Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 60 - 79)



  60. In a newspaper advertisement last year marketed to the broad public you depicted a baby and described the Aberdeen Progressive Growth trust as the "one year old that lets you sleep at night". How much of its value has it lost since then?
  (Mr Marshall) Since that point I think it is down at just over a 40 per cent fall.

  61. Do you regret the advertisement in retrospect?
  (Mr Marshall) I think with the benefit of hindsight you can come back and say clearly that fund has not performed as we laid it out to do but you have to look back at the time the advertisement was run. The information out in the marketplace about zeros was very clearly pointing towards it being a low risk asset class. They had been around for a very long period of time, had performed exactly in line with the type of statement we were setting out. We were confident that was the correct position for the fund. We understand and recognise—and it is the only product that we as a group have marketed very explicitly as low risk—that statement has not been borne out in practice and therefore we have proposed an uplift package for investors which is designed to ensure they get their money back at a date in future.

  62. As your colleagues have said, the significant factor in all this is the gearing and I understand that most splits have 70 per cent or more of their assets represented by debt, is that correct?
  (Mr Marshall) It varies depending on the fund. If you take any split capital fund, it is by definition geared by the existence of a zero because that is obviously a set liability against the fund. It would depend entirely upon the individual fund as to exactly how much gearing was involved. You also find clearly when the equity content has fallen and the shares have fallen that the gearing levels have increased significantly. If you look back at the levels of gearing that were around, say, in June last year, the gearing percentages were considerably lower because the markets have subsequently fallen.
  (Mr Gilbert) When we launch a fund, or a trust I should say, you can compare it to a house and a mortgage. If you are buying a house and you have a mortgage of, say, about 70 or 80 per cent down against the value of the house, that gives you a geared exposure to the property market. When we launched the funds, the maximum they were ever geared was really about 50 per cent. As assets have fallen obviously the gearing rate has gone up. We have, of course, in the falls in the market sold down parts of the portfolio because, as Piers said, the banks and the banking covenants have forced us to reduce assets. Often with the gearing now you will get a fund where there might have been originally, say, 100 million of bank debt against it but there might be 40 million of cash sitting against it.

  63. I understand but management charges are usually based on the percentage of the overall asset value, including the debt. Is that correct?
  (Mr Gilbert) That is correct, yes.

  64. So, leading on from the questions which the Chairman asked at the beginning of the session, what we have here is a trust which was marketed to the general public on the basis of being a trust that lets you sleep at night—
  (Mr Gilbert) No.

  65. Yes.
  (Mr Gilbert) No. The unit trust has no gearing in it.

  66. Okay. Your portfolio has been marketed on the basis of a safe bet.
  (Mr Gilbert) Yes.

  67. Many of its components are highly geared and management fees, which we have heard are very substantial, are charged on the overall amount, including the debt. People have lost a very large proportion of their savings as a result. Harking back to a previous era, do you not feel that this is the unacceptable face of capitalism and this is just not acceptable behaviour?
  (Mr Marshall) If you look at the Progressive Growth unit trust, the fee on that unit trust is one and a quarter per cent which would be standard for a unit trust product in the marketplace. Where there are any zeros which are also managed by Aberdeen, and obviously as a larger player in the market you would expect to see some holdings in there, we do not double-charge. The charge is clear and it is laid out in the fund, that is the net charge which is paid by the investor as far as the products which we manage are concerned. The other holdings that are in that portfolio are shares in the market, that is no different from a holding of any other equity product in the marketplace. The charge that is laid out is clear and is not in excess of that, there is nothing hidden as far as I am concerned.
  (Mr Gilbert) I think the key issue which Gary referred to on Progressive Growth is we realised that the adverts we had were not as good as they should have been when they were made and that is why we are proposing the guarantee to give the investors their money back, which is a key component in this guaranteed uplift package. I do not know where else people in this industry or in these markets at the moment are actually going out and guaranteeing that their investors get their money back.

   Chairman: It is all down to hindsight though, is it not?

Mr Fallon

  68. Let us just pursue this. I am still not quite clear about this cross-holding. If you have got ten investment trusts investing, say, nine million quid each in each other's trusts and they raise one million each from the general public, it looks as if the total assets of the total trusts are about 100 million but, in fact, the real underlying assets are only ten million, the other 90 million is simply cross-holding, the money is not changing hands, is it? If you have got a bull market the whole thing keeps going up but the real burden of producing the dividends on capital growth is raised on a very tiny proportion of the assets. This is pyramid selling, is it not?
  (Mr Currie) I do not think that construction is quite right. When any new issue comes to market, the stockbroker takes the prospectus to several hundred institutions who take equity and shares, so you may have 150 investing institutions putting cash in to buy income shares or capital shares or whatever is on offer. But institutions buying closed end funds is not in itself peculiar, that is how the stock market works. Some private investors then may take the view that they will buy shares in the after market.

