Monday 10 August 2015

Cycles (Portfolio Buy)

The DIY Income Investor portfolio is languishing somewhat this year, barely maintaining its total value. The migration into diversified income-oriented Exchange Traded Funds (ETFs) over the last couple of years was meant to provide stability - but coupled with reasonable gains, not stagnation...

Economies - and therefore financial markets - work in cycles of confident exuberance followed by panicky fear; and unfortunately these cycles can span several years. So, it's difficult to tell whether one particular investment strategy will work in the medium to long term. For the time being, I'm going back to basics that have worked over the last 10 or so years: purchasing more focused investment instruments.

As always, I use yield to find value 'bargains' - at the same time trying to avoid potential disasters by trying to understand why certain shares or bonds are out-of-favour.

The latest purchase is something a bit different. The smaller companies of the FTSE 350 have stormed ahead in many recent years, making this end of the market quite interesting (in terms of finding value, or short-term price reversals). However, because the companies are small, they are more of a gamble.

One approach to investing in this are might be an Exchange Traded Fund that specialises in this area - to provide the security of diversification. But I haven't yet found one with an attractive yield. What I have found, however, is a VCT (Venture Capital Trust) that looks interesting. (VCTs have special tax benefits but I don't buy them for that reason as all my investments are in tax-exempt accounts, like SIPPs or ISAs.)

British Smaller Companies VCT plc (LSE:BSV) is well-established UK-based VCT making long term equity and loan investments, mainly in unquoted businesses. The Company's objective is to provide investors with an attractive long-term tax free dividend yield while seeking to maintain the capital value of their investment. The VCT invests in a mix of UK companies operating in traditional industries with those that offer opportunities in the application and development of innovation, including software, information technology, telecommunications, business services, manufacturing and industrial services, retail and brands, and healthcare.

What initially attracted me was a high reported yield (one site quotes over 9%) but closer inspection reveals that this is partly due to special dividends in the last couple of years (including a bumper one in 2012). Nevertheless, historic yield have been reasonable and it looks like this VCT is getting into its stride. The commitment to an attractive dividend is very interesting for a DIY Income Investor, although there is a risk that this could be achieved by the managers through a loss of capital value.

The Annual Report (to March 2015) gives more details of the actiities of the VCT's manager - YFM Equity Partners. The VCT is diversified: there were 11 new investments in 2014/15. The one disposal netted a sale price of more than five times the original cost. It has no debt.

VCTs are not for everyone. The majority of the £56m investments are in unquoted securities, meaning that there is no straightforward market: the VCT cannot easily sell its assets if it hits a problem, so any investor my have to be patient if they want to sell out. However, as an investor in the secondary market (i.e. not an original VCT investor) you have the ability to move in and out fairly easily - provided there are shares to trade, which may not always be the case. My internet broker made me provide a submission to prove that I was aware of the risks.

Since the VCT's inception in 2006 the VCT the total return (including dividends and net asset value) has been almost 200%. Only 12% of their portfolio of company investments is worth less than they paid for them. Most of the investments are associated with management buyouts. In 2014/15 the income from their portfolio increased by 72% and the 'fair value' of the investments increased by 39% - quite an impressive performance!

The expenses total nearly 2.3% of the Net Asset Value: a high charge compared to many 'mechanical' ETFs but probably not unreasonable for the type of very active management required to identify and select companies to invest in.

So, something different - and an investment that should benefit from a general improvement in the UK economy.

[Purchase price: £0.87]

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.


  1. Interesting post.

    I have never really seriously looked at VCTs before. Though, I may take a closer look at them after this to really see what's what! My gut reaction is to stay away from them, but it is not based on any in-depth study of the sector. We will see!

    Good luck with this. I look forward to seeing how this performs for you.

    (Also the picture you use is quite interesting. I have never seen the boom/bust economic cycles displayed in that format. Quite good actually!)

  2. Very interesting read. I havent really looked into VCTs before much, as I still need to try to maximise pension, my and my partners ISA and VCT always seemed very high risk, and that they would always take the most money themselves, I am suspicious as to why they are looking to "ordinary joe's" for money on this...

    I will wait to see how this pans out with great interest!

  3. Nice idea, maybe. But the first year dividend, if you invest now, is rather reduced because it will only be a half year's dividend - I see that the XDD for the regular dividends is near the beginnings of December and July, although the special dividends seem to happen at intervals. The big difficulty is the one you outline - you can't tell what they are investing in because they don't tell you.. Might try a modest flutter, though.

    1. Actually they do tell you. I get an email each time they make a new investment, which includes some info on the investee company. As a retired VC myself, I look to VCTs with a good level of transparency and BSC and BSV meet that criterion. They also have an annual investor day where you can quiz management about performance, strategy etc.
      I have no connection with these funds, just glad some of my retirement money is benefitting from their performance. But then my risk tolerance is definitely higher than average, so VCTs are not for all.

  4. Arguably you should max out your SIPP/Pension before you touch VCT in any case. Perhaps even your ISA's.
    After that they make more sense and the tax free dividends and capital gains are attractive even if you dont get the extra 30% tax credit for new issues.