Examination of Witnesses (Questions 20
THURSDAY 11 JULY 2002
20. Do you think she was correct?
(Mr Currie) I think she was correct.
21. If we look at your 2000
(Mr Gilbert) I think at the time they were commonly
perceived to be low risk, not just by us but by the market as
22. That is helpful. She went on to say, seeing
as we are quoting her, "they share the same risk characteristics
as gilt edged government securities". Was that an accurate
(Mr Currie) I would have to hear the source of the
article. They share similar analytical characteristics to gilt
edged securities. Typically zeros are compared to gilts in terms
of redemption yields and so the characteristic of zeros as an
asset class has been one which has been low risk over the last
23. Let us take the 2003 zero dividend preference
shares that you offer in Aberdeen Preferred Income. At around
the time she wrote that they were priced at 275 pence. What are
(Mr Currie) I think they are between ten and 20 pence.
I would have to check the exact figures.
24. And they were a low risk investment?
(Mr Currie) I think if we are looking at the redemption
yield criteria written at the time and the analytical process
that was saying Aberdeen Preferred, I think you are saying, 2003
zeros, which is one zero out of 138, and expressed the properties
at the time of offering a redemption yield of somewhere between
7½ and 8½ per cent. What that is telling you is at the
time the market priced those zeros as a lower risk entity, otherwise
it would have been priced at a 50 per cent gross redemption yield.
25. I am coming to you as an investor and thinking
of going into the zero dividend preference shares and I read in
the quite creditable magazine Investment Adviser that your
head of investment trust sales is saying that these products are
low risk and share the same risk characteristics as gilt edged
government securities, so I invest my 275 pence and today it is
worth ten pence.
(Mr Currie) Thirty-nine.
26. It has not done very well, has it?
(Mr Currie) No.
(Mr Gilbert) Can I just elaborate on one point. To
correct a point you made, we did not offer those particular zero
dividend preference shares for sale. What we have offered for
sale, to use your terminology, is a unit trust which invests in
zero dividend preference shares. I think, like any investment,
we always advocate that people take a spread of investments rather
than a particular single investment. I am prepared to concede
that we sold the unit trust to the general public but that particular
share you are talking about is one of many that the trusts that
we manage and which are listed on the Stock Exchange.
27. Indeed, but if you take the full range and
spread the risk, as you put it, it is a similar story, is it not?
I believe that since 31 March 1999 the FTSE has gone down about
16 per cent but splits taken as a whole, if they are non cross-holdings
they have gone down 39 per cent, if they are cross-holdings they
have gone down about 80 or 90 per cent and that is across all
of them, not just taking one product. That is on FSA figures.
(Mr Currie) We are looking at those figures.
Some of those figures we are keen to go back to the FSA to have
a look at. I think the other thing I would point out is that if
there is more than one share class in a split capital share, the
riskiest share classes are those typically called capital shares
or income and residual capital shares. These shares are the highly
geared shares which means if there is a movement in the market
down, say, 20 per cent, they may be down 80 per cent or more.
I think one of the elements of confusion here which Martin has
been trying to clarify is that the zero share class, which is
a preference share, is the lowest risk share class of the ones
in the split capital trusts, the other share classes are higher
risk, they are securities, they are not products. What we are
trying to clarify is that zeros are the lowest risk share class
and in particular the product offered in the main to the retail
market is through a retail unit trust investing in zeros.
28. Shelley O'Donnell said that they shared
the same characteristics as gilt edged government securities,
so if I had put my 275 pence into them in February 2001, what
would I have now?
(Mr Currie) I think she tried to talk about zeros
as a generic type in the same way as bonds. Many people think
that government bonds are low risk, the safest securities, but
in fact they dropped 20 per cent at one stage in 1993-94. Some
people think Argentinian bonds might have been a safe bet. Because
bonds are going to be backed by governments people believe them
to be low risk but not all bonds are the same and not all zeros
are the same in terms of their characteristics.
(Mr Gilbert) Mr Plaskitt, could I pick up your point
on the zeros in the fund we offered to the public because it is
the one fund that we actually retailed to the general public and,
you are quite right, did market as a low risk product.
