Connaught Asset Management has suspended redemptions from its Connaught Income Fund Series 1 after a review flagged the possibility that some of the fund's loans may be under-secured.
Connaught said the suspension was temporary, pending the outcome of a review into the assets being used as security for the fund's loans. This is expected to take "a further four weeks".
The fund, an unregulated collective investment scheme (UCIS), provides funds to the short-term lending market via specialist partner Tiuta, the short-term and bridging lender, with a target average LTV of 75%.
"Our decision to temporarily suspend applications into, and redemptions out of, the Connaught Income Fund Series 1 has been taken while a detailed review of the assets being used as security for the loans in the fund is ongoing," said Connaught chairman Mike Davies.
"The review has so far highlighted the possibility that a small percentage of the loans may be under-secured, which means if all assets were sold immediately to repay the existing loans there could be a shortfall. This potential shortfall would have an impact on the NAV per unit in the fund."
Connaught said any potential shortfall would be covered by Tiuta and the review was "in no way a reflection on the current performance of Tiuta or the fund".
"It is a course of action to make sure there can be no doubt that all of the loans are fully recoverable. All distributions from the fund will continue to be paid as normal during the review period and we believe Tiuta are able to generate sufficient additional capital in order to provide the cover for any potential shortfall," Davies said.
"We anticipate the review will take a further four weeks to complete after which we will be communicating again with all investors."
"We would also like to point out that this decision only affects the Income Fund Series 1 and has no impact or bearing on any other Connaught product."
Last year the FSA warned on Connaught's Series 1 and offshore Series 2 income funds, saying marketing literature making comparison between the "low risk" funds and fixed-rate bank accounts was misleading.
The FSA said investors in either fund should consider contacting their IFA to ensure the investment was suitable.
"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," the FSA said in a May 2011 statement.
"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."
Davies said at the time the group believed IFAs had access to sufficient information within its documentation, but added Connaught was conducting a further review of its literature in response to the FSA's notice.
"We firmly believe that all financial advisers have sufficient information within our documentation and from the series of seminars we ran recently to ensure they can advise appropriately on our products," he said.
"However, we take our role as a prudent asset manager very seriously and we will be conducting a further review of our documentation immediately."
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