Select Committee on Treasury Minutes of Evidence


Supplementary memorandum submitted by Aberdeen Asset Management

  1.  Summary of supplementary information.

  2.  Background: Aberdeen-Managed or Advised Split Capital Closed End Funds (SCCEFs).

  3.  Direct requests for information.

    3.1  Provide thorough information on the cross-holdings of each SCCEF, including detailed figures (Q80).

    3.2  Provide details of individual split-capital investment trusts with holdings in other SCCEFs income shares: under 20 per cent, 20-40 per cent 40-70 per cent (Q37).

    3.3  Measures being taken by Aberdeen to underpin confidence in the case of each SCCEF (Q90).

    3.4  Underlying assets backing the trusts (Q91 & 92).

  4.  Issues to be clarified.

    4.1  Remuneration Package of Mr Christopher Fishwick (Q8).

    4.2  Provide an assessment of how many of the SCCEFs could survive a two or three year continual decline in the market (Q95).

  Annex A—Investment objectives of Aberdeen SCCEFs.

  Annex B—Monthly factsheets for Aberdeen SCCEFs.

1.  SUMMARY OF SUPPLEMENTARY INFORMATION

  During the oral evidence session of the Treasury Select Committee on Split Capital Investment Trusts on 11 July 2002, Aberdeen Asset Management ("Aberdeen") was asked to provide supplementary information relating to Split Capital Closed End Funds ("SCCEFs") managed or advised by Aberdeen.

  This paper gives Aberdeen's response to the Committee's direct requests for information, and also seeks to clarify a number of other issues that were raised during the session. It is intended as a supplement to the written evidence already supplied to the Committee covering the sector as a whole.

Direct requests for information

  Provide the cross-holdings of each SCCEF, including detailed figures. (Q 80)

  Supply details of individual split-capital investment trusts with cross-holdings: under 20 per cent, 20-40 per cent and 40-70 per cent. (Q 37)

  Provide an account of the various measures being taken by Aberdeen to underpin confidence in the case of each SCCEF. (Q 90)

  Provide an explanation of the underlying assets backing the SCCEFs. (Q 91 & 92)

Issues to be clarified

  The remuneration package of Mr Christopher Fishwick (Q 8)

  As assessment of how many of the SCCEFs could survive a two or three year continual decline in the market. (Q 95)

2.  BACKGROUND: ABERDEEN-MANAGED OR ADVISED SPLIT CAPITAL CLOSED END FUNDS (SCCEFS)

  Aberdeen Asset Managers manages or advises 19 SCCEFs out of a total universe of 138 SCCEFs. Each SCCEF has its own board of directors, the majority of whom must be independent of the investment manager in accordance with the UKLA Listing Rules.

  In addition to SCCEFs that have been managed or advised by Aberdeen Asset Managers in the past 10 years or since launch, the Group acquired the investment management mandate of five SCCEFs as a result of acquisitions of fund management companies in Scotland (Murray Johnstone 1999) and Jersey (Graham Investment Managers 1999).

  Murray Johnstone was manager to three SCCEFs before its acquisition:

    —  Murray Emerging Growth & Income Trust PLC;

    —  Murray Extra Return Investment Trust PLC;

    —  Murray Global Return Trust PLC.

  Graham Investment Managers was manager to two SCCEFs:

    —  Jersey Phoenix Trust Limited;

    —  Leveraged Income Fund Limited.

  In addition, Aberdeen Asset Managers also won the mandate for four other SCCEFs formerly managed by other fund managers:

    —  St David's Investment Trust PLC (December 1999);

    —  Broadgate Investment Trust PLC (March 2000);

    —  The Income & Growth Trust PLC (June 2000);

    —  European Growth & Income Trust PLC (October 2000).

3.  DIRECT REQUESTS FOR INFORMATION

  3.1  Provide thorough information on the cross-holdings of each SCCEF, including detailed figures (Q80).

  The information requested is market sensitive as it relates to publicly quoted companies. The matter is being dealt with separately and confidentially.

