Gartmore has become the third major fund manager this year to launch a
zero-dividend preference share fund but IFAs remain reluctant to join in
the zero worshipping.
IFAs appear unconvinced of the value of zero funds and cynical about the
motivations for the recent launches.
Last week, Money Marketing revealed that Gartmore has drafted in star fund
manager Richard Prvulovich to run its fund of zeros following launches by
Jupiter and Framlington.
Prvulovich supported the fanfare for the new product, which offers a gross
redemption yield of 8.4 per cent, by telling IFAs that zero funds are ideal
for many retail investors.
This is the same drum that Exeter Investment Group has been beating for a
decade. In fact, Exeter has spent six years on its own pushing the zero
Exeter head of marketing Philip Thitchener says: “There have been a heap
of new issues of zero-dividend preference shares recently. In 1991, there
were under 25. Now there are closer to 100. There is a lot more in terms of
market capitalisation. It is quite flattering to be mimicked, having spent
six years on our own.”
Exeter does not agree with the notion that zeros – a class of share within
split-capital investment trusts which provide no income but deliver a fixed
rate of capital growth – are at all dull. Its latest newsletter exclaims:
“Lip-smacking, thirst-quenching, coolfizzing, low-risk, tax-efficient,
top-selling 10 years of zeros.”
So why has it taken the big boys so long to get into first gear?
Framlington group marketing director Craig Walton says: “Zeros have been
around for the best part of 20 years. There has been increased demand for
split-capital trusts which has led to an increase in issues to the current
number of around 95.
“Zeros are now quite a sizeable sector and provide a market where you can
put a professional fund manager in charge of a fund of zeros. You need a
professional because the sector is so diverse. There is no doubt over
recent years that there has been an education in the IFA marketplace and
zeros are not a secret any more.”
A further reason for the increased popularity of zeros is highlighted by
Chartwell Investment Managers associate director Sue Whitbread. She says:
“Zeros have not traditionally made most IFAs best-buy lists, largely
because they have not paid commission. This remuneration issue is being
addressed and, in the meantime, members of the general public are becoming
more and more aware of their existence.”
What is her interpretation of the renewed interest by big fund managers?
“The marketeers will tell you it is because of the size of the universe of
zeros but perhaps if the equity market was more flamboyant we would not be
seeing so much new interest in zeros. All of a sudden, fund managers want
to launch zero funds, when players like Exeter have been banging the drum
Klonowski & Co principal Francis Klonowski also takes a cynical stance. He
says: “Every so often there seems to be an area which has been around for a
while which has renewed interest in it, such as venture capital trusts.
IFAs who have been using VCTs and zeros already will not be getting excited
just because three major investment houses, good as they are, have launched
zero funds. The cynic in me says it is because they are struggling in other
He warns that IFAs should ignore the marketing gloss and high-octane
presentations which can surround new launches and let their clients' needs
steer their judgement.
“What IFAs should be doing is seeing through the seminars and marketing
literature and start by looking at their clients' overall portfolio needs
and where zeros might fit in. They also need to be confident in explaining
the underlying investment proposition and be happy with exactly what zeros
can offer,” says Klonowski.
Many IFAs believe that, rather than paying for an extra layer of
management through an investment house, it can be better value to buy zeros
direct from a stockbroker.
Whitbread says: “We are not a big fan of unit trusts which invest in zeros
because the charges can work out proportionally very expensive. Individuals
can choose to invest directly in zeros through a stockbroker and simply pay
the broking fees. We remain to be convinced what third-party fund managers
have to add on a cost-benefit basis to investing in zeros.”
Klonowski says: “Many IFAs I know find it is a lot cheaper to go through a
stockbroker or the likesof BFS who specialise in this because it is a lot
cheaper than going through an investment house.”
But Hargreaves Lansdown investment manager Ben Yearsley defends buying
through a fund. He says: “The main motivation is diversification. There is
nothing wrong with buying individual zeros but there might be more risk
As returns on traditional low-risk investment vehicles such as
with-profits continue to plummet, zeros look set to flourish in the future.
But IFAs should ensure they can confidently demonstrate that any investment
they recommend is the best choice for their client.