Outlook: Aberdeen finds split capital pain hard to assign to history

Alienating business; Inflated Virgin
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The Independent Online

Active fund management is meant to come into its own in bear markets. It's hard to beat the index in an upswing, unless you happen to be running a fund specialising in one of the market's favourite sectors, but in the downturn it can be out performed simply by moving into cash and defensive stocks. In reality, even this is proving a challenge, and most actively managed funds are still struggling to beat the trackers.

Active fund management is meant to come into its own in bear markets. It's hard to beat the index in an upswing, unless you happen to be running a fund specialising in one of the market's favourite sectors, but in the downturn it can be out performed simply by moving into cash and defensive stocks. In reality, even this is proving a challenge, and most actively managed funds are still struggling to beat the trackers.

It's hard to credit now, but as the bull market reached its zenith, fund management was itself one of the market's hottest sectors. Fed by belief that the cult of equity was here to stay, fund management groups changed hands at ever more fanciful prices. The demographics of the savings market made fund management into a growth business, the theory went. Up and up went the stock prices, and up and up went the bonuses.

As the market slipped, the fees, which are directly related to the value of the funds under management, and the bonuses shrunk with it. Those that bought at the top – Merrill Lynch, Commerzbank and others – are left feeling pretty sick. Aberdeen Asset Management remained independent and its outside shareholders have suffered accordingly. From a peak of more than 700p at the start of last year, the shares have fallen all the way to 235p, and although they bounced a little yesterday after a relatively positive trading update, the situation still looks grim.

Aberdeen is heavily caught up in the split capital investment trust crisis, a phenomenon that has come to epitomise the lemming like propensity of small private investors to pile into high risk investments at the top of the market only to get stung and disillusioned so that they miss the upturn in the market when finally it comes round again.

As part of its penance, Aberdeen has donned the hair shirt and waived its fees on some of the 19 splits it manages, further damaging top line revenue. Aberdeen is doing its best to find new business as a wholesale fund manager, but it continues to rely heavily on the retail side of the market for much of its business. Small investors won't start en masse buying the market again until the top of the next cycle, at which stage there will be a whole new generation of high-risk investment products for them to lose their shirts on.

Alienating business

THE BLAIR Government is losing it with business. It's not just the Budget, which loaded most of the extra tax burden for financing improvements in the health service onto business. Nor is it the extra social and labour regulation heaped onto business over the past five years. It's cronyism too, or at least the suspicion of it.

Admittedly, the latest reported instance of cronyism doesn't really stack up. Gavyn Davies, the Labour supporting chairman of the BBC, was reported at the weekend to be a possible beneficiary of cronyism because of his investment in an internet procurement venture which stands to benefit from the NHS's big push to become a paperless organisation.

In the event, the story didn't work, because no evidence could be produced to support the idea that the company had benefited or even might benefit from the Labour Party credentials of the company's founders and investors. The company, UKprocure, has won contracts and there are undoubtedly more to come, but it has nothing to do with Labour Party support or donations. It is simply because the company is better placed than others to win the business.

None the less, mud sticks and coming so soon after the very serious questions raised over the Government contract awarded to PowderJect, it leaves the impression, as Liam Fox, the shadow health secretary, bluntly puts it "of a government where support for Labour leads to personal profit". In reality that's probably less true of this government than almost any predecessor administration you care to think of, but because of greater transparency and disclosure, it is much easier to spot the instances of it than it was.

Labour shot itself in the foot over the charge of cronyism even before it was elected with Tony Blair's famous deal with British Telecom, whereby BT would give free broadband access to schools and other educational establishments in return for being released early from the ban beaming TV down its wires. The cable companies rightly complained. You cannot run a government on the basis of I'll scratch your back if you'll scratch mine they said. That wasn't being pro-business. It was just, well, cronyism. As it happens, BT later got disproportionately clobbered for the windfall profits tax and the chairman, Sir Iain Vallance, announced he wouldn't have voted Labour had he known what Mr Blair would do to him.

Even so, the idea that you could do deals with Labour and you might get policy favours in return persisted. Many businessmen believe it to be true even if it is not. Coming on top of higher taxes for business as a whole, it creates a deeply resentful atmosphere among those which can't or won't attempt to buy access – which is obviously the vast bulk. Britain now has a higher overall tax burden on business than even Germany. It is a dangerous game the Government plays. Capital, investment and talent are more mobile today than ever and without them, there would be no enterprise or wealth creation to pay for the better health service the Government aspires to. As things stand there is little evidence of mass desertion. Things can change with frightening speed.

Inflated Virgin

The idea that Sir Richard Branson's two train companies, Virgin Rail and the internet booking service Trainline.com, could fetch £1.2bn if they were floated will come as a surprise to a lot of people. Not least Stagecoach, the publicly-owned transport group which owns a 49 per cent stake in the two businesses. If Sir Richard's back-of-a-fag-packet calculations are correct, then Virgin Rail and Trainline should constitute £600m or 60 per cent of Stagecoach's £1bn stock market valuation. Either that, or Stagecoach shares deserve the biggest re-rating of all-time.

The truth, of course, is that the two businesses are worth nowhere near this. But that was never going to stop Sir Richard attaching fanciful valuations to his assets. He has the luxury of running what is largely a private-owned and foreign-domiciled collection of businesses, which means he can say pretty well what he likes without having to worry about listing rules or stock market regulators.

All that will change, however, if Virgin does take the plunge and brings as many as eight of its businesses to the market. That would require Virgin and Sir Richard to adhere to a much more rigorous set of requirements governing disclosure of information and verification of public statements. The inconvenience of having to play by these rules was one of the reasons why Sir Richard took his music empire private again in the mid-1980s having briefly dallied with public ownership.

For that reason alone, we should treat his plans for wholesale flotations of everything from his health clubs to his prize asset, Virgin Atlantic, with caution. Plenty of ideas buzz around the Branson brain but not all of them come to fruition. Virgin Rail, for instance, was slated for flotation two years ago until Sir Richard suddenly and unexpectedly decided to raise money by bringing in a trade partner instead.

The other reason we should be sceptical is that by going down the route of public flotations, Sir Richard would need to bring his companies onshore for tax purposes. The beneficial ownership and true profitability of most of the Virgin empire remains obscure. For all his undoubted attributes and for all his contribution to UK employment and wealth creation, Sir Richard likes it that way.

jeremy.warner@independent.co.uk

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