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Split capital investment trusts (zeros/capital shares/income shares)

Product providers will recognise that different investors want different things, and so they structure their company accordingly. There are three main types of share in most splits, and most other types are variations of these three:

  • Capital shares
  • Income shares
  • Zero dividend preference shares (zeros)

Capital shares – these are for risk-oriented investors who want lots of capital gain, and don’t care about income.

Income shares - these are for investors who want income and are willing to accept little or nothing by way of capital gain. Possibly even the loss of their capital (having in effect turned it into income).

Zeros – these provide no income, but potentially deliver a fixed capital return. They also have first call of assets (after any borrowings have been repaid). It is fair to think of Zeros as investors who are lending money to the other classes of investor, but instead of getting interest each month or year, they get their interest when the trust winds up. It is treated as capital gain, and this can have tax advantages.

The fund managers then invest the money, with or without borrowing more, and the company runs accordingly. Each year the income shareholders get their income, and when the trust is wound up, if all is well, the zeros get paid off and hopefully the capital investors make a profit.

If the fund is geared up then the risks to all the shareholders would be increased, as would the potential rewards.

When investing in splits it is essential to understand both the type of share you are buying, and the underlying investment management to be used.

Managed responsibly, splits can be excellent for all types of investor. Managed badly, they can be a disaster, especially for those investors taking on most of the risk. Before investing in splits you should consult your financial adviser. You should seek to ensure that you understand the strategy of the fund managers as a whole, and the relative risks and rewards that apply to the type of share you are considering investing in.

The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations), and investors might not get back the full amount invested. Past performance is not a guide to future performance.

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The value of investments and income from them can fluctuate, and investors might not get back the full amount invested. Past performance is not a guide to future performance. Equity based investments do not afford the same capital security that is afforded with a deposit account.

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