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Why VCTs are set to prosper in 2014 and three fund ideas

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11/03/2014
Investors looking for tax-efficient investment vehicles have been pouring money into Venture Capital Trusts (VCTs).

According to the Association of Investment Companies, assets under management hit an all-time high of £3bn last month.

One of the main draws of VCTs are the significant tax breaks. Taxpayers receive a rebate of up to 30% when investing in a new issue of shares in a VCT or a top-up. Dividends and gains are also tax-free as long as the shares are held for the obligatory minimum 5-year period.

However, VCTs are not for everyone. They are considered high risk and complex investments and investors receive such generous tax breaks because they are investing in small unquoted companies and start-ups or AIM-quoted companies.

But for sophisticated investors who can afford to take a long-term view and who have used up their annual and lifetime pension allowances and their ISA allowance, VCTs could be a good way of mitigating punitive levels of taxation.

VCTs set for a prosperous 2014

Experts are in general positive about the outlook for VCTs this year. The economic recovery in the UK is appearing to take hold, providing a fertile hunting ground for VCT managers.

“As a scheme which is focused on small trading businesses that must operate wholly or largely in the UK, VCTs are investing at the coal face of the domestic recovery, unlike funds investing in listed UK equity markets where companies are more international in nature, ” says Jason Hollands of adviser firm Bestinvest.

The current low interest rate environment is also fuelling demand for VCTs. With rates likely to remain at record lows throughout 2014, tax-free dividends, which are the primary source of returns from VCTs, may prove attractive for income seekers. Yields in excess of 5% are available, even before considering the effects of VCT tax relief.

Crucially, the majority of schemes raising assets at the moment are mature VCTS, not new schemes. These mature VCTs are generating attractive tax-free yields at a time when income remains in scarce supply for some other asset classes.

Hollands says: “If the recovery can be sustained, we think this raises the potential for mature VCTs to accelerate exits from existing holdings, which would support future special dividend payments.”

Three VCT ideas to consider

According to the Association of Investment Companies, there are currently 96 VCTs available to investors.

Richard Troue, head of VCT research at Hargreaves Lansdown, identifies three that are set to do well this year.

Maven Income & Growth VCTs

These consist of six portfolios investing in more than 50 private companies. Maven has a particular specialism in the oil and gas sector and the VCTs have a marginal bias to this area. Maven invests through management buy-outs and management buy-ins, where an external manager or team looks to buy the business.

Troue says: “Maven’s experienced and well-resourced team has a strong track record of delivering regular dividends to investors. They only invest in established, cash-generative companies on sensible earnings multiples. They nurture and develop these companies, helping them make operational improvements or grow sales, to achieve their full potential.”

Details of the offer:

Minimum investment – £5,000     

Amount raising – £20m

Amount raised – £14.4m

Initial charge – 3.50%

Total discount – 1%
                           
Information correct as at 10 March

 

British Smaller Companies VCTs 1 & 2 (BSC & BSC2)

The annual dividend targets for BSC and BSC 2 are 5.5p and 4.5p.The VCTs have a bias towards software, IT, business services and healthcare businesses. In August 2011 BSC shareholders received an 18p special dividend following the partial sale of GO Outdoors.

Troue says: “This is a high-calibre generalist VCT. The team aims to blend companies operating in traditional industries with those developing and applying new products and services. This VCT could complement other ‘core’ generalist VCTS as part of a well-diversified portfolio.”

Details of the offer:

Minimum investment – £6,000

Amount raising – £30m 

Amount raised – £8.25m

Initial charge – 5.50% 

Total discount – 3.5%*
                                             
*4% for existing investors. Ends 28 March 2014. Information correct as at 10 March

Hargreave Hale AIM VCT 1 & 2

These VCTs are run as a diversified portfolio with no more than 8% invested in any one company.

They have taken profits from successful investments in software firms Advanced Computer Software and WanDisco.

Troue says: “The Hargreave Hale AIM VCT 1 & 2 are managed by a strong and experienced team that are among the best in the VCT industry. They look to invest in a selection of AIM listed businesses diversified by industry sector and will make use of cash and fixed-interest investments if their outlook for stock markets is cautious. This could be a good choice for investors seeking an AIM VCT.”

Details of the offer:

Minimum investment – £5,000

Amount raising – £20m

Amount raised- £9.3m

Initial charge- 3.5%

Total discount – 1%

Information correct as at 10 March
  

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