Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 460-479)



Mr Cousins

  460. Just to check back on something you have just said in passing, as I think it may be of some significance, you have referred, Mr Fishwick, that is, to the de-gearing operation of the last 18 months to two years and the fact that the main Board of Aberdeen was very much driving this de-gearing operation.

  (Mr Gilbert) No, that is not true. That is a misunderstanding, Chairman.
  (Mr Fishwick) We, as asset managers, together with our clients, the investment trust, were de-gearing the trust. It was not a request from the main Board of Aberdeen plc, but it is totally separate.
  (Mr Gilbert) Each individual trust has its own board which makes its own decision on de-gearing.
  (Mr Fishwick) And they are all different.

  461. Did I understand Mr Fishwick to say that the FSA was aware of the totality of the de-gearing operation?

  (Mr Fishwick) I do not believe I said that.

  462. I think you may have said that it approved of the de-gearing operation.

  (Mr Fishwick) No, I did not.
  (Mr Gilbert) No.

  463. That would not be right?

  (Mr Fishwick) What I think I said that the FSA actually approved of by the Listing Authority was having directors with the relevant experience, but everyone has been aware of the de-gearing in the sectors.

  464. I see, so everyone is aware of it.

  (Mr Fishwick) You are making announcements every day on the screen.

  465. So your reference to the FSA was simply that the FSA presumably reads the newspapers and follows these things?

  (Mr Fishwick) If you repay a bank debt, even if you repay a penny or £100 million, it is a disclosable event and you have to make a Stock Exchange announcement immediately, so you see on the screen that there have been hundreds and hundreds of announcements of debt repayments by many of these 130 companies, and it happens every day.

  466. Well, I am glad we have clarified that. Mr Marshall, is Aberdeen getting out of the retail sector?

  (Mr Marshall) No.

  467. No?

  (Mr Marshall) No.

  468. Has the main Board taken that as a formal decision?

  (Mr Marshall) I think you are probably referring to the newspaper reports of the potential asset sale of unit trusts and alike business. I would say that there are no plans to do that. I am not sure where the reports in the papers have come from.

  469. You see, when I wrote to Aberdeen in August on behalf of a constituent of mine, this was about the Aberdeen High Income Trust which I do want to talk to you about, I was simply referred to the receivers and Ernst & Young. There was not any recognition of a continuing role.

  (Mr Marshall) I think that is a legal requirement once the trust has moved into receivership, that all correspondence regarding that trust falls with the receivers and we are not in a position to correspond with clients at that point. We will of course attempt to answer any questions which are relevant to the period for which we were involved.

  470. Why did the Aberdeen High Income Trust fail?

  (Mr Fishwick) Can I take that because it is an investment trust rather than for Gary. The reason that the Aberdeen High Income Trust failed is very, very simple. At the end of the day we had less assets than we owed the bank and the debenture holders.

  471. What was the purpose of the attempted reconstruction of the High Income Trust in September 2001?

  (Mr Fishwick) In September 2001 Aberdeen acquired another investment trust which had got itself in trouble, a trust called HL Income & Growth[14]. They were in trouble and they actually approached us and said, "Look, why don't we get together and try and strengthen the balance sheets of both companies because both are having difficulties?" It made sense to make a merger and at that period of time, in that three or four-month period, a number of trusts were in trouble, their assets were starting to fall, so the sector generally, the brokers said, "Look, let's make an attempt to try and rescue these trusts" rather than go bust earlier, and the one thing that I am disappointed about is that we and the sector generally have been heavily criticised for attempting to rescue and save funds from going bust. Quite frankly, you wonder why we bothered trying.

  472. Well, could I just press you on that. You say that in September 2001 the High Income Trust was facing some problems and what you did then was that you merged it with another entity that was in even bigger trouble. That is what you have just said. It does seem a slightly odd strategy.

