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Absolute Investment Returns: Buy ZDP Shares (Zeros)

Updated on December 10, 2014

How to make an absolute return with Zero Dividend Preference Shares

Zero Dividend Preference Shares are a little known sub-class of investment trust share (the safest variety of "Split-Capital" investment trust) which provide almost guaranteed capital gain with a defined end-date. Usually very safe, even in these turbulent market conditions. A "Misselling Scandal" in which zeros were sold as completely "risk-free" products and resulted in pensioners losing a lot money has caused them to be mistrusted and hence very good value for money.

This article is about how to use Zero Dividend Preference Shares to reduce risk in an investment portfolio and for capital gains tax planning or to avoid the new higher income and dividend taxes for higher earners. There is a section about the maths (although you can skip that if you prefer) and there are some links to useful web-sites and some examples of zeros currently available.

Zeros are usually denominated in pounds sterling, but can be bought through many brokers even outside the UK.

Changes to capital gains tax after the UK election and formation of the Liberal Conservative coalition government could make zeros far less attractive for higher rate tax payers. Currently the flat rate of 18% on capital gains makes zeros very attractive to 50% marginal rate income tax payers, but if CGT were to increase to 40% zeros could drop in price as investors dump their holdings before the new rules come in.

Please also see my finance and investment book recommendations

Disclaimer: Information in this and other linked articles is unregulated and for general information only and is not intended to be relied upon in making specific investment decisions. Appropriate independent advice should be obtained before making any such decision.

Zero Dividend Preference Shares

Well Kept Secret

Absolute Returns

(even during the "Credit Crunch")

What are zeros and how do you make an absolute return with them?

Reduce the risk of your investment portfolio

There is a little know kind of investment called a split-capital investment trust, which has been ignored by most of the UK financial press for many years, and yet can represent good risk-reducing diversification for a share portfolio or an alternative to cash. Some of the few remaining zero-dividend-preference-shares, a sub-type of split-capital trust, offer a return above that of the best deposit accounts currently available. The new capital gains tax rules also make them even more attractive. Most coverage of these shares has been negative after misselling claims for a small subset of the shares that have only recently been resolved.

Different Share Classes

Split-capital shares are divided into two or more classes of share of different risk and performance profiles. It is specifically the safest variety that I am writing about here, the Zero Dividend Preference Shares. Split-capital investment trusts are investment companies with a limited lifetime and a defined end-date. The holders of zero-dividend preference shares are, in most cases, paid first, before other classes of share on wind-up of the company (although after payment of any bank debt etc.) and therefore are significantly less risky than the underlying asset portfolio of the investment company or of the other class or classes of share issued. They are not however risk-free (hence the "misselling scandal" from a few years ago which I won't go into here) The zero-holders receive a pre-defined value for each share, if the company assets are of sufficient value to do so, and no dividends throughout the life of the share, so all profit is in the form of capital gains. They are therefore similar to a zero coupon bond.

The "gross redemption yield" (GRY) is published for each zero currently available, which is useful and allows comparison with yields on other investments. GRY however does not tell the whole story and attention should be paid to how it was calculated (the real yield is reduced by stamp duty and commission particularly when the wind-up date is near) GRY assumes that the company can afford to pay out the full redemption price on winding up the company, so attention also needs to be paid to the probability of the company not paying in full. A high GRY may be due to higher risk of default or a short duration to the wind-up of the company as discussed below. I've included some maths below, but this can be skipped and at the end of the review I have included a link to some web-sites that do some of the maths for you and allow comparison between different zeros.

Some Useful Investment Books

The Maths (Skip this bit if you want)

How to Calculate The Gross Redemption Yield (GRY)

The current share-price and redemption price ("p" and "r" in the equation below) are published for each zero and allow the total return ("T") for an initial investment of ("I") to be calculated:


where S= Stamp Duty i.e. (I-C) x 0.5%;

C= Commission (e.g. £10)

e.g. T = (1000 - 10 -5)r/p

or T = 985r/p

for a £1,000 purchase

Note: "p" is the purchase price not the mid-price, which is often quoted. There will be a spread between the bid and offer prices which can significantly affect the return.

