Aberdeen Asset Managers is to launch a unit trust investing in zero dividend preference shares, writ...
Aberdeen Asset Managers is to launch a unit trust investing in zero dividend preference shares, writes James Thorneley.
Subject to FSA approval, the launch will take place later this summer and will make it the third fund of its type available to unit trust investors. It is to be run by the group's head of specialist funds Chris Fishwick.
The charges on the fund will be the same as those on Aberdeen's other unit trusts, with 4.25% initial and annual management charges of 1.25%. Intermediaries will be able to receive up to 3% initial commission and 0.5% renewal.
Zero dividend preference shares are issued by split capital investment trusts. As their name suggests zeros pay no annual dividends, instead a fixed amount is paid when the paper matures. For example, Jupiter Dividend & Growth zeros matures in 2005.
Then holders of the paper can expect a capital return of 164p for each 100p share. The shares have a similar risk profile to gilts, no zero has ever failed to pay its redemption price. The market compares zeros to gilts by calculating a gross redemption yield (GRY) for individual zeros. In the case of the Jupiter paper the GRY is 9.5%pa compared to a 5.95% GRY on a similar dated gilt.
Going forward, Fishwick believes zeros look attractive. After being stagnant for the past year he said demand for zeros is growing.
The supply and demand picture is looking better this year with only one new issuant in 2000, whereas last year was acknowledged as a period of oversupply, according to Fishwick. He added: "Zeros are priced off interest rates and with rates nearly peaking, paper offering around 8.5% GRY will certainly be attractive."
The pick up in the zero market can be illustrated by the short term performance of the two other unit trusts which invest in zeros, the £24.8m Guinness Flight Capital Accumulator and the £134m Exeter Zero Preference funds.
Over the three months to 31 May the Exeter fund rose by 4.8% on an bid to bid basis and the Guinness Flight fund rose by 3.3%. The average rise in the Standard & Poor's UK Gilts sector was 1.2%.
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