Examination of Witnesses (Questions 160
THURSDAY 11 JULY 2002
160. Who should be stopping it?
(Mr Godfrey) I am not sure that someone should be
stopping it; I think it is probably the other way round. I think
people should have sufficient information that they do not buy
it if it is not for them.
161. Well, "increasing premium . . . that
may prove unsustainable". You think there are people who
feel that is a good thing and want to do it?
(Mr Godfrey) Yes, absolutely. I think some people
might say, "This has a three year timeframe; there is a risk
that these premiums may prove unsustainable but if markets go
up by 6 per cent a year it will shoot the lights out and I will
have some of that- not all my money but some of it". I think
it is dangerous territory to start saying, "Let's stop it
happening". What we have to be absolutely sure about is that
people understand what they are getting and what the risks are
so they can take an informed decision for themselves, or their
advisers can, about whether it is the right thing to buy.
162. For legal reasons it is obviously of interest
to people whether they were incorrectly advised when they bought
the investment. Do you consider that people who bought zeros were
adequately advised that their security might be compromised by
(Mr Godfrey) Although we have had letters directly
from people who have invested directly, we have not had letters
of complaint against advisers and we have not seen what advisers
were saying to them so I can only give you a hypothetical response.
If an adviser was simply following the information that they received
from the promoters of the product in the first place, personally
I do not think I would hold them to blame. They are reasonably
entitled to expect that the information they get is accurate and
sufficient. If, however, they go further than they have been told
by the promoter, if for instance they were to write to a client
and say, "You should buy these; they are as safe as gilts",
then I think they might be held up to have gone too far in their
communication with their client.
163. Finally, in paragraph 4.13 you make a distinction
between your statement recommending practice for United Kingdom
based funds and for offshore funds which are more free to do as
they like. Do you not feel that offshore funds operating out of
the United Kingdom should also follow the guidelines you outline
(Mr Godfrey) Given that it is our statement of recommended
practice I could hardly do otherwise than say I would like everyone
to follow it, absolutely.
164. Do they do so?
(Mr Godfrey) No, they do not all do so, but they do
follow the international generally accepted accounting principles.
165. Could you identify, not now but at a later
date, for the Committee those that do and those that do not?
(Mr Godfrey) Yes.
166. Are any of those that do not follow that
good practice your members?
(Mr Godfrey) It is our recommended practice. I do
not know whether any of the offshore funds that have not followed
that practice are our members but we will include that in our
additional information for you.
167. Are all your members co-operating in the
information gathering exercise that you have just set out to the
(Mr Godfrey) We have two exercises, one of which is
to supply data to the website of holdings in other splits, and
we have probably about 80 per cent co-operation with that. We
have not aggressively pursued that over the last couple of months
because of the second exercise we are engaged in which is to collect
the full portfolio for the data exercise that we have, and that
we have had complete co-operation on, or virtually. The reason
why we have not pursued the former is that my feeling is that
once we have gone through that data exercise we will establish
probably a new way forward for what would be the optimum form
and frequency of disclosure of holdings, so there is not much
point in going back and asking people to co-operate with something
which was likely to become redundant fairly quickly.
168. You say that 80 per cent of your members
co-operated with that first exercise and 20 per cent failed to
(Mr Godfrey) 80 per cent of the universe. As I said,
we regard this as such a significant problem for the industry
as a whole that we have opened our doors, if you like, even to
those who are not members offering to put their information up
on our website, and I do not have a breakdown of the 20 per cent
that has failed to co-operate between members and non members,
but I can include that in the data as well. I do not regard this
as just a problem for my members if people are losing money in
investment trusts but a problem for the whole industry, and we
have to tackle it as such.
169. But generally you are getting co-operation
from people who are not your members in these exercises?
(Mr Godfrey) Generally, yes.
170. That is 80 per cent. What sort of fund
value is that?
(Mr Godfrey) I am sorry, I could not break it down
by value, but I would imagine it is fairly representative of the
sector as a whole.
171. You told us in your memorandum what you
would like split fund managers to do in terms of presenting the
assumptions they are making about the value of their portfolio
and breaking it down to the different components. How many of
them do that?
(Mr Godfrey) I think in the format we have presented
here that is not being done at the moment but to be fair to
172. Not being done by anybody?
(Mr Godfrey) Not in this format, no, but to be fair
to the managers
173. So no one is doing it?
(Mr Townsend) To be fair, there are no new issues
taking place in the current market so the opportunity just has
174. I had not understood paragraph 5.8 of your
evidence to apply solely to new issues.
(Mr Godfrey) I think it is a very good point you are
making: that the recommendations we are making there are something
that we would like to see appearing in prospecti of new issues,
but certainly the projections we refer to could be put out on
a regular basis by managers. There is no reason why they could
175. And how many do?
(Mr Godfrey) No one is doing it to this extent; it
is something we would like to see. This is something we have only
recently proposed, however, and in fact it is fleshed out in more
detail in this document than we have yet been able to do elsewhere.
It was first mentioned in our submission to the Financial Services
Authority's consultation document that was due in at the beginning
of this year. Of course one spends a good deal of time racking
one's brains to think about what one can do to improve disclosure
and information for shareholders going forward, so I would say
this is a new idea and therefore we have not had the chance to
get it adopted by people as yet.
176. In paragraph 5.4 of your evidence to the
Committee you set out four categories of split capital trust.
How many of the trusts are in each category, do you think?
(Mr Godfrey) This is a matter of judgment but I will
give you my opinion. We have about 136 trusts in this universe
altogether. My guess is that the number of trusts who are unlikely
ever to return anything to shareholders, even zero dividend preference
shareholders, is probably in the order of just below ten. Depending
on what happens to the market, it may rise to as many as twenty.
The group which in the previous session was referred to as possibly
working themselves out if markets go up in the sense that they
may return monies to zero dividend preference shareholders, and
may even return some to shareholders but probably significantly
less for the shareholders than they invested in the first place,
probably numbers up to in total 40 between those two categories.
Then we have perhaps another twenty who have had to take some
action to avoid getting into further difficulties such as cutting
bank debt, and then we have about half the sector which I believe
will recover given any reasonable market returns over the next
177. That is quite important, is it not? We
are dealing here with a significant category of investments and
you are saying that half of it is sustainable on any basis that
anyone investing in it might consider to be even halfway reasonable,
and half is not?
(Mr Godfrey) No. I think probably more than half is
sustainable. The last twenty who have had to take some action
I think are not in deep difficulties and may well recover. I think
we probably have about forty, or about a third, which stand either
to lose everything or a very significant proportion of their assets.
178. So a third of the investments in this particular
range of investment products, split capital investment trusts,
are unlikely to get any of their money back or, if they do, it
will only be a small proportion?
(Mr Godfrey) Up to a third or it could be as little
as, say, a sixth. As I said, it is very much dependent on what
happens in the future, but it could be up to a third or it could
be as little as a sixth.
179. How would people know in which category
of split capital trust their money was?
(Mr Godfrey) It would be difficult for a private shareholder
unless they did a lot of research work and educated themselves
as to how they work, but there are advisers and analysts, the
same as those who analyse any plc, who are making judgments about
what category these trusts are in and giving ratings to them as
such. One of the outcomes we hope to achieve from the data exercise
that we are undergoing is to be able to develop a more robust
systemnot saying, "This is good", "This
is bad", "This is risky", "This is low risk"
but giving people a measure of to what extent this particular
trust is exposed to bank debt or is exposed to other splits and
also some measure potentially of the quality of the exposure to