VCTs get top marks
Managers of venture capital trusts (VCTs) should be celebrating.
Thanks to the combined threat of rising taxes and increased restrictions on pension fund contributions, the ability to offset 30% of any subscription for new VCT shares against income tax has made new VCT issues more attractive, as has the lure of tax-free dividends and capital distributions.
VCTs have enjoyed their best new issue season in four years, raising £340 million in the 2009-2010 tax year.
Meanwhile, potentially crippling threats to VCTs from an EU directive designed to control hedge funds and private equity managers appear to have been averted.
Worries remain that the government's economy drive could lead to tax break cuts on VCTs, but the need to stimulate growth might discourage the coalition from reducing the support VCTs offer to small businesses.
VCT managers hope to be able to seek support in the new issue and the secondary market under broadly similar regulations.
The more successful managers should be assisted by a new presentation of VCT performance figures from the Association of Investment Companies. These make it easier to see which have done well.
Over three, five and 10 years, the generalist/private equity VCTs have been far more rewarding than VCTs focusing on the AIM.
In the generalist sector the best performers have been some of the oldest trusts, such as Albion VCT, Downing Absolute Income VCT and Northern Venture Trust VCT.
Note that it often takes several years for portfolios of small unquoted companies to mature, and that older trusts operate under more generous regulations. Most of these trusts offer small tranches of new shares each year.
Over one year, the AIM VCTs have performed better than the generalist trusts. As their qualifying investments are quoted, they are more sensitive to stock market gyrations.
However, it was difficult for them to match the 54% gain on the FTSE AIM index over the past year because a lot of its strength derived from oil and gas companies and mining companies, which are not qualifying investments for VCT purposes.
When assessing VCT returns, investors should remember that tax reliefs reduce the effective price of shares bought at issue - recently to as little as 70p in the pound.
This article was originally published in Money Observer - Moneywise's sister publication - in July 2010
Venture Capital Trusts were introduced in 1995 to encourage private investments in the small-company sector by offering tax relief in return for a minimum investment commitment of five years. A VCT is a company, run by a fund manager, which invests in other companies with assets of no more than £7m that are unlisted (not quoted on a recognised stock exchange) but may be listed on the Alternative Investment Market (AIM) or plus with the aim of growing the companies and selling them or launching them on the stock market. Investors in new VCTs are offered desirable tax advantages and VCTs themselves are listed on the London Stock Exchange, with strict limits laid down by HM Revenue and Customs on what they can invest in and how much they can invest.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
A sophisticated absolute return fund that seeks to make money for its investors regardless of how global markets are performing. To that end, they invest in shares, bonds, currencies and commodities using a raft of investment techniques such as gearing, short selling, derivatives, futures, options and interest rate swaps. Most are based “offshore” and are not regulated by the financial authorities. Although ordinary investors can gain exposure to hedge funds through certain types of investment funds, direct investment is for the wealthy as most funds require potential investors to have liquid assets greater than £150,000m.