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Budget makes zeros look attractive

Zero dividend preference shares (ZDPs) have become a more attractive investment proposition following the recent budget, according to Wins Investment Trusts (Wins).

Once the darling of the investment trust industry, the popularity of ZDPs suffered in 2001 because of their connection in the split capital crisis.

However, according to Wins the recent proposed increase in the higher rate of tax to 50% means that zeros look attractive from a taxation point of view with capital gains tax of 18%.

Simon Elliott, the head of research at Wins, says this represents the first chance for a sizable issuance of new ZDPs for some time.

ZDPs are designed to deliver a predetermined rate of capital growth although the capital is not guaranteed. According to Wins the existing market for these securities is limited.

The median gross redemption yield (GRY) for a covered ZDP is currently 7%, which Elliott says compares favourably with the yield on cash deposits. He says: Although the risk profile is considerably different, we believe investors will consider investing in zeros despite memories of the split capital crisis.

At a time when investment trusts are struggling to renew bank facilities, a well-covered ZDP issue is one option to install structural gearing into the companys structure.
However, many current conventional investment trusts will be wary of pursuing this option due to the ramifications of being re-categorised as split capital investment trust.

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