Split capital trusts were one of the wheezes dreamt up by fund managers during the Eighties as part of their campaign to woo back private shareholders. Although they seem complicated, their aim is simple: to increase the attraction of holding their shares by offering a variety of investment choices to suit different shareholders' needs.
Thus they will generally have capital shares - where holders get no income but will share in the trust's assets, after everything else is paid, when it is wound up - and income shares, whose holders are paid a high level of income but take only a small proportion of the assets when it is wound up.
Other types which may be offered include: zero dividend preference shares, which have no income but get a fixed payment on winding up; stepped preference shares, again with a guaranteed repayment, but where dividends rise by a fixed amount annually; geared ordinary shares; units and warrants, all of which have varied claims on capital and income.
All, however, have one thing in common - a limited life, usually 10 years. That means the various promises of a capital return can be fulfilled.
Because investors know when they will get their money back, it also helps to eliminate one of the main drawbacks of buying investment trusts: the fact that the share price usually trades at a discount to the underlying value of its assets.
For the managers of the trusts, however, what seemed like a good strategy at the launch becomes less attractive as the winding-up date draws near - after all, if the trust vanishes, so does their income. This means that increasingly, managers are putting forward proposals to extend their lives rather than wind them up and distribute the income. In the last year, managers of Yeoman, Gartmore Value and City of Oxford have done just that.
'That is not necessarily a good thing,' said Roderick Crawford, investment trust analyst with Barclays de Zoete Wedd. 'If a trust was set up to last a specific number of years, it may have been bought by people for that reason - for example, a liability falling due in the year of winding-up.'
He added that the complicated structures may mean the full benefits are not achieved until near the end of a trust's life, yet many restructuring proposals are put forward up to two years in advance. 'It would be nice to see a split get to its final date, and then the directors put proposals to carry on. That way, investors will know where they are.'
Extending the life of a trust need not, however, be bad news for investors. Holders of the income shares are likely to welcome the chance to carry on earning income, capital shareholders may want to leave their money in, on the prospect of further increases in value - even zero-dividend preference holders may agree to defer repayment to avoid capital gains tax - a key concern in any winding-up proposal.
That does not mean, however, that all have proceeded unchallenged. Yeoman was forced to change its terms and offered income shareholders the option of repayment when it proposed a restructuring. Gartmore Value was effectively acquired by its successor, Gartmore Shared Equity, but shareholders were offered the opportunity of continuing in the original trust if they wanted.
James Hart, an analyst specialising in split capital trusts for Oliff & Partners, believes that Gartmore may decide to wind up its American trust when the term expires next March. 'It has outlived its useful life. It is difficult to raise a yield from the US market, so it has 30 per cent of its portfolio in UK bonds and split capital income shares.'
Gartmore, however, simply points out that the trust has 15 months to run and no decision has yet been taken.
Undeterred by the need to restructure after 10 years, a number of conventional trusts have opted to become split capital in recent years, in a bid to attract new investors and narrow their discounts. These include Merlin International Green and Jos. Shareholders in Thornton Pan-European were voting yesterday on whether to go the same way.
Apart from the effect on the discount, splitting can also allow managers to pursue a more adventurous investment policy - for example, by choosing stocks which carry a high yield. These may be more risky than conventional shares, but the rewards, too, can be far greater.Reuse content