The launches of BFS Zero Preference Growth Trust and Investec Guinness Flight Capital Accumulator fu...
The launches of BFS Zero Preference Growth Trust and Investec Guinness Flight Capital Accumulator fund should help the market digest the glut of zeros now available.
The restructuring of various trusts and launch of a number of split caps this year have helped create an oversupply of zero dividend preference share paper.
Both underlying BFS and Investec portfolios aim to be fully invested in zero shares. The BFS split capital trust has raised £60m through placings with institutions. So far the Capital Accumulator fund has raised £10m.
Ravi Anand, director corporate finance at HSBC, said: "These funds will help the market. There have been so many issues the market is suffering from indigestion.
"One reason is that the activities of the major market makers have fallen. Merrill Lynch has moved out of the market and Barclays Capital has reduced its exposure.
"It used to buy a huge amount of zero paper and drip feed it into the retail market.
The oversupply is a problem for fund management groups launching split caps.
By needing to have a relatively high gross redemption yield (GRY) to ensure the zeros are popular, pressure is put on the other share classes in the structure.
Aberdeen Asset Management took the decision not to include zero shares when it launched its technology split cap and opted to service gearing fully through bank debt.
Anand said: "Aberdeen was able to find a cheap source of bank debt but I do not think many other new split cap trusts will go down that path.
One advantage of zeros is the gearing they provide does not have to be serviced by the income of the trust whereas bank debt needs to be serviced once a year through income. It may be the case with future launches that an increasing amount of bank debt is included at the expense of zeros.
As reported in Investment Week in June the oversupply is not a problem for investors. At present GRYs on newly issued zeros are around 8.
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