IOS-2

Panic stations

JOHN BULL

The future of Investors Overseas Services (los), which sells the Dover Plan in this country and mutual funds all round the world, will soon be resolved. But as I write, six days of nonstop board meetings have produced very little in the way of decisive action. The two founders of the business,

Mr Bernie Cornfeld and Mr Ed Cowett, have stepped down. Sir Eric Wyndham White has become acting chairman and talks

with rescue parties go on. All the same, some conclusions already emerge from this most important of financial happenings.

In the first place, we now have a situation which many have feared—a steady flow of redemptions of funds, plans and policies

which exceeds new sales and existing pre- mium income. This net withdrawal of funds has been put as high as $5 million a day, say i10 million a week. This in turn means that the tos management companies are making losses. Neither the net redemptions

nor the loss are tolerable for long. The first could give rise to a major crisis in the

world's securities markets (we have already

seen the beginnings). The second, if un- checked, means that los would inevitably

go bust. The scenario for the first is that

net redemptions cause tos funds to sell their securities, which in turn drives down values

over a wide front, which in turn could prompt more los customers to try to exit. This is alarmist stuff, but I do think that we ought to realise how serious the los situation has been and still is. How extremely dis- quieting, therefore, to see the tos board dilly-dallying.

The failure, of los itself is a separate issue. The possibility has had to be con- templated by the financial communities (gov-

ernment and private) in London, Frankfurt and Paris and most other market places dur-

ing the past few days. One does not know

what would happen to International Life Insurance (UK), the company which actually

issues Dover Plans. It is registered in this

country and therefore has been operated under Board of Trade rules. It has also made

Profits and built up reserves. It is impossible

10 prove, but I cannot believe that Dover Plan policy holders would be allowed to flounder without a viable management com- pany for very long. It perhaps needs saying again that there is no direct connection be- tween the share price of los and the value of the securities underlying the Dover Plan.

How has the crisis arisen? After all, many companies each year announce that their profit figures will not be up to expecta- tions- Their shares then drop sharply, a new level is established—and usually that is that. In this case, the loss of confidence by the investing public all rivet tie:World .tutS %to' s s9, profound that the comisany has been _ brought to the brink of disaster. One major reason is that there has always been a pre- disposition to believe the worst of tos. The group has consistently flouted convention; acted in a way to reduce its tax charge to ludicrously low proportions and generally annoyed the financial establishments of the world. I am all for bashing establishments. But when you are managing other people's money, it is not altogether sensible.

Thus tos has been less able to afford mis- takes than most. But large mistakes the group has made. In the first place, it de- veloped an investment banking arm which went into some dud situations. Maybe the write-offs occasioned by ill-judged bank- ing investments will prove to have wiped out a great deal of the profits forecast for 1969. Secondly, the group allowed expenses to rise to very high levels indeed. The atmosphere at headquarters has long been like that of a Roman emperor's court. The result has been that there has been a great

amount of unnecessary spending. Thirdly, the plunge in the world's stock markets has been a disadvantage. As for the slowness of the board's reactions over the past weeks. I suggest that this is explained by the fact that los has been a salesman's company and salesmen are not very good in crisis situa- tions. Second, los has been a success story for so long that the leading lights simply could not recognise danger signs when they flashed red.

Now an alliance is being sought. By the time this journal is published, a deal may have been signed, sealed and published. Only one solution will restore confidence. los must be taken over by a banking group which includes European houses of the highest standing and of immense resources. The banks must stand guarantor of the future viability of los. Groups consisting solely of middle-rank American banks—a combination which as I write seems the most popular—will not do.