The split capital investment trust crisis / Andrew T. Adams.

Format:

Book

Author/Creator:

Adams, A. T.

Series:

Wiley finance series

Language:

English

Subjects (All):

Mutual funds--Great Britain.

Mutual funds.

Capital investments.

Great Britain.

Physical Description:

xviii, 255 pages : illustrations ; 25 cm.

Place of Publication:

Chichester ; Hoboken, N.J. : Wiley, 2004.

Summary:

Split capital investment trusts (splits) became fashionable in the late 1990s, but the splits boom led to some spectacular collapses as the bear market unfolded. Despite warnings from certain analysts, academics and journalists, over twenty splits have gone bust leaving many private investors seeking redress. A major FSA investigation is continuing.

This book, with contributions from specialists intimately involved with the crisis, provides an in-depth and authoritative review of splits, discussing their history, what went wrong, and lessons for the future. The contributors express a wide range of views.

Contents:

1 Introduction, Andrew Adams 1

1.1 Aims of the book 1

1.2 The investment trust industry 1

1.3 Types of splits 3

1.4 The crisis and its significance 5

1.5 Overview of the five parts of the book 6

Part 1 The Crisis 7

2 Past Financial Crises, John Newlands 9

2.2 The trust boom of 1888-89 10

2.3 The 1920s' trust boom and the Wall Street crash 12

2.4 The 1970s' trust boom 14

2.5 The trust boom of 1993-94 16

2.6 The hurdle-rate warning of 1872 17

3 Evolution of the Split Trust Sector, John Newlands 21

3.2 The first investment trust 23

3.3 The second milestone 24

3.4 Edinburgh, 1873 - the split capital concept is born 24

3.5 The first major crisis - Sykes v. Beadon, 1878 25

3.6 1929 to 1965 - back to basics 26

3.7 The birth of Dualvest 27

3.8 Splits terminology 28

3.9 Other early splits 28

3.10 Tax changes after 1979 30

3.11 New boost to the attractions of splits 31

3.12 The hybrid, or quasi-split capital trust 33

3.13 1997 - beginnings of the new splits era 33

3.14 Technical developments and structural changes 34

3.15 Aberdeen New Preferred breaks the mould 35

3.16 Key figures in the history of splits 36

4 The Crisis Unfolds, Andrew Adams 39

4.2 Aggressive structures 39

4.3 Barbells 41

4.4 Big fees 42

4.5 Lack of information 43

4.6 The zero market expands 44

4.7 Mounting concern 46

4.8 "For whom the barbell tolls..." 48

4.9 "Barbells unbalanced" 49

4.10 Change in market sentiment 50

4.11 Aberdeen's half-day forum 53

4.12 Suspensions and liquidations 54

Part 2 Risk and Valuation Models 59

5 The Impact of the Structures, Peter Moles 61

5.2 Future values for a trust with a prior claim 62

5.3 Valuing the claims 63

5.4 Value of shares in a traditional split 67

5.5 Traditional split with prior claim 69

5.6 Effect of the different structures on projected returns 70

5.7 Value sensitivity 71

6 The Risks, James Clunie 73

6.2 Major influences on risk: asset allocation and capital structure 74

6.3 Risk for different share classes 77

6.4 Increasing risks and the onset of the splits crisis 78

6.5 Liquidity risk 79

6.6 Reputational risk 79

6.7 Traditional risk assessment measures 80

6.8 Traditional risk assessment measures became misleading 81

6.9 Improvements to traditional statistics 83

6.10 Using Monte Carlo simulation outcomes to illustrate risk 84

7 Valuing the Shares, James Clunie 89

7.2 Background to valuing splits using closed-form option pricing 89

7.3 Problems with closed-form option pricing 92

7.4 A worked example using closed-form option pricing 94

7.5 Monte Carlo simulation 97

7.6 Pricing during the splits crisis 98

7.7 Pricing of splits compared with conventional investment trusts 99

Part 3 Response to the Crisis 101

8 The Media Response, Andrew Adams 103

