Examination of Witnesses(Questions 480-499)|
TUESDAY 29 OCTOBER 2002
480. What this investor in the Aberdeen High
Income Trust was told at the end of this letter telling them about
the terrorist attacks on their investments was, "History
has generally shown that the best policy is to sit tight and await
an improvement in market conditions". In that context, do
you think there is an inference of advice there?
(Mr Marshall) No, I think that is an
objective piece of information. That is true. It is undoubtedly
true that history has shown that over the long term investments
tend to improve and the situation, as Chris was outlining, at
the time, post the re-organisation, investors were in an improved
situation from where they were before and had conditions improved
from that or had conditions even remained stable from there, then
I think that information would have been borne out. In practice,
clearly that trust has failed and, as Chris has said, the reconstruction
failed, but what we were giving was a piece of information which
was valid and remains valid, that in the long term investments
do tend to go up. What we are actually experiencing at the moment
is the longest downturn since the 1930s. It may not be the deepest,
but it is the longest downturn and that is patently very unusual
481. Mr Gilbert, do you feel you have any obligations
to the people who lost money in the Aberdeen High Income Trust?
(Mr Gilbert) I just repeat what Chris
said which is that we are desperately sorry that people have lost
money. It is awful as far as we are concerned because this was
one of the most successful funds we have ever had. It has won
so many awards during the 1990s, it has a string of awards. It
is tragic that it has gone the way it has and circumstances have
just been against it. I was going to make one point, that it is
not just us that decided that the merger between the two funds
is good for the shareholders, but the advisers to both funds,
the advisers to both trusts have to sign off on a document and
it goes through the UKLA, so I think to suggest that Aberdeen
is totally at fault for this is wrong. We tried our best here,
we really did try to save this.
(Mr Fishwick) I do not think there is one analyst
in the City who would say that the merger of the two funds and
the attempted rescue was not in the interests of shareholders.
It failed and I apologise for that and I apologise to the investors.
We know these people. They are not faceless people. They come
to our meetings and I know them personally, but attempting and
trying to do it was the right thing. I still believe it was the
right thing. All that would happen instead is that people would
have lost their money earlier and we would have been sat around
this table earlier.
482. Perhaps we could come back to the other
trust, the Enhanced Zero Trust, which was launched in February
1999. Mr Currie, you were quoted on the day as saying, "It
is a no-brainer. It is a banking decision really. You are able
to borrow cheap, invest high". Is that incompetent or dishonest?
(Mr Currie) I think it is retrospect.
483. This is what you said then.
(Mr Currie) Yes, it is trying to explain
how the mechanics of the trust work and it is enhanced zero because
it uses bank gearing, typically borrowings at 6 per cent, to try
to return at 9 per cent and that was a clear description of what
the policy of the trust was at the time, but in 1999 we were in
very different circumstances from now and it is very easy to issue
little soundbites, to cherry-pick information to suggest that
484. This was your soundbite.
(Mr Currie) In 1999, and in 1999 the
zero market was vibrant, it was growing, everyone had rosy views
of where markets were going and that was then and now is now.
485. But if you describe it as a banking decision
really, you cannot be describing something that is high risk?
(Mr Currie) I think I was trying to describe,
and you are using reported speech as well, how the operation of
the company works. The company borrowed money to invest into the
zeros market. It was borrowing lower and trying to invest higher.
That is what it was there to do.
486. I am using your reported speech and you
are the no-brainer here, are you not?
(Mr Currie) Well, with many thousands
of words written on this subject over the last five years
487. But you are the Head of Marketing and you
were the Head of Marketing when this trust was launched and you
said, "It is a no-brainer. It is a banking decision really".
(Mr Currie) What is the source of your
information. I cannot remember every
488. This is the Glasgow Herald on 11
(Mr Currie) So the Herald has
reported me as saying it.
489. Are you denying you said it?
(Mr Currie) No, I am saying that all
I was trying to do was explain how the functioning of the trust
worked and that is what it was.
490. Well, let's turn to Mr Fishwick. On the
same day you said, "Zeros represent a relatively low-risk
investment and can be relied upon to produce almost unfettered
growth even in the most volatile of equity markets. Their prices
do not fall back sharply even when equities are in decline".
Perhaps you could elucidate.
(Mr Fishwick) Well, I do not think that
is a correct quote of mine because I do not believe, or no one
who knows me will, that I have ever said the word "unfettered".
I find it quite hard to say, but yes, I believe that though I
did not say that, and I say the same and I come back to what everyone
491. This is a statement by you reported by
Reuters News Service. Are you denying this?
