Merrill Lynch Investment Managers (MLIM) is launching a second Defined Returns fund as a direct resp...
Merrill Lynch Investment Managers (MLIM) is launching a second Defined Returns fund as a direct response to the research into zeros it carried out earlier this month.
The research, which was reported in Investment Week two weeks ago, said analysing zero dividend preference shares using gross redemption yields and cover as the main measurements of risk is a dangerous way to invest in the sector.
Merrill Lynch Defined Returns II, which has a fixed three-year life, contains two share classes: income shares and zeros. The income shares offer a gross redemption yield (GRY) of 9.62% and the zeros offer 9.35%.
Unlike split capital trusts, the two share classes are stand-alone. They are independent of each other and there is no conflict of interest between the two classes of shareholder.
MLIM's research argued that the spread of mis-pricing and confusion evident in the split sector is testament to a lack of transparency. David Curry, equity markets director and co-author of the research, said Merrill Lynch Defined Returns II contains transparency because it defines the risk to invested capital at the outset.
It achieves this by showing the contents of the portfolio to begin with and by having no additional downside gearing, so the managers know exactly what the returns will be.
Curry said: 'The overall motivation for this product is that each class of share can be seen as risk averse under all market conditions. You would need each stock in the entire portfolio to decline by 37% before you would start losing money.
'If you believe in a bull market, you should not be buying this; it is for risk averse investors who want positive returns in falling markets.'
The only differences between Defined Returns II and Defined Returns, which was launched in May 2001 and raised £70m, are that the headline rates are 25 basis points lower in the latest fund and the portfolio is based on pan-European blue chip stocks rather than global blue chips.
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