I have been looking for a reasonably safe home for some spare capital and considered zero dividend preference shares. Precious little has been written about them recently (apart from a piece in the IC which I can't access).

I have looked at the data on splitsonline.co.uk, which is good but quite technical. What is not clear to me is the cover on these shares. I understand they have a fixed entitlement to be paid first (after paying prior charges like bank debt). What I don't know is whether, each year as their entitlement increases, there is a notional transfer of assets made from the gross pool of assets of the trust, over to the zeros. This would make them safer than the spot figures suggest.

The Mail has an article saying it is unlikely that zeros will fail to pay out in full. But looking at the splitsonline information, some splits seem to need an increase in value of the assets to pay out their full entitlement and others require a fall in assets of say 10 percent to jeopardise it, that is not much in these volatile markets.

The zeros which appear to be very generously covered by assets are those issued by investment trusts in private equity. But perhaps the market does not accept the valuation of these underlying assets and therefore the real level of cover is illusory. There is an M&G zero expiring in March next year with a gross redemption yield of 45%. But is this because the market thinks it will not pay out in full?

Never trust any ZERO SHARES. I lost 99.9% of my money when investment trusts manuipalated between themself [ buying & selling] I invested with Aberdeen IT. I was compensated some money back, when Investment trusts tricks were highlighted & were caught. I agree with Roger, stick with utility cos, & bluechips with good dividends. MAC

Larry it is wise to look at the underlying investments of the fund, the M & G fund you mention is, I believe in more risky stocks, the M & G website would tell you more, a fund of blue chips is safer but returns will be less. The share you mention is around 89p and due to wind-up in march at 100p, how they get 45% I dont know.
Most funds use the money in zeros as gearing and this is why they dont usually pass money to the zero fund until wind-up date, however not all funds have a wind-up date.
One other thing to consider is the bank base rate, a zero paying 5% now seems good but if base rates rise the your share will be worth less. If you think this is likely then buy one with a short date, most splits start with an end date of 5-10yrs. Hope this helps, you may find the 'Trustnet' website useful.

Chazza, when masud lost his money in zeros, it was because every fund had shares in each other and when it came to light, it was clear that very few genuine equitys were owned by any of them, ie: they were ALL 'funds of funds'. In fact this is similar to the cause of the present disasterous situation. As I said, look at the underlying equity to ensure they have something substantial.