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IFAs venture out

Their slow take-up among the IFA community is partly a result of VCTs being per-ceived as an extremely high-risk product.

Investing principally in non-quoted companies listed on the Alternative Investment Market or Ofex, risk is clearly high compared with a balanced managed unit trust or bond fund. But across the range of VCTs that have been launched since 1995, there has been a wide cross-section of risk levels.

Although VCTs have to invest at least 70 per cent in qualifying small and medium-sized companies, the remaining 30 per cent is not restricted, leaving fund managers the option to include a lower-risk element in the fund.

Furthermore, VCTs investing more heavily in Aim or Ofex-listed firms carry less risk than those investing exclusively in non-listed start-ups.

Hargreaves Lansdown investment director Ben Yearsley believes one of the reasons for the slow take-off of VCTs in the IFA market is due to a lack of understanding of the product. He says: “Most IFAs do not know anything about VCTs, partly because they do not pay enough commission. They only pay 2 to 3 per cent initial and most pay no renewal commission at all.

“They also have 2 or 3 per cent management fees that IFAs are worried will not be very popular with clients. I think IFAs are very lazy when it comes to products like these that are a little bit different.”

But the tables are most definitely on the turn. The first quarter of 2000 was the most successful period ever for VCTs, with almost all issues selling out by April 5. