Aberdeen's forthcoming European Technology & Income split cap vehicle is aiming for a far broader sp...
Aberdeen's forthcoming European Technology & Income split cap vehicle is aiming for a far broader spread of tech stocks than it runs in its retail unit trust.
The closed end fund will have a 50% portfolio weighting in high yield bonds with the remainder in tech stocks. The latter half will have between 70 and 90 stocks as opposed to the 40 holdings in the Aberdeen European Technology unit trust.
John Pullar-Strecker, head of technology at Aberdeen, said: "The unit trust only invests in continental European stocks whereas the split cap will also invest in UK companies."
The average market cap of tech companies in the model split cap portfolio will be £25bn. The majority of holdings will be large and medium cap. The portfolio will have exposure to AIM stocks but it will not invest in unquoted companies.
Pullar-Strecker said: "We want to maintain a high level of liquidity. The portfolio will have three or four stocks, such as Nokia, on weightings of 5% or above with the rest of the portfolio on weightings of below 2%. Some 33% of the portfolio will be turned over each quarter."
Although the European technology market is growing the group has not yet found a suitable benchmark for the portfolio. Pullar-Strecker pointed out that the neutral weighting for Nokia in the Dow Jones Stoxx index was 25% and said that that kind of exposure in one stock would mean a less diversified portfolio. The FTSE techMARK index will be used to gauge the performance of the UK content of the portfolio, which will initially be 35%.
The investment strategy will be similar to that of the group's European Technology unit trust. Stock selection is a bottom-up process primarily looking for the best quality of management and then leading-edge products. Pullar-Strecker stressed the most important aspect of picking companies was actually meeting the managements on regular occasions.
Growing talk of a technology bubble in the US and the debate about whether a similar market will emerge in Europe do not concern Pullar-Strecker. He said: "I don't think a bubble exists in the US or that one will appear in Europe as long as the growth of technology stocks is underpinned by e-commerce. With company earnings growing faster than the market, there shouldn't be a major problem. Investors must expect fluctuations in valuations and take a long-term view."
The bond portfolio, managed by Paul Reed, will hold 90 to 100 issues of mainly high yielding paper offering income of between 9.5% and 10%. In line with the structure of the portfolio the capital structure of the split cap is divided in half, with 50% in equity and 50% borrowed.
Aberdeen, together with Warburgs Dillon Read, broker to the deal, has negotiated a borrowing facility of £200m, meaning at launch it could have gross assets of £400m. Some 70% of gearing will be in euros and 30% in sterling reflecting the corporate bond portfolio. The interest rates being paid on the sterling and euro debt are 7.48% and 6.78% respectively.
The equity part of the capital structure will be 42.5% income shares and 7.5% capital shares. The income shares will be issued at 85p with a capital entitlement of 100p on wind-up on 24 February 2010 providing the hurdle rate is achieved. The portfolio must grow by 4.2%pa over the life of the fund. Dividends will be paid each month beginning on 25 April.
The split cap vehicle is regarded as an investment company rather than a trust since it will be domiciled in the Channel Islands. The use of offshore bases for split capital trusts has become increasingly popular in the past two years because of the tax advantages.
The equity dividend payouts from the trust will be treated as unfranked, or interest payments, in the hands of onshore recipients.
Prior to Labour's July 1997 budget, investment trusts with excess management expenses or financing costs could offset them against tax credits attaching to franked investment income. These so-called 'Section 242 reclaims' were abolished with immediate effect in that budget. Since then it has been tax efficient for investment trusts to seek to match management expenses with unfranked investment income.
The capital shares will be issued at a price of 15p with a hurdle rate of 4.9%pa. If the portfolio grows by an average of 7.5%pa investors will receive 85.4p at wind-up and if growth of 10%pa is achieved the redemption price per share will be 169p.
A packaged unit is also available consisting of one income share and one capital share with an annualised dividend yield of 7.65%. The hurdle rate to receive back 100p per share is 4.2%pa.
Ravi Anand, director of corporate broking at HSBC, thinks the capital shares are attractive and will trade at a premium to asset value. He said: "If you look at the shares of other technology investment trusts they all trade at premiums to NAV. For this kind of vehicle, with regards to what it invests in, it is much better to have geared exposure rather than including zero dividend preference shares in the structure which guarantee a fixed payment at wind-up."
Anand said the market will see more split cap structures without zeros, particularly in trusts which do not invest in the UK, such as the Murray Japan Growth & Income which was launched last November.
He added: "There is still a lot of indigestion in the zeros market with the number of issues brought out last year. Gearing is currently cheaper than issuing zeros so I believe the proportion of zeros in the new split caps will decline from around 40% to between 15% to 20% of the capital structure."
Initially the minimum investment is £25,000 with the vehicle being aimed at institutions and stockbrokers. The launch period closes on 16 February. Anand thinks the initial fundraising will equal £200m making the gross assets of the split cap £400m.
For further information, contact: Warburg Dillon Read o
Partner Insight: For Blackfinch, the arrival of its IHT portfolio services was a 'natural evolution' in the group's offering and points to an established track record of returning cash to investors.
Senior Managers Regime
Interest rate outlook unchaged
FCA made demands last week