  Details of each SCCEF's top ten holdings can be found in Annex B. Each SCCEF's annual report details top 20 holdings.

  3.2  Provide details of individual split-capital investment trusts with holdings in other SCCEFs income shares: under 20 per cent, 20-40 per cent and 40-70 per cent (Q37).

  Subject to the Board's investment strategy, the SCCEF manager has to adopt a strategy that produces both capital growth and income. As set out in paragraph 6.3 (page 15) of our written submission of 11 July 2002, we detail the advantages of investment in the split capital sector.

  The following table details the number of SCCEFs managed or advised by Aberdeen that have holdings in other income shares of other SCCEFs as a percentage of their portfolios: under 20 per cent, between 20 per cent and 40 per cent and between 40 per cent and 70 per cent.

Holdings in income shares in other SCCEFs under 20 per cent
14 SCCEFs
Holdings in income shares in other SCCEFs between 20-40 per cent
2 SCCEFs
Holdings in income shares in other SCCEFs between 40-70 per cent
1 SCCEF*
Holdings in income shares in other SCCEFs over 70 per cent
2 SCCEFs*


  *These trusts have investment objectives to invest in other SCCEFs ie they are funds of funds.

  The table below illustrates what percentage of each SCCEF portfolio is invested in income shares of other SCCEFs. Against that percentage is the ABN AMRO rating given to the SCCEF on 31 July 2002 and 13 September 2001 (the first day of ABN AMRO initiating rating system).

Name of fund
Split Income Share Holdings (% of portfolio)
-30 June 2002
ABN AMRO Rating
31 July 2002*
ABN AMRO Rating
13 September 2001**
Aberdeen Development Capital PLC
0%
AAA2
A1
Income & Growth Trust PLC
0%
AAA2
A1
Murray Extra Return Investment Trust PLC
0.9%
AA3
A2
Jersey Phoenix Trust Limited
4.0%
AA1
A1
European Monthly Income Trust Limited
5.4%
AA8
A6
American Income Trust Limited
5.5%
AA9
A5
Real Estate Opportunities
6.8%
AA6
A4
Broadgate Investment Trust PLC
7.0%
A0
A6
Murray Global Return PLC
7.7%
A2
A1
European Growth & Income Trust PLC
9.0%
A6
A6
Murray Emerging Growth & Income Trust PLC
10.3%
A5
B3
Danae Investment Trust PLC
14.8%
A6
B4
Media & Income Trust PLC
16.7%
n/a
B6
Technology & Income Trust Limited
19.7%
A7
A6
St David's Investment Trust PLC
21.6%
A9
B6
Jove Investment Trust PLC
31.2%
A5
B3
Aberdeen Preferred Income Trust PLC***
65.1%
C7
C4
Aberdeen High Income Trust PLC***
75.0%
n/a
n/a****
Leveraged Income Fund Limited***
91.0%
C9
C5
*As at 31 July 2002, ABN AMRO SCCEF Statistics.
**As at 13 September 2001, ABN AMRO SCCEF Statistics. (First day of ABN AMRO initiating ratings system): Ratings slightly different as AAA and AA ratings only introduced in 6 March 2002.
***Objective of trusts: Fund of Funds.
****At that time Aberdeen High Income Trust was not a SCCEF.


ABN AMRO ratings

  The rating is a combination of a trust's exposure to other SCCEFs and high yield funds and the proportion of its gross assets represented by debt. The letter rating denotes exposure to SCCEFs and high yield funds as follows:

AAAno investments in splits and high yield funds (introduced 6 March 2002).
AAless than 5 per cent invested in splits and high yield funds (introduced 6 March 2002)
Aless than 25 per cent invested in splits and high yield funds
Bless than 50 per cent invested in splits and high yield funds
C50 per cent or greater invested in splits and high yield funds.
0No debt
1up to 10 per cent of assets represented by debt
2up to 20 per cent of assets represented by debt
3up to 30 per cent of assets represented by debt
4up to 40 per cent of assets represented by debt
5up to 50 per cent of assets represented by debt
6up to 60 per cent of assets represented by debt
7up to 70 per cent of assets represented by debt
8up to 80 per cent of assets represented by debt
9greater than 80 per cent of assets represented by debt.


