Zeros

updated: January 22, 2010

We have produced these notes because a number of investors hold zeros in their portfolios, having been attracted by their apparent low risk, high levels of return and tax advantages.

However, we have not previously advised any of our clients to invest in zeros, nor do we currently feel able to make a positive recommendation for clients to invest in zeros.

Before we can begin to understand zeros we need to recognise that they are a form of ‘split capital’ investment trust (often simply referred to as a ‘split’). An investment trust is a company which invests in other companies. Companies can issue more than one share class with different rights, risks and potential rewards attaching to each. The idea behind a split comes from the fact that some investors primarily want capital growth and others primarily want income.

The first recognised split capital investment trust was launched in 1965 when tax on income was particularly high. It was the Dualvest Trust managed by Drayton Montagu and had two share classes – income and capital shares.

The income shares took all the income produced by both the income and the capital shares after charges and costs and were entitled to a return of the original capital when the fund was wound up. The capital shares took all the surplus capital growth from both the income and the capital shares.

To obtain further information please click here for our pdf Guide to Zeros.