  (Mr Fishwick) Well, no, because what it allowed us to do is that it allowed both companies to de-gear and to take on the most attractive form of debt and we raised some new money which left the companies, both of them, in much better shape than either one was in before it occurred. However, it was not enough and I think the point I am trying to get across here now is that one of the problems that people have been saying is, "Oh, everyone in the City just blames 11 September for the problems", and this occurred at that time, but one of the consequences of 11 September, forgetting the fact that stock markets fell, which has never been relayed, is that interest rates collapsed around the world to what is now deemed to be emergency levels, and interest rates falling means that it costs you more to repair your bank debt. If you borrowed £100 million, to repay it two years later would have cost you a further £15 million, so that is £15 million of assets that disappear to the bank. It is just like breaking a fixed-rate mortgage. I do not believe before 11 September that anyone was forecasting US interest rates at 1.75 per cent.

  473. Well, I have in front of me here a letter that was sent to one of my constituents on 19 October 2001 and this is how it begins, and it begins with the very point you have just made: "I enclose a copy of your six-monthly statement", and then the next paragraph: "The tragic events in the United States on 11 September not only caused an unnecessary loss of human life, but also impacted on the major economies of the world. I understand you may be concerned about the ramifications of the terrorist attacks to your investments". As one might say in retrospect, the terrorist attacks and the investments were coming from a slightly different direction. Do you think that was a slightly misleading introduction to the situation of the High Income Trust, as it then was?

  (Mr Fishwick) I do not think that markets or any investments are better off than they were before 11 September. I do not think that is particularly misleading. I think that was an appropriate thing to say in October, five weeks after 11 September. The whole world was pretty shook up.

  474. And do you think, in the context of a reconstruction which had occurred in the company a month earlier after 11 September, that the merger with the trust that was in trouble, do you think that was a sensible way of informing investors?

  (Mr Fishwick) I think part of this attempt, and they had full documentation about the merger going forward, yes, I think it was a reasonable attempt to—

  475. Did the merger documents explain that it was a merger with another investment trust that was in trouble?

  (Mr Fishwick) Of course it did.

  476. Of course it did?

  (Mr Fishwick) Yes.

  477. Well, let me read to you, "The Board and the manager believe that the merger will have a number of benefits to the company's shareholders, in particular the strengthening of the balance sheet and the provision of a significant improvement in the asset cover level".

  (Mr Fishwick) That is exactly what it did do. Just on that point, I think it is quite useful that you make it and you can press me further actually because it is easier, but the Chairman of the AITC, Tony Townsend, was on the Board of that fund that was merged, so ask him whether he felt it made sense at the time rather than just myself because you obviously cannot believe that it is the case. What we did, and it was not enough, I admit that, and I am very, very sorry, this is not very nice, people losing money, but we did attempt to try and save the money of both classes of shares. It was not enough, we failed, but I do not apologise for trying.

  478. Mr Marshall, what is the policy of Aberdeen now towards its retail investors because your earlier statement really was, "Well, the people who invested in Aberdeen High Income Trust and other trusts, well, tough really. It is not our problem any more"?

  (Mr Marshall) No, I do not think we took that attitude. I think what we have tried to do is to ensure that we give as much information to people as possible because they are asking lots of questions. The correspondence you are referring to would be precisely the type of question which was being asked at the time, which was, "What does this mean for me?" and once people had got over, if you like, the initial shock of the September events, they were looking to see the implications, seeing stock markets fall. Now, on an ongoing basis what we are trying to do is to communicate as much as possible with the information that is provided out there. Some of that information regrettably is very unpleasant and we are having to tell some people some very bad news in terms of their investments and it is not very pleasant.

  479. What do you think is the right strategy for the retail investor in a period of stock market volatility?

  (Mr Marshall) I think there are probably two aspects to that. In terms of existing investors, and I think you have to look at each individual in terms of their own risk profile and appetite for risk of the holdings they are referring to in terms of their overall portfolio and see where that stands, but the one thing we would certainly encourage people not to do is to take a knee-jerk, panic reaction and the mistakes of the past, particularly in the retail market, are that people do sell out at the bottom and buy at the top. It is unfortunate and it happens, so what we are trying to do is to give people as much information as possible so that they can make a reasoned decision. You try and put that in the context of historical events and allow people to weigh that up and hopefully in conjunction with their own advisers. We at the end of the day do not give financial advice and it is up to people like us to supply as much information as possible.

14   Note by Witness: The recommended proposals for the merger of HL High Income & Growth Trust PLC with Aberdeen High Income Trust PLC has been supplied to the Committee. Back

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