An investment company whose assets are managed by its own team of managers or by the directors of the company, rather than by external fund managers.
A part of the share capital of a company.
Describes an investment company buying its own shares and reducing the number of shares in existence.
Share buy-backs can be used to return money to shareholders, but are also often used to tackle the company’s discount. Discounts may reflect an imbalance between the demand for shares and the number of shares in existence. The hope is that, by reducing the number of shares in existence, the buy-back will help to prevent the discount widening or even reduce it.
The price of a share as determined by the stock market.
A measure showing how the share price has performed over a period of time in capital terms alone, without reflecting any income dividends paid to shareholders. However it does include capital dividends within the calculation.
The AIC shows share price capital return as a percentage change from the start of the period. Using the share price, rather than NAV, shows performance which is affected by movements in discounts and premiums.
A measure showing how the share price has performed over a period of time, taking into account both capital returns and dividends paid to shareholders.
The AIC shows share price total return as a percentage change from the start of the period. It assumes that dividends paid to shareholders are reinvested in the shares at the time the shares are quoted ex dividend.
Share price total return shows performance which is affected by movements in discounts and premiums. It also takes into account the fact that different investment companies pay out different levels of dividends.
Price volatility is the movement in price over the period, measured by the standard deviation of the logarithm of the daily return in price.
A dividend paid in addition to normal regular dividends in circumstances which are unlikely to be repeated in the near future.
The Specialist Fund Segment (SFS) is a peer group segment of the Main Market designed to appeal to alternative funds and their sophisticated investors. The rules governing corporate governance and transparency standards reflect this by replicating EU Directive minimum standards, which also qualifies the market for most investment mandates. The SFS is designed to accept more sophisticated fund vehicles, governance models and security types that are likely to be characteristic of the funds involved.
Investment companies that offer more than one class of share to meet different investment needs are called split capital investment companies.
In other respects, they are just like other investment companies – they own and manage a portfolio of investments, and you can invest by buying shares in the company.
Split capital investment companies sometimes have a limited life, which means they are wound up after a fixed date, the investments in the portfolio sold, and the cash returned to investors.
Another important concept for split capital investment companies is order of priority. This means that there is a “queue” to receive the proceeds when the split winds up. Some types of share receive money before others, and those at the end of the queue will only receive money if all the other classes of share have received what is due to them.
Classes of share in a split capital investment company
A split capital investment company will normally have either two or three classes of share. These may include any of the following, listed in order of priority:
- Zero dividend preference shares (known as zeros or ZDPs). Holders of zeros receive no income from the split capital investment company, only a capital gain when it is wound up. This is a fixed gain, and is paid before any of the other share classes receive anything. For example, zeros costing 100p may mature in seven years’ time, paying fixed proceeds of 140p. (Note that zeros are not risk-free, because zeroholders can only be paid if there is enough money in the investment company to do so. However, they are the lowest-risk class of share in a split.)
- Income shares. These receive income from the investment company during its life. They may also receive part of a company’s capital on wind-up, usually a predetermined amount, as in a zero. They normally stand just behind zeros in the order of priority.
- Ordinary income shares. If there are no income shares in the split capital investment company, it is likely that there will be ordinary income shares instead. These are normally entitled to all the distributable income of the company, and all the leftover assets on wind-up of the company, after other share types have been paid off. (There may, of course, be no leftover assets if the company performs badly.)
- Capital shares. These are the highest-risk class of share in a split capital investment company. They provide no income and receive none of the company’s assets on wind-up until all other types of share have been paid. If the company does well, capital shareholders could make very large gains, but if it does badly, they could finish with nothing.
- Units. Some splits arrange for a combination of their share classes to be traded together in what is known as a ‘unit’.
In the current market, the most common structure for a split capital investment company is to have two types of share: zeros and ordinary income shares. From the perspective of the ordinary income shareholders, the zeros offer a form of gearing [LINK TO ‘Gearing’], and are included in gearing figures you will find on the AIC website.
When an investment company winds up, it sometimes offers shareholders the opportunity to continue their investment in a new investment company or some other funds, as an alternative to receiving the cash proceeds. This is known as a ‘rollover’ and will normally be done in a tax-efficient way.
A rollover option can also be offered if a single class of share is nearing the end of its life. For example, a split may have ordinary income shares and zeros. The ordinary income shares do not have a limited life, while the zeros mature on a fixed date. When the zeros mature, the holders may be given a choice between receiving their money or rolling over their investment into a new issue of zeros, with a wind-up date some years in the future.
Split capital investment companies may be useful for tax planning purposes, because some classes of share (such as zeros) pay no income but can provide a capital gain.
A tax you pay on the purchase of some investment company shares, but not on the sale.
If you buy shares in an investment company which is based in the UK, you’ll normally have to pay 0.5% stamp duty on the value of the shares. If you buy shares in an investment company which is based outside the UK, you won’t normally have to pay any stamp duty. You don’t have to pay stamp duty on the sale of your shares.
A type of share that investors can convert into new ordinary shares in the company at some time in the future at a fixed price.
Subscription shares have similar characteristics to warrants, including a limited life, but can be held more freely in an ISA. They don’t have the same rights as ordinary shares (e.g. they may not be entitled to any dividends before they are converted into the ordinary shares).
They are also much higher risk than ordinary shares, as you may not want to convert them into new ordinary shares if you can buy these on the stock market more cheaply. Subscription shares can therefore expire worthless and you could lose all the money you paid for them.