Witan Gate East,
Central Milton Keynes
B e f o r e :
| Mr John Petrie
|- and -
|The Standard Life Assurance Limited
Mr Donald Lilly of counsel appeared for the Defendant
Hearing dates: 2nd November 2009
Crown Copyright ©
District Judge Hickman:
Documents may be assembled in any order, provided it is not chronological, numerical or alphabetical.
to invest not only in bank/building society deposits but also holds other short-term sterling assets. The Fund is designed for investors who are looking for a temporary home for their money when the short-term outlook for equities, bonds and property is uncertain. Some of the cash investments that the Fund may hold are not 'guaranteed' in the same way as High Street Bank or Building Society Accounts are. Therefore, in extreme circumstances, it is possible that the value of the Fund may fall.
"…an investment holding in Granite Master Trust, a mortgage based investment issued by Northern Rock reduced due to a revaluation of this investment and this created the biggest price decrease between 21st and 24th November…."
Mr Leiper continued:
"…Although the recent mark down should turn out to be temporary, this temporary loss works in exactly the same way as a loss in any of our other funds. If you were to invest in an equity fund which fell in value and then disinvested before a market rebound, you could not expect to receive a return on the loss incurred following the rebound…."
Floating rate note
From Wikipedia, the free encyclopedia
Floating rate notes (FRNs) are bonds that have a variable coupon, equal to a money market reference rate, like LIBOR or federal funds rate, plus a spread. The spread is a rate that remains constant. Almost all FRNs have quarterly coupons, i.e. they pay out interest every three months, though counter examples do exist. At the beginning of each coupon period, the coupon is calculated by taking the fixing of the reference rate for that day and adding the spread. A typical coupon would look like 3 months USD LIBOR +0.20%.
In the U.S., government sponsored enterprises (GSEs) such as the Federal Home Loan Banks, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are important issuers. In Europe the main issuers are banks.
Some FRNs have special features such as maximum or minimum coupons, called capped FRNs and floored FRNs. Those with both minimum and maximum coupons are called collared FRNs.
FRNs can also be obtained synthetically by the combination of a fixed rate bond and an interest rate swap. This combination is known as an Asset Swap.
FRNs carry little interest rate risk. An FRN has a duration close to zero, and its price shows very low sensitivity to changes in market rates. When market rates rise, the expected coupons of the FRN increase in line with the increase in forward rates, which means its price remains constant. Thus, FRNs differ from fixed rate bonds, whose prices decline when market rates rise.
As FRNs are almost immune to interest rate risk, they are considered conservative investments for investors who believe market rates will increase. The risk that remains is credit risk.
Securities dealers make markets in FRNs. They are traded over-the-counter, instead of on a stock exchange. In Europe, most FRNs are liquid, as the biggest investors are banks. In the US, FRNs are mostly held to maturity, so the markets aren't as liquid. In the wholesale markets, FRNs are typically quoted as a spread over the reference rate.
Suppose a new 5 year FRN pays a coupon of 3 months LIBOR +0.20%, and is issued at par (100.00). If the perception of the credit-worthiness of the issuer goes down, investors will demand a higher interest rate, say LIBOR +0.25%. If a trade is agreed (and who wouldn't) the price is calculated. In this example, LIBOR +0.25% would be roughly equivalent to a price of 99.75. This can be calculated as par, minus the difference between the coupon and the price that was agreed (0.05%), multiplied by the maturity (5 year).
Inverse floating rate note
"'Asset backed' means that money is being loaned against things like books of mortgages… This is what went wrong when the mortgage market fell apart. We realised they [Standard Life] had not been trading in short-term FRNs, but in asset-backed FRNs, a totally different and more risky thing. They should have explained that…"
…The Fund is intended to provide market leading returns from a portfolio of money market instruments and invests not only in bank and building society deposits but also in a variety of other money market instruments such as Certificates of Deposits (CDs), Floating Rate Notes (FRBNs) including Asset Backed Securities (ABSs) where, when purchased, repayment is typically expected within 3 years. The fund price is not guaranteed by Standard Life and there could be circumstances where the fund price may fall. A fall might happen if, for example, there is a default by one of the banks where some of the money is held or where there is an adverse market movement in the value of one or more of the securities held due to for instance a credit event or where the anticipated repayment term of an asset is extended.
