Capital shares of split-level investment trusts look good: As the stock market recovers, Maria Scott looks at some opportunities

INVESTORS seeking capital growth should now be considering capital shares of split- level investment trusts, according to some independent advisers.

Capital shares languished in the recession but have started to recover since Britain withdrew from the ERM last September, bringing recovery in the UK stock market. But advisers believe capital shares are still undervalued and have further to go.

Hargreaves Lansdown launched a managed portfolio of capital shares at the beginning of this month.

Another firm, Whitechurch Securities, reports that the price of units in its Aggressive Growth Fund, a fund of capital shares set up a year ago, has increased by 67 per cent since the launch, before charges.

Capital shares are one of several classes of share that can be issued by split-level investment trusts. The shares pay no dividends and there are no guarantees about how much investors will receive when the trust is wound up. But at that time capital share investors are entitled to receive all the underlying capital growth in the portfolio beyond that needed to repay other classes of share that do carry guarantees.

Until the wind-up date the price of capital shares will rise and fall, depending on demand.

Whitechurch Securities says the potential of capital shares is being overlooked. Their prices collapsed last year after a flood of new split-level share issues came on to the market. Capital shares were overlooked in the rush to buy zero dividend preference shares and income shares.

The firm says the share prices of capital shares are not recognising the underlying growth in the value of the trusts' portfolios.

Capital shares of of River Plate & General, for example, stood at 52p at the end of 1991, with a net asset value of 99p. Since then the NAV has risen to 122p, a 23 per cent increase, but the share price has fallen 27 per cent to 38p. The differential should be narrowing as the trust is coming near to its wind-up date in the autumn of 1996.

Some 70 per cent of the Hargreaves Lansdown portfolio will be put into in what Mike Scott, the portfolio manager, describes as lower risk capital shares.

But he has identified a number of older split trusts, often with just two classes of share, where it is already clear that there is real potential for profit and little risk of loss.

A typical example are the capital shares of M&G Dual, which will be wound up in just under four years' time. The assets in the trust would have to fall by 6.7 per cent a year before capital shareholders, buying in at the present price, would make a loss when the trust is wound up. Hargreaves Lansdown envisages holding these shares until the redemption date.

While 70 per cent of money will go into this type of share, about 30 per cent of the Geared Growth Portfolio will be used to trade in and out of other capital shares.

Mr Scott says the Budget did capital shares a favour, because the changes to the system for taxing share dividends takes a little of the shine off income producing assets.

Minimum investment in the portfolio is pounds 2,500. There is an initial charge of 5 per cent, though there is a discount of up to 3 per cent available at present. The annual management fee is 1.5 per cent.

Whitechurch Securities launched its Aggressive Growth Fund on 1 April last year. Entry to the fund is via an investment bond administered by the insurance company Providence Capitol and the bond is designed as a five-year investment. There are charging penalties for early encashment.

Minimum investment in the Whitechurch fund is pounds 2,000. The fund is designed for smaller investors, but Whitechurch can also construct bespoke portfolios of capital shares for people with larger sums to invest.

Hargreaves Lansdown: 0272 767767. Whitechurch Securities: 0272 687277.