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A trade may be started up with a capital but it requires proper management to sustain its existence. Like all businesses, penny stocks, too, carry risks. But risk factors cannot be considered as a reason for prudential investors like me for not investing in them. So, I did, but at the same time I had subscribed to the free newsletter from www.pennyinvest.com just as a tool for these stocks. I personally went through their advices and have ripped of a good deal of return from penny shares. And from thence, I have been a regular subscriber of the newsletter.
This is a review of Zero Dividend Preference Shares, which can be used to reduce risk in an investment portfolio and capital gains tax planning. I have also published this article on my web-site (www.andrewporterconsulting.co.uk)
There is a little known kind of investment called a split-capital investment trust, which has been ignored by most of the financial press for many years, and yet can represent good risk-reducing diversification for a share portfolio or an alternative to cash. Some of the few remaining zero-dividend-preference-shares, a sub-type of split-capital trust, offer a return above that of the best deposit accounts currently available. The new capital gains tax rules also make them even more attractive. Most coverage of these shares has been negative after misselling claims for a small subset of the shares that have only recently been resolved.
Split-capital shares are divided into two or more classes of share of different risk and performance profiles. It is specifically the safest variety that I am writing about here, the Zero Dividend Preference Shares. Split-capital investment trusts are investment companies with a limited lifetime and a defined end-date. The holders of zero-dividend preference shares are, in most cases, paid first, before other classes of share on wind-up of the company (although after payment of any bank debt etc.) and therefore are significantly less risky than the underlying asset portfolio of the investment company or of the other class or classes of share issued. They are not however risk-free (hence the "misselling scandal" from a few years ago which I won't go into here) The zero-holders receive a pre-defined value for each share, if the company assets are of sufficient value to do so, and no dividends throughout the life of the share, so all profit is in the form of capital gains. They are therefore similar to a zero coupon bond.
The "gross redemption yield" (GRY) is published for each zero currently available, which is useful and allows comparison with yields on other investments. GRY however does not tell the whole story and attention should be paid to how it was calculated (the real yield is reduced by stamp duty and commission particularly when the wind-up date is near) GRY assumes that the company can afford to pay out the full redemption price on winding up the company, so attention also needs to be paid to the probability of the company not paying in full. A high GRY may be due to higher risk of default or a short duration to the wind-up of the company as discussed below. I've included some maths below, but this can be skipped and at the end of the review I have included a link to some web-sites that do some of the maths for you and allow comparison between different zeros.
The current share-price and redemption price ("p" and "r" in the equation below) are published for each zero and allow the total return ("T") for an initial investment of ("I") to be calculated:
where S= Stamp Duty i.e. (I-C) x 0.5%;
C= Commission (e.g. £10)
e.g. T = (1000 - 10 -5)r/p
or T = 985r/p
for a £1,000 purchase
Note: "p" is the purchase price not the mid-price, which is often quoted. There will be a spread between the bid and offer prices which can significantly affect the return.
This allows the real gross-redemption yield ("G") to be calculated:
(1+G)^n = (T/I) where n = number of years to redemption
(1+G)^n = ((I-C-S)r/(pI))
Sorry about the lack of mathematical symbols!
Refer to my web-site for proper equations...
Or a good approximation for durations of less than a few years:
G = ((I-C-S)r/pI - 1)/n
(for small n)
=> Gmax = (0.995r/p - 1)/n
for large investments (or zero commission) and small n
Things to consider when choosing which zero to buy: Wind-up date; Gross Redemption Yield; Cover; Hurdle rates; underlying portfolio performance.
Wind-up date, or Redemption Date is the date at which the company is wound up, shortly before the date at which the zero-holders will be paid. This is where the "financial engineering" and capital gains tax planning aspects comes into the equation. When do you want or need the money e.g. to pay for a new car/yacht/handbag etc.? In which tax year would it be most efficient to make the capital gain? It is also important to consider whether it is worth investing if the wind-up date is soon e.g. less than two years and whether the broking fees stamp-duty and bid-offer spread make the resulting yield attractive for the amount of money to be invested (as described above).
