The risk's in the small print - Spend & Save - Money - The Independent

The risk's in the small print

Don't trust those dazzling adverts that promise high income returns.

Fund managers selling income trusts are always keen to stress the highest-possible rates of return in their advertisements. But often these dazzling "headline" rates conceal a host of less attractive features in the small print.

Fund managers selling income trusts are always keen to stress the highest-possible rates of return in their advertisements. But often these dazzling "headline" rates conceal a host of less attractive features in the small print.

Jupiter's new Dividend & Growth Trust, which closed its offer on Thursday, provides a convenient example. Advertisements for the fund dangle the carrot of 9 per cent income a year. At a time when even the best savings accounts are paying only about 6 per cent, that looks very tempting.

But Jason Hollands, of independent advisers BEST Investment, warns: "If something seems to be paying considerably higher levels of income than prevailing interest rates, it may be taking higher risks with the underlying investments. Or maybe they're doing something odd with the charges."

In this case, increased risk concerns Mr Hollands. The Jupiter fund is a split-capital investment trust. Trusts like these offer two different types of shares. One - known as a "zero-dividend share" - is designed for capital growth and the other for income.

The 9 per cent return promised by Jupiter Dividend & Growth comes from the trust's income shares. When the trust winds up in six years and the time comes to repay investors' capital, income shareholders will find themselves placed firmly at the bottom of the pecking order.

Philip Butt, director of Jupiter Unit Trust Managers, says: "When the trust is wound up, bank loans get repaid first, zeroes get repaid next and what's left over goes to the ordinary income shareholder."

Another characteristic of split-cap trusts is that they tend to be highly geared; that is, they borrow substantial sums to boost the funds they pull in direct from savers. The Dividend & Growth gearing lets Jupiter invest £100 for every £40 worth of income shares it sells. This has the effect of improving returns when the fund manager buys a good share, but increases his losses when he makes a mistake.

Mr Hollands says: "If you don't understand the split-capital structure, don't buy a split-capital fund." Mr Butt says: "It is absolutely true that people ought to be aware of the risks. In our literature, all these risks are spelt out in full."

Dazzling headline rates of interest would be far less common if potential investors were not so keen to take them at face value. David Hanratty, of Nelson Money Managers, believes savers have yet to adjust their expectations to meet the new environment of continuing low interest rates.

He says: "Nine percent is actually twice the going rate on a deposit investment. But it doesn't raise people's fears because 9 per cent is a rate they are familiar with from bygone years. People's income needs are so great they are swayed by the advertising. If their income is so important to live on they shouldn't take much risk." Mr Hollands thinks a better option is investment trust income shares that spread risk widely.

A "fund-of-funds"-style trust exists only to buy income shares in other investment trusts. Exeter Fund Managers' £120m High Income Unit Trust, holds shares in 50 split-capital investment trusts, and offers a yield of 7.96 per cent. Philip Thitchener, the marketing manager, says: "The fund manager puts together a portfolio that has some of the slightly more capital-risky income shares and some of the more capital-predictable ones.

"Exeter High Income appeals to those who have just entered retirement and perhaps don't have quite as much capital as would be ideal."

For a free copy of Investec Guinness Flight's Guide to Split Capital Investment Trusts, call 0171 597 1800

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

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
News
peopleThe report and photo dedicated to the actress’s decolletage has, unsurprisingly, provoked anger
Property
Home body: Badger stays safe indoors
property
PROMOTED VIDEO
News
The programme sees four specialists creating what they believe are three perfect couples, based on scientific matchmaking. The couples will not meet until they walk down the aisle together
tvUK wedding show jilted
Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
You've been framed: Henri Matisse's colourful cut-outs at Tate Modern
artWhat makes a smash-hit art show
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
Sport
Mikel Arteta pictured during Borussia Dortmund vs Arsenal
champions league
Voices
Yes supporters gather outside the Usher Hall, which is hosting a Night for Scotland in Edinburgh
voicesBen Judah: Is there a third option for England and Scotland that keeps everyone happy?
Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Arts and Entertainment
Robin Thicke and Pharell Williams in the video of the song, which has been accused of justifying rape
music...and he had 'almost no part' in writing it
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

    Sales Executive

    £20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

    Payroll & Accounts Assistant

    £20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

    SQL Developer - Watford/NW London - £280 - £320 p/d - 6 months

    £280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

    Senior BA - Insurance **URGENT**

    £400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

    Day In a Page

    Mystery of the Ground Zero wedding photo

    A shot in the dark

    Mystery of the wedding photo from Ground Zero
    His life, the universe and everything

    His life, the universe and everything

    New biography sheds light on comic genius of Douglas Adams
    Save us from small screen superheroes

    Save us from small screen superheroes

    Shows like Agents of S.H.I.E.L.D are little more than marketing tools
    Reach for the skies

    Reach for the skies

    From pools to football pitches, rooftop living is looking up
    These are the 12 best hotel spas in the UK

    12 best hotel spas in the UK

    Some hotels go all out on facilities; others stand out for the sheer quality of treatments
    These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

    Widespread fear of Isis is producing strange bedfellows

    Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
    Topshop goes part Athena poster, part last spring Prada

    Topshop goes part Athena poster, part last spring Prada

    Shoppers don't come to Topshop for the unique
    How to make a Lego masterpiece

    How to make a Lego masterpiece

    Toy breaks out of the nursery and heads for the gallery
    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Meet the ‘Endies’ – city dwellers who are too poor to have fun

    Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
    Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

    Ian Paisley’s decision to make peace with his IRA enemies

    His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

    Exclusive extract from Janis Winehouse's poignant new memoir
    Is this the role to win Cumberbatch an Oscar?

    Is this the role to win Cumberbatch an Oscar?

    The Imitation Game, film review
    England and Roy Hodgson take a joint step towards redemption in Basel

    England and Hodgson take a joint step towards redemption

    Welbeck double puts England on the road to Euro 2016
    Relatives fight over Vivian Maier’s rare photos

    Relatives fight over Vivian Maier’s rare photos

    Pictures removed from public view as courts decide ownership
    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    ‘Fashion has to be fun. It’s a big business, not a cure for cancer’

    Donatella Versace at New York Fashion Week