VCTs get top marks

Published by Fiona Hamilton on 08 July 2010.
Last updated on 25 August 2011

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

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