8.2 Favourable view 103

8.3 The early warnings 104

8.4 Stronger warnings 106

8.5 Rupert Walker steps out of line 107

8.6 Increasing concern over zeros 108

8.7 The FSA steps in 108

8.8 More bad news 109

8.9 The men who wiped out billions 110

8.10 The Treasury Select Committee hearings 110

8.11 Bust-up in the trust industry? 112

8.12 Adverse sentiment goes too far 113

8.13 Comparison with other mis-selling disasters 114

8.14 Implications for the media's personal finance columns 114

9 The Regulatory Response, Peter Gardner and Geoffrey Wood 117

9.2 The Financial Services Authority 117

9.3 The FSA's approach to regulation 118

9.4 The regulations 119

9.5 The tasks and impact of the FSA 120

9.6 Financial market background 120

9.7 The FSA's initial response 121

9.8 The FSA proposals and questions 123

9.9 Objections from the investment trust sector 123

9.10 The FSA's powers and investigations 123

9.11 The FSA's response 124

10 The Political Response, John McFall MP 129

10.2 The Committee's enquiry 130

10.3 Misleading impressions 132

10.4 Responsibility within the industry 133

10.5 Compensation 135

10.6 Looking to the future 135

Part 4 Management Issues 141

11 Corporate Governance, Robin Angus 143

11.2 What legislation can - and cannot - do 144

11.3 The splits crisis really was different 145

11.4 How much could directors have been expected to foresee? 146

11.5 The new AITC Code of Corporate Governance 148

11.6 How can directors provide an "objective view"? 150

11.7 Monitoring managers, communicating with shareholders 151

11.8 Initial involvement and continuing information flow 152

11.9 Changes to the Listing Rules 155

12 Some Ethical Considerations, Andrew McCosh 159

12.2 The existence of senior debt 159

12.3 Pressing the press 161

12.4 Peddling the paper 163

12.5 Forced sales of assets 164

12.6 Charges 165

12.7 Mutual assistance programme 166

12.8 It pays to advertise 169

12.9 If it isn't working, reconstruct it 171

12.10 Why did the shareholders not rebel? 172

13 Reputational Risk, Piers Currie 175

13.2 Reputational risk 175

13.3 The downward slide of reputation 177

13.4 The rise and fall of equity funds' reputation 179

13.5 Reputational risk in the regulatory framework 180

13.6 An introverted facade: "The best kept secret in the City" 181

13.7 Tensions: Barbarians within 182

13.8 Recognising outside stakeholders 184

13.9 Knowledge, rocket science and disclosure 185

13.10 Gossip, fat cats and fast cars: The public gallery 186

13.11 Image restoration strategies 187

13.12 Reputational consequences 188

Part 5 Looking Forward 191

14 Product Innovation and Marketing, James Clunie 193

14.2 Understanding investors' needs 193

14.3 Managing investor expectations 194

14.4 Product design 196

14.5 Stress-testing new products 197

14.6 A decision-making framework for complex investment products 198

14.7 New launch documentation and risk warnings 200

14.8 Risk awareness and client suitability 202

14.9 Client servicing 202

15 Some Implications for the Fund Management Industry, David Harris 205

15.2 Where did the industry go wrong? 205

15.3 A role in education 207

15.4 Stakeholder investment products 209

15.5 Compensation and the AITC Foundation 210

16 Lessons for the Future, Andrew Adams 215

16.2 Corporate governance 215

16.3 The Association of Investment Trust Companies 217

16.4 Financial advisers 219

16.5 Financial education 220

16.6 The financial press 221

16.7 The regulators 222

Appendix A For Whom the Barbell Tolls..., Andrew Adams and Robin Angus 227

Appendix B Response to FSA Consultation Paper 164, Andrew Adams and Robin Angus 233.

Notes:

Includes bibliographical references and index.

ISBN:

0470868589

OCLC:

56540068