This allows the real gross-redemption yield ("G") to be calculated:

(1+G)^n = (T/I) where n = number of years to redemption

(1+G)^n = ((I-C-S)r/(pI))

Sorry about the lack of mathematical symbols!

Or a good approximation for durations of less than a few years:

G = ((I-C-S)r/pI - 1)/n

(for small n)

=> Gmax = (0.995r/p - 1)/n

for large investments (or zero commission) and small n

How to Choose Which Zeros to Buy

Things to consider when choosing which zero to buy: Wind-up date; Gross Redemption Yield; Cover; Hurdle rates; underlying portfolio performance.

Wind-up date, or Redemption Date is the date at which the company is wound up, shortly before the date at which the zero-holders will be paid. This is where the "financial engineering" and capital gains tax planning aspects comes into the equation. When do you want or need the money e.g. to pay for a new car/yacht/handbag etc.? In which tax year would it be most efficient to make the capital gain? It is also important to consider whether it is worth investing if the wind-up date is soon e.g. less than two years and whether the broking fees stamp-duty and bid-offer spread make the resulting yield attractive for the amount of money to be invested (as described above).

The "Cover" or "Share Cover" is a measure of the value of current assets relative to the amount required to pay the zero-holders in full on redemption. A share cover of 1.0 means that the current assets just cover the redemption cost. The higher the number the better and you have to assess the ability of the company, the underlying portfolio and the market to maintain or meet a cover of at least 1.0 by redemption date. It is also important to consider the amount of debt the company has to repay before the zero-holders are paid.

The "Hurdle Rate to Repayment" describes the rate of growth required for the underlying portfolio to cover the full repayment of the zero dividend preference shares. "Hurdle Rate to Wipe Out" is the annual rate of growth to cover just the debt and other costs before paying the zero dividend preference shares (i.e. the rate of return for you to just get nothing) These are a useful measure of risk because you can assess the probability of that rate of growth being achieved over the lifetime of the company. For safe investments the hurdle to repayment should be negative and the hurdle to wipe-out preferably close to -100%

The underlying portfolio performance should also be considered in conjunction with all of the above information: e.g. who manages it and what are the investments.

If you do not want to commit all of your cash to one zero-dividend preference-share it is also possible to invest in a collective investment i.e. a unit trust or fund (similar to a mutual fund) There are currently a few funds that specialise in zeros (ZDPs):

Close Reserve Equity: Zeros and other financial securities

F&C Progressive Growth (Foreign and Colonial): Mostly invests in Zeros

Investec Capital Accumulator: Equities, Derivatives and Zeros

New Star Diversified Absolute Return: Various Securities, Bonds, Money Markets and Zeros

Premier Absolute Growth: Mostly Zero Dividend Preference Shares

In Conclusion:

There are not many zero dividend preference shares left and few recent new issues, but for the moment the remaining ones do make an interesting alternative to bonds and cash and even shares during times of market volatility. They also offer some tax advantages given the lack of dividend and the ability to plan capital gains tax accurately.

Summary: Low risk return even in volatile markets

Remaining Zero Dividend Preference Shares

There are a few Split Capital Investment Trust companies remaining and few new launches. Here is a list at time of writing and their ZDP wind-up dates:

JPMorgan Income & Capital (28/02/2018)

Jupiter Dividend & Growth ZDP (30/11/2017)

M&G High Income (17/03/2017) ***

Utilico 2016 (31/10/2016) +

JPMorgan Private Equity 2015 (31/12/2015)

Utilico 2014 (31/10/2014) +

JPMorgan Private Equity ZDPs 2013 (28/06/2013)

Utilico 2012 (31/10/2012) +

Aberdeen Development Capital (2010/12)

Aberdeen Development Capital 2012 (30/04/2012)

Invesco Perpetual Recovery 2011 (27/10/2011)

Equity Partnership (31/07/2011)

Edinburgh New Income (31/05/2011) **

Real Estate Opportunities (31/05/2011)

M&G Equity (08/03/2011)

Premier Energy & Water (31/12/2010)*

Premier Renewable Energy (31/12/2010) *

Aberdeen Development Capital 2010 (30/04/2010)

Jupiter Second Split ZDPs 30/10/2009

Jupiter Second Enhanced Income (10/10/2009)

JZ Capital Partners (24/06/2009)

* These companies have good cover (i.e. safe) and more than a year to run (at time of writing)

**Reasonably safe and more than 2 years to run (at time of writing)

*** Fairly poor cover, but a long time to run and very good return if the underlying investment recover (at time of writing)

+Utilico is a global infrastructure and utility company which has tranches of zeros maturing on different dates: 2012, 2014 and 2016 making them useful for tax-planning. These also look reasonably safe.


