Holding out for a zero

By ANDREW OXLADE, COLUMNIST
Updated: 19:00 EST, 7 May 2002

FUND manager Aberdeen Asset Management has given a glimmer of hope to investors in crisis-hit zeros by offering to pump £6m into one of its funds.

Aberdeen will plough the cash into the Enhanced Zero Trust (EZT) in an attempt to stop it going bust. It is believed to be the first time a fund manager has directly supported a struggling trust and the move may put pressure on other major providers of zeros to follow suit.

'It's a sign Aberdeen is taking the problem seriously and realises words are not enough and that action and money are needed,' said John Newlands, investment trust analyst at broker Williams de Broe. 'It's good news for the sector as a whole.'

Experts are confident Aberdeen has the financial clout to bail out its other zeros but doubt whether some rivals could do likewise. Other major zero providers include Exeter Investment, BFS Investment, Gartmore and Framlington.

'I doubt whether BFS and possibly Exeter have the resources,' said David Franklin, head of retail funds at broker Christows.

Zeros have plunged in recent months due to the falling stock market and the deficiencies of operating a 'magic circle' of trusts that bought each other's shares. This boosts gains in a rising stock market but has amplified losses in the post-dotcom bear market. For example, Aberdeen's EZT zero trust price has fallen 98% in the past year.

Many zeros may fail to repay the expected returns to zero-holders or are in danger of total collapse and the loss of all small investors' money.

Aberdeen's offer was mooted at a specially convened meeting on Wednesday. It also included restructuring debt repayments and waiving management charges, a move taken by several fund managers in a bid to reduce costs and help stave off bankruptcy for trusts.

Investors, many of who picked zeros as a safe option to save for school fees or retirement, are not taking losses lying down. Solicitors Leon Kaye and Class Law are taking class legal actions.

Leon Kaye will write to each fund manager in the next few days to demand compensation for around 1,200 investors. 'If we are unable to secure appropriate compensation then a writ would follow,' it said.

The firm will also seek damages for investors in the Aberdeen Progressive Growth unit trust. Although not a zero trust itself, it was heavily invested in the sector. Leon Kaye says at the launch of the fund - down nearly 50% in the past year - Aberdeen's claim that it was 'especially suitable for risk averse investors' was 'emblazoned all over the brochure'.

Nobody at Aberdeen was available for comment.

Investors are angry that zeros were marketed as relatively safe investments with the proud boast that none had ever failed to pay the advertised return. Most offered annual gains of 7% to 8% rolled up and paid at the end of the zero's life, typically between five and seven years.

The Financial Services Authority is investigating allegations of mis-selling and whether managers colluded to invest in each other's shares.

More details can be found on the websites of Leon Kaye (020 7228 2020) and Class Law (020 7724 2526). Leon Kaye is charging investors a flat fee of £150.

Click here for a full explanation of zeros.