The split capital investment trust saga: Lessons for financial services marketing
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Andrew Adams is Senior Lecturer in Finance and Director of the Centre for Financial Markets Research at the University of Edinburgh Management School. His research interests focus mainly on the pricing and risk assessment of investment trust shares. His memorandum to the House of Commons Treasury Committee entitled ‘The Split Capital Investment Trust Crisis: Underlying Reasons and Historical Developments’ is published as an appendix to the Committee’s main report.
James Clunie is Lecturer in Finance and Programme Director of the MSc in Finance & Investment at the University of Edinburgh Management School. He was formerly Head of Global Equities at Aberdeen Asset Management and before that Head of Asset Allocation at Murray Johnstone International. He is a chartered financial analyst.
Abstract The split capital investment trust boom at the end of the 1990s demonstrated that product innovation and financial engineering can lead to the creation of dangerous products whose risks are not understood by investors. It also emphasised the need for careful marketing of investment products. This involves identifying the needs of investors, creating products to meet those needs, promoting and selling those products, and managing client relationships after the sale. Particular issues that should be addressed include the need to educate clients and adequate stress testing of new products. Keywords
Investment trusts, splits, product innovation, financial engineering
INTRODUCTION
Andrew Adams The Management School, University of Edinburgh, 50 George Square, Edinburgh EH8 9JY, UK. Tel: +44 (0) 131 650 3807; e-mail: [email protected]
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An investment trust company is a UK investment company, the ordinary shares of which must be listed on the London Stock Exchange. It enables investors to purchase an interest in a professionally managed portfolio held within the structure of a limited company. Ultimate responsibility for running the affairs of an investment trust lies with the board of directors, who (like the directors of any other limited company) are elected by the shareholders; but day-to-day investment management and administration are normally delegated by the board to a fund management firm. Split capital investment trusts (‘splits’) may be defined as investment trust
Journal of Financial Services Marketing
Vol. 10, 3 218–227
companies with more than one main class of share capital offering different rights to income and capital. They aim to match simultaneously the risk, income and tax preferences of different types of potential investor. Splits are usually designed to be wound up at some future date, most of them having an original term of seven to ten years. When the company is wound up, its assets are sold and the proceeds are used to pay off the various classes of share capital in the order of priority assigned to them in the company’s Articles of Association, after meeting the entitlements of holders of debt (if any). Types of split There are two basic types of split: traditional splits and quasi-splits.
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