Knowledge is power, but rarely have investors been as powerless as they are in the field of split-...
Knowledge is power, but rarely have investors been as powerless as they are in the field of split-cap investment trusts. This makes the FSA's report last week that it would launch an investigation into the listed investment trusts welcome news.
The FSA voiced concern back in August that split-capital investment trusts were holding too many of one another's shares in a so-called 'magic circle' of cross shareholdings, which could become a collapsing house of cards driving up to 40 trusts to technical insolvency if markets deteriorated by 30%. It said individual cross holdings of a split cap were each generally less than 2% of a split-cap portfolio. Holdings of less than 5% do not have to be made public but the FSA found earlier this year that about 20% of the 113 split caps had more than 40% of their total assets invested in other split-cap shares.
If stock markets continue upwards, this may not be a problem. The welcome FSA pressure may come at a time when more highly geared split caps that invested wisely in shares of other trusts actually outperform peers just invested in direct equities. The AITC is also pressing for greater disclosure. The association has started to post levels of cross shareholdings of split caps' run by AITC-member companies on its website, updated monthly.
Nick Greenwood, from Christows, says some companies, notably Aberdeen Asset Managers, have already begun reporting cross holdings but adds it is disappointing that the approach has not been adopted by other houses within the sector. Reporting holdings in other trusts, however, is only part of the task facing split caps in making themselves better understood by, and more accessible to, private investors.
Split caps' complexity stems partly from their flexibility in offering private investors three classes of shares ' zeros, income shares and capital shares. Although no split-cap fund manager has yet defaulted on a zero share redemption payment, some split caps have had to borrow money and/or sell shares to meet payments and avoid breaching banking covenants at which bank loans used to gear up may be called in. Breaching covenants could reduce the money available, and so the fund's ability to take risks to produce dividend income and capital growth for the non-zero shareholders.
On trusts winding up, zeroholders are paid first, followed by income and then capital shareholders. All this complexity definitely makes splits an investment where homework is essential. It is encouraging that market bodies are giving investors a hand in this before investing. More transparency would be good news all round.
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