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Daniel enters the lions&#39 den

While much of the national press was getting excited by the FSA&#39s talk of a probe into split-cap investment trusts last week, AITC director general Daniel Godfrey&#39s speech delivered at the same conference appeared to go unnoticed.

This was certainly unfortunate for Godfrey as his words, urging members to accept responsibility for troubles in the split-cap sector, were arguably some of the most courageous and provocative in all his time at the trade body.

In contrast, FSA managing director John Tiner simply reiterated plans laid out in the FSA&#39s December consultation paper and warned that there will now be a serious investigation into the alleged existence of a “magic circle” of investment trust managers who collude to invest in each other&#39s trusts.

But Godfrey&#39s message will not have gone completely unheard. Many of the leading industry figures present at the AITC directors&#39 conference in London may not have been too pleased with his conclusions.

Over the last six months since the split-cap sector began to run into difficulties, insiders have often been quick to blame falling markets and negative media coverage. But Godfrey insisted the sector must accept it made mistakes and take responsibility for the problems.

He said: “With the benefit of hindsight, there is no doubt that mistakes have been made over the past five years and that this has led to some dramatic losses for investors and a tarnishing of the name of the whole split-capital sector. We have to hold up our hands and admit that the problems are not just the result of unforeseeable behaviour by the markets or reporting by the media.”

Godfrey highlighted unrealistic yields and overgearing as the main problems. He said many trusts had promised unsustainable yields at launch, against a backdrop of falling interest rates and plummeting equity yields, while other trusts had unnecessarily piled gearing on top of gearing.

Godfrey also echoed the concerns of the FSA that a number of zeros were sold as low-risk products.

His final comments will perhaps have been the hardest for the industry to swallow. He told the conference: “Splits should be a fantastic way of providing solutions to a diverse range of financial planning problems but some of the practices of the recent past may have gone too far. I like splits. I like what they can do and the way in which they can be constructed to provide solutions to people&#39s financial planning needs. But the AITC will not act as an apologist for bad practice.”

Godfrey&#39s speech can perhaps be interpreted in two ways. He may have hoped his frankness would give the industry a jolt and encourage the development of new practice. However, some members saw the speech as a move to distance the trade body from the mess of split-caps and some believe it was misinformed.

Michael Philips proprietor Michael Both supports Godfrey&#39s view that the industry must accept responsibility for its troubles. He says: “I believe fund managers should take responsibility, that is what they are there for. As an IFA, what annoys me is that you go along to a fund management group, they tell you they have got a great new product at low risk, the fund plummets and then they say it is not their fault. But it is. That is why they are paid several hundred thousand pounds a year.”

But many of those who have been angered by Godfrey&#39s words are unwilling to speak out to avoid being at the centre of the debate in the media. One senior fund management source says: “I think the director general is skating on very thin ice. There seemed to be a lot of innuendo in his speech.”

The AITC directors&#39 conference in London was certainly in a very different vein to the Aberdeen conference on split-caps in the City two weeks ago. There, in a debate on possible misselling, the blame was very much put on investors and advisers rather than the marketeers.

Jupiter head of investment trusts Andrew Watkins told the conference he could not be blamed if investors did not read the prospectus, pointing out that he was careful to put sufficient warnings as early as the second page in every brochure. However, as one delegate at the conference retorted, why are these warnings not put on page one?

Watkins believes it is unreasonable for a marketing document to be forced to pronounce doom and gloom on its front page but stresses that this is not about pulling the wool over investors&#39 eyes. He says: “We would rather have people understand the investment. It is not in our interests to have the wrong type of investors, it is more trouble for us.”

But he concedes there is no easy answer to the split-cap marketing dilemma and accepts the possibility – while unsure whether it is an ideal solution – that the FSA may try to prevent them being sold to the retail market.

Perhaps more likely is the possibility that split-caps will only be able to be sold by IFAs with specialist qualifications in the investment field.

For most of the managers and marketeers at the centre of the split-cap market, the main frustration has been the scale of the debate. Split-cap sales are marginal in relation to the whole retail investment fund industry and many feel that it is unfair that split-caps have been demonised when they have lost much less money than some other more straightforward investments such as technology unit trusts.

But most retail investors simply do not understand how their returns are generated from split-caps. Even if retail sales account for only a small percentage of the market, it is clear that there is a problem which needs to be addressed.

Obviously, managers are frustrated that the split-cap troubles have at times been made to sound as big as the Equitable Life or pension misselling sagas. But with the FSA&#39s consultation set to close in the next few days, the industry is now anxious to see what the next chapter brings.

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