Stable Growth Fund
Type: Unit trust.
Aim: Growth by investing in zero dividend preference shares.
Minimum investment: Lump sum £1,000, monthly £50. Isa lump sum £3,000, monthly £50. Pep transfers lump sum £3,000.
Investment split: 100 per cent in zero dividend preference shares.
Isa link: Yes.
Pep transfers: Yes.
Charges: Initial 1.5 per cent, annual 1.5 per cent.
Commission: Initial 3 per cent, renewal 0.5 per cent.
Tel: 0800 212433.
Suitability to market 7.3
Investment strategy 7.3
Past performance 6.5
Company's reputation 7.0
Product literature 7.8
Gartmore has introduced the stable growth fund, a unit trust that invests in a portfolio of zero dividend preference shares.
Looking at how the fund fits into the market, Buswell says: “In this increasingly volatile and uncertain market, zeros offer a realistic opportunity for better returns than a bank or building society, without the high risks associated with most other forms of investment. Consequently, this plan, along with a few others which have recently entered the market, fits in very well.”
Hughes says: “The fund aims to exploit a growing awareness of zeros as a lower risk medium of investment,” while Wingar says: “With people's confidence in the stockmarket at a low ebb, this fund fits in very well indeed.”
Woodward says: “There are a number of similar offering on the market from established funds and there have been a number of recent new launches.”
Moving on to the type of client that the fund is suitable for, Wingar says: “This is for those who are looking for a lower risk than equities but with a higher return than a building society.”
Woodward says: “The brochure sets out very well the type of investor this will appeal to. This will be those cautious of pure equity investment risk, and clearly with some recent adverse publicity on with-profits funds I can see this being viewed as a viable alternative. I also can see that the withdrawal facility is useful. I also think with more pension drawdown business being transacted, this type of fund would figure well in the fixed interest portion of such a fund.”
Buswell says: “The fund is suitable for everyone as a part of an overall investment strategy where a proportion of the fund is put to one side for cautious growth.”
Looking at the marketing opportunities that the fund will provide, Woodward says: “Many of the competing offerings are from established funds, with Guinness Flight's and Exeter's being the longest standing. Last years entrance in this market from Aberdeen was quite well received and Framlington has also recently launched.”
Buswell says: “In the current climate where an awful lot of UK funds are showing negative returns not just for the past 12 months but for the last three years, this type of fund – if well-marketed on its merits of caution and stable growth – should prove very popular.”
Wingar says: “This offers another option to be able to offer to clients as a lower risk investment.”
Analysing the strong points of the fund the panel differs. Hughes thinks that there are none, while Wingar says: “Zero's produce growth as a form of income, hence no income tax. They also allow you to utilise your capital gains tax allowance.”
Buswell says: “With a pre-determined end price on a zero, it is much easier for the fund manager to determine the yield required to make that price and to plan accordingly.”
Woodward says: “I think that the idea of pricing in a similar manner to a lot of with-profits bonds is interesting and is obviously designed to appeal to similar investors. Gartmore is trying to reduce the cost of entry to look as low as possible.”
The panel does approve of the investment strategy used. Wingar feels that it offers a good sound approach, while Hughes thinks that it is average.
Woodward says: “Judging by the number of launches, this area of investment is attracting quite a lot of support at the moment. In my view a good alternative to corporate bonds and with-profits bonds.”
Buswell says: “Given the current state of the market, the investment strategy is sensible.”
Evaluating the drawbacks of the fund, Hughes thinks that it has high charges. Woodward partially agrees. He says: “The main disadvantage is that the annual management charge is a bit high for this class but as it has reduced the initial charge, it is understandable.”
Buswell says: “There are no real disadvantages. However, the fund will probably lose its appeal when normal service is resumed in the equity markets.”
Wingar says: “Over the longer term of five to 10 years, equities will probably outperform zeros. However this is still a good product to underpin an equity-biased portfolio.”
Considering the reputation of Gartmore, Woodward says: “Gartmore's reputation is quite good, although it has become a little tarnished with the fall off in recent performance in some of its high-profile growth funds in the UK and Europe.”
Hughes says: “Its' reputation is excellent, although it has been somewhat lack-lustre of late.”
Buswell regards it as being solid and well known, while Wingar says: “It has a good reputation as one of the top fund management groups.”
Identifying the main competition to the Gartmore fund, Hughes points to zero funds from Exeter and Aberdeen, as well as stockbrokers' portfolio services. Woodward says: “The established trusts from Exeter and Guinness flight have the longer records and Aberdeen has clearly attracted funds into their fund which is now just over a year old. Framlington is a relatively recent new entrant.”
Buswell says: “There are a lot of split capital investment trusts in the market and I think that that is where the competition lies.”
Assessing whether the charges are fair and reasonable, the panel are split. Wingar says: “The charges are fair at 1.5 per cent initial and 1.5 per cent annual. There is however a 1.5 per cent withdrawal charge in the first five years.”
Buswell has no complaints about the charges while Woodward says: “Yes the charges are fair, and in some ways good compared to the traditional front- end charged funds. At least it is different to most of its competitors.”
However Hughes disagrees. He says: “No, the charges are not fair and reasonable. They are excessive when compared with the fund's competitors.”
Commenting on the product literature, Woodward says: “The literature is in my opinion, very good and easy to follow, and this will appeal to the type of retail investor at whom this is being aimed. I liked it.”
Wingar regards the literature as excellent, while Buswell thinks that it is clear and concise. Hughes says: “It is well-produced and is obviously aimed at the less sophisticated investor.”
Buswell says: “Zeros are probably seen as very boring by most people, but at the moment boring is what investors want They have had quite enough excitement and adventure over the last few years and would like a little stability in their lives.”
Woodward says: “Will the market in zeros keep supporting new launches of this type? It is becoming popular to launch what I would describe as 'me too' funds which are often launched for marketing reasons because new money is harder to come by in this type of market. I liked the literature and the concept of a different charging structure but for investors who do not buy zeros directly then there is a limit to the number of funds needed to satisfy this market and I think we are getting close to that limit, although I think it is likely that there will be further launches of this type.”
Finally Hughes says: “Zeros could be another source of scandal if the IFA does not have a thorough grasp of the market and its rules. Very soon a zero will miss its target. Beware all buyers!”
Alan Buswell, Proprietor, Glenburn Financial Services, Michael Hughes, Managing director, Eccleston Park Financial Planning Services, David Wingar, Partner, Courts Independent Financial Management, Eric Woodward, Managing director, EP Ward Investment Services.