Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)



  20. Do you think she was correct?
  (Mr Currie) I think she was correct.

  21. If we look at your 2000—
  (Mr Gilbert) I think at the time they were commonly perceived to be low risk, not just by us but by the market as a whole.

  22. That is helpful. She went on to say, seeing as we are quoting her, "they share the same risk characteristics as gilt edged government securities". Was that an accurate statement?
  (Mr Currie) I would have to hear the source of the article. They share similar analytical characteristics to gilt edged securities. Typically zeros are compared to gilts in terms of redemption yields and so the characteristic of zeros as an asset class has been one which has been low risk over the last 15 years.

  23. Let us take the 2003 zero dividend preference shares that you offer in Aberdeen Preferred Income. At around the time she wrote that they were priced at 275 pence. What are they now?
  (Mr Currie) I think they are between ten and 20 pence. I would have to check the exact figures.

  24. And they were a low risk investment?
  (Mr Currie) I think if we are looking at the redemption yield criteria written at the time and the analytical process that was saying Aberdeen Preferred, I think you are saying, 2003 zeros, which is one zero out of 138, and expressed the properties at the time of offering a redemption yield of somewhere between 7½ and 8½ per cent. What that is telling you is at the time the market priced those zeros as a lower risk entity, otherwise it would have been priced at a 50 per cent gross redemption yield.

  25. I am coming to you as an investor and thinking of going into the zero dividend preference shares and I read in the quite creditable magazine Investment Adviser that your head of investment trust sales is saying that these products are low risk and share the same risk characteristics as gilt edged government securities, so I invest my 275 pence and today it is worth ten pence.
  (Mr Currie) Thirty-nine.

  26. It has not done very well, has it?
  (Mr Currie) No.
  (Mr Gilbert) Can I just elaborate on one point. To correct a point you made, we did not offer those particular zero dividend preference shares for sale. What we have offered for sale, to use your terminology, is a unit trust which invests in zero dividend preference shares. I think, like any investment, we always advocate that people take a spread of investments rather than a particular single investment. I am prepared to concede that we sold the unit trust to the general public but that particular share you are talking about is one of many that the trusts that we manage and which are listed on the Stock Exchange.

  27. Indeed, but if you take the full range and spread the risk, as you put it, it is a similar story, is it not? I believe that since 31 March 1999 the FTSE has gone down about 16 per cent but splits taken as a whole, if they are non cross-holdings they have gone down 39 per cent, if they are cross-holdings they have gone down about 80 or 90 per cent and that is across all of them, not just taking one product. That is on FSA figures.
  (Mr Currie) We are looking at those figures.[10] Some of those figures we are keen to go back to the FSA to have a look at. I think the other thing I would point out is that if there is more than one share class in a split capital share, the riskiest share classes are those typically called capital shares or income and residual capital shares. These shares are the highly geared shares which means if there is a movement in the market down, say, 20 per cent, they may be down 80 per cent or more. I think one of the elements of confusion here which Martin has been trying to clarify is that the zero share class, which is a preference share, is the lowest risk share class of the ones in the split capital trusts, the other share classes are higher risk, they are securities, they are not products. What we are trying to clarify is that zeros are the lowest risk share class and in particular the product offered in the main to the retail market is through a retail unit trust investing in zeros.[11]

  28. Shelley O'Donnell said that they shared the same characteristics as gilt edged government securities, so if I had put my 275 pence into them in February 2001, what would I have now?
  (Mr Currie) I think she tried to talk about zeros as a generic type in the same way as bonds. Many people think that government bonds are low risk, the safest securities, but in fact they dropped 20 per cent at one stage in 1993-94. Some people think Argentinian bonds might have been a safe bet. Because bonds are going to be backed by governments people believe them to be low risk but not all bonds are the same and not all zeros are the same in terms of their characteristics.
  (Mr Gilbert) Mr Plaskitt, could I pick up your point on the zeros in the fund we offered to the public because it is the one fund that we actually retailed to the general public and, you are quite right, did market as a low risk product.

