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VCTS – an answer for investors seeking yield?

VCTs are averaging a yield of 7.4% over five years and can be an important part of portfolio diversification for those either seeking a pension supplement or a source of tax free income, suggests Jemma Jackson, Association of Investment Companies (AIC)

It is 20 years now since the wheels were first put in motion and the regulations laid down for the thriving venture capital trust sector we see today.

Sometimes, when we’re looking at performance, dividend yield, charges, top holdings and so on, it’s easy to forget the very tangible impact investments are making under the bonnet. And what’s going on is very different to what you get when you have a fund investing in listed shares.

This was very much brought home when we filmed our recent VCT video: ‘Bringing VCT investment to life’. Tom Valentine, COO & Co-founder, Secret Escapes, comments that “The investment given to us by Octopus has helped us accelerate our growth so we are now the market leader in the UK, Germany and the Nordics and we think we wouldn’t have been able to do that without the investment.” Kris Gumbrell, CEO, Brewhouse & Kitchen echoes this sentiment: “We needed fire power, we needed to move quickly, so for us working alongside the Puma VCT team and introducing that level of finance gave us real firepower in the market.  We were able to compete alongside some of the much larger pub operating companies, where we could be very, very competitive.”

Of course, what that ‘firepower’ also brings under the bonnet is a very different risk profile to more mainstream investment companies, hence the various tax benefits that VCT’s offer.  For starters, there’s no income tax on the dividends from VCT shares at a time when 58% of VCTs are yielding over 5% and the VCT sector average yield is 7.4%. There is no capital gains tax on the growth of VCT shares and there is 30% income tax relief on the initial investment when you buy new VCT share issues (providing you hold the shares for a minimum of five years). As investors continue to hunt for yield in a low interest rate world, and the pensions world becomes a much more flexible place, VCTs will continue to have a role to play for the income-seeking, albeit higher risk investor.

The last five years have been kind to the VCT sector, which on average has made gains in each of the last five discrete years. In share price total return terms, the sector is up 58% on average over five years and 110% over 10 years (and 4% over the last 12 months). But investors need to remember that, for every Secret Escapes and Brewhouse & Kitchen success story, there’s likely to be some less successful stories along the way, and some bumps along the road in this higher risk investment journey need to be expected.

Looking ahead further into 2015, Patrick Reeve, managing partner of Albion Ventures, manager of Albion VCTs, thinks 2015 should be a strong year for VCTs, pointing out that “the economic fundamentals support investment in growth companies, while private investors struggle to find homes for their cash which can deliver satisfactory returns. This, in turn, makes VCTs an important part of portfolio diversification for those either seeking a pension supplement or a source of tax free income.”

Time will tell, and it will be interesting to see what effects the UK election brings.  But Happy Birthday VCTs – the sector has clocked up some impressive mileage over the last 20 years – here’s to many more.

 

 

 

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