  3.3  Measures being taken by Aberdeen to underpin confidence in the case of each SCCEF (Q90).

  Aberdeen Asset Managers has led the industry in ensuring that information on each SCCEF is available on a daily, monthly, annual and ad hoc basis to institutional and private investors and IFAs. Specifically:

    —  Each SCCEF managed by Aberdeen has a bespoke website where daily estimated net asset value (NAV) and price feeds are updated, as well as a daily fact sheet produced by Fundamental Data, a third party analyst covering the sector.

    —  The investment policy of each SCCEF is clearly reproduced in each SCCEF's monthly fact sheet (see Appendix B), as well as through the annual and interim reports produced by the SCCEF itself, which are sent to all registered shareholders and planholders.

    —  Individual trust information is published daily and monthly by Aberdeen on the web. This may be found through the directory page www.invtrusts.co.uk.

    -  All registered investors receive twice yearly statements and a Bulletin summarising developments in the market at least three times a year.

    —  Aberdeen runs an investment help desk for investors and advisers. Aberdeen does not provide investment advice to the general public, but does provide comprehensive factual information regarding every Aberdeen SCCEF on request.

    —  In early 2001, Aberdeen initiated and sponsored a third party website, www.splitsonline.co.uk, for the professional and DIY investor looking for comparative SCCEF information. This is maintained by Fundamental Data on a daily basis.

    —  Aberdeen Asset Managers runs a website explaining the issues affecting the SCCEF market. This may be found at www.aberdeen-asset.com/splits.

    —  Aberdeen does not double charge (ie management fees are waived) on Aberdeen holdings within each Aberdeen SCCEF.

  The table below details the measures undertaken by the Boards of each SCCEF that Aberdeen manages or advises. They have been announced to the London Stock Exchange by the SCCEFs since June 2001:

SCCEFCorporate Actions Management & Directors Fees Buybacks
Aberdeen Development Capital PLC       
Income & Growth Trust PLC       
Murray Extra Return Investment Trust PLC        
Jersey Phoenix Trust Limited     Share Buybacks
European Monthly Income Trust Limited18/01/02: £65m Debt Repayment     
The American Income Trust Limited      Buyback Authority Gained
Real Estate Opportunities Limited     Buyback Authority Gained
Broadgate Investment Trust PLC28/03/02: £27.9m Debt Repayment   ZDP Buyback
  30/06/02: Equities Index Unsecured Loan Stock Redeemed early   Authority Gained
Murray Global Return PLC     Share Buybacks
European Growth & Income Trust PLC 07/12/01: £30m Debt Repayment   Buyback Authority
  12/07/02: £10m Debt Repayment   Sought
  24/07/02: £7m Debt Repayment     
  05/08/02: £3m Debt Repayment     
Murray Emerging Growth & Income Trust PLC      Buyback Authority Gained
Danae Investment Trust PLC16/05/02: £12.5m Debt Repayment
Management expenses and finance allocation altered from 55:45 capital/revenue to 25:75 capital revenue
16/05/02: Managers fees reduced & directors fees cut ZDP Buy back Authority Sought
Media & Income Trust PLC
(In Administrative Receivership)
01/06/01: Placing & Open Offer raised £59.9m
01/03/02: £30m Debt repayment
Receivers appointed 10/07/02
28/02/02:
Management fees waived
  
Technology & Income Trust Limited29/11/01: Offer for European Technology & Income
11/01/02: £54.5m Debt Repayment
    
