sum due from Artefact.
However, investors in the Blueprint fund may have been surprised by the announcement, because their current asset allocation makes no mention of any money being run by Artefact. You have to go back to September last year to find a reference to it, when the factsheet said that during the quarter "the allocation to Artefact was removed and placed into the US equity market via the S&P500 index."
Investors may have assumed this meant Artefact no longer had the money and that it was now invested in a passive index fund.
If they did, they were wrong.
Thomas told Chalkie the money is still to be received from Artefact. However, the receivable was "equitised using S&P500 futures."
That's a piece of jargon that Chalkie reckons basically means the fund simulated an equity exposure to the S&P500 index using futures, having "raised some cash elsewhere" to pay for them.
Subsequent fund factsheets show an S&P500 exposure instead of an allocation to the Artefact Partners Global Opportunity Fund.
Chalkie reckons if that's what happened the fund factsheets failed to disclose the true picture, which was that Artefact still had the money. So why was the money still with Artefact?
According to Thomas, the London firm was supposed to be holding it in "cash or cash-like" assets, but appeared to have placed it in assets not easily converted to cash. He declined to specify what those assets were.
So Artefact, a hedge fund manager, was allocated more than A$30m to hold in cash? And this allocation was described in Blueprint's factsheets as Artefact's "Global Opportunity Fund" as part of "a diversified portfolio of international shares via exposure to a range of specialist underlying managers which are highly regarded by Van Eyk"?
Thomas told Chalkie: "The reason why Artefact was given any money in the first place was not because they were a fund manager."
Artefact's fund was being wound up, leaving a shell fund structure, he said. "And we were going to use that shell to access a double-A rated manager out of the US that did not have a structure we could invest in.
"Whether we were going to own that shell or the appointed fund manager [was], we were negotiating that piece. In the interim the money was put on call until that manager was funded."
Thomas said the manager was to be Baker Street Capital, a co-investor in PGC through George Kerr's Australasian Equity Partners. (Coincidentally, Kerr also has links to Artefact's Boon, who is a director of Artefact Holdings (NZ), a company owned by Kerr's interests.)
Chalkie reckons the Artefact arrangement was not at all apparent from Blueprint's description of its International Shares Fund.
Anyway, it appears that having transferred a big chunk of assets to Artefact in July 2012, at some point Blueprint decided things were going awry. When?
"Around about the first quarter of 2013 we became aware the money was not as liquid as we thought it might be," said Thomas.
So having found issues with the Artefact allocation, it appears Van Eyk took six months to formally request a redemption from Artefact and a further 10 months to announce the Blueprint fund was being frozen because they hadn't got the money yet.
Chalkie reckons if that's the whole story it's a long way from desirable behaviour in an investment manager and casts doubt on Van Eyk's portfolio monitoring, as well as on its claim to be unaware of Artefact's investment position. Strangely, despite apparently having doubts about Artefact, Blueprint singled it out as a key contributor to positive performance in its August 2013 factsheet.
It's worth mentioning here the role of Macquarie Investment Management which acts as the fund's "responsible entity", the Australian version of a New Zealand trustee.
Macquarie has the ultimate responsibility for the fund's management and its directors sign off its accounts. In March, those directors certified that in the six months to December, "the trust continued to be managed in accordance with the investment objective and strategy set out in the trust's offer document," and "there were no significant changes in the state of affairs of the trust."
Chalkie reckons current events make those statements look distinctly dubious.
Let's add some context here. The Blueprint fund's accounts show investors were pulling out over a long period. In 2012 they redeemed a net A$34m, in 2013 a net A$48m, and a net A$14m was withdrawn in the half year to December. When the money was first allocated to Artefact it represented about 20 per cent of the fund. By August 2013 it represented 26 per cent. This month it was 32 per cent.
When that happens, a fund's ability to pay redemptions becomes critical - hence, perhaps, Blueprint's move to go nuclear on Artefact. That is of course conjecture, but Chalkie reckons, depending on who told what to whom, this episode reveals disturbing issues about oversight and disclosure by Van Eyk, Macquarie and Blueprint, on top of potentially inappropriate investment by Artefact.
Chalkie is written by Tim Hunter, deputy editor of Fairfax Business Bureau