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Zeros ‘set for comeback’

The zero-dividend preference share market continues to throw up opportunities despite shrinking by a quarter in the last three years, says F&C.

The asset class has fallen out of favour since the high-profile problems in the split-capital investment trust market, shrinking from 2.7bn in 2002 to 2.1bn in 2005, but new zeros are now being created which are not linked to investment trusts.

Fund manager Peter Hewitt points to the 26m zeros issue by property specialist Economic Lifestyle to finance a portfolio of retirement properties as one example of the increased variety of issuer now in the market.

He notes that several high-profile investment trusts have also had successful rollovers in the past year, including Jupiter second split and Aberdeen development capital, bringing new issuance to the market.

While Hewitt expects the market to continue shrinking in the short term, he says this will be offset to an extent by Invesco recovery and New Star financials rolling over in the next couple of months, with a further 40m of issuance.

Investec fund manager Alastair Mundy, who runs the firm’s capital accumulator portfolio, also remains upbeat on the asset class, holding a 35.2 per cent weighting in zeros and a further 11.7 per cent in synthetic zeros.

He says: “The fund continues to benefit from the rally in share prices on the back of steady economic growth.”

Hewitt says: “A significant development was the issue of 26m of zeros by Economic Lifestyle in September. Given the success of this issue, we expect other companies, particularly in business sectors which are backed up by real assets, to consider this method of financing.

“This opens up the prospect for the zero universe to start growing again and move beyond its investment trust roots.”


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