More about VCTs

Friday, 10th November 2017 16:07 - by Eric Chalker

Four weeks ago, on 13^th October, I asked “Who benefits from Venture Capital Trusts?”  These have been heavily promoted recently, supposedly in anticipation of a more restrictive regime being introduced in the Budget in just under a fortnight’s time.  Examining my own experience, I concluded that, generally speaking, these are not a good investment.  Ironically, this has since been confirmed – and by my own VCT provider, no less!

 The Octopus Eclipse VCT

   As previously reported, I invested in the Octopus Eclipse VCT, at its launch in 2004, now merged and renamed the Octopus Apollo VCT.  This gave me an income tax credit which was nice, but I was looking for a return on the investment, to be generated by the Octopus investment team using its expertise and financial clout.  The investments were to be spread; naturally there would be some duds but the scope for major gains from young and spritely businesses was promising.  The promise has not been fulfilled, even after 13 years.

   The two founders of Octopus Investments are this year’s overall winners of the EY ‘Entrepreneur of the Year Award’.  A four-page Financial Times supplement last month told readers that the award winners have established a number of businesses under the Octopus name, in addition to Octopus Investments itself.  Octopus Investments is at the heart of the group and still run by Simon Rogerson as chief executive.  The group is big business, employing over 500 staff and generating a substantial profit, but it’s an unlisted company and will stay that way.  It is clear that the award winners are successful entrepreneurs and have profited from their enterprise.

   Unfortunately, the venture capital trusts run by Octopus appear not to have found similarly successful entrepreneurs in which to put the venture capital provided.  By selling investments and distributing the proceeds as dividends an appearance of success has been created, but as I have come to realise, this is little more than handing back over time the money originally invested.  Instead of seemingly good dividends being reflected in a rising share price, as one might expect from a conventional investment trust, my VCT share price sinks as the dividends are paid out.

Dividend announced, share price falls

   Shortly after my previous article on VCTs, which among other disparaging comments suggested that VCT dividends are simply investors’ money being returned, the Octopus Apollo directors announced a special dividend!  So, I thought to myself, they have read my article (if only) and are determined to prove me wrong. 

   This is a whopping pay-out equivalent to nearly 18 per cent of the share price before the announcement.  But investors’ joy was short-lived.  Almost the next day, the share price dropped by just over 18 per cent, a clear case of VCT investors’ money being returned to them in the guise of a dividend. 

   For the record, my VCT investment in 2004 has produced 100.7% in dividends while losing 83% of the capital.  This equates to a total return over 13 years of 17.9%, an average of just over one per cent per annum compound.

Who benefits from Venture Capital Trusts?

   This is the question I asked when I previously wrote about VCTs.  There must be many young businesses for which VCTs have provided a source of funds that would otherwise not have been available, so they have benefited.  VCT providers appear to have done very well, so they have benefited and quite possibly handsomely.  But the investors in VCTs?  Theirs is a different story.

   Many VCT investors will have been seduced by the thought of eventually making a big, tax-free, capital gain, but getting one seems to be little more than pot luck and only if one is prepared to stay locked in for the first five years.

   Others may be seduced by the tax-free dividends, to which their attention will certainly be drawn, but it is unlikely to be drawn to parallel falls in the share price cancelling out the income received.

   Buying a VCT may seem exciting, but owning it is likely to disappoint.  Providing money to help fledgling businesses grow is a nice thing to do, but most investors want a return that is commensurate with the risks being taken, even if this means waiting for it.  Using a VCT seems unlikely to do this.

   The initial tax benefit of a VCT is attractive, but it’s no more than an illusion if the capital invested diminishes over time, as in my experience it very probably will.  The dividend record may be enticing, but it should be carefully matched against the changing share price to see if those dividends are real.  The whole picture may well be clouded by mergers and issues of new shares, while it seems well-nigh impossible to obtain a full performance record on which to judge.

   If that were not discouraging enough, there is another factor.  The small businesses which are the stuff of VCTs are, by their nature, prone to accidents and vulnerable to mismanagement.  It is therefore essential that VCT oversight teams do a good and thorough job, ensuring (for example) that accounts are produced in time and properly audited, yet I know from experience this is not always the case. 

   VCTs are a nice idea, but their record is not encouraging.  Some performance figures look good, but as I wrote last time these may be open to question.  For example, the top-ranked VCT in Citywire’s current list is Downing Two ‘D’, yet its share price has dropped in the last 3 years from 67.5p to 11.5p (minus 83%) and now has a 2,100% spread (the bid price is 1p, surely a catastrophic collapse). 

   Investing directly into real businesses, especially those with a track record, an annual report that is readily available and an AGM you can attend to find out more, is likely to provide a much better investment experience. 

Eric Chalker, UK Shareholders’ Association Policy Co-ordinator & Director, 2012-2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.