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The Split Capital Investment Trust Crisis

The Split Capital Investment Trust Crisis

Andrew T. Adams (Editor)

ISBN: 978-0-470-86862-1

Aug 2005

276 pages



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 20 splits have gone bust leaving many private investors seeking redress. A major FSA investigation is now underway.

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. A range of views is expressed by the contributors.

The book is divided into five parts:

  • The Crisis past financial crises, evolution of the split trust sector, the crisis unfolds
  • The Split Capital Trust Market the structures, the risks, valuing the shares
  • Response to the Crisis the media, regulatory and political response
  • Management Issues corporate governance, some ethical considerations, reputational risk
  • Looking Forward product innovation and marketing, some implications for the fund management industry, lessons for the future
List of Contributors.

About the Contributors.



1 Introduction, Andrew Adams.

1.1 Aims of the book.

1.2 The investment trust industry.

1.3 Types of splits.

1.4 The crisis and its significance.

1.5 Overview of the five parts of the book.


2 Past Financial Crises, John Newlands.

2.1 Introduction.

2.2 The trust boom of 1888–89.

2.3 The 1920s’ trust boom and the Wall Street crash.

2.4 The 1970s’ trust boom.

2.5 The trust boom of 1993–94.

2.6 The hurdle-rate warning of 1872.

2.7 Conclusion.

2.8 References.

3 Evolution of the Split Trust Sector, John Newlands.

3.1 Introduction.

3.2 The first investment trust.

3.3 The second milestone.

3.4 Edinburgh, 1873 – the split capital concept is born.

3.5 The first major crisis – Sykes v. Beadon, 1878.

3.6 1929 to 1965 – back to basics.

3.7 The birth of Dualvest.

3.8 Splits terminology.

3.9 Other early splits.

3.10 Tax changes after 1979.

3.11 New boost to the attractions of splits.

3.12 The hybrid, or quasi-split capital trust.

3.13 1997 – beginnings of the new splits era.

3.14 Technical developments and structural changes.

3.15 Aberdeen New Preferred breaks the mould.

3.16 Key figures in the history of splits.

3.17 Conclusion.

3.18 References.

4 The Crisis Unfolds, Andrew Adams.

4.1 Introduction.

4.2 Aggressive structures.

4.3 Barbells.

4.4 Big fees.

4.5 Lack of information.

4.6 The zero market expands.

4.7 Mounting concern.

4.8 “For whom the barbell tolls . . .”

4.9 “Barbells unbalanced”