St. David's Investment Trust PLC03/10/02: Placing & Open Offer raised £33m, £29m Debt Repayment 25/03/02: Management Fees Waived & Directors Fees cut by 50%   
Jove Investment Trust PLC     Buyback Authority Sought
Aberdeen Preferred Income Trust PLC19/12/01: Reorganisation Proposals: raised £62m, £30m debt repayment, Exchange ZDPs 2003/5
28/03/02: £12m &
34m Debt repayment
28/06/02: £21m Debt repayment
28/02/02: Managers Fees waived & Directors Fees reduced   
Aberdeen High Income Trust PLC
(In Administrative Receivership)
16/11/01: £5m Debt repayment
21/11/01: Merger with HL Income & Growth and Placing
20/05/02: £10m Debt repayment
10/06/02: £12m Debt repayment
Receivers appointed 29/07/02
21/03/02: Management Fees waived & Directors Fees cut by 33% Buyback Authority Sought
Leveraged Income Fund Limited08/10/01: Placing/Open Offer £35m
08/11/01: £45m Debt Repayment
02/04/02: £8.5m Debt repayment
  Share Buyback
CONVENTIONAL INVESTMENT TRUST

Enhanced Zero Trust PLC (non split)
07/05/02: £7.5m Debt Repayment, Debt to Equity Conversion & Cash injection of £6 million by Aberdeen Asset Management PLC 07/05/02: Management, secretarial and directors fees waived   


  3.4  Underlying assets backing the trusts (Q91 & 92)

  In line with investment strategy set out in the launch prospectus of the SCCEF, the range of investments within the trust may include bonds, equities, cash and income shares, to fulfil the objective of producing both capital growth and income.

  To underline the wide variation in investment strategies across the 19 SCCEFs that Aberdeen manages or advises, the table below sets out the levels of investment in each asset class, as a percentage of the overall individual SCCEF portfolio.

  
Assets as at 30 June 2002
SCCEF
No of
investments
in portfolio
% of
Equities
within
Portfolio
% of
bonds
within
Portfolio
% of
Income
Share
Holdings
within
Portfolio
% of
Cash in
Portfolio
Aberdeen Development Capital PLC
79
73.31%
11.39%
0%
15.3%
Income & Growth Trust PLC
111
64.5%
34.0%
0%
1.5%
Murray Extra Return Investment Trust PLC
94
80.3%
13.4%
0.9%
5.4%
Jersey Phoenix Trust Limited
82
67.0%
29.1%
4.0%
(0.1)%
European Monthly Income Trust Limited
125
39.1%
24.2%
5.4%
31.3%
American Income Trust Limited
178
29.2%
24.0%
5.5%
41.5%
Real Estate Opportunities
117
0%1
8.1%
6.8%
21.3%
Broadgate Investment Trust PLC
80
43.9%
6.1%
7.0%
43.0%
Murray Global Return PLC
159
70.9%
20.8%
7.7%
0.6%
European Growth & Income Trust PLC
147
70.9%
12.5%
9.0%
7.6%
Murray Emerging Growth & Income Trust PLC
149
53.0%
26.4%
10.3%
10.3%
Danae Investment Trust PLC
123
69.2%
14.4%
14.8%
1.6%
Media & Income Trust PLC2
85
40.0%
1.9%
16.7%
41.0%
Technology & Income Trust Limited
212
16.0%
49.0%
19.7%
15.5%
St. David's Investment Trust PLC
134
50.9%
23.3%
21.6%
4.2%
Jove Investment Trust PLC
179
26.9%
40.1%
31.2%
1.8%
Aberdeen Preferred Income Trust PLC
150
4.4%
12.7%
65.1%
17.8%
Aberdeen High Incme Trust PLC2
93
0%
4.0%
75.0%
21.3%
Leveraged Income Fund Limited2
90
0%
3.2%
91.0%
5.8%
1 63.8% of the portfolio is invested in Direct Property.

2 As at 31 May 2002.


  See Appendix B: Monthly Reports of Aberdeem Managed SCCEFs and, for futher information on the top 10 holdings of equities, bonds and income shares within the portfolio of each trust.

4.  ISSUES TO BE CLARIFIED

  4.1  Remuneration Package of Mr Christopher Fishwick (Q8)

ROLE AND RESPONSIBILITIES

  Mr Fishwick joined the Group in 1991 and was appointed to the Board of Aberdeen Asset Management PLC in October 1995. He is responsibile for the Group's global closed-end funds division, that was created following the purchase of Graham Investment Managers Limited in March 1999 and expanded considerably in December 2000 following the purchase of the EquitiLink Group and Murray Johnstone.

