Gut feelings, quantitative analysis and financial investments - 2

There is hardly anyone in Malta who has not heard of the investment name Aberdeen. I would like to ask how many know whether it made or lost money last year. I must also ask how many saw the recent BBC programme, broadcast at 3 a.m., which showed dozens of angry policy-holders protesting in front of an Aberdeen office.

I am not saying that the Aberdeen smacks of fraud, nor am I advising anybody to buy or sell any Aberdeen financial investments. I am using Aberdeen as an object lesson for Maltese investors to inform them that, although it is a name that appears on the Bloomberg screen, that is hardly a lesson in quantitative analysis for the untutored investor.

How is the Maltese investor, with the limited means supplied by his Malta environment, one that is hundreds if not thousands of miles from the world's major financial centres, to analyse quantitatively a financial product into which he has poured his future financial hopes, and which must provide for his old age?

Has he got to read specialised financial publications that are meant for experts, like The Economist, the Financial Times or The Investor's Chronicle? This is by no means the case. The quality English financial press, like the Sunday Telegraph and The Times supply financial advice, based on quantitative analysis that is equal if not superior to anything appearing in the specialised financial press.

The European quality newspapers have had their imitators in Malta for the past 200 years, and tourists are amazed when they discover the high standards of Malta's quality press. If the Maltese investor were to follow the local quality press closely, and seek further professional elucidation in his own interest, he would get more than an inkling of what is the significance of the quantitative characteristics of the financial products on offer.

Quantitative analysis requires a whole staff of moneymen, accountants, economists, stockbrokers and brokers. No financial office in Malta has the staff, which a newspaper like The Sunday Telegraph has at its beck and call so as to perform quantitative analysis.

It is with such thinking in mind that I present, after much pondering, an article on the Aberdeen financial house that was published at the beginning of this year (January 2) in The Sunday Telegraph. I do not claim that the article is definitive or irreproachably up to date but it is certainly authoritative, and based on quantitative analysis and not or any gut feeling whatsoever.

It is a 'must' read for anybody who has anything to do with the Aberdeen name, whatever he is - stockbroker, investor as regulator.

The title of the Sunday Telegraph article was "Why Aberdeen is An Object Lesson in Survival". It is by Grant Ringshaw, deputy city editor. The serious reader of this article is warned that the quotations being supplied are by no means sufficient for the full understanding of the article, which must be studied in its entirety if any misunderstandings are to be avoided.

FSA conduct

There is evidence that Ringshaw is unhappy with the conduct of the UK Financial Services Authority. This is a startling conclusion as Ringshaw is unhappy with a financial regulator that many Maltese confuse with the paragon of integrity and effectiveness. Our article has nothing to say about the development of the Aberdeen fortunes during these last two months. The Ringshaw position in that article is:

"When a company agrees to pay out a whopping £78 million in compensation, most sane people would struggle to see this as a good result. But this is the price that Aberdeen Asset Management is paying for its part in settling the long-running and tortuous investigation by the Financial Services Authority into the split-capital investment trust scandal.

"Given that the sum represents a third of Aberdeen's market value of £235 million, it looks a disaster. But the realty is that Martin Gilbert, the chief executive of the embattled fund manager, has pulled off a remarkable escape and should probably be nicknamed Houdini.

"Back in early 2002, as Aberdeen's share price plummeted, some gossips in the fund management trade speculated that the company would go bust. By the end of the year, during which the share price had fallen relentlessly, Aberdeen was saddled with debts of £277 million - an astonishing three times its then market value.

"In fact, Aberdeen is a lesson in survival. The company has managed to pay out far less than many thought (the FSA wanted £350 million in compensation but settled with 18 groups for £194 million), and by not admitting guilt it has closed off the possibility of legal action.

"Even more remarkably, Aberdeen has kept the City onside. Investors who lost hundreds of millions of pounds in split caps will find little comfort in this, but the issue is: Should Aberdeen have been allowed to survive and how did Gilbert manage to pull off his escape act?"

As regards the FSA, Ringshaw has this to say: "What we can expect to see is Gilbert picking up a stack of new share options (of his 1.1 million outstanding options just 175,000 are in the money and some 600,000 are massively underwater). Would this be a reward for failure? No, but as so often in the past two years, the Aberdeen board will need to perform a delicate balancing act on this issue.

"So how should we judge the FSA? In fairness, it has got a settlement and avoided the prospect of enforcement action that would have dragged on for years, delaying any compensation. But sabre-rattling by John Tiner, the regulator's chief executive, so upped the stakes that the results looks like a huge climbdown.

"The FSA claimed that it had evidence of firms colluding to boost asset values and fees, using a web of cross-shareholdings in trusts; the firms said the regulator's evidence was pretty weak. Given that the evidence is not in the public domain, we may never know the truth - but Tiner played his hand badly."

Maltese investors

Maltese investors should ask themselves the following questions to before they make any investment:

Am I performing this act through gut feeling? Or am I basing myself on the sort of quantitative analysis Ringshaw displays in his evaluation of Aberdeen?

I am not saying that Ringshaw is right or wrong in his assessment, that matter is better decided by those who have poured their thousands into Aberdeen, but we certainly present Ringshaw as a paragon of tough thinking and even more powerful calculating power as a quantitative analyst.

If Edward de Bono and Jim Slater supply us with what are the final attitudes of those who either use gut feelings or quantitative analysis on the stock exchange, Ringshaw's Sunday Telegraph Aberdeen article provides some useful scientific thinking for anybody who has ambitions to make money with the help of Aberdeen.

Concluded