What to buy, what to sell
By
Contributing editor
Emily Hohler
Nov 29, 2005
A look at which funds might be worth getting into - or getting out of.
Split-caps make a comeback
Split-capital trusts have been deeply unfashionable since their wipe-out in 2001. However, the market recovery over the past couple of years has helped this type of investment trust “produce some of the best performances for any type of pooled fund”, says Max King in The Daily Telegraph, so it could be a good time to venture back in.
Split-caps are specialist trusts that issue different classes of shares with different levels of risk: income shares, growth shares and zero-dividend preference shares, also known as zeros, which are supposed to offer a safe but low return until a fixed redemption date.
In the late 1990s, the holders of the riskier classes of shares did well as the market rose, but with the tech crash in 2000, thousands – including holders of the zeros – lost all their money. One of the reasons for this was that many split-caps had borrowed heavily to invest in each other, compounding their losses when the markets fell.
However, during the past year there has been an astonishing rebound, with nearly half of all splits, other than zeros, returning more than 50%. Jupiter Second Split and Jupiter Second Growth, for instance, managed by Philip Gibbs and Tony Nutt respectively, were launched a year ago and have since returned more than 25%. “It is incredibly difficult to raise money for splits,” said Gibbs, “but that is often the time to invest.” Gibbs has put his money where his mouth is and now owns nearly 6% of Jupiter Second Split’s stock, as well as 4% of the shares in Jupiter Dividend and Growth, a risker, more highly geared trust, which has also performed well in the past year.
Foreign & Colonial stops the rot
Britain’s oldest investment trust, Foreign & Colonial Investment Trust, has disgraced itself since 2000 by returning –7% compared with a 17% return from its peers. But the trust has been desperately trying to “stop the rot”, says Paul Farrow in The Sunday Telegraph, and the results are starting to show.
Earlier this year, it took the “radical decision” to adopt a multi-manager approach for its underperforming US and Japan portfolios, and appointed new fund managers to manage its UK and European assets. Then, last week, it announced it was introducing a ‘discount control mechanism’, using share buybacks to ensure that the trust’s share discount doesn’t exceed 10%.
Whether it can keep its discount below the magic 10% for the long term, says Heather Connon in The Observer, will depend not just on its policy, but also on whether its recent better performance continues and “if the arbitrageurs and hedge funds use the pledge to make mischief”. But if it does, and they don’t, the fund could at last be a good buy.
Published in Investments
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Emily Hohler
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