The rewards from pooling different investors' risks
Split-capital trusts: Andrew Verity on a variation on an old idea
Saturday 08 February 1997
Lord Lawson of Blaby stars in a new TV advertising campaign lauding the benefits of personal equity plans (PEPs), a savings scheme he devised back in 1987.
"If you want to lose pounds try this slim volume," he will say, plugging his diet book. "But if you hope to gain some, try a PEP."
For those who want to take Mr Lawson's advice, one method is growing in favour with financial advisers: using a PEP to invest in a split-capital investment trust.
Split-capital trusts are a variation on the method, now more than a century old, of allowing those with a small amount to invest to gain access to stock market investments by pooling their resources within an investment trust company.
Investors buy shares in the trust, which is then invested professionally and supervised by an independent board of directors.
But whereas conventional investment trusts may have only one kind of share - income or growth shares for example - split capital trusts always have at least two classes of share.
The idea is that if you pool the resources of those who want income, those who want growth and those who want security for their capital, you can get advantages for each.
The trusts are set up with a fixed period of time to achieve their objectives, ranging between seven and 20 years, after which they are wound up.
The cautious investor can buy zero dividend preference shares, which means you receive no ongoing income from dividends as the trust's assets grow in value (zero dividend). Instead you get a pre-set amount, the redemption value, when it winds up.
When it does wind up, your redemption value will take priority over paying off others within the trust with other classes of share.
Other investors buy income shares, which pay out all of the income from dividends paid to the trust by the companies it has invested in.
These may also pay back some of the investors' capital when the trust winds up. But they are often bought on the understanding that the income comes both from dividends and from the investor's own capital, paying little back on wind-up.
Those who do not mind riskier investments can buy capital shares. These do not pay income and their holders are entitled only to what is left within the trust after paying off the holders of other classes of share. But if all works well, the gains can be greater than with other growth trusts.
Split-capital trusts work by combining the different classes of share. Because some are foregoing growth and income for the sake of safety, those taking a punt on income or growth have a larger share of the proceeds.
Equally, if investment performance is poor, the losses are born more by the risk-takers. Putting the product inside a PEP wrapper also exempts investors from income or capital gains tax, depending on which class of share they own.
Gerrard Vivian Gray split-capital expert Bill Fowler points out some spectacular returns for those willing to risk buying capital shares.
For example, by far the best performing trust is Henderson Touche Remnant's Technology trust. This has benefited over five years from the boom in US technology stocks, with the underlying value of its stocks rising by 302 per cent - against a world-wide average of just 89 per cent in the same period.
Investing in the growth of stocks like these carries an even higher risk than usual with a split-capital trust. But cautious investors can tap into zero-dividend preference shares with a safe promise (though not a guarantee) of much better returns - known as a gross redemption yield - than any building society.
For example, zero dividend preference shares in M&G's Income split-capital trust currently cost 73p. M&G offers to pay back 102p on these shares when it winds up in 2001 - or growth of net assets of 7.5 per cent per year. To meet this offer, M&G's trust needs to have assets worth pounds 254m in 2001. But its assets are already worth pounds 357m.
In other words, assets would need to fall by 6.9 per cent per year (called its "hurdle rate") for that promise not to be met.
Many other trusts need to shrink by unusual amounts not to meet their promises to holders of zero-dividend shares (see table). For school fees, weddings or other savings they can provide predictability and a good but cautious return.
Split-capital investment trust specialists: Stephen Philips, Citywall Financial Services, 01392 422592; Gerry Gray, Walsh Lucas IFA, 01904 610 495; Andy Merricks, Simpsons IFA, 01273 270222; Jonathan Whittenbury, Jonathan Whittenbury Financial Services, 01494 67188; Graham Hooper, Chase de Vere, 0171 604 5766.
01 April 2015 12:00 AM
Video: The Independent's Personal Finance Editor runs you through the key facts about Premium Bonds
27 March 2015 08:30 PM
27 March 2015 08:30 PM
20 March 2015 07:30 PM
How to make the most of Isas: You can save more money now, the returns are tax-free and the rules are flexible
20 March 2015 07:30 PM
13 March 2015 09:00 PM
13 March 2015 09:00 PM
10 March 2015 09:03 AM
The Financial Conduct Authority found non-compliance in all reviewed firms
11 March 2015 11:38 AM
Pension expert John Lawson talks on why improved longevity is something to plan for carefully
06 March 2015 08:30 PM
02 March 2015 10:50 AM
The DWP and the FCA have joined forces to investigate transaction charges in occupational pension schemes
04 March 2015 03:00 PM
The company was found to have unacceptably long call waiting times
27 February 2015 07:30 PM
27 February 2015 07:30 PM
27 February 2015 12:01 AM
The NHS is currently bearing a yearly burden of approximately £1.5bn treating cold-related illnesses every winter
- 1 Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
- 2 Google April Fools': company unveils backwards search engine and huggable digital assistant
- 3 I might be an MP, but that doesn't stop me fighting sexism with my breasts
- 4 April Fools' Day 2015: The best hoax news stories from around the internet
- 5 Gamers confess the worst things they've done in The Sims
Katie Hopkins attacked me on Twitter — so I reported her to the police for inciting racial hatred
Street preacher quoting from the Bible fined for calling homosexuality an 'abomination'
Woman filmed launching racist tirade against men on the Tube for speaking in 'own lingo'
David Cameron calls Labour 'hopeless, sneering socialists' while announcing 7-day NHS plans
Revealed: Putin's army of pro-Kremlin bloggers
Katie Hopkins reported to the police for race hatred by Labour MP Simon Danczuk after tweet about Pakistani men
iJobs Money & Business
£20000 per annum + commission: SThree: Sthree have an exciting opportunity for...
£18000 - £32000 per annum: Recruitment Genius: A Telesales Executive is requir...
£45000 - £50000 per annum + benefits : Ashdown Group: A highly successful, glo...
£50,000 - £55,000: Neil Pavier: Are you a professionally qualified commercial ...
Day In a Page
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000