All of these companies have ZDP shares and at least one other type of share. Usually the company is wound up on the same date as the ZDP shares, but in some cases the company may continue beyond that date in some form depending on the share-holder vote.

New Launches:

After income tax-rises in the UK, making capital gains more attractive than interest or dividends and the winding up of JZ Capital Partners Zeros, there have been some new launches of zeros: Ecofin and JZ Capital Partners are both launching zeros with approximately a 7% and 8% Gross redemption yield, respectively, over a seven year period. JZ Capital Partners are a riskier private equity venture, hence the higher yield to compensate for the extra risk. Jupiter will also be launching new zeros when the existing Second Enhanced, Second Split and Defined Capital Return wind-up, although these may all be combined into a single trust.

Some Example Zeros

This is not a recommendation to invest. It is just a snap-shot of some example zeros on 1st November 2008 and an explanation of the numbers:


Windup Date = 30/10/2009 (i.e. just a year left to run)

Mid Price = 77.5

Redemption Price = 84.14

Hurdle = -38%

Share Cover = 1.51

NRY = 8.7%

This zero will return an annual gain of 8.7% even if the underlying assets fall by 38% per year and the underlying assets are worth 1.51 times the required money to pay the zero holders. This looks quite safe, but only has a year to run. You need to take the 0.5% stamp duty on the share purchase and the dealing cost.


Windup Date = 24/06/2009 (i.e. less than 8 months left)

Mid Price = 202

Redemption Price = 215.9

Hurdle = -76%

Share Cover = 2.9

NRY = 11%

This zero will return an annual gain of 11% even if the underlying assets fall by 76% per year and the underlying assets are worth 2.9 times the required money to pay the zero holders. This looks safe, but only has 8 months to run. You need to take the 0.5% stamp duty on the share purchase and the dealing cost.


Windup Date = 31/03/2009 (i.e. less than 5 months left)

Mid Price = 184

Redemption Price = 195.54

Hurdle = -65%

Share Cover = 1.69

NRY = 17%

This zero will return an annual gain of 17% even if the underlying assets fall by 65% per year and the underlying assets are worth 1.69 times the required money to pay the zero holders. This looks safe, but only has 5 months to run. You need to take the 0.5% stamp duty on the share purchase and the dealing cost.

MGIZ M&G Income Investment Company ZDP

Windup Date = 31/10/2008 (i.e. It has just expired)

Redemption Price = 56.59

This has just matured and paid a good yield over several years, although the exact yield achieved would depend on what date it was purchased.

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    • Andy-Po profile image

      Andy 3 years ago from London, England

      @tennis41: I researched the Utilico ZDPs (2012, 2014 and 2016. There is also a 2018 maturity one now) a while ago and they certainly looked safe then, in terms of debt, although the web-site I used to do my research no longer exists. I checked on this morning and there is some useful information there, that might help you make a decision. One thing to remember though is that this ZDP has less than a year to run and the redemption yield is quite low, so stamp duty, the bid off-spread and dealing charges will make a big dent in the total return. Today the bid price is about 162 and the redemption price in less than a year's time 167.6.

    • profile image

      tennis41 3 years ago

      i am interested in the zdps [utilico UTLB] the hurdle rate at minus 78% looks really safe, what could go wrong? does the trust have any debt which could damage the return?

    • profile image

      tennis41 3 years ago

      i am thinking of investing in UTLB[2014] wit a hurdle rate of minus 78% this looks really safe. does the trust carry any debt or other problems which could damage the return over the next 0ne year term? John ward []

    • profile image

      anonymous 4 years ago

      Can you formulate your mathematics into spreadsheet formula, because I cannot get it to work at all to give the redemption yield? Thanks

    • infiniti99 lm profile image

      infiniti99 lm 5 years ago

      I have never heard of these before and you did a great job of explaining how what and where and why.I'm going to investigate these Zero's and see if this option is available to me in the states.Thank you for sharing

    • profile image

      Anthony00 5 years ago

      these shares are very profitable and really sounding have explained ZDP shares very well and this information is very useful to me.

