Christchurch-based Socrates Funds Management has frozen redemptions for six months as it mounts a last-ditch effort to survive the impending regulatory deadline.
Charles Drace, head of the approximately $3.5 million exotic investment business, said he was in merger talks with at least two other managers that could see the Socrates funds survive post the December 1 Financial Markets Conduct Act (FMC) cut-off date.
“If we are unsuccessful in finding a licensed manager willing to [house the Socrates products] before the FMC regime becomes mandatory we will have to close the funds,” Drace said. “We’ve frozen the funds as a protective measure to ensure that if we do close the wind-up costs would be evenly-shared among all investors.”
Socrates offers three funds under the 21st Century Renaissance brand that typically invest in a range of instruments exposed to precious metals and other commodities. After launching in unit trust form in 2007, the Socrates funds peaked at just under $20 million in total.
According to Drace, the FMC requirement for Socrates to obtain a managed investment scheme (MIS) licence would add about 2-3 per cent in costs for investors based on the current level of funds under management.
“That’s just unfair for investors,” he said.
Drace told unit-holders in a letter this May the cost of gaining an MIS licence would be “over $130,000”.
“There are also significant compliance costs involved in running the funds on a day-to-day basis… under the new regime. We note that all these additional costs would have to be paid out of investor’s funds,” the letter says. “As a small fund manager, these extra expenses make it prohibitive for us to continue operating as before and, as a result, we have decided not to apply for a license under the new scheme.”
Another gold-centric investment offered by South Island business, Hayes Asset Management, head by Craig Robins, also closed to retail investors recently.
However, it is understood the $4 million Hayes Gold Fund would continue in a wholesale-only version.
Drace said the wholesale option was not open to Socrates as most of the underlying investors were retail clients.
Funds open to wholesale clients only do not have to comply with many of the FMC regulations while wholesale-only managers are not required to obtain an MIS.
To date, 28 entities have gained an MIS, according the FMA website, with the latest batch of entrants including property-oriented operators Fund Managers Otago and Conrad Funds Management as well as Forsyth Barr Investment Management and the Ngai Tahu-owned Whai Rawa Fund.