As stock markets gyrate and interest rates fall, zero dividend preference shares are being promoted as one of the few 'safe' ways to get a decent return on your cash. Even the lowest-yielding zeros offer a return equivalent to more than 5 per cent a year. Some pay double that, and it could be tax free. This column is a fan of zeros, but the incestuousness of this market makes it vital that investors know what they are buying.
Zeros are one class of share issued by split-capital investment trusts.
They do not pay any income but aim to repay a set amount when they mature. But some splits exist mainly to buy shares in other splits. That adds to the risk, making it harder to work out how the fund will perform. The higher risk is usually reflected in the price of the shares. About 75 per cent of its assets are in the shares of other trusts and that is reflected in its yield, equal to 11.5 per cent a year until its pay date in August 2005, the highest in the sector.