  In addition to his specified investment responsibilities, Mr Fishwick has been responsible for the operation of the London office and the Jersey office since 1999. In 2002, he was appointed Chief Executive of the UK asset management subsidiary, Aberdeen Asset Managers Limited.

  The Group's closed-end funds under management at 30 June 2002 totalled £5.8 billion, of which the value of the eight SCCEFs experiencing most difficulty totalled £431 million. The value of the North American closed-end funds now managed by the Group is circa £1.9 billion, with each fund performing ahead of benchmark over the one year and three year periods to 30 June 2002.

REMUNERATION

  Mr Fishwick's basic salary for 2001 was £350,000, with the major part of his total remuneration comprising bonuses (£1.403 million) and deferred bonuses (£1.4 million). Bonuses are dependent on the Group's overall profitability and net new business generated, in line with the Group's remuneration policy, as disclosed in the annual report each year.

  Aberdeen Asset Management PLC has always complied with accepted best practice in corporate governance and its annual report has included full details of the remuneration of individual directors, as decided by the remuneration committee of independent non-executive directors, each year since 1995.

  At the Annual General Meeting held in January 2002, shareholders were able to vote on the remuneration report for the year to 30 September 2001—the report was approved by 95.8 per cent of the votes cast (64.7 per cent of shares in issue). This level of transparency is only available in respect of directors of listed companies who are subject to the detailed disclosures.

SHARE OPTIONS

  Mr Fishwick exercised 445,000 share options in Aberdeen Asset Management PLC on December 2000, when the market price of the shares was 599p, resulting in a then unrealised notional capital gain of £2.3 million.

  This notional gain should not be considered as being earned in any one financial year, as the options had originally been granted to Mr Fishwick in 1993 and 1994 at the then prevailing market prices.

  Mr Fishwick has retained all of the shares issued on exercise of these options, and therefore has suffered from subsequent declines in the share price in the same way as other shareholders. The current unrealised notional capital gain based on the market price of the shares at 6 August 2002 is in fact £210,000.

  4.2  Provide an assessment of how many of the SCCEFs could survive a two or three year continual decline in the market (Q95).

  Each SCCEF managed by Aberdeen has a different investment objective (see Appendix A), as well as different ratios of capital shares, income shares, ZDPs and bank debt. Moreover, these funds are actively managed so the portfolio composition and the structure are not static.

  An assessment would depend on:

    —  the market/sector the fund is invested in;

    —  the composition of the portfolio;

    —  the structure of the company at any given time; and

    —  the severity of the decline.

  A simple assessment of the health of an overall SCCEF is to calculate the current and expected liabilities of the SCCEF relative to its assets. Assuming current structures, SCCEFs with gearing levels of 80 per cent for example, would not withstand a further 20 per cent drop in gross assets; those with gearing levels of 70 per cent a further 30 per cent drop in gross assets and so on. Such analysis oversimplifies the case however. For example, the following are significant influences:

    (1)  cash held in SCCEF, which changes gearing ratios;

    (2)  breakage costs;

    (1)  quality of non-cash assets;

    (1)  any portfolio changes; and

    (1)  any changes to structures.

  It is worth pointing out that debt repayment programmes and zero buy backs by boards affect the structure of SCCEFs significantly, as do the rating of the underlying investments, which change all the time. Boards also need to weigh the interest of shareholders, not just the preferred shareholders, when making corporate decisions. The model is not a static one and is specific to each SCCEF.

  Conversely, asset rises, as one would expect with geared investments, would result in the opposite scenario. Each share class responds differently to asset growth, as they are so designed. The gearing of each share class responds to asset growth according to its own entitlement. The gearing factor is explained, along with hurdle rates in the quarterly performance booklet at the back of Aberdeen's packaged product literature. It is also published by the AITC of their member trusts monthly. Splitsonline publishes detailed estimated hurdle rates and cover levels daily, which allows investors to make their own analysis of each company's health.



 
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