Investment trust uses endowment policies

INVESTORS now have the option of investing in a portfolio of with-profit endowment policies via a new investment trust, writes Vivien Goldsmith.

The trust, Kleinwort Endowment Policy Trust, or Kept, is raising pounds 30m with three-quarters being allocated via a placing and a quarter available to the public. This will be used to buy policies with an average value of pounds 10,000.

The trust has a fixed life of 11 years and one class of share. It will invest in endowment policies that are no longer wanted by the original investor. Some of the funds will be held in cash to pay the early premiums on the policies.

Most of the policies will have 10 or 11 years to run, but some shorter-term policies will be bought, which will fund later premiums when they mature.

The policies will be from 25 of the leading life offices. If bonus rates are unchanged then the trust would produce a return equivalent to 12.7 per cent a year. But bonuses are expected to come down. If no terminal bonuses were paid at all, only annual bonuses, then the annual return would come down to around 6 per cent. The trust pays no dividends. Arthur Copple of Smith New Court, sponsor of the issue, compares the trust with the zero dividend preference shares of split capital trusts. But the returns depend on the bonus policies of the life insurance companies, which are dictated by investment returns.

Nigel Sidebottom, investment manager of Gerrard Vivian Gray's investment trust portfolio service, said: 'The management costs are a bit high, but they are doing something I could not do myself.' He thinks the trust could go to a premium when dealing begins on 27 July. The policies will all come from Chester-based Surrenda Link, which will pass them on at cost, in return for a share in the management fees.