  29. But it was not low risk, was it? Was it not completely misleading to suggest to your customers that it was low risk?
  (Mr Gilbert) It was perceived at the time to be low risk, not just by us but by the whole industry.

  30. I am sorry to interrupt but when as a prospective customer I read one of your senior people saying this is low risk I do not read that as saying "this is low risk today but it might be terribly high risk tomorrow". Low risk is a broad statement about the general prospectus of this investment and that was misleading, was it not?
  (Mr Gilbert) Mr Plaskitt, I am going to ask my colleague, Gary Marshall, to tell you what we have done about it in a second. I do have to point out that we are suffering the longest bear market since the 1930s, not the deepest since the 1930s but the longest since the 1930s. Whatever happened, these bear markets are very, very tough and zeros as a whole have tended to lose on average 30/40 per cent of their value. Perhaps Mr Marshall could tell you what we are doing about it.

  31. I think my colleagues may wish to take that up. I just want to round off on this and let my colleagues pick that up, so I am sure you will have the opportunity to do it. Do you think in hindsight that Shelley O'Donnell should not have described these products as low risk?
  (Mr Gilbert) I do not think hindsight is a true measure or a true description of how we should judge it. At the time we believed they were low risk.

  32. I think your investors looked at it that way.
  (Mr Gilbert) Unfortunately, everyone looks at it that way. Everyone judges things with hindsight. If we only had the benefit of hindsight I am sure we would all do things differently.


  33. I have got the Cazenove investment company's annual review before us here and last July they stated that "A systematic collapse could result from the high degree of investment by these trusts in other geared funds". Were you aware of that quote? If you were aware of that quote, did that affect your management practice?
  (Mr Gilbert) We were aware of that quote and, yes, it did affect our management practice. We did not agree with everything that was in the document, in fact we disagreed with a lot of it, as did a number of other analysts disagree. There were two opinions on that particular paper.

  34. Things kept getting worse for you despite that.
  (Mr Gilbert) They did get worse because sentiment got worse. I think we have got to separate share prices into two aspects: market movement and sentiment. What we have got at the moment is poor markets driven by general market falls plus falls on sentiment specific to the sector. For instance, a zero which is worth 150 pence today and might have 200 pence of assets backing it would be priced at 75 pence today and that is the sentiment factor.

  35. Just before the meeting, immediately before, we were provided with this document which you describe as "refreshed information". How "refreshed" is it?
  (Mr Currie) I am sorry, there is a typo on the last page.

Mr Ruffley

  36. That is the least of your problems. Could I ask you, Mr Gilbert, how many of your splits have cross-holdings in other splits under 20 per cent?
  (Mr Gilbert) My colleague is looking for the figure—

  37. Perhaps while he is fingering through there, if he could tell me how many of your splits have cross-holdings in other splits of firstly under 20 per cent, between 21 per cent and 40 per cent and 41 per cent to 70 per cent.
  (Mr Currie) From memory we—[12]

  38. No, not memory, give me the figures.
  (Mr Currie) This (document) compiles it as a sector rather than by split—.

  39. You should know these figures, let us get them.
  (Mr Currie) We have 19 split capital investment trusts, three of which are fund of funds, which means their specific mandate is to invest in other split capital income shares. Three of them have no investment in other income shares at all and others have varying amounts between nought to ten and nought to 30. The reason why it is not off the top of my head is that they are all managed separately with different mandates, with different boards and with different instructions. There is also the fact that the ownership profile changes dramatically over time as managers invest into different areas. To answer your question, there are three fund of funds and there are four that would be described as barbell trusts that may typically have between ten and 30 per cent in income shares. The figures do change.

10   Note by Witness: FSA DC10 Update Report table covers not just zero dividend preference shares but other riskier share classes as well. Back

11   Note by Witness: Investment Adviser article July 2001 states: ". . . zeros are riskier than gilts" and ". . . zeros have different levels of risk." Back

12   Ev 68. Back

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