Clearing Up Split-Share Confusion

03/16/2011 1:25 pm EST


John Heinzl

Reporter and Columnist,

If you can time the market, almost anything will make money, but believe John Heinzl, reporter and columnist for, when he says split-capital shares are not the best idea.

My column a couple of weeks ago, about the risks and benefits of split shares, sparked a question from one reader and a cranky comment from another. I’ll deal with the cranky comment first.

Jim complained that the article portrayed split-capital shares in an unfairly negative light. His comment focused on the capital shares of Financial 15 Split Corp. II (Toronto: FFN), which invests in a portfolio of 15 Canadian and US financial-services companies.

Here’s his e-mail, which I’ve edited and condensed for clarity, followed by my response:

I find it interesting that you have decided to write this article now rather than when the shares were issued. It would mean much more when an investor is potentially paying top price.

Now (as of March 2), an investor is paying $8.50 for a net asset value of over $15. Not a bad deal.

The price dropped due to market conditions from the $15 issue price to $3 and change. If it wasn’t for the financial crisis market meltdown, these types of shares would not have dropped. Your article does not point out the tremendous gain that was made if you had bought at or near the low.

Also you failed to mention that the shortfall in dividend income for the capital shares is made up from writing covered calls, one of the most secure and safest types of income investing one can do IF you know what you doing.

It never ceases to amaze me just how little investment writers like yourself know about investing and its various components yet write an article like they are experts. Cheers and get a real job where your expertise is informative.


Dear Jim:

Thank you for the career advice. However, my services are evidently still needed here.

I encourage you to read the fund’s February 28 update, available at You’ll see that the net asset value (NAV) of Financial 15 Split Corp. II was $15.53 as of that date.

However, contrary to what you say, this is not the net asset value of the capital shares. It is the net asset value of the whole corporation.

To find the NAV of the capital shares, you must subtract the $10 of NAV belonging to the preferred shares. That leaves a NAV of $5.53 for the capital shares, which is a far cry from the “NAV of over $15” that you cite.

Based on the February 28 trading price of $8.45 for FFN, the capital shares were therefore trading at a hefty premium to NAV, not a discount. [Incidentally, the shares have fallen to under $6.50 as of March 16—Editor.]

The confusion highlights the need for investors to read net asset value information carefully. Some split share companies break it out separately by class of share, while others provide only the total NAV figure.

NEXT: Tax Question Answered|PAGEBREAK|

Tell Us Something We Don’t Know

You’re correct that an investor could have made money by buying “at or near the low.” Problem is, you only know it’s a low after the fact. Cherry-picking profitable entry and exit points on a historical chart doesn’t prove anything.

It’s also unhelpful to say the capital units would not have fallen if it weren’t for the financial crisis. A lot of things wouldn’t have fallen without the financial crisis. But the financial crisis happened, and the capital shares suffered an extraordinary loss—because they’re a leveraged play on the underlying portfolio.

The capital shares—which were issued at $15 in 2004—plunged to a low of $1.52 in February 2009, not “$3 and change” as you say. That’s a drop of 90%.

Granted, the preferred shares also sank during the financial crisis. But unlike the capital shares, which omitted numerous dividends, the preferreds never missed a monthly dividend payment. What’s more, the preferreds are now trading slightly above their $10 issue price.

Regarding your point about selling options to generate income, I asked split-share expert James Hymas of Hymas Investment Management to comment generally on the strategy of writing covered calls to fund dividends on the capital shares.

(When an investor writes a covered call, he earns cash in exchange for granting the right to another investor to buy his shares at a specific price on a certain date.)

Here’s what Hymas had to say: “There does not appear to be any support for the claim that the strategy is doing anything useful at all for the split share corporations. None of them break out their books in sufficient detail for an assessment to be made; none of them or their subadvisers provide any actual performance data to support such a claim.

“The only thing that can be said for [selling covered calls] is that it will produce income, at the expense of potential capital gains. There is a tradeoff there.”

Do the dividends from split preferred shares qualify as “eligible” with respect to the Canadian tax gross-up/credit treatment? —R.M.

In most cases, dividends from split preferred shares do qualify for the dividend tax credit. However, there are exceptions, so I recommend that you look up the tax information on the company’s website or call the investor-relations department to be sure.

Capital-share distributions can also consist of eligible dividends, but I have seen cases where the payment is entirely return of capital—so, again, it’s important to contact the split-share corporation.

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