CLOSED-END FUNDS

Split Capital Investment Companies (Splits)

Capital Shares

· no entitlement to income

· receive the surplus assets at the pre-determined liquidation date

· if the fund has performed well then Capital Shares can produce very good returns

· if the fund has performed badly then shareholders may not even recover their initial investment - any prior claims have to be satisfied first e.g. Zeros

· a higher risk investment as there is no income and they are last in line to benefit - but the higher risk taken can produce excellent returns if the performance is good

· in the early years of a fund's life Capital Shares normally stand at a large discount to NAV reflecting the initial uncertainty of returns - as time goes by and if the fund performs to expectations the discount will decline

Warrants

· Warrants are not shares at all

· they merely give the holder the right to buy shares (normally ordinary shares) at a fixed price (the exercise price) at some defined time in the future · they must be exercised before the option expires - and this will only be profitable if the price of the underlying shares has risen above the exercise price

· the holder of a Warrant does not have to wait to exercise - Warrants may be sold at any time in the stock market just like shares

· as a Warrant only confers a right to buy a share - no income is payable

· Warrants are frequently issued "free" with shares when a new fund is launched - typically one Warrant for every five shares purchased and giving the Warrant Holder the right to buy a sixth share at the issue price of the shares - the Warrant will immediately attract a small value in the stock market (based on the hope that the underlying shares will perform well in the future) and serves to compensate investors for the fact that the shares will probably trade at an initial discount as a result of the expenses of launching the fund

· Warrants are "highly geared" (a little money controlling a much greater sum) because they may be issued "free" with shares in a fund (not strictly "free" - they usually have some small time value even though the exercise price is higher than the current market share price) or because they may be bought in the stock market for a fraction of the underlying share price - the result is that the underlying shares although not owned are nevertheless effectively controlled for a fraction of their market value

· the gearing implicit in Warrants thus increases the risk but also the potential for profit · Warrants are high risk investments and rank alongside futures and options - they should only be bought by those who fully understand the risks and are financially able to bear the potential loss (which can often be the entire cost of the warrants)