Zero dividend preference shares have seen several of their number suffer heavy mark downs in the las...
Zero dividend preference shares have seen several of their number suffer heavy mark downs in the last seven weeks but funds of zeros do not seem to have suffered.
The falls have come as investors worry about the zeros' exposure to highly geared ordinaries.
According to David Coulson, senior divisional director at Hill Osborne, part of Brewin Dolphin, of 103 zero shares on the market, 21, equivalent to 23.7%, have less than 100% cover.
Cover is the extent to which the final redemption price is covered by the current assets of the trust.
He added that out of these 21 Zeros, 15 have more than five years to run to maturity so they still have time to recover.
Over three months to 22 August 2001 on a bid to bid basis, the Exeter Zero Preference Fund is only down 2.8% while Investec GF Capital Accumulator is up 1.4%.
The offshore Neville James Zero Fund, which Coulson is adviser to, is up 2.5% in share price terms over the period 25 April to 25 July
Two weeks ago, Investment Week reported that the low levels of cover and high levels of prior-ranking bank debt in the structure of split-capital investment trusts, have resulted in heavy mark downs for several zeros.
According to Peter Mason, investment director and actuary at Neville James, many stocks are down 10% over the last month, and several are down 20% over the last few months.
Over one month to mid August, examples of individual zeros suffering include Leveraged Income, which fell 23%, and Gartmore Split Cap Opportunities, which fell 11%.
Coulson said: 'At the moment in the market we can not look ahead more than three months, let alone three years. A lot does depend on how quickly equity markets recover as to when the cover on zeros begins to improve.'
Coulson said that as with equities, stock selection is becoming a much more important ingredient when investing in zeros and also corporate bonds.
He described what has happened over recent weeks as a 'flight to quality'.
The fund he runs for Neville James has an average cover of 128%.
He added: 'In a low risk, low inflation environment, investors must realise that it is not realistic to look for high growth without taking higher amounts of risk.
'The worries in the zero market are not widespread and there is still a far bit of downside potential with the average level of cover being 120%.'
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