A private hell for investors

As Railtrack is shunted to the sidings, Melanie Bien asks if shareholders in other state sell-offs are safe

The millions of people who have bought privatisation stocks may now be questioning where they stand. After last week's discovery by thousands of Railtrack investors that their shares are virtually worthless, those who have bought shares in other privatised companies may well be wondering what's to stop the same thing happening to them.

"What is the Government going to do now?" asks Andrew Whalley, head of investment at LeggMason Investors. "Renationalise BT or Severn Trent if they mess up?"

LeggMason's International Utilities Investment Trust owned £9m worth of Railtrack shares before last Sunday's announcement. "I am absolutely incensed at what is little more than daylight robbery," says Mr Whalley. "Of course, Railtrack was a bankrupt company which relied on a stream of revenue from the Government to pay for a good chunk of its expenditure. But the Government gave it no time to find alternative financing arrangements before pulling the plug."

Share ownership undoubtedly involves taking risks but Railtrack was a special case: its survival was dependent on the goodwill of the Government, and when that was suddenly withdrawn, the company failed. It's not just a few "fat cat" investors hoping for a quick buck who have been hit, either: thousands of ordinary people who invested for their retirement now face a battle to get any of that cash back.

More than 90 per cent of Railtrack employees – about 12,000 people – also bought shares through share-save schemes. Many of these snapped up privatisation stocks believing, wrongly as it turns out, that there was a certain amount of security involved in the shares of a former state-owned company.

A quarter of a million private shareholders have been affected, along with big institutional investors responsible for millions of people's pensions. Bondholders are in a stronger position than shareholders: Railtrack issued about £1.5bn in corporate bonds, and at the moment it looks as though these will be repaid.

As Railtrack presses for shareholder compensation of 360p per share – 20p less than the flotation price of the former British Rail five years ago – the Government has said there will be "no bail-out" for investors. It argues that investors should have appreciated the risks and taken time to read the privat-isation prospectus prior to flotation.

However, the City is mobilising for a legal battle that could go on for years. Institutional investors such as LeggMason, Deutsche Asset Management, Fidelity Investments, Odey Asset Management and Invesco Perpetual have signed up law firm Allen & Overy to fight the decision. Solicitor Class Law is also launching actions on behalf of small shareholders.

The Institutional Shareholders Committee (ISC), whose members represent a majority of Railtrack shareholders – including the Association of British Insurers, the Association of Investment Trust Companies, the Association of Unit Trusts and Investment Funds, and the National Association of Pension Funds – has also set up a working party to examine all the options open to investors.

What can investors do in future to avoid finding themselves in a similar position? Apart from reading any prospectus carefully before investing, and taking advice about anything that remains unclear, fund managers are advising that diversification is the best idea.

"The extraordinary events surrounding Railtrack are a warning to millions of single-company Pep investors," says Simon White, head of investment trusts at Dresdner RCM Global Investors. "Those who have a significant percentage of their savings in a single-company Pep should consider moving their investments into funds that will invest their money across a range of shares and sectors."

Although people can no longer put money into their Pep and ISA investments from previous tax years, they can switch existing investments from one fund manager to another. Dresdner is waiving the £20 fee and 0.5 per cent dealing charge on Pep and ISA transfers into Triplits, its package of three investment trusts, until 31 December.

Class Law, 020 7266 3020; Dresdner RCM, 0800 317573; Railtrack shareholder information line, 020 7864 9001.