Money: A split trust is a big winner...

... or you could lose it all, warns Isabel Berwick

ANYONE who had the foresight to invest pounds 3,000 in a little-known investment scheme back in September 1995 would now have pounds 34,500. Amazingly this isn't a dodgy get-rich-quick scheme. These spectacular returns came from one investment trust, Scottish National, which is run by Gartmore.

Scottish National is a split capital investment trust. This means the trust has ordinary shares as its main assets, mainly in big names such as BT and Lloyds TSB. But the fund managers then split up the shares they issue to investors, and usually offer three different types of shares (see box).

The big money-makers are the capital shares. Split-capital trusts have a fixed lifespan, and when you buy capital shares you are buying the chance to take a share of whatever capital is in the fund after the winding-up date. It sounds simple but there is (of course) a snag. "It's not out of the question that you could lose everything if there was a market upset," says Tim Cockerill, managing director of Whitechurch Securities, independent financial advisers. "Capital shares are quite complex, and they magnify the ups and downs of the stock market. You buy them if you believe the market will do well in the long term. But you have to accept that you may wake up and say `Oh my God' because they've gone down massively."

During the life of the investment trust, capital shares can be traded through stockbrokers like any other share. Scottish National, which is due to wind up in September, has seen the price of its capital shares rise 90 per cent in one year. There are currently enough funds in the trust to pay out 239p per capital share when the trust winds up in September. Any stock market growth between now and then should mean investors get a bigger payout. As the shares are trading at 219.5p each at the moment there isn't much to gain if the market does not move up between now and then. And if it falls dramatically, you could lose a lot of money.

If you are thinking of buying capital shares you should probably be taking a long-term view. Look for a trust with a winding-up date in several years' time - but don't expect to find bargains. Richard Hughes manages M&G's Recovery investment trust, winding up in 2002. He says capital shares in his fund were trading at 20p in September but are now around 70p each. Even so, there is enough money in the fund now to repay that amount to capital shareholders if the market doesn't move upwards between now and 2002. If the fund grows at 5 per cent a year, the capital shares will grow at 20 per cent a year. At 10 per cent growth a year, you'd get back 34 per cent growth from the capital shares.

This exaggerated performance is possible through "gearing" - borrowing against the assets in the fund in the hope of making more money. Investment trusts do this by selling loan stock. The more highly-geared a trust is, the more volatile the share price will be. "If they pile on the gearing and something goes wrong, it can be disastrous. A share may have put on 200 per cent in a year but there are no guarantees it will continue," warns Mr Cockerill. If you make short-term gains by buying capital shares, you may be happy to take the money and sell up when prices are high.

The biggest holdings in M&G's Recovery fund are Lloyds TSB, Royal & SunAlliance, BT, NatWest and Ocean Group - not obvious "recovery" stocks. Mr Hughes says: "Our definition of recovery is a company going through a difficult time - it may be a problem with a division or a subsidiary. Some shares we bought six years ago have recovered, but if there's more out-performance to come we hang on." Other managers look for firms outside the FT-SE 100 index.

Capital shareholders might be left empty-handed when the trust winds up if there's a market downturn or the underlying shares held in the trust perform badly. All the owners of lower-risk zero-dividend preference shares (see box) have to be paid off at their guaranteed price when the trust winds up. If there is anything left it is shared out among capital shareholders.

If you like the sound of capital shares but haven't the time (or the nerve) to invest directly, there is a unit trust that specialises in capital shares. The

Jargon busters

Split capital investment trusts are a type of investment trust that has a fixed lifespan. All the assets are divided up between investors when the fund winds up. The shares bought and held within the fund are often big names like BT and Glaxo Wellcome. The complicated part is that the fund managers issue different types of shares. Most commonly, these are:

q Income shares pay an income during the life of the trust. Some have no value at the end of the term.

q Zero-dividend preference shares have a fixed redemption price, which is almost certain to be paid. Often used for school fees planning.

q Capital shares offer the chance of spectacular returns if the trust has done well. Effectively, capital shareholders get everything that is left at the wind-up date after the less risky classes of shares have been paid off. Capital shares (known as caps) are bought and sold during the life of the trust, and investors can make big gains without holding the shares for the full term. The downside is that you could lose all the money you invested if the stock market performs badly.

q The Association of Investment Trust Companies has a free factsheet on this type of trust: call 0171-431 5222.

Start your day with The Independent, sign up for daily news emails
Voices
There will be a chance to bid for a rare example of the SAS Diary, collated by a former member of the regiment in the aftermath of World War II but only published – in a limited run of just 5,000 – in 2011
charity appealTime is running out to secure your favourite lot as our auction closes at 2pm today
News
File: James Woods attends the 52nd New York Film Festival at Walter Reade Theater on September 27, 2014
peopleActor was tweeting in wake of NYPD police shooting
Sport
Martin Skrtel heads in the dramatic equaliser
SPORTLiverpool vs Arsenal match report: Bandaged Martin Skrtel heads home in the 97th-minute
News
Billie Whitelaw was best known for her close collaboration with playwright Samuel Beckett, here performing in a Beckett Trilogy at The Riverside Studios, Hammersmith
people'Omen' star was best known for stage work with Samuel Beckett
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
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.

iJobs Job Widget
iJobs Money & Business

Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

$200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

Carlton Senior Appointments: San Fran - Investment Advisor – Ind Advisory Firm

$125 - $225 per annum: Carlton Senior Appointments: San Fran - Investment Advi...

Sheridan Maine: Commercial Finance Manager

Up to £70,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Sheridan Maine: Regulatory Reporting Accountant

Up to £65,000 per annum + benefits: Sheridan Maine: Are you a qualified accoun...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'