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From Zero to HeroThe return of the Zero Dividend Preference share

James BurnsJune 2009

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A return for Zeros

Three drivers

• Tax Benefits arising from tax changes 2010/11 highest rate of income tax 50% / div tax rate 42.5% / CGT 18%

• Issuance Investment Trusts likely to raise capital Efficient & reasonably secure

• Usage School fees planning Any liability-driven investment

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A quick recap

Issued as part of package Income / Ordinary / Capital shares

Limited life set at launchPre-determined maximum capital return

Cover Hurdle rate Gross Redemption Yield (GRY)

Usually paid ahead of all other shareholdersNo income

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JZ Capital Partners Share Price since launch

Life of a Zero - JZ Capital Partners

At launch25/06/99

Launch price 100p

Redemption date

24/06/09

Redemption price

215.8925p

Cover at launch

2.65x(Estimated)

Hurdle rate at launch

-9.3 per annum

(Estimated)

GRY8% per annum

0

50

100

150

200

250

Price

Expected NAV

25 June1999

25 June2000

25 June2001

25 June2002

25 June2003

25 June2004

25 June2005

25 June2006

25 June2007

25 June2008

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History“…the Tay Bridge collapsed in December 1879 but that didn’t stop people from correcting and improving bridge design and moving on.

They didn’t all revert to paddling about in rowing boats.”*

Source: *Association of Investment Companies (AIC), 01/06/09.

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Jupiter Second Split conventional ZeroManaged by Philip Gibbs

At launch01/11/04

Launch price60.0p

(58.65p opening entitlement)

Redemption date

30/10/09

Redemption price

84.15p

Cover at launch

1.16x

Hurdle rate at launch

-2.95% per annum

GRY7.5% per annum

50

55

60

65

70

75

80

85

1 Nov2004

1 May2005

1 Nov2005

1 May2006

1 Nov2006

1 May2007

1 Nov2007

1 May2008

1 Nov2008

1 May2009

Price

Expected NAV

Jupiter Second Split share price

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Groups you may know managing Investment Trusts with Zeros• Aberdeen• Invesco• JP Morgan• Jupiter• M&G• Premier

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Synthetic Zeros

• Huge issuance of structured products• Passive management based on an index• Return profile very similar to conventional zeros• Capital protection within limits• Capped upside• Be aware of counterparty risk

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Japanese Accelerated synthetic Zero

Based on Nikkei 225

Details

At launch

10,092 (100p), 5x growth up to max 200p

(12,110)

Redemption date

17/12/09

GRY7.5% per annum

80

100

120

140

160

180

18 Dec2003

18 Dec2004

18 Dec2005

18 Dec2006

18 Dec2007

18 Dec2008

Japanese Accelerated share price

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A renaissance for Zeros?

• Demand and appetite for trusts to issue Zeros• Traditional sources of bank borrowing for

investment trusts limited• Long-term financing opportunities from large

existing investment trusts to offer “super-covered” Zeros

• Talk of AIC encouraging issuance

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Ecofin Water & Power Opportunities

Portfolio of global water, gas and electric power companies Launch:

date: July 2009 price: 100p

7 years Redemption:

date: July 2016 price: 160.578p (not guaranteed)

7% GRY Hurdle: -19 per annum 4.5x covered

Recent developments - new issue

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Recent developments - rollover issue

JZ Capital Partners

Portfolio of private equity investments Launch:

date 22/06/09 price 215.8p

7 years Redemption:

date 22/06/16 price 369.84p (not guaranteed)

8% GRY Hurdle: -13.4 per annum Minimum 3.0x covered

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Smith & Williamson MM Cautious Growth Fund

• Fund of funds provide accessibility & spread of risk

• Primarily Zeros, mixture of conventional (56%)* and synthetic (21%)* as well as some other lower risk asset classes

• A balanced, well-diversified portfolio for those not wanting to take the risk of individual Zeros

*As at 29th May 2009

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In summary

• Renaissance for Zeros • Your clients seek tax efficiency• Potentially attractive returns• Could have a place in most multi-manager portfolios• Multi-manager approach provides a diversification

solution for IFAs

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Important informationInvestment does involve risk. The value of investments can go down as well as up. The investor may not receive back in total the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate tax advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.Splits may be financially geared and also provide gearing to their share types through their capital structure (structural gearing). The returns to each class of share are governed by the effects of the entitlements of the other share classes. Shares in splits will high levels of financial gearing in addition to their structural gearing will be exposed to higher risk. Shares further down the order of entitlement are subject to greater gearing and higher risk within the structure.This document contains information believed to be reliable but no guarantee, warranty or representation, express or implied, is given as to their accuracy or completeness. This is neither an offer or a solicitation to buy or sell any investment referred to in this document. Smith & Williamson Investment Management documents may contain future statements which are based on our current opinions, expectations and projections. Smith & Williamson Investment Management does not undertake any obligation to update or revise any future statements. Actual results could differ materially from those anticipated. Appropriate advice should be taken before entering into transactions. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication.Issued by Smith & Williamson Investment Management Limited. Smith & Williamson MM Cautious Growth Fund is a sub-fund of Smith & Williamson Investment Funds PLC, a Dublin-based (UCITS) OEIC with segregated liability between sub-funds.  The scheme is FSA Recognised.  Smith & Williamson Investment Management Limited is the Investment Manager and the Distributor.