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Have your cake and eat it

Split-capital investment trusts are attracting attention again. In the recent weeks, Legg-Mason Investors, Aberdeen and BFS have produced new split caps, with other companies expected to join them before the end of the year.

Among these is Investec Asset Management – curr- ently designing a new European split cap to make further use of the talents of Black Rock&#39s European fund manager, Albert Morillo.

Split caps have undoubtedly performed well in the past year, which accounts for at least some of the industry&#39s growing interest. Income share yields are as high as 10 per cent, while some trusts have seen capital value double in the past year.

The split-cap industry now holds around £14bn of funds under management across 88 funds, representing about 16 per cent of the investment trust market.

In December 1998, there were only 61 split-cap trusts holding less than £6bn and accounting for less than 10 per cent of the market.

Although impressive past performance is no doubt a contributing factor to their recent success, there is a growing school of thought that split caps are the only way forward for the investment trust industry.

So far this year, two small investment trusts have converted to split caps. But Brewin Dolphin consultant David Thomas believes that in the next year we are likely to see a number of the bigger investment trusts converting. He says: “The vanilla sector is dead. No one can raise any money in the vanilla sector anymore. Splits have doubled in size in the past few months and they are sure to double again. It&#39s the only future for the industry.”

Whether Thomas is proved to be right or wrong, splits are a compelling and flexible product for investors. With the choice of income, capital, or zero-dividend preference shares, there is potentially an option to suit every investor&#39s portfolio.

Zeros are one of the safest investments in the market. They are ideally suited to investors who need to have a guaranteed return in the future. Fund managers often push these as ideal investments to cover school fees or mortgage payments.

Hargreaves Lansdown investment director Ben Yearsley says: “Zeros are very useful for people who need to know they will have a certain amount of money in, say, five years time. They are not guaranteed, but so far no zero has failed to pay out.

“Split caps are really coming back into fashion at the moment. There is more talk, more awareness and more desire for the fairly safe returns you can get from them.”

For those looking for a higher risk investment, capital shares can potentially provide very good returns. Those wanting income have the option of investing in income or annuity income shares.

Perhaps split caps&#39 biggest attraction is their ability to provide capital growth and income. LeggMason Investors head of investment trusts and manager of the new American Assets offshore split cap fund Alan Kerr says: “The beauty of splits is they allow you to have your cake and eat it. You&#39re getting a high yield which is growing, with the prospect of some capital growth as well. You don&#39t really get that with any other investment.”

Foreign & Colonial, one of the UK&#39s biggest investment trust companies, has yet to launch a split-cap trust. F&C head of investment trusts Jeremy Tigue is not convinced by Thomas&#39 argument that there is about to be a mass conversion of investment trusts into split caps. He says: “At the moment, most investment trusts are performing very well so we are probably unlikely to see many changes.

“The reason we have not launched any split caps is that they are quite complicated to manage and it is difficult to please all the different categories of shareholders. We will certainly keep an open mind, but we are not about to get into the split market.”

Although splits do have their complexities, the closed-ended structure of investment trusts may be another aspect which has contributed to the recent enthusiasm. It has been suggested the recent departure of Henderson&#39s star technology fund managers was prompted by the phenomenal size of the funds. Henderson&#39s Global Technology fund was almost £1.3bn. Funds of this size can be incredibly difficult to manage, while investment trusts can be closed off at a set size.

Another contributory factor to the success of split caps has been a favourable economic climate. AITC PR manager Annabel Brodie-Smith says: “I think we&#39re in an historically low interest rate environment, so therefore people are looking elsewhere for sources of income.

“Splits are an extremely useful tool and a good way for advisers to add value. Zeros in particular have become extremely popular among IFAs.”

The volume of new split launches is testimony itself to split caps&#39 popularity among IFAs. Being a slightly more complex investment vehicle, IFAs play a major part in their distribution and fund managers will rarely produce a new fund without testing adviser opinion.

Plan Invest director Michael Owen says: “The investment trust market has gone through a particularly grizzly period over the past two or three years up until this year. But zeros have been one of the few exceptions to that. I think they very underrated.”


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