Heather Connon: Good time to try the splits

Heather Connon: Good time to try the splits

JP Morgan has not chosen the most auspicious time to launch the first big split capital trust in two years. It coincided with the first payouts to investors who lost millions when splits went sour at the start of the decade - compensation likely to cover at best half of the losses sustained.

But JP Morgan Income and Growth Investment Trust shows that not all splits are bad. It succeeds a trust of the same name which comes to the end of its life next month, and some of those who bought into the original at its April 1999 launch have not done too badly. As its name suggests, the trust was split into two classes of shares: one taking all the dividends and the other all the capital. Holders of income shares have seen a return of 60 per cent over the seven years, well ahead of the 37 per cent benchmark. Return on the capital shares, at 22.8 per cent, has been more pedestrian, though given that the FTSE 100 index is still some 2 per cent below the level it was at when the trust launched, investors could have fared worse.

Holders of capital shares in the new fund should find themselves a bit less behind the income ones: while the existing fund was launched with a yield of 8.8 per cent, the new one is initially offering 6 per cent which, while still generous compared with the FTSE's 3.1 per cent, means the balance between income and capital shareholders is more even.

The capital shares will still be risky. Not only do income shareholders take the dividends,.....continued below

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they also get their initial investment back, provided there is enough money in the trust; the capital investors simply share what is left after the income shareholders and banks have been paid off.

The growth targets do not seem that demanding: to get the 46.5p investment back, the fund has to grow by just 1.7 per cent a year for 10 years; if it rises by 5 per cent a year, holders should get back 116.6p a share, equal to an annual yield of nearly 10 per cent. But gearing means a relatively small fall will wipe out the original investment.

But 10 years of falling markets are rare and, while shares do not look screamingly cheap after their three-year bull run, they are not hideously expensive. Mick Gilligan, investment trust analyst at stockbroker Killick, says Jamie Streeter, who will continue managing the fund, is 'very good'.

But he thinks it will be a challenge to persuade enough capital shareholders to roll over into the new fund, or new subscribers to buy. 'I imagine that more income shareholders will roll over, as the 6 per cent yield will be quite attractive.'

JP Morgan is also offering units combining income and capital shares, which will give a 4 per cent yield. David Barron, its head of investment trusts, says he hopes to keep between half and three quarters of existing shareholders. The take-up on a similar roll-over by some Jupiter funds two years ago was rather disappointing. But the Jupiter proposal was more complicated and the splits scandal more recent. JP Morgan's new trust is attractive enough to warrant serious consideration.

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