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Split-cap debacle casts doubt on zeros’ surge

Industry experts are divided on whether there will be a big increase in zero-dividend preference share issues due to the memories of the split-cap debacle.

Speaking at an Association of Investment Companies’ press briefing on defensive stocks last week, Ecofin chairman John Murray said there was significant demand for zeros but investors’ memories of split caps could hinder their return.

He said: “There have been rumours that some of the very big generalist investment trusts might want to put in some structured gearing and do a zero but I am not sure that we are going to see a flood of them. I do think we may see more convertible share issuances.”

Fund firms such as JP Morgan have predicted an increase in split caps as investors seek to reduce exposure to the income tax changes announced in this year’s Budget.

Winterflood head of research Simon Elliott says: “Although there is clearly demand for zeros out there, given tax rates, it is still a relatively expensive way of raising debt finance and we do not think that there will be a huge rash of issuances.”

But Brewin Dolphin head of investment companies research John Newlands says: “Just because there have been problems in the past does not mean that you give up. You improve the design and move on.

“I think that the time has come for the new age of zeros and splits. They make a huge amount of sense under the present tax regime.”

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