FSA probes 'magic circle' claims

THE Financial Services Authority is to swoop on fund managers of split capital investment trusts and advisers who sold them. The probe will investigate possible mis-selling and the alleged 'magic circle' of managers which invested in one another's funds.

FSA managing director John Tiner warned that any collusion could fall foul of the watchdog's controversial 'market abuse' powers.

Tiner's warning came at an Association of Investment Trust Companies conference. It will shock those who hoped the split capital fiasco would die away. Though older 'split' trusts have a good record, many launched during the tech bubble are in trouble, breaching bank covenants and cutting dividends.

Some invested in growth stocks - which fell - and high yield bonds - which collapsed.

Tiner said the watchdogs would begin a series of visits to fund managers to examine transactions and the way they sold. Cross holdings in other trusts will be probed to see if they were in the best interests of investors. The FSA will demand to see minutes of board meetings. Investment advisers will be visited to determine any evidence of mis-selling.

The FSA's questionnaire in December found 10% of split trusts had more than 60% of their assets in other splits. This caused a 'domino effect' when the market slumped.

Chris Whittingslow, of Exeter Investment Management, said there were 135 split funds, with £12.5bn assets. Only 15 had cut dividends.