The prospectus is deceptively complicated but the principle is straightforward. Isis will be aiming for capital growth by investing in British equities. To give the trust a start, it is parcelling up the dividends, which will be received between now and the end of the century, and selling them to institutional investors as annuity shares.
That has two effects. First, the proceeds from the annuity shares mean the trust will start with more funds than the ordinary shareholders have put in - 10.1 per cent more, if pounds 100m is subscribed - despite the costs of the launch. Second, it means that shareholders will receive no income unless they cash in their shares.
That introduces the next gimmick: the monthly income plan under which Ivory & Sime will undertake to sell sufficient shares to give investors a 7 per cent return, based on the 100p offer price. Because that attracts capital gains (instead of income) tax, the proceeds should be tax-free provided the investor does not exceed the pounds 5,800 CGT exemption limit. In an attempt to secure demand for those shares, it is also offering a conventional savings scheme with a 'loyalty bonus' of warrants to regular savers.
So far, so simple. But the risks, particularly in the income scheme, are considerable. Ivory & Sime is confident that shares will trade at close to net asset value because the warrants make the savings scheme almost irresistible. But, if they go to a 10 per cent discount - about average for a UK investment trust - Isis will need capital growth of 6 per cent a year to avoid eating up the original investment. A higher discount, or a lower return, means capital will be eroded. Ivory & Sime points out that, over the past 20 years, the minimum annual capital growth in any seven-year period has been 10.1 per cent. That cannot be guaranteed in future.
Ivory & Sime also points out that, unlike split capital trusts, it does not have to provide any shareholders with income. That means it can genuinely invest for growth, and its portfolio is likely to yield about 90 per cent of the market average, compared with up to 1.5 times for other capital trusts.
The imaginative structure means Isis does have attractions. But for all the comparisons with building societies, remember that Isis is an equity investment. Only put in what you can afford to lose.Reuse content