Examination of Witnesses (Questions 60
THURSDAY 11 JULY 2002
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
(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 recogniseand it is the only
product that we as a group have marketed very explicitly as low
riskthat 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.
(Mr Gilbert) No. The unit trust has no gearing in
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
(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?
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
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 institutionsI can check that figure
laterinvested 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 sharesand
I think the FSA report touches on thisis 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 companiesthe 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
(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
(Mr Currie) Unless they run into difficulties, which
I think some of them have. We have been the first to waive fees
on distressed fundswe were the first manager to do soalthough
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
futurethat 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.
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