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The Split Capital Investment Trust Crisis - Essay Example

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Adams and Clunie, 2006 lay the blame for the split capital investment trust boom at the end of the 1990s on the dangerous financial products created through product innovation and financial engineering with high inherent risk, by fund managers in pursuit of high fees and the…
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The Split Capital Investment Trust Crisis
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Download file to see previous pages The objective in this differentiation in the financial products is to make available risk, income and tax preference options based on the required of potential investors. These offerings are designed such that they can be wound up at a future date normally extending to seven or ten years (Adams, 2004).
The norm in split investment trust companies was traditional splits consisting of income shares and capital shares and quasi splits that had an added zero-dividend preference shares. Income shares had a low risk and high income and were a suitable investment for elderly people, while capital shares offered high income with an element of risk involved. The zero-dividend shares received no income and so attracted no income tax and had the added benefit of being paid off first at the time of liquidation of the trust. The high risk for the capital shares came from their being the last in terms of settlement at the time of the liquidation of trust (Adams, 2004).
Spurred by the buoyant financial markets in the 1990s and the pursuit of fees by the fund management firms and their broker/advisors, who were invested with the day-to-day management of the investment trust products led to a the aggressive combination of the traditional splits and quasi-splits wherein all income shares, capital shares and zero-dividend preference were combined in what came to be known as the barbell trusts (Adams, 2004).
Barbell trusts as their name suggests consist of a growth portfolio at one end and an income portfolio at the other and nothing in between. The problem in this was that the growth portfolio invariably was invested in an area of growth that was popularly attractive at that period of time and carried a high risk potential. The barbells were however high yielding securities and found an easy market with investors, who had gone used to high returns ...Download file to see next pagesRead More
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