Select Committee on Treasury Minutes of Evidence

Examination of Witnesses(Questions 560-579)



  560. In the submission you made to us, it is dated 11 July 2002, it is on the first page of your minutes of evidence, the paragraph sub-headed "Risk Profile" on the first page of the book. I cannot help you with the pagination because mine may be different. You have been handed it now. "Some form of equity market growth could be expected from equity markets in each succeeding year, as had been the case in preceding decades"?[25]

  (Mr Gilbert) That is correct, as had been the case for the preceding decades. That puts it into context.

  561. How is that statement compatible with what was up on your website at the same time where you were freely admitting the sector over-confidence, that you will not have the growth rates—

  (Mr Gilbert) I am afraid, we will have to come back to you on this. I really cannot answer, it, I am sorry.[26]

  562. Can I ask you one more question about your website in that case? This is the July 2002 website. "Question: Does this mean the splits' geared structure is flawed? Answer: No, despite their recent poor performance, the inherent structure of splits cannot be considered inadequate. The ability to gear has historically been one of the main advantages." The next question: "Why did you not foresee it?"

Investment professionals over the 1999-2002 period did not in the main anticipate the sustained nature of what has now become the longest bear market in equities since World War II. The potential problems splits have encountered? Answer: Gearing in falling markets has proved to be the greatest single factor contributing to loss of value in the sector." Are not those two answers flatly contradictory? First of all, you say gearing is the advantage and a couple of lines later that gearing is why they have crashed?

  (Mr Fishwick) No. I think it is very easy to explain. The truth of the matter is that if you think markets are going up and you get it right, you want to borrow money. It is like buying a house. If you think markets are going down, and you get it right, you want to have no borrowings. It is a question of when you use the gearing. That is the advantage. You borrow money when assets are rising and you try and get rid of your debt and really to catch up when assets are falling. It is no different from housing. So gearing is the advantage. The question is: do you use it properly or correctly at a given moment in time? That is the issue. In the last three years, whether you had 5 per cent gearing or 50 per cent gearing, you wanted none because things have gone down.

  563. If I am an investor who has lost a lot of money and I am checking this website, I think I am not going to be able to reconcile these two statements. You are telling them gearing was a great advantage and "Oh, sorry, because of the gearing you have lost your money".

  (Mr Fishwick) I think gearing is the greatest advantage for investment trusts. If investment trusts have no gearing, I believe they have no reason to exist.

  564. How are the folk who have invested in your trusts, who have now lost their money, going to understand what you have just said about the advantages of gearing? It is gearing that has killed them, is it not?

  (Mr Fishwick) Gearing is the biggest single factor. The companies happened to have large borrowings, or any kind of borrowing, and assets fell and that has hit them. In the previous 10 years, they borrowed money when assets were rising, and that benefited them. I cannot understand that you do not understand that.

  565. I do understand it. So the risk inherent in gearing was always there?

  (Mr Fishwick) Of course it was always there.

  566. The risk was always there.

  (Mr Fishwick) If you borrow money—

  567. Can I stop you there because that is a helpful comment. You said, "The risk of gearing was always there". Yet, further on in the website: "Question: Are zeros a low-risk investment? Answer: Zeros do not appear to be as safe an investment as they had been". If the risk was always there, you should never have promoted them as low risk, should you?

  (Mr Fishwick) I think that is a question you have to ask the whole industry.

  568. What about you? You have just said the risk was always there, but you promoted these as low risk?

  (Mr Fishwick) We believed it to be low and minimal risk. We got it wrong. We as the sector, including our trade body, did not believe that markets were falling to the levels we had. If you had said to me, "If the market falls to 4000 when it was at 7000, and you believed that case, would you remove all your debts?" "Yes." Did the AITC believe, did every other manager believe, did ever broker believe three years ago that zeros were low risk? The answer is: "Yes, they did".

