Go on, take a chance and do the splits

Split capital investment trusts can bring high, if sometimes risky, returns for individuals who have a gift for mastering detail.

Investment companies take perverse pleasure in baffling ordinary folk with obscure products, but they really pushed the boat out with split capital investment trusts. A shame, really, because they offer investors the possibility of attractive, if sometimes risky, returns.

Investment companies take perverse pleasure in baffling ordinary folk with obscure products, but they really pushed the boat out with split capital investment trusts. A shame, really, because they offer investors the possibility of attractive, if sometimes risky, returns.

Split caps - or splits as they are sometimes called - are a breed of investment trust. Investment trusts are companies quoted on the Stock Exchange which invest in the shares of other companies, providing a broad spread of managed investments.

Investment trusts have been around since the 19th century, but splits only arrived on the scene in the 1960s. They are rapidly growing in popularity, with more than 20 new launches in the past 18 months. They are offered by big-name fund managers such as Fleming, Framlington, Gartmore, Henderson, Jupiter and Schroder, plus some less well-known names. Recent launches include Aberdeen European Growth & Income Trust, launched in November.

Like investment trusts, splits run one portfolio of investments, but they issue several types of share designed to appeal to specific investors. Originally, there were two classes of share, income and capital - by concentrating exclusively on either capital or income, investors would potentially receive greater returns.

Splits now come in different share classes, the most common being zero dividend preference shares (aka zeros), income shares, ordinary income shares and capital shares. Splits have a fixed winding-up date, when the various returns are divvied up and paid to shareholders. The share classes are ranked on where they stand in the pecking order when it comes to receiving a payout, with zeros first in line and therefore the safest investment, and capital shares last and therefore most risky.

Mark Dampier, head of research at Hargreaves Lansdown, says: "After a difficult time performance has improved and you can get returns of between 8 and 10.5 per cent. With low interest rates this is an attractive return, and if rates fall further next year as many predict, it will look even better."

Zeros pay a fixed capital return at redemption but, as their name suggests, they pay no income. "You can avoid paying tax on your returns using your £7,200 capital gains tax allowance. A higher-rate taxpayer paying tax on large sums of money sitting in a building society account will find that zeros have a lot to offer."

The Close FTSE 100 Trust-Zero tops the performance charts over the last 12 months, returning 11.55 per cent, say figures from Micropal. Returns typically hover between 6 and 8 per cent. Mr Dampier's preferred zeros are BFS Income & Growth, Jupiter Dividend & Growth and JZ Equity Partners-Zero. The other type of split Mr Dampier uses are frequently ordinary income shares. These offer a high income plus the chance to receive the surplus assets of the investment trust when it winds up, after other higher-priority share classes have been repaid (zeros, another type of share called stepped preference shares, and income shares are paid first). It is a relatively high-risk investment, and dividend and capital returns depend on the performance of the trust managers. "You can get returns of 8 to 9 per cent, and sometimes even 12 per cent, but a fund paying that much would be incredibly volatile," says Mr Dampier.

He says most investors should avoid individual ordinary income shares, and spread their risks by investing in a pooled fund. Hargreaves Lansdown runs its own fund, the HL Income & Growth Trust, for those who want to spread their bets. Legg Mason Utilities has topped the Micropal rankings for ordinary income shares over the last one, three and five years.

James Dalby, investment specialist at Bates Investment Services in Leeds, also prefers zeros and ordinary income shares, but warns: "Ordinary income shares offer the potential for income and capital growth, and can be used by mainstream investors to add oomph to their portfolio. But before recommending them to clients, I make sure they grasp the concept of investment trusts and the greater complexity of split caps."

Mr Dalby uses two other types of splits - income shares and capital shares, only rarely. Income shares offer the prospect of far higher yields than you could expect to receive from conventional shares, possibly with some capital growth when the trust winds up. "Some have offered income well into double figures, but there is no guarantee you will get your initial capital back at the winding-up date. With some you can get next to none of your capital back, which makes income shares more like an annuity," he says. His recommended income share is BFS Income & Growth. "I only recommend these for people who require high income immediately, as their initial capital is very much at risk."

