Legal & General has brought out the distribution trust, a unit trust
which aims to balance tax efficiency and growth potential in the light
of Isa changes next year.
In April 2004, equity Isas will lose some of their tax efficiency, as it will
no longer be possible to reclaim a 10 per cent tax credit on dividends.
However, the rules on corporate bond Isas and cash Isas will not
change and funds with at least 60 per cent in corporate bonds will
have their income treated as interest rather than dividends. This
means income is tax-free.
l & General has designed the distribution trust that invests in a
diverse portfolio of equities bonds and cash. This fund's mix of 54
per cent investment-grade corporate bonds, 30 per cent equities, 15
per cent high-yield bonds and 1 per cent cash is an attempt to marry
the tax-efficiency of bonds with the higher growth potential of equities.
The fund produces an income yield of 4.9 per cent a year but if
investors require growth, they can roll up the income. Its equity
holdings will includes companies such as Boots, Abbey and
Granada, while bonds are likely to include Woolworths and Lloyds
The lead fund manager will be David North, L&G's associate director,
bonds. North manages Legal & General's high income trust and has
over 16 years' experience in fixed income at L&G and Scudder
Investments. He will be in charge of two asset class managers - Neil
Newbury on the equities side and Robert Barnard-Smith on the
Cautious investors may find the fund appealing as a solution to the
tax efficiency versus growth conundrum that L&G has identified.
However, the tax-free status will only apply if at least 60 per cent of the
fund remains in bonds, which may not be the best strategy in all