      Property Investment Australia

    • profile image

      anonymous 6 years ago

      Thanks for sharing this informative lens.Your ideas for the how to make an absolute return with zero dividend preference shares.Thanks for sharing. strategic planning software

    • Andy-Po profile image

      Andy 7 years ago from London, England

      I have used ZDPs over the years almost as a proxy for cash - usually fairly short dated ZDPs - A great method of CGT planning. Unfortunately they really aren't as good in terms of predicted growth, as they used to be, because a lot of people are using them to avoid 50% income tax. Now Edinburgh New Income Zeros (ENIZ) is too expensive to consider, and probably too close to maturity, what is left? I avoid longer dated Zero Dividend Preference shares at the moment because the future path of interest rates is so difficult to predict.

      Invesco Perpetual Recovery 2011 ZDP matures in 14 months with a redemption yield of 7.6% but a low cover of just 1.1 making them quite risky. Utilico ZDP 2012 pays just 4.5% but has good cover (3.5) Others with short (but not too short life-spans) are Equity Partnership 2011 and three Aberdeen Development Capital ZDP issues (2012) with very high redemption yields (25% or more) but I cannot find sufficient reliable information about them to take the risk.

      The best website that I have found for risk analysis of Zeros and other split capital investment trust shares is : Splits On Line

    • Andy-Po profile image

      Andy 7 years ago from London, England

      Edinburgh New Income Zeros (ENIZ) has gone up in price (ask price is now 137.5p + stamp duty and broker fees) since my last comment and no longer offers such good value (although would have been an excellent investment back in June) It will still pay nearly 3% to maturity, but the main motivation to buy this now would be shifting income to capital gains for tax reasons.

    • Andy-Po profile image

      Andy 7 years ago from London, England

      Edinburgh New Income Zeros (ENIZ) will pay 5% return in less than a year. Looks like a good safe investment. negative hurdle rate of about -30% and a good cover of about 1.4, so, unless the next year is really bad for stock markets, it should pay out current price plus 6% (nearer 5% by the time stamp duty has been paid on the purchase) which beats any UK bank account over the same period and is a capital gain rather than income (although watch out for any CGT capital gains tax announcements in next weeks emergency budget)

    • ElizabethJeanAl profile image

      ElizabethJeanAl 8 years ago

      Thanks for the info. I'm going to look into this


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      Global_B2B 8 years ago

      You are part of my B2B Marketplace Headquarters business group so I thought I'd let you know about a new service I intend to start in a few days.

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      anonymous 8 years ago

      Many thanks for the information. You have explained the instrument very well.

      Cheers! 5*'s

    • SandyMertens profile image

      Sandy Mertens 8 years ago from Frozen Tundra

      Thanks for the information!

    • SylvianeNuccio1 profile image

      SylvianeNuccio1 8 years ago

      Oh Well, I am not very educated in this department. Thank you for this information.

    • profile image

      topstuff 8 years ago

      Yeah you sure do know your stuff, thanks for sharing so much great information

    • profile image

      Global_B2B 8 years ago

      Thanks for joining my group: B2B Marketplace. You have a great lens here! 5*

    • Andy-Po profile image

      Andy 8 years ago from London, England

      [in reply to Bob]

      Corporate bonds do look very good at the moment. I would go for an ETF though rather than individual bonds: e.g. iShares SLXX (8% yield and probable capital gain) also index linked gilts (treasuries) such as INXG may be good because everyone has already priced in deflation, so these are inexpensive now (and very safe) Zeros still look good though - Typically paying 6% or 7% capital gains from now to maturity.

    • profile image

      anonymous 8 years ago

      Wow. These are obscure. Most people gave up on tthese when the miss-selling scandal occurred all those years ago, but they look really good value compared to cash (especially given the tax advantage) but corporate bonds now also look good. Have you looked into them?

    • profile image

      anonymous 8 years ago

      You know your stuff, AndyPo! I need to read more about your topic...