Examination of Witnesses(Questions 460-479)|
TUESDAY 29 OCTOBER 2002
460. Just to check back on something you have
just said in passing, as I think it may be of some significance,
you have referred, Mr Fishwick, that is, to the de-gearing operation
of the last 18 months to two years and the fact that the main
Board of Aberdeen was very much driving this de-gearing operation.
(Mr Gilbert) No, that is not true. That
is a misunderstanding, Chairman.
(Mr Fishwick) We, as asset managers, together with
our clients, the investment trust, were de-gearing the trust.
It was not a request from the main Board of Aberdeen plc, but
it is totally separate.
(Mr Gilbert) Each individual trust has its own board
which makes its own decision on de-gearing.
(Mr Fishwick) And they are all different.
461. Did I understand Mr Fishwick to say that
the FSA was aware of the totality of the de-gearing operation?
(Mr Fishwick) I do not believe I said
462. I think you may have said that it approved
of the de-gearing operation.
(Mr Fishwick) No, I did not.
(Mr Gilbert) No.
463. That would not be right?
(Mr Fishwick) What I think I said that
the FSA actually approved of by the Listing Authority was having
directors with the relevant experience, but everyone has been
aware of the de-gearing in the sectors.
464. I see, so everyone is aware of it.
(Mr Fishwick) You are making announcements
every day on the screen.
465. So your reference to the FSA was simply
that the FSA presumably reads the newspapers and follows these
(Mr Fishwick) If you repay a bank debt,
even if you repay a penny or £100 million, it is a disclosable
event and you have to make a Stock Exchange announcement immediately,
so you see on the screen that there have been hundreds and hundreds
of announcements of debt repayments by many of these 130 companies,
and it happens every day.
466. Well, I am glad we have clarified that.
Mr Marshall, is Aberdeen getting out of the retail sector?
(Mr Marshall) No.
(Mr Marshall) No.
468. Has the main Board taken that as a formal
(Mr Marshall) I think you are probably
referring to the newspaper reports of the potential asset sale
of unit trusts and alike business. I would say that there are
no plans to do that. I am not sure where the reports in the papers
have come from.
469. You see, when I wrote to Aberdeen in August
on behalf of a constituent of mine, this was about the Aberdeen
High Income Trust which I do want to talk to you about, I was
simply referred to the receivers and Ernst & Young. There
was not any recognition of a continuing role.
(Mr Marshall) I think that is a legal
requirement once the trust has moved into receivership, that all
correspondence regarding that trust falls with the receivers and
we are not in a position to correspond with clients at that point.
We will of course attempt to answer any questions which are relevant
to the period for which we were involved.
470. Why did the Aberdeen High Income Trust
(Mr Fishwick) Can I take that because
it is an investment trust rather than for Gary. The reason that
the Aberdeen High Income Trust failed is very, very simple. At
the end of the day we had less assets than we owed the bank and
the debenture holders.
471. What was the purpose of the attempted reconstruction
of the High Income Trust in September 2001?
(Mr Fishwick) In September 2001 Aberdeen
acquired another investment trust which had got itself in trouble,
a trust called HL Income & Growth.
They were in trouble and they actually approached us and said,
"Look, why don't we get together and try and strengthen the
balance sheets of both companies because both are having difficulties?"
It made sense to make a merger and at that period of time, in
that three or four-month period, a number of trusts were in trouble,
their assets were starting to fall, so the sector generally, the
brokers said, "Look, let's make an attempt to try and rescue
these trusts" rather than go bust earlier, and the one thing
that I am disappointed about is that we and the sector generally
have been heavily criticised for attempting to rescue and save
funds from going bust. Quite frankly, you wonder why we bothered
472. Well, could I just press you on that. You
say that in September 2001 the High Income Trust was facing some
problems and what you did then was that you merged it with another
entity that was in even bigger trouble. That is what you have
just said. It does seem a slightly odd strategy.
