Wednesday, 20 August 2014
Nothing Ventured...(Portfolio Buy)
But what I didn't realise until recently is that you can also buy and sell shares in VCT companies - and some of these have really attractive yields.
To quote my latest purchase: "Venture Capital Trusts are fully-listed companies whose shares are traded on the London stock market and whose principle activity is investing in other companies that are seeking capital. Those underlying investments must be predominantly in businesses which meet specific qualifying conditions (for the purposes of obtaining and retaining the associated investor tax benefits), and are usually in private (unlisted) companies, but can also include those quoted on AIM and ISDX.
A VCT manager aims to provide not only capital but also significant input and advice in helping each company to achieve its business plan, in order to generate capital profits at exit when the business is sold. A VCT will typically look to exit each investment after between three and seven years, by way of a trade sale, a public flotation or a sale to another private equity manager. All or part of the gains generated on the sale of an asset can then be paid out to the VCT investors as a tax-free dividend and the remaining proceeds are reinvested in further investment opportunities.
Consequently there is potential for significant rewards from VCTs which invest in these successful companies, but there is also more risk attached to owning such shares than there is with larger companies. VCTs do offer significant advantages for UK tax-paying investors, whether purchased as new issues or in the open market. They are principally aimed at investors who understand the nature of smaller company investment, can afford to take a longer term view and accept that the value of their investment can go down as well as up."
Now, I don't pretend to fully understand the inner workings of VCTs. As far as I can see, it boils down to this: they provide capital to smaller companies in exchange for a stake in the company - if the company is successful the VCT can sell that stake at a profit. VCTs invest in many different companies, to offset the risk of any of them failing. Because investors' money is 'locked in' for years, the VCTs can invest for the medium term. And because of the diversification, there is some risk mitigation - but it must be understood that VCTs are often working at the very risky end of the market: not all of them make money for their investors.
Choosing the right target is obviously the key skill and VCTs use professional managers to help them do this. Knowing when to cash in and - conversely - when to walk away (at a loss) are also key skills. Much like running the DIY Income Investor portfolio.
Rather than investing in VCTs by subscription, there is another way to invest in VCTs: via the shares of the VCT company itself, which are quoted on the LSE. This is a new area of the market for me, thrown up by the Google Finance Stock Screener, which identifies a number of VCT companies with attractive yields.
My first choice in this field is Maven Income & Growth VCT PLC (LSE:MIG1 - there are other quoted shares for different funds operated by this company), which has been running since 2010 and is described on their website as "a generalist VCT which aims to achieve long term capital appreciation and generate maintainable levels of income for shareholders". A 'generalist' VCT invests in a wide range of sectors.
A first look at the numbers is somewhat discouraging - although there is a chunky dividend yield of over 8%, the dividend cover is only 0.4. This would be a flashing red light for any other type of company but you have to remember that VCTs are different: they must distribute 85% of their investment income. They do not usually generate a lot of income but rather rely on making net capital gains: the dividend is paid mainly from (hopefully judicious) liquidations of holdings in companies. On the good side; there's no debt, and over the yearsthe Net Asset Value has risen and the dividends have increased.
The Annual Report for 2013/14 makes interesting reading: the range of investments is impressive.
This is new territory for me and there may be disadvantages to VCTs generally (or this particular one) that I am not aware of, so I urge anyone considering this type of investment to Do Your Own Research.
[Purchase price: £0.665]
I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.