Splits roasted

By STEPHEN WOMACK
Updated: 19:00 EST, 16 July 2002

SHAREHOLDERS in a third of split-capital investment trusts face losing their entire savings as the crisis engulfing the troubled sector deepens.

Daniel Godfrey, director-general of the Association of Investment Trust Companies, has warned that up to 20 trusts are unlikely ever to return any money to investors and a further 20 would struggle to meet their commitments. He told MPs last week: 'Investors in between one sixth and one third of these trusts stand to lose a reasonable proportion of their capital - if not everything. It all depends on whether stock markets fall further.'

Split-capital trusts are highly geared, borrowing heavily to buy shares. This can yield handsome rewards when stock markets rise, but the big falls over the past two years have left trusts with debts that far outweigh their assets. And savers have suffered a double blow because some trusts invested heavily in the shares of others.

Split-capital trusts are divided into different types of shares, hence the name. Some shares pay an income, while others, such as zero-dividend preference shares, aim to give capital growth. Zero shares were heavily marketed as low-risk investments, but some have lived up to their name and are now worth virtually nothing.

Four split trusts have already collapsed. Shares in the Media & Income Trust, run by Aberdeen Asset Management, were suspended last week as its board held talks with bankers. And B&C Income & Growth, based in Guernsey, said it would appoint a liquidator and break itself up.

Godfrey's predictions of further problems came as MPs on the Treasury Select Committee met to investigate the crisis in the sector. They questioned Godfrey, executives of Aberdeen Asset Management, which runs 19 split trusts, and John Tiner, managing director at the Financial Services Authority. The MPs wanted Aberdeen to explain why thousands of investors in trusts that it manages have suffered such big losses.

Those who hold zero shares in Aberdeen Preferred Income, for example, have seen the value of their investments fall by a frightening 93% in less than a year. Aberdeen also marketed the Progressive Growth unit trust as a low-risk fund. This invested heavily in split-capital shares and has lost more than half of its value. Aberdeen last month offered to compensate investors in only this fund if it fails to recover.

Michael Fallon, Conservative MP for Sevenoaks, Kent, accused the company of running a pyramid-selling scheme. But its bosses repeatedly denied they were to blame for the losses. Martin Gilbert, Aberdeen's chief executive, told MPs: 'I don't think the managers screwed up. These are geared funds and the reason they have done so badly is because the market lost money.'

But his claims were undermined later at the meeting when Godfrey admitted mistakes were made. 'The risk profile of these funds changed and the industry did not go out of its way to communicate this,' Godfrey said.

FSA's Tiner told the MPs that the watchdog had already started enforcement actions against a string of financial companies for mis-promoting splits as low-risk investments. He said the regulator was collecting evidence that suggested 'a handful' of fund management groups were colluding to distort the market, buyingshares in each others' trusts to prop up funds.

Legal firm Class Law is preparing a group action on behalf of 1,700 investors who believe they were mis-sold split trusts. Stephen Alexander of Class Law told Financial Mail: 'The fund groups blame 11 September, which is a load of rubbish. The problems were already evident and all the market falls did was magnify them.'

• Details on trusts are at Trustnet.com or Splitsonline. The AITC has information on cross shareholdings. Class Law, 020 7724 2526.