Unfortunately, the very first thought to enter most advisers' heads when considering the zero divide...
Unfortunately, the very first thought to enter most advisers' heads when considering the zero dividend market is that it exemplifies everything that can go wrong in the promotion of an investment sector.
But while there is no question better regulatory supervision was required, the pain suffered by the sector has actually performed a great service. The more dubious issues (and issuers) have been forced from the field of play and, while we wait to hear the fate of the 'not-so-magic circle', the 'fire sale' mentality that previously gripped the sector has started to ease. This has left a number of pricing anomalies behind for those with the financial and market wherewithal to pursue investment in the sector.
The beauty of the current zero proposition is that advisers need not take the word of some ambitious marketing department when it comes to the attractions of the sector ' the numbers speak for themselves.
In many ways, zeros can be regarded as being among the first modern derivative contracts in that the returns paid are a simple function of the performance of an equity-based portfolio.
For this reason, it helps to think of today's market ' consisting of around 60 to 70 worthwhile individual issues ' as falling into two neat categories, namely those that are closely geared to a stock market recovery and those that are not.
Naturally, those that aren't reliant on a recovery are those zeros that still possess a good degree of asset cover and, consequently, hurdle rates that are close to, or better than, nought. The relatively strong performance leaves zero managers free to exercise their stockpicking skills on the market's uncovered issues.
Here, one manager's ability to appraise another's comes into play as those portfolios that still have work to do before wind-up will be closely geared to any market recovery with their own borrowing acting to magnify portfolio returns.
There are numerous quality issues here that have been tarred by the splits brush. Our largest holding, City of Oxford Geared Income, for example, only has cover of 0.96 times.
In the current environment, this has meant it trades at a discount despite offering a 15% yield if the underlying portfolio achieves no growth and some 19% if the manager can generate a paltry 1.6%pa before the trust winds up. Other quality issues such as Murray Extra or Global Return or Jupiter Dividend and Growth sport similarly attractive figures.
It's this phenomenon that enabled us to generate a 13% return for investors in the six months to the end of June despite the All-Share managing only 7% over the period.
Of course, other zero fund managers did much better ' June's top retail fund was actually a fund investing in splits ' but this was the long-awaited payback for losses of up to 70% that previously resulted from much more speculative holdings.
With many such zeros still trading at discounts of almost 30%, there's no other asset class that currently has so much potential or so much room for knowledgeable participants.
Good yields still available.
Managers can afford to focus on solid funds.
Some funds trading at near 30% discounts.
Slow progress in improving diversity
Share purchase deal with assets of £28m
Came into effect in January
Three examples of compensation rule issues
Buying in baskets