Geared ordinary shares and income shares of split caps are looking good value for those who see old ...
Geared ordinary shares and income shares of split caps are looking good value for those who see old economy stocks making a comeback.
Until three weeks ago both investment trust shares classes were having a torrid time as market sentiment continued to favour technology companies.
With the market returning to old economy stocks, splits, which have tended to invest in them, have seen their share prices go up. The geared ordinaries of Jupiter Income & Growth have gone from 69p in February to 84p on 24 March. Even so, Johnson Fry sees more upside for the sector.
Andrew Whalley, fund manager at the group, says: "Research we undertook three weeks ago found geared ordinary shares were 20% below fair value. Since then the shares have bounced by around 8% but there is still plenty more room for growth."
Income shares are closer to their respective fair values as they are less geared to the upside in the market, he says.
Johnson Fry sees further upside because it sees further potential for the underlying old economy stocks. He says: "On 16 February Whitbread, a stock many splits will hold, stood at 459p. It is now around 602p and I believe it has further to go. In June 1999 it peaked at 1,100p."
As income shares are less geared to the upturn in the market Whalley favours geared ordinary shares. He points out that the geared ordinary shares of the Johnson Fry Utilities split cap trust offer the potential of a better total return than the income shares of the same trust.
The geared ordinary shares currently offer a yield of 6.5%pa and have a hurdle, or portfolio growth rate of 1.75%pa for investors to recoup the current share price in 2003. While the income shares offer a 9%pa yield on a current share price of 90p, but will be redeemed at 84.2p.
Investec Guinness Flight is favouring geared ordinary shares with relatively low hurdle rates even if they offer lower yields. Richard Prvulovich, fund manager at the group, favours the geared ordinary shares of Henderson Geared Income & Growth in preference to the similar shares of Jupiter Dividend & Growth. The former offers a yield of 5.5%pa and is on a hurdle rate of around 1% while the latter offers a yield of about 10% and is on a hurdle rate of above 5%.
Prvulovich says when looking at the splits it is important to look at the underlying portfolio. All of Henderson Geared Income & Growth's portfolio is invested in blue chips while the portfolio of Jupiter Dividend & Growth has exposure to shares of other split caps allowing it to offer a higher yield. Prvulovich adds: "The total return on the Henderson shares should be greater than the Jupiter shares because there is more potential of capital growth in the Henderson portfolio as it is totally invested in direct equities."
Prvulovich believes both income shares and geared ordinary shares are attractive. One particular issue he likes is from Framlington Income & Capital. He says: "The shares were fully priced at 70p but have fallen to 46p. Investors in 2008 will receive 31p at the wind up of the trust, but the share currently offers a yield above 10%."
Head of UK intermediary distribution
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