"…If I were to be asked as to whether I consider the current circumstances in the economy to be extreme, I would say absolutely… We have had a run on a UK bank [Northern Rock] and a major American investment bank going bust, therefore I would call these circumstances extreme…"
He also ventured the opinion that
"…I would expect that a sophisticated investor would understand that an FRN has various subsets below it and that ABS is one of them. I do not consider that any IFA would make an assumption that an FRN does not equate to ABS. The safer assumption would be that if a fund factsheet or any documentation referred to FRNs it could be to any of the various types of FRN. My opinion is that any adviser who is advising on a fund should know what an FRN is and what the subsets of FRNs are. I wouldn't sell a car if I didn't know how it worked."
"…If one really wanted to waste time defending such a comment I would say, should the car salesman know if the pistons in the engine were made of aluminium or a grade of alloy containing an element of aluminium…"
"…If I were to be asked as to whether I consider the current circumstances in the economy to be extreme, I would say absolutely…"
it appears to be advanced on the basis that because conditions are extreme, an investor can by definition have no complaint against Standard Life however badly his investments perform. If that is the basis on which it is advanced, it goes too far.
…Floating Rate Notes (FRNs) including Asset Backed Securities (ABSs) where, when purchased, repayment is typically expected within three years…
which I quote in paragraph 14 above.
Conditions within the credit and money markets have been difficult for the best part of the last twelve months. With the start of the credit crunch, spreads on some FRNs, particularly those backed by mortgages, widened significantly and a lack of appetite for these assets in the market has resulted in little bidding and some deals going through at discounts to par…
The Pension Sterling Fund continues to offer a well-diversified portfolio. Currently the Fund has around 50% invested in short-dated assets; around £1 billion. This level is expected to increase as, to be prudent at the current time, we are reinvesting maturing floating rate notes into more liquid, short-dated assets. As such, we do not expect the Pension Sterling Fund to be a forced seller of any of its floating rate notes and we will continue to hold them until they mature, when we will receive par value…
"Irrespective of anything that is said about the objective of the fund, and irrespective of how this fund has been marketed, and irrespective of how this fund has historically been invested, this fund is classified as 'ABI Money Market' and therefore may include ABSs. Indeed, and again irrespective of the objective of the fund, nearly half of the fund may actually be so invested."
The adviser, and the investor, were and are entitled to consider the documentation as a whole, and to consider all of the representations made by Standard Life, not just those which in retrospect support Standard Life's position.
to invest not only in bank/building society deposits but also… other short-term sterling assets. The Fund is designed for investors who are looking for a temporary home for their money when the short-term outlook for equities, bonds and property is uncertain.
"…investors had been promised that their investments were safe and liquid only to have the value of the fund slashed because much of it had been invested in toxic debt…" (Emphasis added)
It is possible that a fear of such an adverse reaction may have prompted the cautious and uninformative drafting which Standard Life initially adopted, though that is a matter of speculation.
…the unforeseen instability of Northern Rock Bank and its affiliates…
This is a surprising comment. But I do not need to ask whether investment in Granite was actually a breach of contract. The test, as Mr Lilly correctly says, is whether the nature of the fund was misrepresented. And I regret to say that I find that it was.
…as, to be prudent at the current time, we are reinvesting maturing floating rate notes into more liquid, short-dated assets…
It is denied that Mr Petrie did not know that some of the FRNs in the Fund were asset-backed. The Fund factsheet provided to the IFA gave sufficient information for an investment professional such as himself to determine the content of the Fund and the nature of those Funds
"sufficient...to determine the content of the Fund and the nature of those Funds"
"…decided to remain in the Fund for almost a month thereafter. Accordingly Mr Petrie was content to invest in the Fund with the knowledge that it contained asset-backed securities."
|Date||Value of fund||Change in value of fund||Percentage change|
his investment in a cash fund would normally have generated interest exceeding £1,303 but he is limiting his claim to that amount…
"No testator, in the light of this example, would choose this Bank for the effective management of his investment."