23.4.1 Structure and Purpose

23.4.1 Structure and Purpose of Split Shares

Split share corporations are specialized investment vehicles that provide a dynamic means of catering to diverse investor preferences, focusing primarily on income and capital appreciation. Established as closed-end funds, these corporations issue two distinct classes of shares: capital shares and preferred shares. This clear division allows investors to strategically align their investment portfolios with their financial goals—be it a quest for stable income or growth potential. In this article, we will delve into the structural composition and objectives of split shares, highlighting their utility within the broader realm of structured products.

Structure of Split Shares

The architecture of split share corporations revolves around the bifurcation of ownership interests into two core share classes:

Capital Shares

Capital shares are the growth-driven component, offering investors potential capital appreciation. These shares appeal to investors who are willing to assume more risk for the possibility of earning a higher return.

Characteristics:

• Predominantly focused on capital gains.
• Convert appreciation from the underlying asset portfolio into potential growth returns.
• Lack of fixed dividend yields, reflecting a greater emphasis on asset value increase.

    graph LR
	A[Split Share Corporation] --> B[Capital Shareholders]
	B --> C[Capital Appreciation Potential]

Preferred Shares

Preferred shares serve the income-focused facet, prioritizing predictable earning distributions. These shares are designed for income-seeking investors who favor stability and revisiting returns over capital gains.

Characteristics:

• Typically provide fixed dividends.
• Lower risk compared to capital shares, as dividends are paid from the portfolio’s income.
• Offer a higher claim on income and assets than capital shares in the event of liquidation.

    graph LR
	A[Split Share Corporation] --> D[Preferred Shareholders]
	D --> E[Fixed Dividend Payments]

The Purpose of Split Shares

The primary purpose of structuring split shares is the distinct separation of investment strategies for income versus growth:

Income Emphasis

Preferred shares in split share corporations cater to conservative investors looking for:

• Steady income streams from dividends.
• Lower risk exposure compared to pure equity investments.

Growth Emphasis

Conversely, capital shares focus on appealing to investors pursuing:

• Appreciation of principal through enhancing portfolio values.
• Higher risk investments, typically suitable in a bullish market environment.

Benefits of Split Shares

1. Customization: Allows investors to tailor their portfolio allocation according to individual investment goals.
2. Diversification: Provides access to various asset classes within one vehicle, enhancing diversification.
3. Risk Allocation: Enables strategic risk management by allocating investment capital into diverse financial priorities.

Conclusion

Split share corporations offer a layered investment approach by segregating capital growth and income generation, catering explicitly to the preference dichotomy among investors. By understanding the structure and objectives of these products, investors can effectively deploy them to complement their broader investment strategy across economic climates.

Glossary

• Split Share Corporation: An investment vehicle that divides its shares into two categories: capital shares and preferred shares, to cater to different types of investment goals.
• Capital Shares: Shares that provide the potential for capital appreciation, typically without guaranteed dividend payments.
• Preferred Shares: Shares that provide fixed dividends, prioritized over capital shares in cases of income distribution and liquidation.

Additional Resources

• Canadian Securities Administrators - Information and Resources
• IIROC: Investment Industry Regulatory Organization of Canada
• Dictionary of Canadian Securities Terms

In summary, split shares reflect the evolving landscape of structured products where customizability and risk diversification are crucial. Understanding their function can empower investors to better navigate the complexities of modern security markets.