the split capital sector needs market to rise again if it is to regain investors' confidence
Chris Fishwick, investment director, head of specialist funds at Aberdeen Asset Manager, believes market falls have put the split capital sector back five years in terms of its education programme.
Speaking at the Investment Week Investment Trust Forum last week, Fishwick said intermediaries and private client stockbrokers need a better understanding of splits because if they understood properly the risk attached to them, they would be more willing to take that risk.
He said the dangers attached to splits were well-documented in 1999 when the new barbell trusts were originally launched, so he said takes exception when investors say they were never warned of the risks about involved.
Fishwick said: 'Gearing and falling markets are the major villains for splits, not the cross holdings in the sector. We have been seeing a lot of reconstructions and mergers as of late in the industry, and four or five splits will not make it through the difficulties.'
Despite the pressure on the dividends of a certain number of split caps, Fishwick said most income flows are quite strong. He added that, provided the reconstructions are successful, then the dividends on the troubled splits should also go up. So far the signs have been positive from those that have reconstructed, he added.
'Reconstructions will help repair the sector, but it will take a few months before this really becomes clear to the market. There are about 30 splits in the universe of 130 that are in trouble ' these will work through their solutions to their problems until around March 2002.'
Splits need the markets to go up, said Fishwick, and if you do not believe this will happen then you should not invest in these types of vehicles.
He said: 'Historically, splits tend to follow, rather than lead, the market, so they need a long-term market rally before they start going back up.'
Fishwick believes one of the lessons learned in the split sector is that the practice of locking in debt has now been proved to be incorrect. With many trusts having to de-gear in the current economic conditions, the break costs have proved to be expensive for the trusts.
On the question of zeros, Fishwick said that, when the cover is eroded, zero shares behave more like capital shares. He said: 'What must be remembered is that zeros have always been risky assets because they are linked to equities. They were and never have been low risk, hence the volatility we are currently seeing.'
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
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Will report to Mark Till