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Education

Split Capital Investment Trust Guide

 

Assess Risk

Understanding what each class of Split Capital share can do to your investment and recognising how much risk you are willing to take may seem relatively simple. The difficult part is in choosing a specific share from all the different Split funds available on the market. It is important to understand how you can assess the risk of a share before investing.

Share type should not be your only consideration for risk. A trust is fundamentally dependent on its underlying assets, and as some investments are riskier than others you should look to the sector, region and objective for an indication of whether the fund is investing in technology stocks, smaller companies stocks or areas such as Europe.
Gross Redemption Yield

The gross redemption yield, expressed as a percentage, is a way of showing the annual return of a share, presuming you hold the shares until wind-up.
 
Hurdle Rate
Hurdle rate gives an indication, again expressed as a percentage, of how much the assets of a trust will have to grow each year to fulfil the full repayment value of the share at wind-up. A negative hurdle rate is a good sign that you have a less risky investment as it means that the trust could fall by the amount indicated each year and still be able to repay shares at the redemption price. A positive hurdle rate means that a trust will have to grow by a certain percentage each year.
 
Cover
The term 'cover' refers to how much the current value of a trust's total assets can cover the redemption value of a share, after deducting any liabilities. In other words, if a trust has a cover of two, its assets could fall by half before the wind-up date and still have sufficient funds to pay back the fixed values of the Zero and Income shares in full.
 
Smaller Companies Outlook
Over the long-term smaller companies have tended to outperform larger companies. This is because they are more flexible and can respond to growth opportunities more rapidly. They can exploit niche products more easily and are often taken over at premium prices by their larger competitors. It is important to remember that smaller company shares can be undervalued for long periods.
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