Zero-dividend funds are in danger of becoming the next misselling scandal, independent advisers are warning.
IFAs claim that many zero funds carry a higher investment risk than companies currently portray in their literature.
Some IFAs believe that as more investment houses launch zero funds and as IFAs search for low-risk alternatives to with-profits, clients may accept that the products are lower risk than they may prove.
Advisers fear the current universe of zeros cannot support any further launches and while no zero has yet defaulted, it may only be a matter of time if investment houses with no zeros track record enter the market with copycat funds.
Their concerns follow a number of recent launches by Gartmore, Jupiter and Framlington and amid widespread anticipation that more new players will wade into the market as equities continue to struggle.
EP Ward Investment Services managing director Eric Woodward says: “IFAs are looking for an alternative for with-profits but some zero funds have seen dips within a month which are more akin to equities.
“This is not dissimilar to what happened with corporate bonds a couple of years ago. Then there were further launches, the market tightened and they fell rather heavily, which is not characteristic of a low-risk investment although some investment houses' literature portrays zeroes as very low risk.”
