Why I have never sold a VCT
Despite researching VCTs since 1998, it took me a while to start investing. I’m not sure when exactly the first time was, probably in 2001 or 2002. Partly this was down to finances - I didn’t consider myself wealthy enough to invest (I was only 25 at the time). Also I didn’t want to lock my capital up for five years, which then seemed an inordinately long time.
Fast forward 15 years and I now have a well-diversified VCT portfolio that pays regular tax-free dividends. Not being smug, but it is very rare that a week goes by without me receiving a tax-free dividend cheque. Interestingly, despite my initial reservations all those years ago about locking my capital away, I have never sold any VCT I bought as a new issue.
So what changed? Why did I take a few years getting comfortable with investing?
Firstly, the VCT sector today is very different to the embryonic one of 20 years ago. Then virtually all the investments made were early stage, and much less thought was given to how to structure a deal. Many VCT managers made mistakes and often got caught up in fads – investing in very early-stage technology companies is an example. Management teams were smaller and far less experienced. And probably the most important point was that back then there seemed to be very little emphasis on shareholder value; big discounts to Net Asset Value prevailed and dividends seemed more sporadic.
Contrast that with today and in my view the two biggest changes are the quality and experience of VCT managers, and the commitment to regular dividends. Both are good news for investors.
It is amazing to think dividends weren’t seen as very important, whereas in fact the majority of an investor’s return should come from them. The dividend focus was triggered by the need to attract new investors and managers realised they could structure a deal to help fund a regular flow of dividends. More emphasis was on lending money to a business as well as investing in them so the loan repayments could go towards investors’ dividend payments.
Another big change was the type of business invested in. I mentioned many focused on early-stage technology. Today VCT portfolios are much more rounded with everything from wind farms to online wine retailers found within various VCTs. New rules make it harder for managers to invest in later-stage businesses, however the experience of the last decade should put them in good stead to navigate these changes and provide investors with the consistent flow of dividends to which many have become accustomed.
VCTs have provided excellent long-term returns to investors – statistics from the Association of Investment Companies bear this out. The average return of a Generalist VCT over the last five years has been 38.5% and over the last ten years 58.5%. These figures stack up well compared to the FTSE 100 index that has returned 23.71% and 49.8% respectively over the same time periods. Of course past returns are not a guide to the future.
Finally, why have I never sold?
Quite simply due to investing in VCTs that carry on meeting my requirements and delivering tax-free dividends. Why would I ever sell? Some of the VCTs I have been investing in for many years include Northern, Mobeus and British Smaller Companies as well as two that have top-up offers currently open (but due to close on 30 June) Maven and Downing One.