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Split trust for the sophisticated

Gartmore&#39s Second Scottish National Trust is designed as a split-capital investment trust, offering income and the prospect of capital growth over a term of seven years.

Our panel first look at how it fits into the market. Lewis says: "This trust is built on the success of the first Scottish National Trust. It will be attractive, as the original trust which has a first-class history of income and dividend growth."

Ball makes reference to the trust&#39s Pep link, saying: "It fits into the market very well. A 10.5 per cent a year net income for shares held within a Pep offers good growth potential. But many people have already invested their 1997/98 Pep allowance."

Hosking says: "The yield compares favourably with corporate-bond Peps, particularly if the outlook for Government bonds over the medium term is for lower returns."

Robinson reckons the trust is suitable for cautious clients seeking a high income or deferred capital gain. Hosking and Ball think sophisticated clients are the ones to target.

Hosking says: "This is for the more sophisticated client looking for income, who is able to understand the concept of split-capital trusts. The Pep facility will appeal to higher-rate taxpayers."

In terms of marketing opportunities, Lewis is confident that the performance on the original trust will entice new investors. But Hosking says: "The opportunities are limited. However, existing clients looking for income would find this useful."

Looking at useful features, Robinson points to continuity of the investment team who have established a solid track record on the original trust. He highlights the use of only two classes of share, which he believes keeps it simple.

Other useful features mentioned by the panel include the high level of income, facility for a Pep link and potential for additional growth.

For the trust to maintain the original investment at the end of seven years, it must achieve a growth rate of 5.6 per cent a year. Hosking says: "This is a reasonable hurdle rate."

Lewis says: "This would appear to be very achievable."

Most of the panel praise Gartmore for its past record. Hosking says: "It has solid past performance across its range of investment trusts and has experience of running split-capital trusts."

Lewis says: "The original Scottish National Trust has a very good track record. It has provided consistently higher returns than its sector average over the last 10 years. This is particularly good when you consider that, within the 10-year period, the UK had very high levels of interest rates in the late 80s and early 90s."

Robinson has clients who invested in the original trust. He says: "The zero preference clients have been happy with the returns. Income clients have been very happy with the level of income payments although the situation is neutral on the capital improvement of the income shares."

Ball says: "Gartmore has a couple of specialist funds which have done well but by and large it is middle of the road."

Robinson describes Gartmore&#39s reputation in the market as solid and dependable. But Hosking reckons it is not enhanced by being part of the NatWest stable. Ball says: "Gartmore is a well-respected provider."

Commenting on the top 10 holdings, Lewis says: "These are all top UK blue-chip shares. Some holdings, such as Lloyds TSB, Glaxo and BP, have had excellent returns over the last two to three years."

Hosking says: "The top 10 holdings benefit from avoiding the manufacturing sector. Lloyds TSB, General Accident and British Aerospace have significantly outperformed the All Share index over the last 12 months."

Turning to disadvantages, Robinson points out there are income shares selling on substantial discounts, which may provide better value. Hosking is concerned about the effects of the Individual Savings Account and Ball says tax changes may affect the income stream.

The panel name the main competition as: Framlington, Fleming, Henderson and Exeter Fund Managers.

They agree that the charges are reasonable. Lewis says: "Overall, the charges are quite competitive."

Ball says: "The reducing annual management charge geared to total assets is fair and reasonable although 0.6 per cent on the first £200m is perhaps a little high."

Most of the panel believe the trust will not create a great demand although Hosking thinks there could be a possibility for clients with a gap in their income portfolio. Lewis says: "It will have limited appeal, mainly due to the image of investment trusts with IFAs."

Looking at the product literature, Hosking says: "It is clear and builds on the solid tradition of the Scottish National Trust. The accompanying information is very clear and useful for advisers not regularly dealing in the investment trust market."

Ball says: "It looks as if we are trying to sell wine. I am not terribly impressed. I prefer punchy, bullet-point-type lit erature which is easy to read and understand."

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