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First State has another bite of VCT cherry

First State Investments has announced it will be raising up to 25m through an ordinary share issue to top up the First State Aim venture capital trust in December.

The VCT was established in March this year and currently holds 18 qualifying aim stocks, comprising 38 per cent of the portfolio.

The company is keen to issue more shares because it is still seeing a strong flow of good investment opportunities and expects to add more VCT qualifying Aim holdings over the next few months.. Examples of existing holdings include SMC Group an architecture business which is run as a commercial operation rather than a partnership and SectorGuard which provides specialist manned guarding and security services.

The VCTs management team is led by First State head of UK equities Paul Jourdan, who runs the First State British smaller companies fund. This fund, which contains Aim-listed holdings, was established in 1998.

Within the VCT Jourdan and senior analyst Mikhail Zverev look for Aim companies that are well financed, well managed and where earnings growth looks likely to grow faster than the economy. They believe good knowledge and understanding of the companies is important because there is a limited amount of published research available on Aim companies.

One issue for Jourdan is that VCT rules state at least 70 per cent of the money raised must be invested in qualifying holdings during the first three years. Jourdan believes this restricts the ability to diversify and manage risk, making it difficult to change the portfolio in line with market conditions, especially as Aim companies can lack liquidity.

This VCT will aim to meet these challenges by using the non-qualifying holdings as a means of balancing the portfolio. Non-qualifying holdings may include direct equities, government bonds, investment-grade corporate bonds and money market funds. Derivatives will also be used to offset the risk from equities.

An Aim VCT like this may be well placed to take advantage of current demands for VCTs. The Chancellors plans for VCT tax relief at the next Budget is not known, but it seems an extension of the current 40 per cent income tax relief is unlikely. If the current rate of relief is due to end in April 2006 this may be investors last chance to take advantage of it. However, a similar ordinary share issue for the Invesco Perpetual VCT in January 2006 could provide competition.

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