(Mr Fishwick) I certainly deny that I
have actually physically said the word "unfettered".
492. You said "almost unfettered growth",
but let's look at the second sentence. You said, "Their prices
do not fall back sharply even when equities are in decline".
(Mr Fishwick) They had not at that time.
If you look at the chart and the AITC and every single person
in the sector, if you look at the chart and look at the movement,
and if you remember the LTCM crisis when the stock market fell
dramatically and the Russian debt crisis at the same time in 1998
when the stock market fell from 6,000 to 4,800, the zero market
It did not fall 10 per cent, it did not fall 5 per cent. There
was hardly a blip and the zero line went up pretty much like that
(indicating). The markets went up and down throughout the
1990s at various levels and it had not been. At that time that
was very much what people believed, what we believed, what the
AITC believed, what every broker believed and every journalist
believed. There was no one saying any different at that time.
Now, it has been proved to be wrong, but that is what everyone
believed to be the truth at the time and that is what the history
of the past was. They had ridden out volatile markets, as also
did income shares. Income shares hardly dropped during the Russian
debt crisis and the LTCM crisis when stock markets fell dramatically
because it was a very sharp fall and a very quick rebound, a bit
like 1987 was. What we are experiencing now is a falling market
and a continued fall. We have had three years of markets going
down which we have not seen for an awful long time. It is a different
type of fall and it is a question of how long it lasts.
493. Why did this particular trust do so conspicuously
(Mr Fishwick) I think it did badly at
the time because what it actually was, it was funding zeros and
zeros have gone down dramatically, the sector has fallen. It had
£100 million of assets where £40 million of that was
bank debts and banks do not lend money if they do not think they
can get it back. The bank was convinced that it was a very safe
bet for them. The bank itself is now losing substantial money
494. You are blaming the bank now, are you?
(Mr Fishwick) No, I am not blaming the
bank. I am just saying that the bank believed, as we believed,
that this was a fair proposition and in the early parts of its
life it performed exactly as it did, but at the end of the day
if you borrow money and assets go down, you end up losing money.
The more borrowing you have, the more the assets fall, the more
you lose. It is simple mathematics.
495. But was it not also because its largest
holdings were in fact in zeros issued by highly-geared trusts
with substantial cross-shareholdings? Did this fund invest in
(Mr Fishwick) Well, let's knock this
one on the head once and for all. All Aberdeen zeros are not highly
geared and they are not all invested in cross-holdings.
496. Some of them are.
(Mr Fishwick) Some are and some are of
every single person in the industry. This is not an Aberdeen issue,
but an industry issue. Many, many zeros have bank debt and have
investments in other trusts. This is not uncommon. It may have
proved to have not worked, but it is not uncommon.
497. There seems to be a substantial amount
of pyramid investing by your trusts in each other.
(Mr Fishwick)The Enhanced Zero Trust
was a trust to invest only in other zeros,
so, by nature, is a fund of funds.
That is what its name is and that is what it does. It only invests
in trusts with zeros.
498. So this was a pyramid investment, was it
(Mr Fishwick) Not necessarily because
some of the trustswell, I will try again to get this through,
this "pyramid investing". Everyone assumes that because
a fund of fund owns lots of other trusts that they necessarily
owe the bank and that is not true.
(Mr Gilbert) Fund of funds are not illegal. They have
been around for as long as the City has been around.
499. They have not done quite as badly as this
one, have they?
(Mr Gilbert) Fund of funds generally?
Fund of funds in the split capital sector have
(Mr Fishwick) There is not one single fund of funds
which has survived.
(Mr Gilbert) So they have equally all done badly.
(Mr Fishwick) None of them has survived.
(Mr Gilbert) Three of the seven zeros that Cazenove's
are recommending today are Aberdeen zeros, so I refute your point
that all Aberdeen zeros are highly geared and pyramid, and I forget
your exact word.
15 Note by Witness: Plan members in all investment
trusts receive a generic commentary on markets as part of their
six monthly statement. Specific information on individual investments
are published monthly on the web and specific annual and interim
reports are mailed to plan members. Back
Note by Witness: The investment objective of The Enhanced
Zero Trust PLC is "to achieve an above average return from
investment in Zero Dividend Preference shares by utilising gearing
in the form of bank borrowings". Back
See Ev 180. Back
Note by Witness:. . . and income shares. Back
Note by Witness: "Fund of funds have been around for
a very long time" John Tiner, Managing Director, Consumers'
Investments and Insurance Directorate, Financial Services Authority,
Treasury Select Committee, 22 October 2002. Back