4.10 Change in market sentiment.

4.11 Aberdeen’s half-day forum.

4.12 Suspensions and liquidations.

4.13 Conclusion.

4.14 References.


5 The Impact of the Structures, Peter Moles.

5.1 Introduction.

5.2 Future values for a trust with a prior claim.

5.3 Valuing the claims.

5.4 Value of shares in a traditional split.

5.5 Traditional split with prior claim.

5.6 Effect of the different structures on projected returns.

5.7 Value sensitivity.

5.8 Conclusion.

5.9 References.

6 The Risks, James Clunie.

6.1 Introduction.

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

6.3 Risk for different share classes.

6.4 Increasing risks and the onset of the splits crisis.

6.5 Liquidity risk.

6.6 Reputational risk.

6.7 Traditional risk assessment measures.

6.8 Traditional risk assessment measures became misleading.

6.9 Improvements to traditional statistics.

6.10 Using Monte Carlo simulation outcomes to illustrate risk.

6.11 Conclusion.

6.12 References.

7 Valuing the Shares, James Clunie.

7.1 Introduction.

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

7.3 Problems with closed-form option pricing.

7.4 A worked example using closed-form option pricing.

7.5 Monte Carlo simulation.

7.6 Pricing during the splits crisis.

7.7 Pricing of splits compared with conventional investment trusts.

7.8 Conclusion.

7.9 References.


8 The Media Response, Andrew Adams.

8.1 Introduction.

8.2 Favourable view.

8.3 The early warnings.

8.4 Stronger warnings.

8.5 Rupert Walker steps out of line.

8.6 Increasing concern over zeros.

8.7 The FSA steps in.

8.8 More bad news.

8.9 The men who wiped out billions.

8.10 The Treasury Select Committee hearings.

8.11 Bust-up in the trust industry?

8.12 Adverse sentiment goes too far.

8.13 Comparison with other mis-selling disasters.

8.14 Implications for the media’s personal finance columns.

8.15 Conclusion.

8.16 References.

9 The Regulatory Response, Peter Gardner and Geoffrey Wood.

9.1 Introduction.

9.2 The Financial Services Authority.

9.3 The FSA’s approach to regulation.

9.4 The regulations.

9.5 The tasks and impact of the FSA.

9.6 Financial market background.

9.7 The FSA’s initial response.

9.8 The FSA proposals and questions.

9.9 Objections from the investment trust sector.

9.10 The FSA’s powers and investigations.

9.11 The FSA’s response.

9.12 Conclusion.

9.13 References.

10 The Political Response, John McFall MP.

10.1 Introduction.

10.2 The Committee’s enquiry.

10.3 Misleading impressions.

10.4 Responsibility within the industry.

10.5 Compensation.

10.6 Looking to the future.

10.7 Conclusion.

10.8 References.


11 Corporate Governance, Robin Angus.

11.1 Introduction.

11.2 What legislation can – and cannot – do.

11.3 The splits crisis really was different.

11.4 How much could directors have been expected to foresee?

11.5 The new AITC Code of Corporate Governance.

11.6 How can directors provide an “objective view”?

11.7 Monitoring managers, communicating with shareholders.

11.8 Initial involvement and continuing information flow.

11.9 Changes to the Listing Rules.

11.10 Conclusion.

11.11 References.

12 Some Ethical Considerations, Andrew McCosh.

12.1 Introduction.

12.2 The existence of senior debt.

12.3 Pressing the press.

12.4 Peddling the paper.

12.5 Forced sales of assets.

12.6 Charges.

12.7 Mutual assistance programme.

12.8 It pays to advertise.

12.9 If it isn’t working, reconstruct it.

12.10 Why did the shareholders not rebel?

12.11 Conclusion.

12.12 References.

13 Reputational Risk, Piers Currie.

13.1 Introduction.

13.2 Reputational risk.

13.3 The downward slide of reputation.

13.4 The rise and fall of equity funds’ reputation.

13.5 Reputational risk in the regulatory framework.

13.6 An introvertedfaçade: “The best kept secret in the City”.

13.7 Tensions: Barbarians within.

13.8 Recognising outside stakeholders.

13.9 Knowledge, rocket science and disclosure.

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

13.11 Image restoration strategies.

13.12 Reputational consequences.

13.13 Conclusion.

13.14 References.


14 Product Innovation and Marketing, James Clunie.

14.1 Introduction.

14.2 Understanding investors’ needs.

14.3 Managing investor expectations.

14.4 Product design.

14.5 Stress-testing new products.

14.6 A decision-making framework for complex investment products.

14.7 New launch documentation and risk warnings.

14.8 Risk awareness and client suitability.

14.9 Client servicing.

14.10 Conclusion.

14.11 References.

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

15.1 Introduction.

15.2 Where did the industry go wrong?

15.3 A role in education.

15.4 Stakeholder investment products.

15.5 Compensation and the AITC Foundation.

15.6 Conclusion.

15.7 References.

16 Lessons for the Future, Andrew Adams.

16.1 Introduction.

16.2 Corporate governance.

16.3 The Association of Investment Trust Companies.

16.4 Financial advisers.

16.5 Financial education.

16.6 The financial press.

16.7 The regulators.

16.8 Conclusion.

16.9 References.

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

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


""...the definitive work on the scandal"" (The Express, 08/10/04)

""...features a wealth of expertise on the tricky questions of ethics."" (The Glasgow Herald, 13th Oct 2004)

""...intended to explain what went wrong and the lessons to be learnt..."" (Financial Times - Money, 13th November 2004)

""...explains clearly and authoritatively how what used to be a small, safe part of the investment world took the low road to disaster."" (Professional Investor, April 2005)

""This book provides an excellent record of perhaps the worst calamity ever to hit the investment trust is timely, beautifully produced...and comprehensive..."" (IEA Economic Affairs, September 2005)