Dividend suspensions in the split cap sector have been snowballing ' accumulating to almost a dozen....
Dividend suspensions in the split cap sector have been snowballing ' accumulating to almost a dozen. While not overly held by the average retail investor, these suspensions are having a knock-on effect on retail zero unit trusts, conventional splits and the investment trust industry as a whole. In addition, while the affected splits are not necessarily popular retail vehicles, they have been widely invested by institutional investors, which is bound to affect retail punters.
This is starting to look similar to the rise and subsequent implosion of technology funds. Both were popular and sold when the market was good for those vehicles ' tech at the height of a boom and the splits at a time when the need for solid income streams was creating huge demand.
Competition, along with demand, caused fund management groups to be more creative in their structure ' hence the more popular usage of cross holdings.
This may be a lesson, apparently not learnt after the collapse of tech stocks, that buying at the height of any market is unwise. Gearing is even more so.
Buying a product that only works in one investment climate, a rising market, for example, and chasing what looks to be a too-good-to-be-true deal is something many intermediaries warned clients about with tech funds.
The pain felt from the subsequent losses is one reason investors have been shying away from the markets this year. As income producing vehicles have been marketed as somewhat safer compared to tech funds, the current splits problem is likely to have a similar effect on investor sentiment.
However, the question of whether these trusts should have existed at all or what was the cause of their collapse is fast becoming a moot issue.
The mess exists and the clean-up has to start.
Aberdeen is making the first step in this direction by looking to suspend its annual management fees. Although unlikely to hurt the company, in an already bad financial year, it's going to sting somewhat.
Reconstructions are being planned but may not be the overall solution ' after all BFS didn't have the capital needed for its plans.
If no one is willing to buy, then it is hard for investors to get out of the affected splits in an effort to minimise the damage.
The situation may not be as grim as it appears or sounds but crisis management should be the focus if we are ever going to get investors to regain their confidence, not only in the markets but also in the products the industry is providing them with.
Product innovation has always been heralded as a good thing in this industry. But unless greater scrutiny is given to the product, such as working out a worst case scenario ' after all two years of negative returns has not exactly been unheard of ' then this innovation is going to cause more harm than good, undermining years of breeding an investor culture in the UK.
Feasibility study due
'Let’s be bold enough to demand change'
Joint life second death option added to relieve tax burden on couples gifting assets
Backed by Schroders, LGIM and the IA
New system for funds without without three-year track record