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Exeter research defends zeros&#39 cross-holdings

Exeter Fund Managers has come to the defence of zero-dividend preference shares, with new research showing that split-cap trusts with big cross-holdings are not necessarily the highest risk.

The research separates the zeros into three categories – vulnerable, currently uncovered and relatively secure – in terms of how much asset cover they have in relation to their final repayment value.

Of the 109 zeros, just 10 were classified in the vulnerable category with asset cover of less than 77 per cent.

However, three of the 10 funds have no exposure to other split-caps while a further two funds only have 25-30 per cent of their assets invested in other splits.

Of the funds in the vulnerable category with lower cross-holdings, most are highly geared although Martin Currie&#39s premium trust, which is directly invested, has lower than average gearing.

Exeter says the research shows that assessing the risk of zeros is not as simple as looking at cross-holdings or gearing in isolation. Using asset cover as a measure of risk, it highlights that more than 70 per cent of the sector falls into its relatively secure category.

Exeter marketing director Philip Thitchener says: “Assessing the merits of a zero may not be as simple as it once seemed. It is not surprising if investors and their advisers, searching for safe product categories in which to place money with confidence, have begun to think twice about zeros, given the confusion arising from recent events. But the bulk of the zeros sector offers cover of 100 per cent or more and the average gross redemption yield of this group is 10.1 per cent.”

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