Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 119 - 139)




  119. Good morning, gentlemen. Can I welcome you to the Committee meeting. Would you formally identify yourselves, please?

  (Mr Godfrey) I am the director general of the Association of Investment Trust Companies.
  (Mr Townsend) I am the chairman.

  120. I have a general question to start with which is what are your observations on the previous session?
  (Mr Godfrey) Clearly the split capital trust sector has been having a very difficult time, and the managers of that sector are under a great deal of pressure. I think that was evidenced in the session we have just witnessed.

  121. Can you empathise with the views we have put across on behalf of ordinary investors and what reassurance do you have for ordinary investors? It is a rather short answer you have given.
  (Mr Godfrey) The Association of Investment Trust Companies' mission is to work with our member investment trust companies to add value for shareholders. We are an organisation funded by the shareholders' funds of investment trust companies so we regard our primary objective as being to work in their interests, and we share this with the boards. In the context of that, therefore, we are deeply distressed by the losses that they have experienced.

  122. Putting it another way to you, given the quote that I gave from Martin Dixon regarding the fact that they deserve no sympathy, they have tarnished the whole of the split capital sector, and the stain may have spread through the investment trust industry as a whole, do you agree with him?
  (Mr Godfrey) I think it is a matter of the greatest possible regret that the good name of the investment trust industry—

  123. But do you agree with Martin Dixon's quote?
  (Mr Godfrey) I would agree with it in part.

  124. What parts do you agree with and what parts do you disagree with?
  (Mr Godfrey) I would agree that the good name of the investment trust sector, certainly of the split capital sector, has been blackened and that the stain has started to spread through the investment trust industry as a whole.

  125. So you do agree with the whole quote, because there are two parts to it: that they have tarnished the split capital sector and that the stain may have spread.
  (Mr Godfrey) Yes, I do agree with that. I thought you were asking me whether I had any sympathy for Aberdeen Asset Management or not as well.

Mr Plaskitt

  126. In your view, should zeros ever have been marketed as a low risk investment?
  (Mr Godfrey) There was a long period of time during which I believe it was entirely appropriate for zero dividend preference shares to have been marketed as low risk investments. One of the things we heard in the previous session was that they were low risk, and one of the statistics mentioned was that some of the zeros issue could suffer a fall in the value of supporting assets by 11 per cent per annum and still pay out. That is only one of the methods of analysis. Clearly what one also has to look at is the quality of the assets underlying that structure and then take a view as to how risky one thinks it is that those assets will fall by 11 per cent per annum. The assets are not necessarily related to the market as a whole, so if you feel that you have assets which are vulnerable to falling considerably then clearly the chances of them falling by 11 per cent a year become much greater.

  127. What do you think an ordinary investor understands by the phrase "low risk"?
  (Mr Godfrey) I think an ordinary investor understands by the phrase "low risk" that they are not likely to lose very much money. If they lose anything at all it will not be very much.

  128. Is that what happened in the case of zeros?
  (Mr Godfrey) It is not what happened.

  129. So they were not low risk then?
  (Mr Godfrey) From that perspective they were not low risk but if I can please just return for a moment—

  130. But the industry cannot hide behind its own self-helpful definition of what "low risk" is. You used the phrase, or they used the phrase, or your people used it, in promotional material and in articles.
  (Mr Godfrey) I could not agree with you more that the industry should not hide behind its own definition of "low risk" which may not accord with that of its customers. I think it is incumbent on us to make sure we understand what the customers believe and make sure we inform them accurately about what they are getting but the fact is that zeros, up until a few years ago, could suffer big falls in value and were backed by fairly conservative portfolios as well so the chances of them suffering any catastrophic loss were infinitesimally small. What happened over the last few years was that the portfolios backing that supposedly low risk investment started to change because of the introduction of investment in other split capital trusts—what we have referred to today as cross-holdings—and it started to change also because of the introduction of bank debt which destabilised the whole structure in the event of serious falls in the market. So I do believe that the risk profile was changing, and it is also my belief that the industry did not go out of its way to communicate with potential investors that the risk profile was changing.

  131. So investors were being misled in that sense?
  (Mr Godfrey) Investors were not in receipt of sufficient information.

  132. Which means they were being misled?
  (Mr Godfrey) It depends what you mean by "misled". If you mean that they were being told something proactively that was wrong, I think probably not; if they were not being told something that perhaps they should have been told, then yes.

  133. Pretty crucial information was being withheld from them?
  (Mr Godfrey) They were not given crucial information.

  134. And you accept that that in a sense defines being "misled?"
  (Mr Godfrey) No, I do not.

  135. I thought you did.
  (Mr Godfrey) I cannot go to the motivation of the people who did not give them the information so it is impossible for me to say "withheld". It would depend on whether they recognised it themselves or not.


  136. So they could have been absent-minded?
  (Mr Godfrey) They may not have recognised it themselves—

  137. Fair enough.
  (Mr Godfrey)—And that is a separate issue, whether they should have done or not.

  138. According to your memorandum, concerns about the merits of splits emerged in the press as long ago as November 1998. What action did you take?
  (Mr Godfrey) The concerns that were being raised in 1998 were concerns about what has become known as the "magic circle". We started to hear rumours about the magic circle; we were reading reports in the press; we looked into those rumours and we could not find any corroborating evidence. Again, there is a big issue of intent here and intent is always the hardest thing to prove. The fact that a number of managers issue new funds and invest in each other's shares is not of itself evidence of collusion. They may think that those shares are the most wonderful thing since sliced bread and may want to invest in them without any collaboration between them, and that is something that is quite difficult to prove. The rumours we were hearing were only of the nature that managers who were not participating in this were being invited to participate, and that in itself does not represent a misdeed being done—just an attempt to purloin them. We then, I think perhaps wrongly, after that period began to get more comfortable and the reason was that the argument was being made—and I think to a certain extent we accepted it—that the fact that more managers were coming into this sector and more of these holdings with other splits were being launched was leading to diversification which was reducing risk. The other factor which made us more comfortable was that increasingly the new issues were being issued purely into the institutional market place by way of placing. What we were not picking up on was that the intent was to push them out into the secondary market over time so I think we may have been wrong in buying that argument.

  139. So in hindsight—that sacred word—you made a mistake?
  (Mr Godfrey) I am not going to use the word "hindsight": I think we made a mistake.

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