Think about selling. The main buyer of already-issued venture capital trusts (VCTs) is the VCT itself. How often is their buying window and what does the process involve? You might need to advise your broker of the VCT’s broker’s name, and deal by phone. Since this process costs more than trading online, it might be worth buying VCTs in larger, rather than smaller, amounts. Albion, for example, operates six VCTs, so rather than spread an investment across all six (which would incur six separate sets of dealing costs when they’re sold), it might be preferable to plump for just one.
Check how the VCT is invested. Only about two thirds of the assets in an Aim VCT might actually be invested in Alternative Investment Market (Aim) shares. Conversely, Baronsmead Venture Trust (BVT) is classified as a generalist VCT, but it has a third of its assets in Aim shares. A quarter are held in funds, and only a fifth are in private businesses.
Key person risk. Check the depth of management. Like the last point, this is also good practice before investing in any investment trust or fund.
Be aware of how the 30 per cent tax rebate is whittled down. The NAV, or net asset value, is what VCT managers assess their investments to be worth. When you take up an offer, anything up to 5 per cent or so of NAV can be added to the offer price. This can be halved by buying through an intermediary, such as Hargreaves Lansdown or the Wealth Club. The annual charge (of about 2 per cent or more) also mounts up whilst the VCT is being held and then, when you sell, the typical VCT buys back its shares at a discount, of typically NAV less 5 per cent.
Check the recent dividends. Before issuing new shares, it’s only fair for VCTs to distribute past gains amongst existing shareholders by paying an enhanced dividend. But not every VCT does this. Those that don’t will effectively reward the new subscribers with gains accrued from before they bought the shares.
Don’t rely on future dividends. All VCT managers stress that since a rule change in 2015, they’ve had to invest in companies at an earlier stage than previously, and that these carry more risk. As their pre-2015 investments are sold, they expect returns to become progressively lumpier, and regular dividends might suffer. Most still expect to pay a dividend but they’re making no promises.
Look for dividend re-investment. Shares bought through re-investing dividends in the VCT face no extra charges, so this is cheaper than buying through an offer. But some VCTs, such as Mobeus Income and Growth (MIX) and Mobeus Income and Growth 2 (MIG) don’t operate these schemes (whereas the other two Mobeus VCTs do).
Check whether dividend re-investment shares are new issues. Baronsmead reissues the shares it previously bought back. Since these aren’t newly issued, they don’t qualify for the tax rebate.
Be aware of Hotel California buybacks. When hurdles are placed in the path of the selling process, investors can check out but may find that they can never leave. Unicorn AIM VCT (UAV) has a buyback policy of NAV less between 12 and 15 per cent (or even higher). Maven VCT4 (MAV4) recently scaled back its buybacks across the board: it would only buy, say, a third of the number you wanted to sell. This was repeated on consecutive tranches, so investors could not sell out completely.
Watch out for the six-month rule. If you fund a VCT purchase from the sale of a VCT, make sure it’s a different one if you do it within six months. Some managers, such as Northern, ProVen and British Small Companies, run two VCTs, both of which invest in similar businesses. That might add to the admin costs, but it enables you to sell one VCT and buy the other within the six months and suffer no penalty, whereas if you’d bought and sold the same one, the tax rebate would be lost.
Think how you define best practice. Octopus AIM VCT (OOA) ticks many boxes. It normally values its portfolio each Monday and buys back its shares using this valuation on Thursdays or Fridays. It buys at a discount of up to 5 per cent (although this can always change). Other VCTs ask investors to use a broker for buybacks, but Octopus will now buy back shares directly from its shareholders. This involves downloading the buyback form from the website, and then returning it to Octopus with the share certificate.
I must add a rider: I have invested in all those VCTs named, and the above examples are from my own experience. The returns from the same VCT can also vary according to the year in which the VCT was purchased, and fund managers can change over time. VCTs might not be right for you, and never forget that their future performance can always differ significantly from that of the past.
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