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Cornerstone VCT with Matrix

Matrix Money Management – Cornerstone VCT

Aim: Income by investing initially in gilts, fixed interest securities and cash then small income-generating companies

Minimum investment: Lump sum £2,500

Opening-closing date: September 17, 2002-May 30, 2003

Charges: Initial 5.5%, annual 2%

Commission: Initial 2.25%, annual 0.375%

Tel: 020 7292 0825

Broker Panel:

Douglas Croft, partner, Andrews Gwynne & Associates

Hugh Rogers, VCT analyst, Bestinvest (Brokers)

Stuart Smith, deputy managing director, R J Hurst & Partners

Broker Ratings:

Investment philosophy 7.0

Company&#39s reputation 6.3

Charges 4.3

Commission 6.6

Product literature 6.6

Matrix Money Management has introduced a new venture capital trust (VCT), cornerstone, which invests initially in gilts, fixed interest securities and cash, then moves into small income-generating companies. GLE Development Capital, a company experienced in VCT investing, manages the fund.

Asked how the trust fits into the market, Croft says: &#34Interesting &#45 A VCT that majors on investment returns rather than tax breaks.&#34 Rogers says: &#34Within the VCT market this trust would be lower down the risk scale than most other VCTs. This is due to it investing in established unquoted companies with a combination of equities and loan stock or preference shares.&#34 Smith says: &#34There are likely to be very few new VCT launches this year, so this could well fill a gap in the market, especially as most of the top-up issues seem to be based on the Aim market.&#34

Rogers thinks this VCT would be suitable for the type of client who is seeking exposure to the VCT sector, but not necessarily wanting to take the high levels of risk associated with VCTs. Smith says those prepared to ignore the current state of the market and invest in a higher risk vehicle in order to achieve a higher return. Typically, he thinks they will be high-net-worth clients looking to take advantage of the tax breaks.

Turning to the marketing opportunities the product will provide, Smith says: &#34Very few. Although we have a number of clients who are interested in VCT issues, they tend to be looking for capital growth and so this income-oriented issue is not likely to appeal.&#34

Analysing the main useful features and strong points of the product, Rogers lists the annual tax free dividend under the VCT, the fact that the proceeds raised will initially be held in fixed interest securities while waiting to be invested, that the trust is planning to invest in established, profitable or near profitable unquoted companies and that 20 per cent of the fund is to remain in fixed interest securities.
Croft says: &#34The manager, GLE, is not noted for being a high flying whizzkid, worthy might be a better description. Given uncertain times that might be no bad thing.&#34 Smith thinks the cautious approach, particularly in the first three years, could be seen as a marketing strength, although it could also be an investment weakness. The high initial and growing yield should appeal to income seeking clients, particularly if they are higher-rate taxpayers.

Discussing the investment philosophy, Croft thinks it is traditional. Smith says: &#34Whilst I am sure the cautious approach is being taken to increase the appeal of the trust. I believe a more aggressive approach would pay dividends, given the stage of the economic cycle we are in now.&#34 Rogers says the investment philosophy is one of backing established unquoted companies, although companies floating on Aim and Ofex maybe considered. He continues: &#34Most importantly, is that the investments can be structured as a combination of equity, loan stock and preference shares. This should provide a reduction in the volatility of the portfolio, as well as a stream of income to help fund the anticipated annual dividend.&#34

Highlighting the trust&#39s drawbacks, Rogers says: &#34The main disadvantage is the relatively small size of fund which GLE currently manages, compared to the other VCT offerings in the market. Due to GLE&#39s small size it may also struggle to attract a strong flow of qualifying companies.&#34 Croft says: &#34It might just be the yield. The aim is to generate 2.5 per cent net of charges. That&#39s equal to say 2.2 per cent gross for a higher rate taxpayer. That is not unreasonable against a mainstream income fund but not exceptional. I wonder if the managers might be tempted to up the yield and reduce the quality.&#34 Smith points out the relatively high charges, particularly for a fixed income trust. He says the use of preference shares and loan stock will turn off those looking for pure equity exposure.

Turning to Matrix Money Management&#39s reputation, Rogers says: &#34Matrix has promoted many VCTs since the market began, and is very experienced in this market. It promoted the Unicorn VCT last year which was the only one in that season to raise the full amount it was looking for.&#34 Smith says: &#34Matrix is unknown outside of the industry, but for those in the know it has a growing reputation for offering good quality tax sheltered investment plans. The lack of a retail image could, however, make this trust more difficult to market.&#34

Discussing which trusts will provide the main competition, Croft feels that there is nothing like this trust so there is no direct competition. Smith says: &#34Very little competition at present, although Quester VCT 5 has launched a top-up offer which will prove tough competition.&#34 Rogers thinks the VCT market is going to be relatively small this year, mainly due to the dearth of capital gains tax liabilities incurred by investors. He says: &#34The main competition will be from the Close Brothers Development C share issue which also runs a lower risk VCT by investing in predominantly asset-backed unquoted companies. It also has a very good net asset value track record and pays out dividends every year.&#34

Turning to the charges, Croft thinks they are fair and reasonable. Smith says: &#34They do seem a little high for what will be, at least for the first three years, a portfolio of primarily fixed interest stocks.&#34 Rogers feels the annual running costs of the VCT that are capped at 3.6 per cent are standard for the VCT market, although the addition of irrecoverable VAT on top is unfortunate.

The panel agree the commission payable is fair and reasonable, Smith says: &#34It is good to see Matrix has continued to support the IFA market by offering trail commission.

Looking at the product literature, Croft says: &#34Not glam, but does the job perfectly well.&#34 Smith thinks it is clear and concise. He says: &#34It explains the investment philosophy of the trust very well and also covers the tax treatment in clear terms which any potential investor should understand.&#34 Rogers thinks it is of a high standard.

Summing up, Rogers says this is a VCT launch we recommend. In the main we see this trust as suitable for investors who may have an unexpected capital gains tax liability, which they wish to shelter, but do not wish to expose the gain to the volatility and levels of risk normally associated with VCTs. Smith says: &#34It is brave of Matrix to launch this trust now and although it has tried to position it for the tough markets we are experiencing, I still think it will struggle to raise a significant sum.&#34 Croft will watch this with interest. He says: &#34If people cotton on to the investment advantages rather than just capital gains tax deferral, we might see a new and perhaps attractive range of new products.&#34

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