Examination of Witnesses(Questions 560-579)|
TUESDAY 29 OCTOBER 2002
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"?
(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
(Mr Gilbert) I am afraid, we will have
to come back to you on this. I really cannot answer, it, I am
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
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,
(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,
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.
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
(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
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
Ev 202. Back