On the other side of the ring is the Ferrari-driving figure of Hugh Osmond, the Pizza Express financier and all-round City whiz. His motto: “Act decisively. Use maximum force. Do it today.”
The two men are locked in combat over what was for years an unfashionable and neglected sector of the financial markets: the millions of small savings, pensions and endowment policies languishing in old life assurance funds that have closed their doors to new business.
The sector may seem drab compared with the sexy world of corporate finance and hedge funds, but the sums at stake are breathtaking. Closed life assurance funds — the so-called zombies — hold £95 billion in small investors’ savings in some 13m individual policies.
Once the backbone of British savings and investment, many of the funds were built up over more than a century and contain premiums from millions of investors, large and small. Up to 10% of adults are thought to have a stake in one — through an old personal pension scheme, an insurance bond or a mortgage endowment policy, for example.
For many, such investments have been all but written off because of poor investment performance and swingeing exit penalties. But for City financiers the funds have proved a goldmine.
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Cowdery and Osmond, whose companies have bought dozens of the big zombies over the past few years, now control some £90 billion in small investors’ savings between them and have become fabulously rich on the back of it.
Cowdery, who three years ago had almost no money to his name, is worth an estimated £80m. Osmond, who started rich, is now richer still with his stake in the zombie business worth about £135m.
Both men have won plaudits from the City. The prevalent verdict there is that when Cowdery or Osmond come knocking, it is good news not just for shareholders but also for the policyholders stuck in zombie funds.
With new management and economies of scale, they have promised small investors improved returns.
However, an investigation by The Sunday Times suggests that all is not so rosy. While Cowdery, Osmond and their fellow shareholders have made millions, most investors are still receiving dismal returns on their investments. Indeed, so marked is the divergence in the two groups’ fortunes that MPs are now calling for an inquiry.
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“The bonuses that are being added to these funds are absolutely appalling,” said John Armstrong, 69, whose wife Angela has two Money Maker Advantage policies that have been controlled by Resolution, the company run by Cowdery, since 2004. “We would have almost been better off putting the money under a mattress.”
On one of the Armstrongs’ policies, £35 has been paid in monthly since April 1997. But last year’s investment return was just £4.14, one of the lowest they have received to date.
“That £4 is the bonus on more than £4,000 of savings at a time when the stock market was doing well, so what on earth is going on?” Armstrong asked last week. “At the same time, the people who are running funds like these are making millions which don’t seem to be benefiting the savers. There needs to be an inquiry into what has happened.”
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Life assurance investment funds were once the staple of the British financial services industry. The “with-profits” funds were run by actuaries who would announce bonuses annually. For generations they provided excellent returns while also protecting investors against the volatility of the stock market.
However, the schemes started to fall out of fashion in late 1980s. More flexible and transparent investment schemes such as unit trusts and Isas provided the old actuary-driven funds with stiff competition. One by one the life assurance companies that ran the with-profits funds started to close their doors to new customers and the so-called zombie sector was created.
In the mid-1990s Sir Mark Weinberg, a South African insurance tycoon, became the first to target the zombies. He had some success but on a relatively small scale. It was Cowdery, who had once worked for Weinberg, who saw the opportunity on a grand scale. In 2004 his company, Resolution, went on a buying spree, taking control of funds previously operated by Royal & SunAlliance, Swiss Life, Britannic and Alba. Earlier this year it bought Abbey Life for £3.6 billion.
Over the same period Osmond, an entrepreneur who made his first fortune when he bought the Pizza Express chain, snapped up the funds of Pearl, London Life, National Provident and NPI.
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The consolidation by Cowdery and Osmond of all these zombie funds was supposed to benefit investors through revamping the management and exploiting the economies of scale. But figures obtained by The Sunday Times show that the funds still lag behind their competitors and, far from catching up, some seem on average to have fallen further behind in the past two years.
The difference in investment performance last year between the funds owned by consolidators, such as Cowdery and Osmond, and ordinary insurance funds, adds up to a total loss for zombie fund policyholders of nearly £3 billion.
At the same time Resolution has stripped hundreds of millions of pounds in capital from the insurance companies that it bought out. It is estimated, for example, that Resolution has paid out more than £1.7 billion to its shareholders and lenders in the past two years alone. Some £1.3 billion of this has come straight out of the capital reserves of Abbey Life.
“If you take capital out of a life company, it means that company has less capital to play with in future,” said one actuary last week. “It may be possible for the company to survive without it but it narrows its options and that can have an impact on policyholders. It might mean the company is less willing to invest in top investment managers or more promising securities, for example. It may also increase the temptation to push up charges and surrender penalties.”
