Split capital debacle may give bear raiders an AAM picnic

By Ian Fraser

Published: Sunday Herald

Date: October 13th, 2002

The collapse of a fourth split capital trust has sharpened the axe over Aberdeen Asset Management, reports Ian Fraser

MARTIN Gilbert faces one of the toughest weeks of his life. The embattled chief executive of Aberdeen Asset Management, branded as “the unacceptable face of capitalism” by the Treasury Select Committee in July, is finding himself increasingly isolated over the split capital investment trust debacle which some believe is threatening to engulf his firm.

Over the last few weeks, Gilbert has been buffeted from all sides by furious investors, politicians, analysts, the media, other fund managers and industry regulators. BBC Radio Scotland added to the tension by incorrectly reporting he had resigned on October 4.

There have been suggestions that such rumours are being put about by bear raiders – short sellers eager to manipulate the market and make a quick killing from the prompted collapse in AAM’s stock.

AAM’s share price has certainly slumped, falling from 725p in early 2001 to 48p at Friday’s close, giving the group a market value of just £84 million. This has given rise to fears over AAM’s ability to service its £250m debt.

Last week, a fourth split capital trust managed by AAM – Leveraged Income – was forced into receivership, only adding to the woes of a firm which once seemed to walk on water.

Even though it is only one of around 15 investment players involved in the split capital debacle, Aberdeen has borne the brunt of the criticism. The firm is daily been excoriated for allegedly colluding in a “magic circle” of fundraisings that generated huge fees and bonuses for fund managers and brokers but left investors impoverished.

The questions on everybody’s lips are: is AAM, founded by Gilbert through a management buyout in 1983, strong enough to survive the current storm? How long before Chris Fishwick – dubbed “the investment industry’s master magician” for his role in split capital fundraisings – is thrown to the wolves? And how long before such non- executive directors as Sir Malcolm Rifkind and former Murray Johnstone boss Giles Weaver distance themselves from a firm widely branded as a pariah?

There is little doubt Gilbert still believes he will be able to extricate AAM from the current imbroglio. After all, as his supporters never tire of pointing out, split-cap funds only account for 4% his company’s total business.

In its trading statement 13 days ago AAM reassured investors that fund inflows have proved resilient – £1.25 billion in 2002 – compared with those of other fund management groups. And they say the firm continues to generate more cash than Schroders.

Philip Middleton, an analyst at Merrill Lynch, said: “It’s worth enumerating the good things about Aberdeen’s business, given that we and the rest of the market have been vigorous in enumerating the bad things. These include: a genuinely strong property franchise, which continues to win mandates; a top-10 UK unit trust operation; genuine strength in fixed-interest management; and a strong Asian business.”

The trouble is that the market has sensed blood and the amount of compensation and fines that could be payable by AAM as a result of its role in the split-cap disaster remain unquantifiable.

There is a chance they could amount to nothing, but until the actual figures are finally known, the prospect of substantial sums having to be paid out will continue to hang over AAM’s share price like the Sword of Damocles.

Martin Cross, an analyst at Teather & Greenwood, believes enforced payouts are unlikely. He said: “We think it will be impossible for litigants to prove that Aberdeen’s actions – rather than the collapse of equity valuations – caused the loss of their capital.”

Nonetheless, there is little doubt the investment industry is perceived as arrogant and unsympathetic to the plight of investors in the split-cap affair. Aberdeen is, belatedly, seeking to correct this impression and has come up with a number of proactive initiatives to show it cares.

It is therefore regrettable that a technical dispute between the Financial Services Authority and the Financial Ombudsman has delayed AAM’s proposed deal to compensate the 7000 investors in its progressive growth unit trust.

When earlier this month AAM put forward plans for a “hardship fund”, modelled on that offered by Lloyd’s of London in the early 1990s, it won little support from other players in the sector.

Some rival firms feared the proposal would be seen as window- dressing rather a serious attempt to address a serious problem. Others had more fundamental problems with it. Quite simply they did not wish to be associated with anything emanating from AAM.

One reason Gilbert is finding it difficult to muster support from his peers is because he is seen as having alienated some of them on the way up. They have variously described Gilbert as a “deal junkie” and a “spiv” who became so focused on building up his own group that, among other things, he failed to properly address the complex integration issues that arose after each acquisition.

They argue this led to a weakness of risk management and controls at AAM, which in turn gave rise to later problems such as the alleged collusion in the split capital sector.

But what of Fishwick, who sat on the boards of nine of the troubled split-cap trusts and was so handsomely rewarded for his fundraising skills?

“The fact that Fishwick is the only person who knows where the bodies are buried means he’s still of some use to Aberdeen,” said one industry observer. “But once he has outlived his usefulness, which may be quite soon, I suspect he’ll be thrown to the wolves.”

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