Capital shares are last in line when the assets of the split are shared out, only receiving their entitlement after all other classes of shares have taken their fill. This makes them a high-risk investment, but since they are entitled to all remaining assets, if the trust performs well the capital return can be excellent.

For those interested in capital shares, Mr Dalby recommends Exeter Capital Growth, a unit trust that invests in the capital shares of investment trusts, with good recent performance.

But for Bhavesh Amlani, director of London-based financial advisers Simple Savings, splits are a risk too far. "Most people want something they understand, and they are put off by the complexity of splits."

Doing the splits may not be for everybody, but for more experienced investors, the rewards may be worth the risk.

Contacts: Hargreaves Lansdown 0117 900 9000; Bates Investment Services 0113 295 5955; Simple Savings 020 8863 4100

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

Sport
footballLIVE City face Stoke, while Warnock returns to Palace dugout
Life and Style
3D printed bump keys can access almost any lock
gadgets + techSoftware needs photo of lock and not much more
News
Paul McCartney backs the
people
News
i100
PROMOTED VIDEO
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind the scenes to watch the latest series
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
News
i100Steve Carell selling chicken, Tina Fey selling saving accounts and Steve Colbert selling, um...
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
News
i100
News
The slice of Prince Charles and Princess Diana's wedding cake and the original box from 29 July 1981
newsPiece of Charles and Diana's wedding cake sold at auction in US
Voices
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Sport
Mario Balotelli pictured in his Liverpool shirt for the first time
football
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Network Engineer (CCNP, CCNA, Linux, OSPF, BGP, Multicast, WAN)

    £35000 per annum: Harrington Starr: Network Engineer (CCNP, CCNA, Linux, OSPF,...

    DevOps Engineer (Systems Administration, Linux, Shell, Bash)

    £50000 per annum: Harrington Starr: DevOps Engineer (Systems Administration, L...

    Data Scientist (SQL, PHP, RSPSS, CPLEX, SARS, AI) - London

    £60000 - £70000 per annum: Harrington Starr: A prestigious leading professiona...

    Financial Technical Consultant (C++, C#, Finance, MSc, PhD)

    £50000 per annum: Harrington Starr: Financial Technical Consultant (C++, C#, F...

    Day In a Page

    Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

    The phoney war is over

    Russian troops and armour pour into Ukraine
    Potatoes could be off the menu as crop pests threaten UK

    Potatoes could be off the menu as crop pests threaten UK

    The world’s entire food system is under attack - and Britain is most at risk, according to a new study
    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

    Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
    From Mozart to Orson Welles: Creative geniuses who peaked too soon

    Creative geniuses who peaked too soon

    After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
    Caught in the crossfire of a cyber Cold War

    Caught in the crossfire of a cyber Cold War

    Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

    Salomé: A head for seduction

    Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
    From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

    British Library celebrates all things Gothic

    Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
    The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

    Is the Hard Rock Café worth fighting for?

    The restaurant chain's owners are currently embroiled in a bitter legal dispute
    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

    In search of Caribbean soul food

    Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
    11 best face powders

    11 best face powders

    Sweep away shiny skin with our pick of the best pressed and loose powder bases
    England vs Norway: Roy Hodgson's hands tied by exploding top flight

    Roy Hodgson's hands tied by exploding top flight

    Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
    Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

    Di Maria and Ronaldo: A tale of two Manchester United No 7s

    They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
    Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

    Robert Fisk: No victory for Israel despite weeks of devastation

    Palestinians have won: they are still in Gaza, and Hamas is still there
    Mary Beard writes character reference for Twitter troll who called her a 'slut'

    Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

    The Cambridge University classicist even wrote the student a character reference
    America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

    America’s new apartheid

    Prosperous white districts are choosing to break away from black cities and go it alone