Market for venture capital trusts opening up

Scarce availability of income investments from traditional sources is leading to an increase in trading on the notoriously illiquid secondary-market for venture capital trusts (VCTs), traders are claiming.

While activity remains low, investors are beginning to look at VCTs on the secondary market following consistent dividend payments from these vehicles in recent years, which have shown an ability to deliver consistent income levels.

Michael Bellamy, head of trading at Singer Capital Markets, is among those who have witnessed an uptick in activity on the secondary market.

He explains: "As a trend, it is certainly growing. A number of VCTs have been stating their dividend policy for a few years now and some have now got a proven track record.

"Some of the managers who do not have an active buy-back policy or discount control mechanism have found their discounts are quite wide and at the sort of level of 30 to 40 per cent, investors are finding that attractive."

Traditionally, VCTs are front-of-mind only towards the end of the tax year when new issues are made as they offer 30 per cent relief on initial investments of up to £200,000 as long as the shares are held for five years.

Diversifying income sources

This uplift in secondary market activity, while small, could result in wider recognition for the vehicles to retail investors.

Patrick Connolly, a financial planner at AWD Chase de Vere, says while the news is encouraging, investors still need to be careful about the implications of buying on the secondary market. He notes: "There has been an increase in the secondary market for VCTs but it is still extremely small, which is why, when you look at the generalist VCTs, there are still many big discounts. However, some of them, like the Baronsmead VCTs, aim to keep the discount at around 10 per cent because of their buyback policy.'

Connolly says there are advantages for those investors willing to give the secondary market a go, however.

He says: "Timing isn't so relevant because secondary products are around on an ongoing basis and you can buy into an established portfolio. Therefore, you can jump into an income stream although you lost out on the initial tax advantages."

Advisers agree that while dividend policy has been proven by some VCTs, a combination of capital growth and income is still hard to come by for many, and this is still hampering faster expansion of the secondary market.

Connolly explains: "I can see why there is a stronger secondary market for some of the better-quality VCTs, but not for the whole market. I think some VCTs still haven't proved themselves to be consistent in terms of retention of capital and dividends."

Matthew Woodbridge, head of investment products at Chelsea Financial Services, agrees that activity on the secondary market is on the increase and admits to having bought VCTs this way himself.

He says: "I am not saying that it is going to explode in the next six months, but it is something that people are becoming more and more aware of. It is quite clear who the winners and losers are.

"Some VCTs have even reduced their dividend policy but still, the yield they are getting when you gross that up is very compelling. For high net worth individuals who are looking to diversify their sources of income, some of these trust have been consistent."

Picking a winner

For those investors wanting to try the secondary market for the first time, there are some vital considerations before buying in.

Looking at the quality of assets is key. Many of these funds now have long track records, so investors can see what recent investments have been made and note any significant changes to the portfolio including disposals.

The experience of the investment manager is also vital, and this has led to a shake-out in those underperforming managers in recent years when a VCT's board has decided to change manager in favour of one with a better track record.

As a rule of thumb, the most consistent VCTs that are established tend to have the most assets under management.

Investors should also check when the date when the net asset value (NAV) was last published. If it is fairly recent, you should be able to rely on the fact that it is accurate. If its old, you should take into account what has happened in the economy and in the wider market generally.

Chelsea Financial Services' Matthew Woodbridge says this is a factor, as is the VCT's management of the discount. He explains: "Generalist VCTs such as Northern Trust or Baronsmead pay out very steady discounts and there is a lot of transparency in the portfolio. Those companies have strong buy-back policies so the investor has the comfort of knowing, if they want to sell it, they can get out of the stock if they want to."

For the most part, it is unlikely that you will ever realise the NAV unless the company winds up in future and most VCTs have no intention of doing so, so the NAV should not be viewed as an exit strategy.

Specialist VCTs are widely recognised as being more risky than those in the generalist sector. While this doesn't necessarily mean that they are bad, it should be kept in mind.

This research is taken from the June issue of "Business XL" magazine, which is published on 10 June.

Understanding VCTs

Venture Capital Trusts (VCTs) are companies listed on the London Stock Exchange, which are run by fund managers. They can invest in companies which are unquoted, on the Alternative Investment Market (AIM) or on the Plus Stock Exchange. Investors can subscribe for, buy and sell shares in a VCT, which invests in trading companies to enable their growth and development. They invest in UK companies, but no single investment holding can be more than15 per cent of a VCT's overall assets.

VCT dividends are exempt from income tax and there is no tax to be paid on VCT profits.

