2014 has been a positive year for VCTs and a move to bring down charges would make 2015 better
This time of year, as the nights draw in, is always a time for reflection on the events of previous months. This column is going to do just that. What has 2014 been like for the VCT industry? What has gone right? What has gone wrong?
Let’s start with the positives. As I have noted in previous columns, this year has been a decent one for exits – crucial to fund the tax fee dividends investors like so much. Probably the standout deal was from the rather unheralded Elderstreet team with their sale of Wessex Automotive Switching Products, which added almost 20 pence to the VCT’s net asset value. Other high profile exits elsewhere included Zoopla for Octopus Titan and ATG Media for Mobeus.
Fund raising has also been strong, partly driven by the low interest rate environment and investors’ continued search for yield. VCT managers should not get too complacent, though, as when rates eventually go back up they may find demand dropping. £418m was raised last tax year, but I would be surprised if it hits the same heights this tax year – about £350m looks a decent bet.
Finally on the good news front, discounts to NAV continue to be quite tight. Some, such as certain Maven and Downing VCTs are trading below a 5 per cent discount. After years of nagging, most managers and boards are finally treating shareholders who wish to exit with respect.
It is probably a bit harsh putting the latest Treasury consultation in the “bad” section but I do wish VCTs could be left alone. It would be much better to decide on the rules and stick to them for the long term rather than continually tinker. Having said that, more tax relief and a higher annual allowance would not go amiss.
All VCT managers clearly want to see a sustained future for the industry, but as I have said many times before, a little bit of movement on the fee side would be welcome. VCTs are still too expensive on an annual basis and in my view an effort should be made to bring total expense ratios down to below 2 per cent rather than the 3 per cent-plus as many are. This is even more relevant now as VCTs are generally much larger in size than say five or 10 years ago and have more opportunity to lower costs.
VCTs are high risk so write-offs or refinancing of some portfolio holdings are inevitable. However, there have been some notable shockers this year. Edge’s recent write down of Intent HQ, has seen a large fall in the NAV of their ‘C’ share pot and more modest falls in their other share classes. And even though this is the rump of a limited life VCT pot, it is a reminder that any VCT portfolio should be sufficiently diversified so that one troubled firm does not disproportionately affect the overall value.
It is also worth noting that while most VCTs are now at reasonable discounts to NAV, there are still a few, Foresight 2 for example, where the discount is unacceptably wide. With Foresight 2 I understand there is very little cash to currently support a share buy back policy or to pay dividends. How did it get to this point?
Being a shareholder I have a vested interest in this one, and it is frustrating even though I am not intending to sell. Ultimately boards are paid by the shareholders to monitor the manager (and the trust) and although abandoning share buybacks and dividends is the right thing to do in the short term, how did it end up nearly running out of cash? While shareholders who do want to sell are effectively trapped, board members still get paid.
Actually this year has been generally positive, but the debacle surrounding the Oxford Technology VCTs was an exception. In March they were threatened with withdrawal of VCT status after buying additional shares in one of their existing holdings, which appeared to breach the rule that one company cannot make up more than 15 per cent of the portfolio at the time of last purchase.
It seems an entirely avoidable scenario, and appears to have simply been manager error. Indeed the VCT posted an RNS admitting to an “inadvertent breach”. Again, what was the board doing? Thankfully HMRC have backed down and the VCTs have their status back (after selling the additional shares purchased), but it will be interesting to see who picks up the cost for any legal fees – it should not be the shareholders.
So despite a small number of gripes, 2014 has been broadly positive for VCTs. Dividends have continued to be paid, profitable exits have been flowing, and all we need now to make me really happy is some downward movement on charges in 2015