VCTs - the next scandal ?

[Karellan]

This is not great for VCTs :-

http://citywire.co.uk/investment-trust- ... der+Weekly

I do feel that he is not as long term an investor here as many of us.

[londoninvestor]

This is not great for VCTs :-

http://citywire.co.uk/investment-trust- ... der+Weekly

I do feel that he is not as long term an investor here as many of us.

I'm not a Northern holder but this seems very confused. HMRC changes may well mean VCT investors don't get quite the dividend stream they used to - but conflating that with a complaint that a special dividend last year wasn't repeated this year, and so the trusts have reverted to yielding a mere 6-9%, is odd.

[james188]

Karellan - Yes, I also read the article and it is not great PR, but I am not going to lose sleep over it - and I am invested in all three Northern VCTs. I guess that he has column inches to fill and a sensationalist headline is always going to be tempting. Having identified some of the problems with split capital trusts, he could have pointed out that Northern VCTs do not gear up (they have no shortage of cash and can easily raise more, as the last couple of fundraising have demonstrated) and there are no cross-holdings. He could also have pointed out that the directors/managers of Northern are pretty heavily invested. Last, the dividends paid out this year do meet the target threshold level (although some would consider that a relatively modest target).

I think that a number of people have become accustomed to receiving the levels of special dividends that Northern has paid out recently (2015 - 17), but if you go back before that, the payments were lower for several years. I also seem to recall Tim Levett commenting at the annual shareholder bash at the start of the year that Northern would be looking to invest more cash to grow the portfolio, rather than paying out SDs. They have been pretty active this year on the investment front.

All that said, the number of disposals over the past year has been disappointing - and Northern still has quite a rump of MBO investments, so more could have been expected. Contrast Mobeus, for example. To my mind, it demonstrates the need to have a portfolio of VCT holdings for those who invest in this sector - particularly for those who regard it as a proxy for annuity income (a dangerous assumption to make). Allied to this, there are obvious dangers with the number of new and inexperienced investors piling in to the sector as a direct result of Government action in recent years - and both main parties can and should be blamed for this - which has severely limited the ability of investors to adequately provide for future years through pensions. I suspect that the adverse consequences of this policy will become painfully apparent over the next decade or so.

[Karellan]

When I posted the article above I was quite taken aback by it. I often read his columns and think he is an astute investor and I quite like his views on investment trusts. He has mentioned in a few articles about VCTs and written others :-

http://citywire.co.uk/investment-trust- ... st-insider

We all know the problems but this view being based upon a 'dividend reduction' seems naive. The old axiom about needing to understand your investment market applies here I feel.

[Kidman]

An interesting comparison but I don't think it is valid. The split cap debacle was gearing taken to extreme in a lesser regulated day.

On the other hand, I agree with the concerns expressed above and on other posts about the next few years of VCTs.
They are taking in heaps of money but with more government regulations they have a smaller universe of potential investments, hence the risk of over-paying especially as the amount that can be kept as cash will reduce before long;
There is an attraction to hold on to old MBO investments on the basis that they will pay dividends and loan interest but some of these need to be moved on so they can execute their next stage of growth;
Private equity and venture capital is only as good as their exits and we are possibly seeing fewer these days, some need to concentrate more on crystallising their gains;
Charges and costs are still very high whereas in the investment trust and unit trust world they have dropped significantly in recent years;
Over the two decades of VCTs we have probably hung on to more than we should. If we had sold after five years and then bought new shares we would have benefitted from initial tax reliefs whereas a buy in 1997 at 20% initial tax relief and hold until now only means 1% per annum benefit.

Whilst I love the convenience of not having to enter VCT dividends on my tax return, I prefer the after tax returns of those of my investments which are better than my VCT shares.

[Vulgaris]

Its quite possible that some (or many) VCTs will have a torrid time in a future downturn, or because their managements aren't so competent at identifying good prospects among the higher-risk investments on which they now must concentrate. There are plenty of example (e.g. Acuity) of VCTs that did badly in the past, and anything with a fixed winding up date is at the mercy of markets being bad when it's time to liquidate. It's quite likely that some buyers are deluded and don't see these risks or will claim afterwards that they weren't warned etc etc.

But there's a huge distinction from the splits/zeroes scandal of 10-15 years ago: VCTs don't have a complex structure with multiple share classes.

[BusyBumbleBee]

Hmmm... The article makes a lot of sense but he has missed a few points.

** First they cut the last dividend from 3 pence to 2 pence. What's the betting that the full year dividend will get the same treatment?
** They are sitting on a lot of cash coupled with a big fund raise last year - means the manager still gets a % of this cash each year
** they diluted my holding with newbies - should gave done a separate share class.

No longer a fan of this VCT. Have reduced the number within the DRIS by transferring most to a nominee account

While Northern 2 did not cut it's final dividend - what are the odds that they cut it next year - so not a fan of this one either. And have sold out completely

[GentlemansFamily]

I don't expect that there can be a mis-selling scandal with VCTs - but clearly they will not be suitable for everyone and people will regret investing when they lose money.
I think that EIS is even riskier and a lot of fingers will be burnt.