Split Capital Investment Trusts

Most investment trusts are referred to as "Conventional Trusts" which are companies with just one class of share; an ordinary share (See detailed article here...). Split capital investment trust companies however have two or more classes of share and generally have a predefined life-time before they are wound-up. Different types of investor have different requirements e.g.: high dividends to provide an income to live off; low risk capital gains, but no income to avoid income tax or for capital gains tax planning; a combination of the two.

The exact details of the classes of share, asset and income allocation will vary for each company, with the exception of the Zeros which tend to have very similar terms. The zero-dividend share holders will be paid first on winding up the company before other classes of share, although after any bank-debt. See the related article for details about how to value and invest in zeros.

There are a few Split Capital Investment Trust companies remaining and few new launches. Here is a list at time of writing and their ZDP wind-up dates:

JPMorgan Income & Capital (28/02/2018)

Jupiter Dividend & Growth ZDP (30/11/2017)

M&G High Income (17/03/2017)

Utilico 2016 (31/10/2016)

JPMorgan Private Equity 2015 (31/12/2015)

Utilico 2014 (31/10/2014)

JPMorgan Private Equity ZDPs 2013 (28/06/2013)

Utilico 2012 (31/10/2012)

Aberdeen Development Capital (2010/12)

Aberdeen Development Capital 2012 (30/04/2012)

Invesco Perpetual Recovery 2011 (27/10/2011)

Equity Partnership (31/07/2011)

Edinburgh New Income (31/05/2011)

Real Estate Opportunities (31/05/2011)

M&G Equity (08/03/2011)

Premier Energy & Water (31/12/2010)

Premier Renewable Energy (31/12/2010)

Aberdeen Development Capital 2010 (30/04/2010)

Jupiter Second Split ZDPs 30/10/2009

Jupiter Second Enhanced Income (10/10/2009)

JZ Capital Partners (24/06/2009)*

All of these companies have ZDP shares and at least one other type of share. Usually the company is wound up on the same date as the ZDP shares, but in some cases the company may continue beyond that date in some form depending on the share-holder vote.

*JZ Capital Partners is an interesting case. The ZDP shares wind-up on 24/06/2009. The company does not have adequate cash to pay the ZDP (JZCZ) shares, on this date, although more than enough assets. The Highly Geared Ordinary Shares (JZCP) of the company have no defined end-date and a rights issue has been proposed (7 shares issued for each 3 shares held) in order to fund the cash payment of the JZCZ ZDP shares. New zero dividend share are also being offered to the existing zero holders with approximately 8% GRY until wind-up in 7 years time.

Other new launches

Changes to the top-rate of income tax in the UK (now 50% versus just 18% for capital gains tax) has recently made zero dividend preference shares look attractive to higher-rate tax-payers when compared to interest on deposit accounts or dividends paid by shares. While there are a few attractive zeros remaining, there are also a few new releases:

Ecofin (like JZ Capital Partners described above) are launching new zero dividend shares at £1.00 each with a life-time of 7 years and a gross redemption yield of 7% (i.e. £1.60 will be paid to each zero share holder on expiry) They have a cover ratio of 4.5 and a hurdle rate of about -20%, so these are relatively safe. See this related article for explanation.

The Zero Dividend Preference Shares pay no dividend, but have a predefined value on the wind-up date and are therefore tax-efficient for some people and also allow accurate tax-planning. The zero-holders are always paid first on the wind-up of the company, so these are the safest type of share.

To determine the safety and probable returns from a zero you need to look at various data which are published in some financial magazines and newspapers:

Redemption Date: When will the company be wound up?

The Redemption Price: The price you will received from each share on the redemption date.

The Gross Redemption Yield (GRY): The effective yield to maturity (capital gain only, no dividend)

The "Cover" or "Share Cover": A measure of the value of current assets relative to the amount required to pay the zero-holders in full on redemption. A share cover of 1.0 means that the current assets just cover the redemption cost. The higher the number the better.

The "Hurdle Rate": The rate of growth required for the underlying portfolio to cover the full repayment of the zero dividend preference shares.

"Hurdle Rate to Wipe Out": is the annual rate of growth to cover just the debt and other costs before paying the zero dividend preference shares (i.e. the rate of return for you to just get nothing)

For more details about how to interpret these numbers and some maths see my related, more detailed article about zeros...

Income shares may pay out income and dividends derived from the underlying assets to their share-holders and are aimed at people who need a high level of income in exchange for lower capital gain.

To determine the safety and probable returns from an income share you need to look at various data which are published in some financial magazines and newspapers:

Redemption Date: When will the company be wound up?

The Redemption Price: The price you will receive from each share on the redemption date.

The Price now

The NAV: The Net Asset Value per share

The Net Yield: The income yield

The Redemption Yield: The effective yield to maturity

The "Hurdle Rate": The rate of growth of the underlying portfolio required.

Capital shares might return some defined portion of the capital gain of the underlying assets to the share-holder on wind-up of the company, but none of the income.

To determine the safety and probable returns from a capital share you need to look at various data which are published in some financial magazines and newspapers:

Redemption Date: When will the company be wound up?

The Price now

The NAV: The Net Asset Value per share

Debt Cover Ratio: The ratio of total assets to borrowing

The Redemption Yield: The effective yield to maturity

The "Hurdle Rate": The rate of growth of the underlying portfolio required.

Highly Geared Ordinary Shares are similar to ordinary shares of an investment trust company, except with more gearing (i.e. leverage) due to the existence some zero dividend preference shares.

To determine the safety and probable returns from an Highly Geared Ordinary Share you need to look at various data which are published in some financial magazines and newspapers:

Redemption Date: When will the company be wound up?

The Price now

The NAV: The Net Asset Value per share

Debt Cover Ratio: The ratio of total assets to borrowing

The Net Yield: The income yield

The Redemption Yield: The effective yield to maturity

The "Hurdle Rate": The rate of growth of the underlying portfolio required.