  69. You have got a group of investment trusts buying shares in each other. You have constructed a pyramid which when there was a bull market was fine but the minute the market turned down the whole thing collapsed.
  (Mr Gilbert) I do not accept that. On one of the last trusts we launched, which was the European Technology and Income Fund, there were 95 institutions—I can check that figure later—invested in that. They invested £100 million of equity in that fund. I just do not accept those figures.
  (Mr Currie) And then that portfolio gets invested—

  70. How many cross-holdings did you have in other people's investment trusts?
  (Mr Gilbert) That particular fund I think was less than 1 per cent of other funds. In fact, when it initially started it had no cross-holdings at all.

  71. But how many of your funds were invested in other people's funds?
  (Mr Currie) We have got the statistics here.
  (Mr Gilbert) We have three that were funds of funds.
  (Mr Currie) We have four AAA-rated which means they have no income shareholding at all; three AA-rated which means they have less than 5 per cent invested in income shares in their portfolio; and then eight which are A-rated which is less than 25 per cent; so 15 out of the 18 split capital trusts invested by Aberdeen have less than 25 per cent in income share ownership, four of which have none at all and three of which have less than 5 per cent, and each of those individual holdings in income shares—and I think the FSA report touches on this—is less than 2 per cent of the portfolio so the actual quantum of individual holdings into a particular trust is pretty small. What we have tried to cover in the paper is to say that, where cross-holdings become an issue, is if you have circular elements attached with fund A back to fund B back to fund A, and then you have a problem if there are falls. Nigel Sidebottom explains in the article for Credit Lyonnais that by the third iteration of a cross-holding its effect on NAV falls is de minimis. What matters, therefore, is whether investors are investing in the right type of income share, and income shares have become somewhat demonised generally. They do something very good that other equities cannot: they can offer high yield and capital appreciation in a way that corporate and government bonds cannot, and conventional equities cannot as well. Where you have a problem is if you have income shares falling generally because bank debt is then putting pressure on the portfolio that remains.

  72. But did nobody designing these products think what might happen if there was a sustained bear market?
  (Mr Gilbert) At the time they were launched the market was significantly higher and the projections from all the experts were of continuing stock markets going up at rates of 7 to 9 per cent per annum. It is very easy sitting here today with the market down 200 points and 100 points this morning to laugh at that but that was the reality at the time. Not only are we caught by surprise but so are pension funds, insurance companies—the whole industry is caught out by a fall of this magnitude.

  73. Let us just pursue, finally, the issue of charges again. Was it clear to your individual investors that the fees were levied on the gross assets before borrowings rather than on the net assets?
  (Mr Gilbert) Yes. Absolutely clear.

  74. And investors understood that fees could be as high as 2 or 3 or 4 per cent, rather than 1 per cent?
  (Mr Currie) They were not as high as that. They were 1 per cent of gross assets.
  (Mr Gilbert) 1.2 per cent of gross assets.

  75. That was your highest figure?
  (Mr Gilbert) And no fees charged on holdings in other Aberdeen funds either.

  76. So you had nothing higher than one and a bit per cent?
  (Mr Gilbert) No.

  77. Do you think the investors understood what that meant?
  (Mr Currie) Yes, and relative to initial distribution costs, say, of a unit trust of 5 per cent or 3 per cent, such charges are not unusual. After all, you are investing one hundred per cent of the portfolio not just 50 per cent of it, so the charging structures which apply to these trusts and which have been set for all investment trusts are pretty much the industry standard.

  78. And you think they are reasonable?
  (Mr Gilbert) Yes, I think they are. They are the industry standard.
  (Mr Currie) Unless they run into difficulties, which I think some of them have. We have been the first to waive fees on distressed funds—we were the first manager to do so—although we appreciate that was not much consolation given the extent of the sector's difficulties. People have lost a lot of money. But the important thing is how we as an industry, and we as Aberdeen, can make best efforts to try to restore investor confidence and produce information that is genuinely helpful and that people can understand, and we are taking a number of initiatives with the AITC and others to try to achieve that end.


  79. Mr Gilbert, there is a problem for the ordinary person. What you are saying is that the problem for you was the future—that everything seemed okay at the time but the future was a problem. But the ordinary person would say that if you are going to climb Mount Everest, because it is a good day when you start you go in shorts and trainers but you anticipate what could happen at later date. It just seems that you are not anticipating what could happen, and that is the issue here. It is your responsibility, and that is what the ordinary citizen writing into us is asking us to question you on.
  (Mr Gilbert) We stress-tested these products to a 30 per cent fall in the market; we did not expect the falls to be greater than that.[13] Now, you may say, "You should have known that the market was going to fall to the extent it did", but I either was not clever enough or did not know enough to foresee that the market was going to fall to those levels

13   Note by Witness: Chapters 5, 6 and 21 of the UKLA Listing Rules govern the disclosure requirements relating to the publication of Listing Particulars. Investment trust companies are launched by sponsoring stockbrokers, the modelling of which, risk factors and assumptions are verified independently by lawyers and accountants. 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 2002
Prepared 17 October 2002