(Mr Fishwick) Well, no, because what
it allowed us to do is that it allowed both companies to de-gear
and to take on the most attractive form of debt and we raised
some new money which left the companies, both of them, in much
better shape than either one was in before it occurred. However,
it was not enough and I think the point I am trying to get across
here now is that one of the problems that people have been saying
is, "Oh, everyone in the City just blames 11 September for
the problems", and this occurred at that time, but one of
the consequences of 11 September, forgetting the fact that stock
markets fell, which has never been relayed, is that interest rates
collapsed around the world to what is now deemed to be emergency
levels, and interest rates falling means that it costs you more
to repair your bank debt. If you borrowed £100 million, to
repay it two years later would have cost you a further £15
million, so that is £15 million of assets that disappear
to the bank. It is just like breaking a fixed-rate mortgage. I
do not believe before 11 September that anyone was forecasting
US interest rates at 1.75 per cent.
473. Well, I have in front of me here a letter
that was sent to one of my constituents on 19 October 2001 and
this is how it begins, and it begins with the very point you have
just made: "I enclose a copy of your six-monthly statement",
and then the next paragraph: "The tragic events in the United
States on 11 September not only caused an unnecessary loss of
human life, but also impacted on the major economies of the world.
I understand you may be concerned about the ramifications of the
terrorist attacks to your investments". As one might say
in retrospect, the terrorist attacks and the investments were
coming from a slightly different direction. Do you think that
was a slightly misleading introduction to the situation of the
High Income Trust, as it then was?
(Mr Fishwick) I do not think that markets
or any investments are better off than they were before 11 September.
I do not think that is particularly misleading. I think that was
an appropriate thing to say in October, five weeks after 11 September.
The whole world was pretty shook up.
474. And do you think, in the context of a reconstruction
which had occurred in the company a month earlier after 11 September,
that the merger with the trust that was in trouble, do you think
that was a sensible way of informing investors?
(Mr Fishwick) I think part of this attempt,
and they had full documentation about the merger going forward,
yes, I think it was a reasonable attempt to
475. Did the merger documents explain that it
was a merger with another investment trust that was in trouble?
(Mr Fishwick) Of course it did.
476. Of course it did?
(Mr Fishwick) Yes.
477. Well, let me read to you, "The Board
and the manager believe that the merger will have a number of
benefits to the company's shareholders, in particular the strengthening
of the balance sheet and the provision of a significant improvement
in the asset cover level".
(Mr Fishwick) That is exactly what it
did do. Just on that point, I think it is quite useful that you
make it and you can press me further actually because it is easier,
but the Chairman of the AITC, Tony Townsend, was on the Board
of that fund that was merged, so ask him whether he felt it made
sense at the time rather than just myself because you obviously
cannot believe that it is the case. What we did, and it was not
enough, I admit that, and I am very, very sorry, this is not very
nice, people losing money, but we did attempt to try and save
the money of both classes of shares. It was not enough, we failed,
but I do not apologise for trying.
478. Mr Marshall, what is the policy of Aberdeen
now towards its retail investors because your earlier statement
really was, "Well, the people who invested in Aberdeen High
Income Trust and other trusts, well, tough really. It is not our
problem any more"?
(Mr Marshall) No, I do not think we took
that attitude. I think what we have tried to do is to ensure that
we give as much information to people as possible because they
are asking lots of questions. The correspondence you are referring
to would be precisely the type of question which was being asked
at the time, which was, "What does this mean for me?"
and once people had got over, if you like, the initial shock of
the September events, they were looking to see the implications,
seeing stock markets fall. Now, on an ongoing basis what we are
trying to do is to communicate as much as possible with the information
that is provided out there. Some of that information regrettably
is very unpleasant and we are having to tell some people some
very bad news in terms of their investments and it is not very
479. What do you think is the right strategy
for the retail investor in a period of stock market volatility?
(Mr Marshall) I think there are probably
two aspects to that. In terms of existing investors, and I think
you have to look at each individual in terms of their own risk
profile and appetite for risk of the holdings they are referring
to in terms of their overall portfolio and see where that stands,
but the one thing we would certainly encourage people not to do
is to take a knee-jerk, panic reaction and the mistakes of the
past, particularly in the retail market, are that people do sell
out at the bottom and buy at the top. It is unfortunate and it
happens, so what we are trying to do is to give people as much
information as possible so that they can make a reasoned decision.
You try and put that in the context of historical events and allow
people to weigh that up and hopefully in conjunction with their
own advisers. We at the end of the day do not give financial advice
and it is up to people like us to supply as much information as
14 Note by Witness: The recommended proposals
for the merger of HL High Income & Growth Trust PLC with Aberdeen
High Income Trust PLC has been supplied to the Committee. Back