CLOSED-END FUNDS

Split Capital Investment Companies (Splits)

This type of closed-end fund still has one portfolio of securities (the assets of the fund) but different classes of fund shares to suit different types of investor seeking different sorts of return - income or capital / low or high risk. The essential feature of a Split is that it will have a limited initial life span. The categories of share capital may vary from fund to fund (and may include preference shares or loan stock) but the following are common:-

Zero Dividend Preference Shares (Zeros)

· only issued by Splits

· the fixed redemption date will be the same as the termination date of the fund - usually 5 to 10 years

· Zeros yield no income

· they have preferential rights to capital at the end of the life of the fund

· the shares are issued at an initial value which will increase at a pre-determined annual growth rate to the final redemption value at the termination date

· the pre-determined gain is taxed as capital not income

· they are considered a low risk investment as the total value of the trust assets at launch is usually sufficient to cover the final repayment value of the Zeros

Income Shares

· only issued by Splits

· they will receive most if not all the income of the fund

· the yield is much higher than that of ordinary shares

· they receive no capital gain because they will be repayable at the issue price

· lower risk normally - during the early years of the fund's life the market price of Income Shares tends to rise above the scheduled repayment price anticipating the steady and increasing income flow

Income and Residual Capital Shares (Ordinary Income Shares)

· have largely taken over from Income Shares in Splits

· entitle the holder to all or most of the income and to participate to a defined and limited extent in any capital gains at redemption provided all prior charges have been repaid e.g. Zeros

· no fixed repayment price so ultimate returns depend on performance of the fund and the extent of prior claims e.g. Zeros

· the risk level lies between the lower risk level of Income Shares and the higher risk level of Capital Shares