29. But it was not low risk, was it? Was it
not completely misleading to suggest to your customers that it
was low risk?
(Mr Gilbert) It was perceived at the time to be low
risk, not just by us but by the whole industry.
30. I am sorry to interrupt but when as a prospective
customer I read one of your senior people saying this is low risk
I do not read that as saying "this is low risk today but
it might be terribly high risk tomorrow". Low risk is a broad
statement about the general prospectus of this investment and
that was misleading, was it not?
(Mr Gilbert) Mr Plaskitt, I am going to ask my colleague,
Gary Marshall, to tell you what we have done about it in a second.
I do have to point out that we are suffering the longest bear
market since the 1930s, not the deepest since the 1930s but the
longest since the 1930s. Whatever happened, these bear markets
are very, very tough and zeros as a whole have tended to lose
on average 30/40 per cent of their value. Perhaps Mr Marshall
could tell you what we are doing about it.
31. I think my colleagues may wish to take that
up. I just want to round off on this and let my colleagues pick
that up, so I am sure you will have the opportunity to do it.
Do you think in hindsight that Shelley O'Donnell should not have
described these products as low risk?
(Mr Gilbert) I do not think hindsight is a true measure
or a true description of how we should judge it. At the time we
believed they were low risk.
32. I think your investors looked at it that
(Mr Gilbert) Unfortunately, everyone looks at it that
way. Everyone judges things with hindsight. If we only had the
benefit of hindsight I am sure we would all do things differently.
33. I have got the Cazenove investment company's
annual review before us here and last July they stated that "A
systematic collapse could result from the high degree of investment
by these trusts in other geared funds". Were you aware of
that quote? If you were aware of that quote, did that affect your
(Mr Gilbert) We were aware of that quote and, yes,
it did affect our management practice. We did not agree with everything
that was in the document, in fact we disagreed with a lot of it,
as did a number of other analysts disagree. There were two opinions
on that particular paper.
34. Things kept getting worse for you despite
(Mr Gilbert) They did get worse because sentiment
got worse. I think we have got to separate share prices into two
aspects: market movement and sentiment. What we have got at the
moment is poor markets driven by general market falls plus falls
on sentiment specific to the sector. For instance, a zero which
is worth 150 pence today and might have 200 pence of assets backing
it would be priced at 75 pence today and that is the sentiment
35. Just before the meeting, immediately before,
we were provided with this document which you describe as "refreshed
information". How "refreshed" is it?
(Mr Currie) I am sorry, there is a typo on the last
36. That is the least of your problems. Could
I ask you, Mr Gilbert, how many of your splits have cross-holdings
in other splits under 20 per cent?
(Mr Gilbert) My colleague is looking for the figure
37. Perhaps while he is fingering through there,
if he could tell me how many of your splits have cross-holdings
in other splits of firstly under 20 per cent, between 21 per cent
and 40 per cent and 41 per cent to 70 per cent.
(Mr Currie) From memory we
38. No, not memory, give me the figures.
(Mr Currie) This (document) compiles it as a sector
rather than by split.
39. You should know these figures, let us get
(Mr Currie) We have 19 split capital investment trusts,
three of which are fund of funds, which means their specific mandate
is to invest in other split capital income shares. Three of them
have no investment in other income shares at all and others have
varying amounts between nought to ten and nought to 30. The reason
why it is not off the top of my head is that they are all managed
separately with different mandates, with different boards and
with different instructions. There is also the fact that the ownership
profile changes dramatically over time as managers invest into
different areas. To answer your question, there are three fund
of funds and there are four that would be described as barbell
trusts that may typically have between ten and 30 per cent in
income shares. The figures do change.
10 Note by Witness: FSA DC10 Update Report
table covers not just zero dividend preference shares but other
riskier share classes as well. Back
Note by Witness: Investment Adviser article July 2001
states: ". . . zeros are riskier than gilts" and ".
. . zeros have different levels of risk." Back
Ev 68. Back