The "Cover" or "Share Cover" is a measure of the value of current assets relative to the amount required to pay the zero-holders in full on redemption. A share cover of 1.0 means that the current assets just cover the redemption cost. The higher the number the better and you have to assess the ability of the company, the underlying portfolio and the market to maintain or meet a cover of at least 1.0 by redemption date. It is also important to consider the amount of debt the company has to repay before the zero-holders are paid.
The "Hurdle Rate to Repayment" describes the rate of growth required for the underlying portfolio to cover the full repayment of the zero dividend preference shares. "Hurdle Rate to Wipe Out" is the annual rate of growth to cover just the debt and other costs before paying the zero dividend preference shares (i.e. the rate of return for you to just get nothing) These are a useful measure of risk because you can assess the probability of that rate of growth being achieved over the lifetime of the company. For safe investments the hurdle to repayment should be negative and the hurdle to wipe-out preferably close to -100%
The underlying portfolio performance should also be considered in conjunction with all of the above information: e.g. who manages it and what are the investments.
There are not many zero dividend preference shares left and few recent new issues, but for the moment the remaining ones do make an interesting alternative to bonds and cash and even shares during times of market volatility. They also offer some tax advantages given the lack of dividend and the ability to plan capital gains tax accurately.
Some useful websites:
Close Finsbury Asset Management ( www.finsbury-asset.co.uk ) Telephone 0990 502 017 runs some very successful investment trusts. Finsbury Trust is five star rated by Micropal (www.micropal.com). As at 29 September 2000, Finsbury Trust was up 543% over 10 years, up 196% over 5 years, up 123% over 3 years, and up 94% over 1 year. Its performance was well above average in 1999, 1995, 1993, and 1992. Its worst years were 1990 and 1991. It has a first quartile ranking over 1, 3, and 5 years. Finsbury Trust invests in special situations. It is growth orientated. Two of its holdings are Ramco Energy Plc and Robotic Technology Systems. Other Finsbury Investments Trusts worth considering are : Finsbury Technology, up 237% over 1 year, and up 486% over 3 years. Finsbury Life Sciences, up 224% over 1 year. Finsbury Worldwide Pharma, up 207% over 1 year, and 518% over 5 years. Alternatives to Finsbury's trusts that are worth a look are: Witan, Henderson Electrical and General, Thompson Clive, Jupiter Primadona Growth and Fleming European Fledgling.
I took out the Enterprise Trust with Fand C,approximately 2 years ago,and now pay in £35 per month.It has been as high as £50 per month and as low as £25.That is what I like about them,you can vary the amount as your financial circumstances dictate,without any charges.You always have forms to change the direct debit mandate.I believe that the minimum is now £50 p.m.-but not 100% sure. The reason I picked it out was because in the Financial Mail on Sunday,at one point it was leading the Investment Trust tables for five and three years. Since then,it has slipped back a little,but I am still very happy with the performance,and compares well with other investments. It is qualified as a higher risk investment,but when it goes down a fair bit-like this year for example-you get more units for your money.I dont worry,Foreign and Colonial are a big company,and it has now bounced back again. For someone who is not worried about short paper losses,and is looking for a reasonable long term view,I recommend it.
I have recently taken out a bonus cash builder plan with axa sunlife. This is the ideal way to save for something special you may want in fifteen years time. If you start with saving £10 a month, then every year it increses by two punds, until you reach twenty pounds which is pegged at that amount for 10 years. Whilst saving you have a guareented mimium life cover of £2,400 and at least a minimum of £2,200 plus bonus after fifteen years. I choose this plan because it is so affordable so much so my husband and son have taken out plans.
I am 20 years of age now, when I was about 13 my Granddad put a £5000 investment into the company that he at the time worked for called Monsanto. Ok £5000 is quite a lot of Money, but now 7 years later that £5000 is worth £12000, its fantastic, I had forgot all about the investment until I received a letter asking me weather I would like to withdraw my Money now or leave it in there. I will say that if you are thinking of investing your money then seek expert advice because there are some nasty company’s out there and you could lose your money, but on the other hand if you find a good investment then your money is in the best place possible. Good luck