Not as adventurous as you might think
In the eight or so years I’ve been writing my regular column for the Financial Times I’ve encountered more than my fair share of adventurous investment ideas.
When I first started writing for the weekend FT, vehicles such as Exchange Traded Funds (ETFs) were regarded as decidedly alternative. Venture Capital Trusts (VCTs) by contrast were perceived as almost exotic.
The perception was these listed stock market trusts were risky, regarded by many as an excuse for fund managers to charge large fees in exchange for poor returns, and focused on risky early-stage businesses. Most investors, I’m sure, made the mental leap and assumed a great many of these businesses would fail. The clue I suppose was on the tin: that word venture.
Exotic or borderline boring?
The good news is I’ve tracked the fortunes of many VCTs and I’m pleased to say not only have perceptions changed, but many have delivered decent returns. When VCTs were first introduced I couldn’t imagine anyone in their right mind describing them as a useful adjunct for long-term pensions planning. Now many use precisely this language – helped of course by the generous tax subsidies which include up to 30% income tax relief on any investment up to £200,000 if you hold the investment for five years, plus tax-free dividends and no capital gains tax to pay. Please remember tax benefits depend on circumstances and tax rules can change.
Many VCTs are now regarded as – dare I say it – a tiny bit boring
In fact, I’d go so far as to say many VCTs are now regarded as bordering on – dare I say it – a tiny bit boring. They are, of course, rightly viewed as riskier than your average mid-cap index tracker but many now view them as an acceptable and tax-efficient way to access the growth potential of smaller, largely private, businesses here in the UK.
Crucially, the passage of time has also allowed us to dig deep into returns. The table in the middle shows total net asset value returns including dividends for some VCT fund types. Importantly, these returns are asset weighted, i.e. the larger the VCT in terms of market cap, the greater the impact on actual returns.
I’ve also included below some comparative total returns for the FTSE 100 index, plus numbers on a couple of market-leading VCTs. The overall message is that VCTs have delivered decent returns fairly consistently in excess of a major blue-chip benchmark index such as the FTSE 100. Obviously an investor could have beaten the returns on offer from VCTs if they’d have focused on US equities for instance over the last decade, but 20:20 hindsight is a very rare gift.
Comparative share price total returns over five, seven and ten years
|Category||Five years to 31 Jan 2017||Seven years to 31 Jan 2017||Ten years to 31 Jan 2017|
|VCT AIM Quoted Sector||84.7%||103.02%||31.04%|
|VCT Generalist Sector||38.83%||63.89%||57.54%|
|Artemis VCT (AIM)||173.65%||186.86%||129.64%|
|Octopus Titan VCT (generalist)||95.31%||88.25%||N/A*|
Source: aic stats online (the Association of Investment Companies). Total returns to January 2017. Past performance is not a guide to the future; dividends are variable and not guaranteed.
* The Octopus Titan VCT was launched in 2007 so ten-year performance is not available.
A surprisingly ‘normal’ mix of businesses
If we dig deeper into individual VCT portfolios we discover a surprisingly ‘normal’ mix of businesses. Fund manager Artemis, for instance, has run a successful VCT (no longer open) which is usually never far from the top in terms of annualised returns. Its portfolio is jammed full of AIM-listed businesses in sectors such as business support services (ULS Technology), gas connections services (Fulcrum) and publishers (Dodds).
Many are looking at VCTs as just another way to access – tax-efficiently of course – micro or small cap stocks and private businesses
These are well established small-cap firms growing at a fair clip. They’re also exactly the same kind of business private equity outfits such as HgCapital (a phenomenally successful listed fund with stellar returns) spend most of its time focused on acquiring. Past performance is not a guide to the future.
Or take Octopus, currently the largest provider and manager of the single biggest VCT, the Octopus Titan VCT, with assets of well over £300 million. Its portfolio businesses look on first inspection much more tech orientated but again there’s nothing in here you might not find in a successful and absolutely mainstream investment trust such as Scottish Mortgage run by legendary manager James Anderson – this fund has stakes in tech unicorns such as Funding Circle. In the Octopus portfolio there are stakes in the likes of fast-growing furniture business Swoon and travel specialist Secret Escapes. These are largely private businesses but they are a long way from being insanely risky start-ups. The updated rules on VCTs have helped foster a change in investment culture, encouraging fund managers to back growing businesses with under seven years trading history whilst also discouraging too much of a focus on asset-backed projects.
Discrete performance over five years – share price total return
|20/2/2012 – 20/2/2013||20/2/2013 – 20/2/2014||20/2/2014 – 20/2/2015||20/2/2015 – 20/2/2016||20/2/2016 – 20/2/2017|
|Artemis VCT (AIM)||15.6%||45.0%||2.6%||21.2%||48.2%|
|Octopus Titan VCT (generalist)||48.1%||9.2%||14.4%||7.8%||5.3%|
Source: aic stats online and FE Trustnet. Past performance is not a guide to the future; dividends are variable and not guaranteed.
The challenge for investors
In sum the challenge to pick the right VCT increasingly looks a tiny bit pedestrian, even ‘ordinary’ i.e. like any other fund. You need to pick the right manager with the right investment strategy – understand what their sweet spot is in terms of investment opportunity. I’d also suggest you still need to understand the full impact of costs, which can be substantial especially once one includes stuff such as transaction fees (a problem that also applies to many private equity funds listed on the stock market).
And last but by no means least you need to understand your own investment needs, i.e. how much you can afford to invest or even lose in the worst case. Ultimately, your capital is at risk. Evidence from the Treasury is that most investors still appear relatively cautious. These numbers tell us 44% of VCT investors claim tax relief for an investment of £10,000 or less – the largest group are those in the £5,000 to £10,000 bracket (21%). Only 7% of investors made a claim for an investment over £100,000. To me this suggests many are looking at VCTs as just another way to access – tax efficiently of course – micro/small cap stocks and private businesses, with portfolio allocations probably at the 5% to 15% level. Arguably not very adventurous at all.
About David Stevenson
David Stevenson is a financial journalist and commentator for a number of leading publications including The Financial Times (the Adventurous Investor), Investment Week (The Contrarian), MoneyWeek and the Investors Chronicle. He is also the author of a number of books on investment including the bestseller on ETFs and their use within portfolios in Europe for the FT. Previously David was a director at successful corporate communications business The Rocket Science Group and a senior producer in business and science in BBC TV.
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