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Zero tolerance for marketing gloss

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

fund proposition.

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

for years.”

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&#39 needs

steer their judgement.

“What IFAs should be doing is seeing through the seminars and marketing

literature and start by looking at their clients&#39 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.


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