Investment trusts: Isis aims to attract with capital growth: Heather Connon profiles a trust with intriguing features to win investors

INVESTMENT trust managers are past masters at innovation. A host of new features from warrants to split capital structures, from savings schemes to pre-determined wind-up dates have been rolled out by trusts to win, and retain, the loyalty of the growing army of private investors.

But even those who are well-used to innovation were intrigued by Isis, a new trust launched by Ivory & Sime earlier this year. It has two aims. First, it wants to provide a tax-efficient way for investors to get income from their savings, yet with enough security to rival a building society. Second, it aims to eliminate the main deterrent to investment in trusts - the fact that trust share prices usually languish at a discount to their underlying net assets - for those who want to leave their capital to grow.

The solution Ivory devised sounds complicated but is actually remarkably simple. Isis will aim to grow its capital by investing in high-quality, blue chip shares whose value is expected to grow faster than the rest of the market. And it has parcelled up the future dividends from the companies it invests in into annuity shares, all of which were placed with institutional investors.

That had two effects. The extra funds raised by selling off the future income stream meant the trust could invest more than shareholders had actually subscribed. That compensated for the costs of launching the trust and should have ensured that the shares started trading above their 100p issue price. It also meant that the trust's managers could concentrate on capital growth - unlike most capital shares which, because they have to pay income to one class of shareholders, have to invest in high-yielding stocks that are often higher risk. That is underlined by the fact that the Isis portfolio yields 3.5 per cent, below the market average of about 3.85 per cent.

For those who want a regular income, Ivory undertakes to sell enough shares every month to give investors a 7 per cent gross return on their funds. Because these sales are subject to capital gains tax, not income tax, the proceeds should be tax-free provided the investor has not exceeded the annual pounds 5,800 exemption.

Regular selling does mean there is a risk of eroding the original capital. But Ivory points out that, over the past 20 years, growth has averaged at least 10.1 per cent a year in any seven- year period. Provided that continues in the future, it would ensure that even those in the income plan end up with more than they put in.

A shareholder in any investment trust can, of course, sell some of his shares every month when he needs the income - provided he can find a buyer. Ivory's third innovation was to supply the buyer by establishing a regular savings scheme and enticing investors to participate by offering them warrants as a loyalty bonus. By matching buyers and sellers, it aimed to ensure that the regular disposals did not depress the share price.

If the theory was excellent, the practice proved less successful. Ivory took only pounds 26.6m, less than a third of what it had hoped for - and that was only after it had bought pounds 2.5m and S G Warburg, the sponsor of the issue, pounds 2m. And, despite the manager's efforts, the shares did fall to 97.5p - below the issue price - soon after dealings started. The price is currently about 104p, above the 100p subscribed but below the underlying net asset value of 107p.

Despite that, Gordon Neilly of Ivory & Sime is not disappointed. 'The surprise has been the after-market demand.' The 1,700 subscribers to the regular savings scheme will buy pounds 4m worth of shares a year. 'So they will own the trust in five years,' Mr Neilly said.

He believes the concept was a good one, but admits the trust's unusual characteristics made its benefits hard to get across to potential investors. 'We have to recognise that we need to simplify the procedures,' he said. But he also pledged that Ivory will be launching a number of initiatives extending some of the Isis features to other products in his portfolio.

Other fund managers were intrigued by Isis, although it is unlikely any will rush to emulate it until it is clear the innovative structure has succeeded in eliminating the discount. 'It is easier to sell conventional things that people will understand,' said Robin Angus, investment trust analyst at NatWest Securities. 'But I hope they will be able to understand it, and that it will catch on,' he added.