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If the split-cap fits, invest in it

The split-capital investment trust crisis has almost crippled what was once considered to be one of the best-value, safest sectors in the industry.

With horror stories coming out regularly of zero shareholders losing up to 95 per cent of their investment in less than a year, only the implosion of the endowment market in the 1990s comes close to rivalling splits&#39 ignominious fall from grace.

But, as with some mortgage brokers in the endowment market, there is a growing band of industry figures beginning to question whether sounding the death knell for splits might not be premature.

Simpsons of Brighton IFA partner Andrew Merricks says: “A lot of damage has been done but I hope it will not be the end for splits. Obviously, there are market risks but there is nothing wrong with many of them and, if there is a change in market sentiment, the sector could return to the growth of a few years ago.”

Even the FSA, which last month launched a full-blown investigation into the sector amid allegations that some trusts colluded to prop up prices, has been keen to state that the serious problems are restricted to a minority of the 130 splits in the market.

Its findings will not be known for up to two years but Association of Investment Trust Companies&#39 director general Daniel Godfrey believes that, by then, the splits sector could be in the middle of a recovery. He says: “I would not be at all surprised if 12 months from now many of the best-performing funds are shares in split-cap trusts. Some are oversold and others are extremely highly geared and would do very well if there is any unexpected recovery in valuation.”

Some IFAs agree but many take a more cautious approach. Chase de Vere savings and investment manager Anna Bowes says: “There is some very good value to be found and good returns to be made in the splits&#39 sector. They may not provide high growth but they are generally secure in terms of capital return and, in the case of zero shares, will probably do exactly what they were always supposed to.”

Bowes advises steering clear of splits with cross-holdings and – unlike Godfrey -those with heavy gearing. But she sees no reason why cautious investors should shy away from trusts with sound underlying investments. As she points out, only one split-cap – the Gartmore monthly income trust – has defaulted so far, its board opting in April not to pay the full entitlement to zero shareholders on the due date despite having the money to meet redemptions.

There is no question that there could be others making similar moves but many IFAs continue to recommend the trusts as they see them meeting their safety and performance requirements.

Chelsea Financial Services managing director Darius McDermott pinpoints two trusts – the Investec capital accumulator and Isis progressive growth – which he believes could be considered. Neither boasts spectacular performance but he says their low-risk approach means they do not fall too far when the stockmarket takes a downturn.

But McDermott is not a big fan of splits, believing they are only for the most sophisticated investors – preferably with good contacts in the industry – and not for the vast majority. His view is not uncommon, although there are many IFAs who believe splits should not be the exclusive preserve of the sophisticated investor.

Merricks acknowledges the damage done by the current crisis, noting that it has probably done wonders for sales of with-profits bonds, but remains a committed advocate. He highlights the safety features that some have which could go some way to allay the fears of nervous investors.

One of these is the self-select feature of the Ivory & Sime optimum income trust, which provides guaranteed capital return for the life of the trust. Although Merricks says the hurdle rate is demanding, he believes the trust offers nervous investors a low-risk proposition. Other trusts he rates are Henderson geared income & growth, which he believes will comfortably roll over into another trust, JP Morgan Fleming income & capital and Schroder split investment.

Although not all IFAs share his confidence in the sector, there are many who believe splits have been unfairly demonised. Despite the fact the FSA is likely to focus on zeros because many were marketed as low-risk, IFAs say most of them have sufficient assets to repay shareholders when trusts are wound up.

Alan Steel Asset Management consultant Alan Adam says : “Confidence in splits has been badly damaged and will probably remain that way for some time. But zeros could provide a sense of security and may turn out to be the light at the end of the tunnel. Let&#39s just hope there isn&#39t a train coming the other way.”


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