View from City Road: EPC back to drawing board

WHEN the snappily named Exeter Preferred Capital Investment Trust was launched in January it held out the prospect of 'significant out-performance' for risk- averse shareholders. An initial 100p investment could be worth, it said by way of illustration, 341p when the trust was wound up in 2002, embracing a compound rate of return of 13.5 per cent a year over the trust's 10-year life span.

This unlikely combination of out-performance and risk aversion was to have been achieved by fancy financial engineering. EPC issued a mixture of zero coupon debenture stocks and equity so it could invest in higher-return zero coupon preference shares and income shares in other investment trusts. Doubts were expressed in this column in January about the realism of EPC's assumptions with respect to returns on zero coupon preference shares and prospective net capital growth in income shares. Indeed, gross redemption yields on zero coupon preference shares have fallen from over 11 to 10 per cent, while the yields on income shares have risen almost 20 per cent, taking their prices down.

EPC's net asset value is now 85p, compared with a high point of 114p, and its price has slumped from 100p at issue to 92.5p. This is a worse performance than the investment trust sector or the stock market, let alone building society deposits, which are the best home for risk-averse money.

Only eight months from launch EPC has torn up its original strategy, buying in half its pounds 30m debenture issue and shifting the bulk of investment into income shares. It projects a final net asset value of 315p, not 341p. Greig Middleton, launchers of EPC, predictably says this is too pessimistic and expects 360p, or a 15.6 per cent return.