Alan Perkins is to run UK portfolio with a growth bias
Pavilion Asset Management is to launch its first split-cap, the Pavilion Geared Recovered Trust, which will be aimed primarily at recovery situations in the UK market.
The trust, to be managed by Alan Perkins, is looking to raise £75m through an institutional placing, and aims to capitalise on the growth opportunities perceived to be available in the market, by investing in companies considered to offer recovery potential.
Some 60% of the growth portfolio will be invested in quoted equities, which appear undervalued and offer an average yield of around 3%. The 40% income portfolio will be put into geared ordinary shares and income shares of other investment trusts to yield an average 9.75%.
The capital structure of the trust will be made up of 37.5 million ordinary shares at a placing price of 100p with no fixed life and a yield of 8.0%, £18.75m in Zero Dividend Preference (ZDP) shares yielding 9%pa over six years, and a bank debt facility of £18.75m, which will be fixed for six years.
Richard Howells, head of the investment trust department at Seymour Pierce, the brokers to the trust, said: 'This is an ideal play on the recovery market with an 8% yield at the same time. By offering a yield away from the 13% range it enables the fund manager to concentrate on getting growth from the ordinary shares in the portfolio, as we feel there is more potential growth from the ordinary shares than very high yielding income shares.'
The zeros have a planned life to August 2007, with a cover of 1.3 times after expenses charged to the capital account. The hurdle rate on the zeros will be -4.6%pa, this is the amount the total assets at the beginning of the trust's life could drop each year before the zero could not be paid out.
The growth portfolio will mainly be tilted towards UK large caps, although there will be 2% of the portfolio available to invest outside the UK.
The portfolio will be fairly concentrated, investing in 30-40 stocks. Requirements for stocks are a material market or sector discount, an above market yield, compelling price performance, potential management and strategic change, and favourable changes in industry dynamics.
The income side of the portfolio will look to hold around 15 shares of other investment trusts, and although it has the power in the future to use bonds, it is not yet planning to do so.
In the first year of trading, the directors forecast dividends of 8p and in subsequent years they plan to adopt a progressive dividend policy. The management charge of the trust is 0.8%pa.
Jason Hollands, deputy managing director at Best Investment, said that while the fund manager has a good track record in managing the Family Asset Trust, which ranks top decile over three, five and 10 years in the UK All Companies sector, he is becoming increasingly concerned about the number of splits in the market that are highly geared.
Hollands said: 'While Perkins has a respectable five year track record on his unit trust, I am not buying splits at launch at the moment because of the increasing risks attached through borrowing and am nervous about the entire sector.'
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