Arts and Entertainment
Characters in the new series are based on real people, say its creators, unlike Arya and Clegane the Dog in ‘Game of Thrones’
tv'The Last Kingdom' embraces politics, religion, warfare, courage, love and loyalty, say creators
Sergio Romero saves Wesley Sneijder's penalty
world cup 2014But after defeating the Dutch, Lionel Messi and Argentina will walk out at the Maracana on Sunday as underdogs against Germany
Scoreboard at the end of the semi-final World Cup match between Brazil and Germany at The Mineirao Stadium in Belo Horizonte
'Saddest man in Brazil' takes defeat with good grace, handing replica trophy to German fans
peopleThe Game of Thrones author said speculation about his health and death was 'offensive'
Arts and Entertainment
Martin Freeman and Lauren O'Neil in Jamie Lloyd's Richard III
theatreReview: The monarch's malign magnetism and diabolic effrontery aren’t felt
Glamour magazine hosts a yoga class with Yogalosophy author Mandy Ingber on June 10, 2013 in New York City.
newsFather Padraig O'Baoill said the exercise was 'unsavoury' in a weekly parish newsletter
people'She is unstoppable', says Jean Paul Gaultier at Paris show
Alexis Sanchez and apparently his barber Carlos Moles in Barcelona today
Arts and Entertainment
Miley Cyrus has her magic LSD brain stolen in this crazy video produced with The Flaming Lips
Arts and Entertainment
In his own words: Oscar Wilde in 1882
theatreNew play by the Oscar Wilde's grandson reveals what the Irish wit said at his trials - and what they reveal about the man
Arts and Entertainment
Unless films such as Guardians of the Galaxy, pictured, can buck the trend, this summer could be the first in 13 years that not a single Hollywood blockbuster takes $300m
filmWith US films earning record-breaking amounts at the Chinese box office, Hollywood is more than happy to take its lead from its new-found Asian audience
The garage was up for sale in Canning Place Mews for £500,000
newsGarage for sale for £500,000
Life and Style
Finacial products from our partners
Property search
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Associate CXL Consultant

    £40000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: CXL, Triple Po...

    Financial Planning Manager, Qual Accountant, £380

    £300 - £380 per day: Orgtel: Financial Planning Manager, Banking , London, £30...

    Business Analyst - Financial Services, Trading Systems, Agile

    £60000 - £75000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fina...

    Day In a Page

    The true Gaza back-story that the Israelis aren’t telling this week

    The true Gaza back-story that the Israelis aren’t telling this week

    A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
    A History of the First World War in 100 Moments: The German people demand an end to the fighting

    A History of the First World War in 100 Moments

    The German people demand an end to the fighting
    New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

    New play reveals what Oscar Wilde said at trials

    For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
    Can scientists save the world's sea life from

    Can scientists save our sea life?

    By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
    Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

    Richard III review

    Martin Freeman’s psychotic monarch is big on mockery but wanting in malice
    Hollywood targets Asian audiences as US films enjoy record-breaking run at Chinese box office

    Hollywood targets Asian audiences

    The world's second biggest movie market is fast becoming the Hollywood studios' most crucial
    Grindr founder Joel Simkhai: 'I've found love on my dating app - and my mum keeps trying to hook me up!'

    Grindr founder Joel Simkhai: 'I've found love on my dating app'

    Five years on from its launch and Grindr is the world's most popular dating app for gay men. Its founder Joel Simkhai answers his critics, describes his isolation as a child
    Autocorrect has its uses but it can go rogue with embarrassing results - so is it time to ditch it?

    Is it time to ditch autocorrect?

    Matthew J X Malady persuaded friends to message manually instead, but failed to factor in fat fingers and drunk texting
    10 best girls' summer dresses

    Frock chick: 10 best girls' summer dresses

    Get them ready for the holidays with these cool and pretty options 
    Westminster’s dark secret: Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together

    Westminster’s dark secret

    Adultery, homosexuality, sadomasochism and abuse of children were all seemingly lumped together
    A History of the First World War in 100 Moments: Dulce et decorum est - a life cut short for a poet whose work achieved immortality

    A History of the First World War in 100 Moments

    Dulce et decorum est: a life cut short for a poet whose work achieved immortality
    Google tells popular music website to censor album cover art in 'sexually explicit content' ban

    Naked censorship?

    The strange case of Google, the music website and the nudity take-down requests
    Howzat! 8 best cricket bats

    Howzat! 8 best cricket bats

    As England take on India at Trent Bridge, here is our pick of the high-performing bats to help you up your run-count this summer 
    Brazil vs Germany World Cup 2014 comment: David Luiz falls from leader figure to symbol of national humiliation

    David Luiz falls from leader figure to symbol of national humiliation

    Captain appears to give up as shocking 7-1 World Cup semi-final defeat threatens ramifications in Brazil