Summer job became life's career

To get your first taste of life in fund management as a holiday job is unusual, but that was what happened to Alan Kerr. "I started training to be a lawyer in Scotland, but I told my law tutor I wasn't sure about all this legal stuff and economics would be more interesting," he says. "He said I should be doing fund management, as it involves elements of corporate law and economics."

The tutor put him in touch with the Edinburgh-based investment house Ivory & Sime (now part of the Friends Provident Group), where Mr Kerr worked in a summer holiday. "I was interviewed by the chairman and I was awed, because I was a humble trainee. I also recall working out that he earned in 20 minutes what I earned in a week."

Mr Kerr was offered a permanent job with the fund management team. "I wanted to finish my law degree and, as it turned out, I left to go back to university just before the big market crash of October 1987."

Law studies completed, Mr Kerr developed his interest in investment management. "I won a Carnegie Scholarship to do a Masters in finance, and I chose to write it on investment trusts, which is the area I have specialised in since. I joined Ivory & Sime as a full-time employee, then moved to Murray Johnstone, where I had an equally enjoyable five years."

At Glasgow-based Murray Johnstone, Mr Kerr had his first experience of running investment trust portfolios. "I started with what can be described as a 'buy-everything-you-like' portfolio, the quoted part of Murray Ventures. I had a very good time buying things like the bus privatisations and the first round of the bio-tech boom. Then I ran Murray Split Capital for a while, which was eventually rolled into Murray Extra Return, and ended up overseeing the launch of Murray Global Return, which at around £280m was one of the biggest split capital trusts in the market."

At the beginning of this year, Mr Kerr moved to Johnson Fry to oversee that group's investment trust activities. "I joined with the idea of growing the split capital business here. We already have two splits that have performed very well, both specialising in the utilities sector in the UK and Europe. What I want to do is take the best of the performance that is generated by Johnson Fry's fund managers and combine it within a higher yielding fund."

The result is the Johnson Fry Income & Growth Trust, launched on 15 March. "We are linking Johnson Fry's capital performance to a 9 per cent yield. I will manage the income part of the trust by investing in high-yielding shares of other investment trusts, but I will also oversee the team running the growth portfolio. Essentially, this is a case of keeping an eye on things without standing on their feet or, worse still, requiring income from them."

This is the key to the new trust's approach, running two separate pools for income and growth. To some extent, this is a natural development of the split-capital structure. An investment trust issues one class of shares that pay out all the income generated by the trust's portfolio, but have little, or no, capital value, and another which pays no dividends but attracts all the capital growth from the trust's assets. That is after other classes of, for example, preference share have been met, when the trust is ultimately wound up.

In most cases, "splits" have a single portfolio meeting the requirements of the different classes of share in issue. In the case of Johnson Fry Income & Growth, the income and growth portfolios will be run separately. Indeed, the trust is not strictly a split at all, since it issues only one class of ordinary shares, the gearing on its investments being provided by bank debt, amounting to 40 per cent of total gross assets.

Initially, 75 per cent of the trust's assets will be put into the income portfolio and 25 per cent into growth stocks. Mr Kerr's specific brief is to generate the yield from a portfolio of mainly highly geared ordinary shares, income shares and some capital shares of other split-capital investment trusts.

The most attractive aspect of thenew trust is its estimated initial yield of about 9 per cent, which Mr Kerr insists is both achievable and realistic. "The trouble with a high yield is that if it is too high, you end up having a portfolio you don't want to own, but if too small, it is not attractive and investors will not buy it. Because we have arranged inexpensive bank debt, if we do a bad job, and don't grow the assets by a single penny over the next five years, investors should still get back 139p for every 100p they invest, because we are growing the yield."