Examination of Witnesses (Questions 40
THURSDAY 11 JULY 2002
40. What about the percentage, off the top of
your head if you cannot give a specific number, between 41 per
cent and 70 per cent? What would you say? Give us an estimate
to save time.
(Mr Gilbert) Three to four.
41. Under 20 per cent?
(Mr Currie) Three.
42. Twenty-one to 40 per cent?
(Mr Currie) I will check my previous file if I have
it with me.
43. Whilst you are checking that, how many of
your splits are in what you would term or outsiders would term
or the FSA would term "financial distress"?
(Mr Gilbert) Eight at present.
44. Eight out of?
(Mr Gilbert) Nineteen.
45. In Professional Investor in April
2001 experts at the University of Edinburgh talked about the importance
of the inter-related structure of cross-holdings and what could
happen in a falling market and they said "The risks created
by geared trusts investing in other geared trusts are very real.
Substantial price declines in the ordinary shares of some individual
trusts might all too easily become a self-feeding downward spiral
as the net asset values of the ordinary shares of other trusts
that held them fell in turn." What do you do to manage that
clear and present risk to protect investors?
(Mr Gilbert) When was that report?
46. The April 2001 edition of Professional
Investor. Do not just take that as evidence, the quote that
my Chairman read out, the Cazenove briefing note, makes a similar
point. What do you do about that clear risk?
(Mr Gilbert) I would like to correct the point that
it is the cross-holdings that have caused the difficulties for
capital investment trusts. It is not the cross-holdings, it is
the gearing that has caused the problem. If there had been no
gearing in funds at all they would not be in difficulty, to take
the extreme case.
47. But you had both, did you not?
(Mr Gilbert) Gearing has added huge positive returns
over the last, Piers?
(Mr Currie) Over the last 15 years.
(Mr Gilbert) The gearing has added about 11 per cent
of the value.
(Mr Currie) I think what you are trying to get to,
Mr Ruffley, is the supposed systemic risk.
48. I know what I am trying to get to, just
give us some straight answers.
(Mr Currie) You can cut and slice the data with 400
different shares and class it a number of different ways. If I
do not have immediate answers I will certainly come back and let
you know the specifics. The issue that the FSA was raising in
their report and what the Chairman appeared to be mentioning before
was the question of the systemic risk affecting the sector. We
now see about ten per cent of the split capital market is weak
but as against that, identifying purely cross-holdings as the
clear and present danger is one which is possibly over-expressed.
Only about 15 per cent of the sector is invested in income shares.
Investing in income shares per se is not necessarily a
bad thing, income shares are priced according to how much income
they can produce in the future. The problem that we see here with
some of these structures that were being invented in the late
1990s was that bank debt proved to be a more inflexible form of
gearing than zero dividend preference shares. Once assets fall
sufficiently and fund managers effectively lose control to the
bank because assets have fallen, you have an issue with income
shares, This is because income shares that are unable to pay out
their income fall in value quite dramatically. The sensitivity
modelling is generally done by each trust and each board and each
manager specific to that trust because they are all designed differently,
some invest in different areas, different asset classes, some
have bank debts, some do not have bank debt, some have a focus
on the UK.
49. I understand all that. You have explained
the problem but why did they screw up?
(Mr Currie) I think the reason with hindsight
50. So you think they screwed up?
(Mr Gilbert) No, he did not say that.
(Mr Currie) Who screwed up?
51. The managers.
(Mr Currie) No, I do not think the managers did screw
52. Ah. I think a lot of people listening to
what you have said, Mr Gilbert, will be quite staggered by that
but do continue, Mr Currie.
(Mr Currie) I think one of the issues is that when
these instruments are designed, and they have been designed by
some of the best investment bankers and brokers in the UK, they
actually build the product to try and withstand stress testing
in certain market environments. As it is they stress tested it
as if it was a car driving down a pretty bad rainy road and what
ended up happening was that they hit a hurricane. We have seen
fairly massive falls, let us not forget. A number of these trusts
are exposed to the technology market which has been down about
80 per cent and a number of conventional investment trusts exposed
to certain asset classes have also fallen dramatically. Geared
instruments on falling asset classes do worse. That was the purpose
of a number of these instruments and it is obvious what the instrument
said it was going to do.
53. Can I ask you finally, Mr Gilbert, which
authorities are investigating you for collusive behaviour?
(Mr Gilbert) As far as I am aware no authorities are
investigating us for collusive behaviour at the moment. The industry,
including Aberdeen is working with the FSA in their overall review
of the split sector.
54. At the moment. So you might expect it in
(Mr Gilbert) I think that is a question you should
ask Mr Tiner.
55. Are you expecting it, Mr Gilbert?
(Mr Gilbert) I am not expecting it but that is a question
you have got to ask Mr Tiner. I would not dare speak on behalf
of the FSA.
56. On the point you said about cross-holdings
not being the problem, just to finish my colleague's comments,
I have got a quote from David Franklin, who is a Director of stockbrokers
Christo's, and he said "I think the directors of some of
these investment trust companies should be held accountable. There
is no doubt in my mind that they would have been aware of the
level of cross-holdings and should have understood the consequences."
Can I ask for a simple yes or no, do you agree with that?
(Mr Gilbert) No, I do not agree because it is all
written with hindsight, Chairman. Every comment there is with
the benefit of hindsight.
Chairman: Fair enough.
57. I just want to explore these cross-holdings
a little more. Are you aware of the extent to which the holdings
in, let us say, Aberdeen Progressive Growth is actually invested
in other similar trusts?
(Mr Gilbert) I think it is very important to understand
that some of the funds are set up as fund of funds so their specific
investment remit is to hold shares of other investment trusts.
That is what it was set up to do, that is what it has been described
as doing and that is what it does.
58. So the answer is 100 per cent?
(Mr Marshall) Was that Progressive Growth you mentioned
or Aberdeen Preferred Income Trust?
59. No, Progressive Growth.
(Mr Gilbert) Sorry, I thought you meant Aberdeen Preferred
(Mr Marshall) If I could take that question. Progressive
Growth is a unit trust which invests in split capital trusts,
the zero dividend preference shares which are shares of split
capital trusts. It is, as Martin said, in this case designed to
invest in zeros. It is very clear that it invests in zeros. That
is its entire purpose and it is laid out that way.