The Split Capital Investment Trust Crisis (The Wiley Finance Series)

The Split Capital Investment Trust Crisis......Page 4
Contents......Page 8
List of Contributors......Page 14
About the Contributors......Page 16
Foreword......Page 20
Acknowledgements......Page 22
1.2 The investment trust industry......Page 24
1.3 Types of splits......Page 26
1.4 The crisis and its significance......Page 28
1.5 Overview of the five parts of the book......Page 29
PART ONE: THE CRISIS......Page 30
2.1 Introduction......Page 32
2.2 The trust boom of 1888–89......Page 33
2.3 The 1920s’ trust boom and the Wall Street crash......Page 35
2.4 The 1970s’ trust boom......Page 37
2.5 The trust boom of 1993–94......Page 39
2.6 The hurdle-rate warning of 1872......Page 40
2.7 Conclusion......Page 42
2.8 References......Page 43
3.1 Introduction......Page 44
3.2 The first investment trust......Page 46
3.4 Edinburgh, 1873 – the split capital concept is born......Page 47
3.5 The first major crisis – Sykes v. Beadon, 1878......Page 48
3.6 1929 to 1965 – back to basics......Page 49
3.7 The birth of Dualvest......Page 50
3.9 Other early splits......Page 51
3.10 Tax changes after 1979......Page 53
3.11 New boost to the attractions of splits......Page 54
3.13 1997 – beginnings of the new splits era......Page 56
3.14 Technical developments and structural changes......Page 57
3.15 Aberdeen New Preferred breaks the mould......Page 58
3.16 Key figures in the history of splits......Page 59
3.18 References......Page 60
4.2 Aggressive structures......Page 62
4.3 Barbells......Page 64
4.4 Big fees......Page 65
4.5 Lack of information......Page 66
4.6 The zero market expands......Page 67
4.7 Mounting concern......Page 69
4.8 "For whom the barbell tolls . . ."......Page 71
4.9 "Barbells unbalanced"......Page 72
4.10 Change in market sentiment......Page 73
4.11 Aberdeen’s half-day forum......Page 76
4.12 Suspensions and liquidations......Page 77
4.13 Conclusion......Page 78
4.14 References......Page 79
PART TWO: RISK AND VALUATION MODELS......Page 82
5.1 Introduction......Page 84
5.2 Future values for a trust with a prior claim......Page 85
5.3 Valuing the claims......Page 86
5.4 Value of shares in a traditional split......Page 90
5.5 Traditional split with prior claim......Page 92
5.6 Effect of the different structures on projected returns......Page 93
5.7 Value sensitivity......Page 94
5.9 References......Page 95
6.1 Introduction......Page 96
6.2 Major influences on risk: asset allocation and capital structure......Page 97
6.3 Risk for different share classes......Page 100
6.4 Increasing risks and the onset of the splits crisis......Page 101
6.6 Reputational risk......Page 102
6.7 Traditional risk assessment measures......Page 103
6.8 Traditional risk assessment measures became misleading......Page 104
6.9 Improvements to traditional statistics......Page 106
6.10 Using Monte Carlo simulation outcomes to illustrate risk......Page 107
6.12 References......Page 109
7.2 Background to valuing splits using closed-form option pricing......Page 112
7.3 Problems with closed-form option pricing......Page 115
7.4 A worked example using closed-form option pricing......Page 117
7.5 Monte Carlo simulation......Page 120
7.6 Pricing during the splits crisis......Page 121
7.8 Conclusion......Page 122
7.9 References......Page 123
PART THREE: RESPONSE TO THE CRISIS......Page 124
8.2 Favourable view......Page 126
8.3 The early warnings......Page 127
8.4 Stronger warnings......Page 129
8.5 Rupert Walker steps out of line......Page 130
8.7 The FSA steps in......Page 131
8.8 More bad news......Page 132
8.10 The Treasury Select Committee hearings......Page 133
8.11 Bust-up in the trust industry?......Page 135
8.12 Adverse sentiment goes too far......Page 136
8.14 Implications for the media’s personal finance columns......Page 137
8.15 Conclusion......Page 138
8.16 References......Page 139
9.2 The Financial Services Authority......Page 140
9.3 The FSA’s approach to regulation......Page 141
9.4 The regulations......Page 142
9.6 Financial market background......Page 143
9.7 The FSA’s initial response......Page 144
9.10 The FSA’s powers and investigations......Page 146
9.11 The FSA’s response......Page 147
9.13 References......Page 149
10.1 Introduction......Page 152
10.2 The Committee’s enquiry......Page 153
10.3 Misleading impressions......Page 155
10.4 Responsibility within the industry......Page 156
10.6 Looking to the future......Page 158
10.7 Conclusion......Page 160
10.8 References......Page 161
PART FOUR: MANAGEMENT ISSUES......Page 164
11 Corporate Governance, Robin Angus......Page 166
11.2 What legislation can – and cannot – do......Page 167
11.3 The splits crisis really was different......Page 168
11.4 How much could directors have been expected to foresee?......Page 169
11.5 The new AITC Code of Corporate Governance......Page 171
11.6 How can directors provide an "objective view"?......Page 173
11.7 Monitoring managers, communicating with shareholders......Page 174
11.8 Initial involvement and continuing information flow......Page 175
11.9 Changes to the Listing Rules......Page 178
11.11 References......Page 179
12.2 The existence of senior debt......Page 182
12.3 Pressing the press......Page 184
12.4 Peddling the paper......Page 186
12.5 Forced sales of assets......Page 187
12.6 Charges......Page 188
12.7 Mutual assistance programme......Page 189
12.8 It pays to advertise......Page 192
12.9 If it isn’t working, reconstruct it......Page 194
12.10 Why did the shareholders not rebel?......Page 195
12.11 Conclusion......Page 196
12.12 References......Page 197
13.2 Reputational risk......Page 198
13.3 The downward slide of reputation......Page 200
13.4 The rise and fall of equity funds’ reputation......Page 202
13.5 Reputational risk in the regulatory framework......Page 203
13.6 An introverted façade: "The best kept secret in the City"......Page 204
13.7 Tensions: Barbarians within......Page 205
13.8 Recognising outside stakeholders......Page 207
13.9 Knowledge, rocket science and disclosure......Page 208
13.10 Gossip, fat cats and fast cars: The public gallery......Page 209
13.11 Image restoration strategies......Page 210
13.12 Reputational consequences......Page 211
13.14 References......Page 212
PART FIVE: LOOKING FORWARD......Page 214
14.2 Understanding investors’ needs......Page 216
14.3 Managing investor expectations......Page 217
14.4 Product design......Page 219
14.5 Stress-testing new products......Page 220
14.6 A decision-making framework for complex investment products......Page 221
14.7 New launch documentation and risk warnings......Page 223
14.9 Client servicing......Page 225
14.11 References......Page 226
15.2 Where did the industry go wrong?......Page 228
15.3 A role in education......Page 230
15.4 Stakeholder investment products......Page 232
15.5 Compensation and the AITC Foundation......Page 233
15.6 Conclusion......Page 234
15.7 References......Page 236
16.2 Corporate governance......Page 238
16.3 The Association of Investment Trust Companies......Page 240
16.4 Financial advisers......Page 242
16.5 Financial education......Page 243
16.6 The financial press......Page 244
16.7 The regulators......Page 245
16.8 Conclusion......Page 247
16.9 References......Page 248
Appendix A For Whom the Barbell Tolls . . . , Andrew Adams and Robin Angus......Page 250
Appendix B Response to FSA Consultation Paper 164, Andrew Adams and Robin Angus......Page 256
Index......Page 264