Fool's Eye View

[ June 2, 2000 ]

Standard procedure

By Rob Davies (TMFEssex)

Carburton Street, London. When a company comes under attack its first line of defence is usually to say what a great job it has done and trot out all sorts of carefully selected statistics to "prove" that. Such a document will normally also include financial data to demonstrate its record to the City. But the first defence document prepared by Standard Life to repel the attack from Fred Woollard, the Australian carpetbagger, is curiously devoid of any financial data about the company at all.

To me this is truly indicative of the arrogant and patronising management style adopted by mutual companies. Their view seems to be that the general public is incapable of understanding financial statements so they don't even try to explain what is going on. I have no doubt than no listed company would try and defend itself it to the City with such a vacuous piece of propaganda. This document alone is sufficient evidence that the company needs to be more managed more efficiently.

Firstly its title "The real facts and figures about your future" is an oxymoron. No one can present any facts the future. Least of all a company selling endowment policies that has had to write to shareholders recently telling them that the projections made a few years ago are wrong and have been revised down.

The document states that Woollard is simply trying to make a large amount of money. Eh! Isn't that why all of us invest? Then it goes on to say that "one-off windfalls of uncertain value, payable in some two years time, do not justify demutualisation and that Standard Life members can look forward to high returns in the future as a direct result of our continuing mutuality." Why it thinks endowment returns are more certain than a windfall payment is not explained and there is nothing in the way of a fact to back it up.

All it does say is that the company might have a value of £12bn that would generate minimum payments of £250, although some would receive a lot more. Mr Woollard could make £150,000. Good for him. A research document by Deutsche Bank estimates the value of the company between £10.4 and £16.1bn giving an average windfall of £4,500 to £7,000, just the right size for an ISA.

Turning to investment returns it presents a table showing the hypothetical return from a £50 a month endowment policy held for 25 years maturing in February 2000 against four its rivals. Oddly enough it beats these carefully selected four. But it does not tell us how much of the £15,000 contributed went in fees. It also does not tell us how much that money would have returned if it had been invested in a low cost index tracker. A lot more I am sure.

But where the document gets really outrageous is on page 9. Here it purports to show that staying mutual would give the policyholder a better return in the future than if the company becomes a PLC. What it totally ignores is the actual windfall payment itself and the returns that might generate. This chart assumes a 7% growth rate as a mutual and 6.25% as a PLC, yet the new FSA guidelines say that everyone should use 6%, whether a PLC or not. So this document does not even comply with FSA rules.

What the document totally fails to understand that the process of flotation simply changes the capital structure of the group. It does not change the ownership. All that happens is that the policyholders will now own the company through shares rather than through opaque investment policies, and future returns will come through dividends and share price growth as well as with its policies.

But perhaps the most damming endorsement comes from the four IFAs at the back who all support the company staying mutual. They don't want their gravy train derailed. Foolish policyholders with Standard Life may consider that the most salient fact when it comes to voting.

Related Links

• Standard Life Discussion Board
• Endowment Life Assurance discussion board.
• Poll on mutual status