Gilbert digs for trust amid the 'toxic waste'

The chief of Aberdeen Asset Management explains how he plans to take the poison out of the £13bn split capital scandal
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The Independent Online

When Martin Gilbert, the historian and biographer of Winston Churchill, was knighted in 1995, his namesake, the chief executive of Aberdeen Asset Management, received five letters of congratulation. He passed them on. But maybe he should have kept them. The way things are going, with Aberdeen up to its neck in the £13bn split capital trust scandal, it is the nearest to a gong that the pugnacious Scot will ever get.

A year ago, it looked so different. Aberdeen had grown from its beginnings in 1982 as a tiny regional business with only £50m of funds under management, to one of Britain's fastest- growing and highest-profile investment groups. It had a reputation for successful acquisitions – not only of rivals, but also of people such as "superwoman" Katherine Garrett-Cox – and had raised its profile by sponsoring the Oxford-Cambridge Boat Race. At the end of last September, having swallowed the unit trust specialist Prolific and prestigious competitor Murray Johnstone, the group could boast £34.7bn under management.

Gilbert was pinching himself. "We couldn't have dreamed of this: when we started, Murray Johnstone was 50 times our size."

Although Aberdeen was seen by the City as an outsider – "arriviste" is Gilbert's description – its success was starting to get noticed. "We'd been lucky," says Gilbert. "We were heavily reliant on the Far East before the Far East crash. But we had bought Prolific, which took us into technology."

Then came the technology crash, which hit some of Aberdeen's funds so badly that the entire value of one launch was obliterated. But the group had broadened its portfolio: it now claims to be Britain's second-largest property fund manager, and the arrival of Garrett-Cox from Hill Samuel led to a move into US funds.

But one bullet Aberdeen could not dodge was the split capital trust market. The sector, where Aberdeen was by far and away the largest player, had seen trusts worth £13bn launched in recent years. These offered quite complex financial investments with different classes of shares, complicated debt arrangements and a worrying tendency for trusts to buy shares in each other. The fall in the equity markets brought a downward spiral in the value of the trusts, particularly in the zero dividend classes. One commentator described the worst of the trusts as "toxic waste".

Five of the trusts launched by Aberdeen have suspended paying dividends and face being restructured, and the group has said it will waive its fees on any funds in distress. Aberdeen is also facing an investigation by the Financial Services Authority. The FSA is dealing with accusations of mis-selling of the trusts; collusion between the backers of the funds, the stockbrokers who dealt in the shares and the independent financial advisers (IFAs) who advised investors to buy them; and questions about the disclosure of information in the prospectuses for the trusts. Politicians from all three main parties have started asking questions about the scandal, and now it seems that Aberdeen faces being sued by angry investors.

Gilbert admits that the splits scandal has been bad news for Aberdeen. "When you are used to things going well, a reversal can hit you hard," he says.

There are many explanations for what has gone wrong, and Aberdeen admits to mistakes having been made. But it feels it has been unfairly victimised. It claims that no more than 20,000 investors actually own split capital trusts, indicating that the average investment is large and the buyers were more likely to be sophisticated players in the market than old ladies in Minehead saving for a rainy day.

The sustained bear market caught experts and novices alike with their trousers down. Piers Currie, investment trusts marketing director for Aberdeen, says: "We just got the gearing wrong. We genuinely thought splits were low-risk products. The thing that has been a major surprise has been the meltdown."

The question is how Aberdeen deals with the problem. Gilbert argues that as the largest manager of splits, it is best placed to sort the mess out. It has been hiring experts from outside the fund management industry who have experience in restructuring problem investments.

"When you move from helicopter to submarine then you need a different set of dials," says Gilbert. "The question is, how flexible can you be on gearing in an aggressive bear market? You are managing liabilities rather than assets."

One manager who will be centrally involved in sorting out the splits is Christopher Fishwick – the man dubbed the "£5m loser" by the press after it was disclosed that not only had he earned £4.85m last year at Aberdeen, but his funds had performed so badly, he topped the "Spot the dog" rating produced by IFA Bestinvest.

Gilbert admits that the payments made to Fishwick can hardly have inspired confidence among investors in Aberdeen's troubled funds.

"With the benefit of hindsight, timing could not have been worse. All I can say in defence is that his remuneration is deserved for all that he did before the splits blew up."

However, Gilbert is not going to change Aberdeen's policies.

"The way we get paid, to the outside world, seems indefensible. But if you are in a people business you are dependent on those people to produce profits for your shareholders, so you have to pay them what it takes. All our shareholders voted in favour of the remuneration deal."

This isn't the only policy Aberdeen is determined not to change. Despite a 60 per cent fall in the group's share price over the past 14 months, Gilbert is not about to stop making acquisitions. The latest in his sights is Jupiter, the fund manager being put up for sale by Commerzbank. The price tag of £600m is more that the current value of Aberdeen, but Gilbert is not put off. "There will be further consolidation in this industry," he argues. "The big will get bigger and people in the middle will get squeezed. We will either get bigger or get gobbled."

It has undoubtedly been a difficult six months for Aberdeen, and even worse could be awaiting it once the FSA completes its investigation. Yet nothing seems to dent Gilbert's enthusiasm. As he says: "This has been quite a shock to us. But it may have done us good."

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