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Sunday, 28 April, 2002, 11:49 GMT 12:49 UK
'Splits' investors to discuss legal action
Class Law is one of two legal firms looking at "class action"
Investors who have lost money from a special kind of investment vehicle, often used to save for school fees or boost retirement funds, will meet in London on Monday to discuss legal action.

An estimated 40 out of 120 of these kind of investment products - called split capital investment trusts, or 'splits' - are believed to be in trouble.

Class Law, a firm of London solicitors, has organised the meeting and is keen to seek redress for people who have incurred losses from the multi-billion pound splits markets.

A number of financial institutions, including investment firms and banks, as well as accountancy firms and independent financial advisers could become embroiled in the action.

The Financial Services Authority is also conducting its own investigation, which is focusing on alleged collusion between some trusts.

Zero risk?

Split-capital funds are quoted investment trusts that offer several classes of share.

'Zeros' are one type of share issued by these investment trusts.

The major contention for investors who feel they were mis-sold is that they were told these were low-risk products.

Unlike normal shares, which aim to pay a dividend and appreciate in value, zeros are designed to pay out a set return at the end of the trust's life.

Zeros have been around since the 1970s and have been very popular with private investors, especially those planning for school fees who need to achieve a fixed sum at a set date in the future.

Not guaranteed

The returns on zeros and splits have never been guaranteed to investors, but they have never failed to pay out since they were created.

This cosy track record has been shattered in recent months, spelling misery for many private investors.

So far, one trust has suspended trading and another has suspended dividend payments.

Investors in up to 40 trusts have seen their stakes plummet in value in recent months.

Aggrieved investors are discussing legal action, because those who bought direct from the fund - not through independent financial advisers - are not covered under the Financial Ombudsman scheme.

Troubled times

In the late 1970s, managers of split cap trusts sought to capitalise on rising share prices.

They aimed to boost returns by "gearing" - effectively borrowing more to buy more shares and feel more of the benefit of rising share prices.

In addition, a number of managers have taken on higher levels of bank debt in recent years.

As the market fell this level of bank debt became unsustainable, and some were forced to offload their holdings to avoid breaching bank loan covenants.

Extensive cross-holdings caused by split capital trusts investing in other trusts haven't helped.

In a rising market, these cross-holdings worked to a fund managers advantage, but as the market fell, trusts spiralled downwards bringing other trusts with them.

All doom and gloom?

At the meeting on Monday, investors will elect a committee to discuss proceedings.

But they will not be the only investors considering legal action.

Leon Kaye Solicitors, another firm involved in class actions has been contacted by more than 500 investors.

Leon Kaye told BBC News Online that they would be focusing any possible legal action on fund managers and literature that was given to potential investors, rather than independent financial advisers and accountants.

See also:

06 Feb 02 | Business
FSA steps up split caps probe
22 Oct 01 | Business
Q&A: What are split caps and zeros?
17 Dec 01 | Business
FSA launches split-caps review
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