management Groups threatened with legal action as bubble bursts on product that claimed to come into its own in falling markets
Funds that 'give you a peaceful night's sleep', and splits with 'more safety features than a Volvo' that 'come into their own when stock markets are flat and falling': the marketing literature was certainly appealing but in many cases the reality has been very different.
The well-documented problems with the highly geared trusts of splits have resulted in poor investor sentiment in the sector.
It has also left the threat of legal action hanging over some intermediaries and split capital trust providers.
The FSA has confirmed that unit trusts of zeros could also face investigation and censure, particularly as prior to the troubles of the split cap sector, they were able to advertise more widely than the trusts themselves, which are restricted by regulatory rules designed to prohibit the advertising of shares.
Last week, the FSA published its first report on the sector, which found that in some cases, the marketing material for split capital trusts given to investors did not adequately disclose or explain the risks of investing in certain splits.
Where there have been breaches of its rules or principles it would take action and the FSA said it will now begin formal investigations into alleged collusive behaviour, promotions that may have been misleading and possible mis-selling.
The regulatory enforcement implications for the split cap sector are potentially far-reaching, with the report steering clear of specifics, either about the firms it is investigating or the marketing and collusive breaches it plans to pursue.
John Tiner, FSA managing director, said at a general level, the FSA is looking for promotional literature or advice that was misleading. How it was misleading, he said, will be open to its own interpretation.
Tiner said that the FSA is not only targeting individual split cap trusts, none of which it would name, but all packaged products, like unit trusts and Isas, that sell funds of splits and zeros.
He said: 'If we do find evidence of misleading literature we will go through the usual process of investigating through our regulatory decisions council. The powers we have are fairly broad, ranging from fining to varying people's ability to do business or taking away their authorisation altogether.'
From the intermediary's perspective, Tiner said that the FSA wants to understand whether the advice they have provided was supported by an appropriate disclosure of the risks involved and whether the product they sold was appropriate for investors.
He said the FSA also wants to understand what intermediaries did with the marketing material given to them by the different groups ' how they used the information when selling their products to clients.
Launched in August 2000, Aberdeen Progressive Growth, a fund of zeros, began marketing after a one-year track record had been established.
In June last year it began its advertising campaign with a picture of a baby with the catchline: 'At last, a one year old who lets you sleep at night.'
It was marketed strongly with the group discounting the initial charge by 1% to attract investors.
However, over one year to 13 May 2002, the fund is bottom of the UK Other Bond sector, returning -51.1%, compared to the sector average at -8.0%
Gary Marshall, sales and marketing director at Aberdeen, said that when the group began advertising the fund it behaved as they had expected, providing apparent low risk compared to volatile markets and, at the time, demand for it was high.
Marshall said: 'At the time, the understanding was that zeros were low-risk assets, and there was no reason to doubt this. Valuations started falling off in July and August by a bit and then fell off the cliff after 11 September. As a result in October we withdrew all our marketing material and recategorised the fund medium- risk, from its previous low-risk category.'
Marshall said all the information the group had at the time and all the risk measures it used showed that up until September the volatility of zeros was in line with that of gilts.
He said: 'It is difficult to see how we could have picked up the risk element of zeros before what happened in September. The commonly accepted view at the time was that zeros were low-risk investments.'
Craig Walton, marketing director at Framlington, which launched its Absolute Growth Fund, managed by Stephen Payne, on 1 June last year, said that all its advertising was targeted at existing equity investors not first-time investors and it made the point that there was some risk involved.
Walton said: 'The whole point of launching a fund with a basket of zeros in it was because there was some risk involved, which needed to be diversified. If there was no risk involved you would just need to hold one zero, whereas we hold around 40.'
Vee Montebello, head of communications at Gartmore which runs six splits and one zeros unit trust, Gartmore Stable Growth, launched on 1 August last year, said that every document the group produced was in line with FSA guidelines and the risk warnings were made very clear from the outset.
Stable Growth advertised itself under the strapline, 'Pick up rock solid returns', which Montebello said was a play on words due to the pictures of rocks in the advert. She added that in this advert the risks were clearly explained and in the text the advert did actually state: 'The level of yield can fluctuate and is not guaranteed. Your money is more secure in a deposit account.'
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