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The attraction of as-good-as guaranteed returns enticed thousands of savers to invest in investment trust zero dividend preference shares, known as zeros. However, many have discovered at considerable cost that zeros are not as safe as they seemed.
Zeros are part of split capital investment trusts. These are funds that invest in a basket of shares. Trusts may be split into three types of share that are designed to do different things. Income shares get all of the income from dividends, capital shares benefit from any growth but not income and then there are the zeros.
Savers looking to tuck away a set amount were attracted to zeros because they offered a return of 7% or 8% a year over five or six years and were supposedly safer than traditional stock market investments. No income was paid - hence the name zero - and the returns were rolled up and paid at the end, which is why so many people used them to meet school or university fees. Another attraction was that although returns above the yearly allowance of £7,500 are liable to capital gains tax when they are cashed in, because there is no income, there is no income tax due.
Investment trusts invest in company shares. But managers of these split cap funds decided it was a good idea to buy shares in each others' trusts, which is fine in a rising market. The trusts also borrowed money - known as gearing - to further crank up returns. Again, this works well in a bull market, but losses are magnified if the market turns down.

As it was, the stock market plunged from highs of the late 1990s and the 'magic circle' of investment trusts that were cross-invested collapsed. The banks then began calling in their loans. By 2001, around 45 out of 140 split capital trusts ran into serious difficulties, and 27 subsequently had their shares suspended (ie. the trust went bust).

Many investors who had been sold the idea of a risk-free haven for their money, were finding their investments were worthless. Others, whose trusts were still in business and who wanted to sell up before they matured, found that as the trusts shrunk, the likelihood of zeros paying out also diminished and their values fell even further.

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