  569. I think it is interesting that you have said the risk was always there because—

  (Mr Fishwick) If you borrow money and you cannot pay it back, of course it is a risk.

  570. That is a change of—

  (Mr Fishwick) No, it is not a change.
  (Mr Gilbert) Gearing is always a risk. If you have a mortgage on your house, it is always a risk.

  571. I accept that you are now saying that but you say it in relation to products that you marketed as low risk?

  (Mr Gilbert) You are speaking about two different things. We are speaking about zero dividend preference shares and you are speaking about investment trusts.


  572. You have given us a submission on it. We understand that if you gear, you go to the bank and the bank is first in the queue to get its money back. Is that correct?

  (Mr Gilbert) That is correct.

Mr Mudie

  573. Mr Fishwick, you said here just latterly that investment trusts are all about confidence. That is this exercise. Mr Fallon would say that is what he means by pyramid selling, that as long as I believe I am going to make money; I will buy it and then somebody else will buy it and somebody else and, as long as we all have confidence and it keeps going up and keeps selling, that is what pyramid selling is all about.

  (Mr Fishwick) I do not accept that argument whatsoever. I think investment trusts are like markets that are based around confidence. Financials systems are around confidence. It is no different from you saying about a small bank that if you take your money out and you have a run on the bank, it disappears. It is about confidence. I will give you an example of that. You can have an investment trust, for example, that is on a discount of 2 per cent. Confidence goes; the assets do not change, so that it is a discount of 40 per cent. That is what we are seeing in the sector, discounts widening. People would have lost 38 per cent of their money and the assets would not have moved. People say, "Well, don't worry, you can wait to get them back", but you could wait for 100 years if discounts did not narrow. Investment trusts are all about confidence and there has been a huge crisis of confidence in the sector, which has added to the problems and made them worse.

  574. Investment trusts have a long history and your memorandum spells out the history. It started in Scotland, etc. There have been a lot of companies doing them. Do you not have any shame that the recent developments, the way you have developed investment trusts, have damaged the investment trust industry?

  (Mr Fishwick) I do not have shame. I am very, very sorry that people have lost money.

  575. I am not trying to pillory you. If you will bear with me—

  (Mr Fishwick) I did not design the sector.

  576. I would like to take you on to something constructive because I worry that you threw away some figures to Mr Laws that could damage the industry further. You said, "19 trusts, the rest will go broke". Can we just settle down and will you tell us which, not individual trusts, type of trusts you were talking about when you said, "All 35 will go"?

  (Mr Fishwick) I said, "All 35 might go". Let us not complicate it. Nineteen have gone already. Four further ones have assets substantially below what they owe the bank, so that is 23. The rest of them, and it is very simple, and I do not want to name them, you can work out from the guide. It is those which, for example, maybe owe the bank 90 pence and have got 95 pence of assets. It does not take much of a fall to go down. That is the point I am making. If they cannot get asset growth from markets or if the cost of that debt goes up, the mathematics say that they will not survive. Those who have got the least amount of assets against their debt are the ones that are likely to fall.

  577. You are saying in public that you think all 35 will go?

  (Mr Fishwick) No. I am saying that I think—

  578. That is what you did say. Can you clarify it? There are people over there who have money in those and who will be distressed to hear that half of the sector will go.

  (Mr Fishwick) If markets do not recover or if they fall further, the mathematics are simple: they will not survive. If markets rise, they will survive.

  579. What is peculiar about those 35 as regards the rest of the investment trust industry, which is being damaged by these 35 that we are referring to?

  (Mr Fishwick) They have more bank debt in proportion to their assets.
  (Mr Gilbert) And repaying bank debt is not just as simple as writing out a cheque to them because the break costs are the things that have come out so dramatically.

25   Note by Witness: Investment professionals over the 1999-2002 period did not in the main anticipate the sustained nature of what has now become the longest bear market in equities since World War II. Back

26   Ev 202. Back

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2003
Prepared 29 January 2003