Morningstar Education
Investment Trusts Solutions
Understanding Split Cap Trusts
Slide 2: Understanding Split Capital Trusts

Unlike "Conventional" funds, Split Capital Trusts issue more than one type of share, each with differing claims on the fund's assets. The traditional structure is for a Split Capital Trust to issue an Ordinary Income Share and a Zero Dividend Preference Share (ZDP), or a Capital Share and Income Share. Most Split Capital Trusts have a fixed life.

Slide 3: Understanding Split Capital Trusts
The ZDPs pay out a fixed capital amount at redemption, provided there are enough assets available to pay out this sum. Ordinary Income Shareholders are entitled to regular dividend pay-outs and any assets left over after the ZDP has been paid.
Slide 4: Understanding Split Capital Trusts
In the other structure cited, the Income Share is entitled to all the income generated by the fund and, other than in the case of annuity shares, a fixed capital amount at redemption (again assuming there are enough assets left to cover that pay-out). Holders of the Capital Shares receive all the capital growth from the fund's portfolio after the Income Shares have been paid.
Slide 5: Understanding Split Capital Trusts

The different share types available mean that investors can tailor their needs for capital or income by choosing the appropriate share class; given that ZDP profits are taxed as capital gains rather than income, they can be a great way of saving for a specific expense in the future, particularly when that expense has a fixed date, such as school fees.

Slide 6: Understanding Split Capital Trusts

Split Capital Trusts were extremely popular in the 1990s but fell out of favour in the early part of the next decade. Increasingly complex and highly geared structures, the addition of bank debt to the capital structures, and cross-investment in other Split Capital Trusts led to the market downturn post-TMT hitting the sector very hard.

Slide 7: Understanding Split Capital Trusts

There are now just 25 Split Capital Trusts listed on the London market. Although many investors are still turned off by the problems, the merits of the structure still stand up to scrutiny, with the underlying problems at the heart of the crisis having been addressed long ago through changes in regulation.

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