Investors are at a loss to understand why the regulators have allowed such rewards to be bagged by the new owners without first seeing a sustained improvement in returns to small investors.
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The regulator, they point out, has a legal obligation to block the takeover of funds unless it is certain that policyholders will do at least as well or better under the new company as they did under the old one.
“City institutions have managed to trap millions of people in underperforming funds,” said Vince Cable, the Liberal Democrat MP, last week. “The Financial Services Authority (FSA, the leading City watchdog) should be looking at this more seriously.”
Even City analysts, the hard-nosed men and women used by investment banks to assess company performance, have been taken aback at the capital sums removed from some of the companies in question.
“I must say it was never very clear to me why Abbey was prevented by the regulator from taking this capital out of the company before it was purchased, while Resolution was able to release it afterwards,” one senior insurance analyst said.
Cowdery and Osmond say they have done nothing wrong. Resolution said last week that it had been able to remove capital from the companies it bought with the permission of the regulators because they were “over-capitalised” in the first place.
It denies that removing the capital will have any impact on policyholders in either the long or short term. Specifically on the money taken from Abbey it said: “This £1.3 billion was money that belonged to shareholders; it did not belong to, and had never been a part of, the with-profits funds . . . the capital that was extracted was not needed to support the with-profits funds.”
A spokesman for Resolution compared the company’s activities with someone buying a rundown house for a discount, doing it up and making a profit — “no one loses”, he said.
“Resolution shareholders, including Mr Cowdery, have made money because they acquired companies from vendors at low prices and the stock market has subsequently reassessed the value of life companies,” he added.
Others say that the house buying analogy is not so straightforward. “You could compare it with buying a house, but it’s a house with sitting tenants,” said one City source. “Rather than doing it up to make money, you sell off the garden.”
Until now the performance of zombie funds has not been properly analysed. It was only in November last year that the FSA made it a requirement that companies disclosed how their funds were doing. Even now the statistics are extremely difficult for ordinary investors to obtain.
The Sunday Times analysis was conducted by AKG, a specialist firm of consulting actuaries. The analysis reveals that the investment returns produced by closed funds last year were about 13% lower than the open fund average.
Closed funds that had been bought up by consolidators such as Pearl and Resolution, however, produced even poorer returns on average. Their investment yields were more than 40% behind the open fund average.
This under-performance translates into an overall monetary loss for investors in those funds of about £2.7 billion annually and there is no evidence that the gap is getting narrower. For many policyholders such poor performance will cost them dear in retirement or when it comes to paying off their mortgages.
David Parfett, 64, an experienced financial adviser, took out a with-profits pension policy with Royal & SunAlliance in 1987. He was told that he could expect his policy to be worth about £300,000 when it matured in 2007.
The final payout is now expected to be about half of that. He has also been told that his terminal bonus — which previous statements suggested might be worth more than £30,000 — would be zero.
“The rewards for shareholders are out of all proportion,” Parfett said. “It’s unreasonable when they are restricting the ultimate payouts on policyholders’ contracts.”
Parfett is among nearly 3,000 policyholders who are disgruntled at the way Resolution has managed their funds. They claim the investments policy for their funds was changed without their permission, leading to slimmer returns.
Both Resolution and Sun Capital, Osmond’s company, admit that some of the zombie funds they manage continue to perform poorly, but they point out that others have shown a significant upturn in performance and insist that the laggards will do better in years to come. Osmond last week compared turning round the performance of such funds with “trying to turn round a supertanker”.
AKG also believes that the “jury is still out” on whether the takeovers of zombie funds would benefit investors or not in the long term. “While there isn’t any indication from the data that things are being greatly turned around, it is too early to ascribe the current relatively poor performance to the consolidators themselves. It will be interesting to see what may come later,” it said.
It leaves one obvious question for the policyholders of the £90 billion in funds controlled by Cowdery and Osmond. If policyholders’ funds are still doing poorly, why is the City extracting such vast profits so early? Surely the shareholders’ rewards should come later once an improvement in returns to investors has been proved?
The salt in the wound for policyholders is that they face exit penalties of up to 20% on some policies if they try to leave early.
When the House of Commons Treasury select committee examined the issue of closed funds in 2004, it warned the FSA to protect the interests of consumers in the battle for zombie funds. Some MPs now want to see a full-scale regulatory inquiry.
Paul Flynn, the Labour MP who has campaigned for more protection for small investors, last week called for a new inquiry into closed funds. “The performance of some of the funds has been appalling and many of them don’t seem to be getting any better,” he said. “Why have shareholders made so much money out of these takeovers while some policyholders have seen their bonuses cut? The FSA should investigate whether these takeovers really have been in the interest of policyholders.”