NEWS ANALYSIS: Investment Trusts Torn Apart by the Split Capital Crisis ; Aberdeen Asset Management Share Price Plummets Anew as Fears Grow for Future of Dozens of Split Cap Trusts
Griffiths, Katherine, The Independent (London, England)
SPLIT CAPITAL investment trusts, for decades an obscure niche sector in the multi-million pound financial services industry, have in the last few months become one of its most controversial investments. The cause of the notoriety is an appalling set of investment performances, leading many investors to face their investments being entirely wiped out and triggering an investigation for potential mis-selling by the Financial Services Authority.
The shadows hanging over the sector have also decimated the share price of fund managers involved in the sector. Aberdeen Asset Management, the most exposed investment company to split caps, yesterday became one of the biggest fallers in the stock market, closing down 6 per cent to 264p. This followed a 16 per cent drop on Wednesday in Exeter Investment's shares after the company issued a profits warning.
It is a long way away from the heyday of split caps in the late 1990s, when fund managers were pocketing massive fees as they launched a raft of funds, which promised ever more dramatic returns to investors.
Now funds that are doing well among the total of 119 split caps are considered to be those that will struggle through to an upturn in the stock market without being drowned in debt.
At the other end of the spectrum, analysts are talking about the "meltdown" that is approaching for around a quarter of all split caps whose debts outstrip assets and have breached their banking covenants.
There were indications this week that the process has begun. Quilter Global Enhanced Income became the first trust to suspend its shares amidst speculation that it has become insolvent. Other splits are expected to follow and plenty have not been able to afford dividend payments recently.
Split capital trusts, so called because they have different classes of shares, have been around for more than 100 years, but they have thrived when markets have boomed because their geared structure has meant they could take advantage of market upturns.
Splits provide growth for investors who take no income for a number of years with a view to receiving a return of something like double their money in the long run. These shares are called zero dividend preference shares. They also offer something for investors who want a regular income, who buy ordinary shares and - when things are going well - receive an annual dividend.
Some splits have done so badly recently that in some cases no class of shareholder will receive even their initial investment back. Daniel Godfrey, director general of the Association of Investment Trusts, says: "Shareholders in a smallish number of trusts stand to loose virtually all of their capital".
The reason why some splits have become so dramatically unstuck in the recent economic downturn lies in the decisions fund managers took in the context of the frenzy of accelerating stock markets and the dot.com boom.
The first decision, which looks very misguided with hindsight, is the timing of the launch of many splits. The most obvious example was Aberdeen Asset Management's decision, two days before the burst of the dot. …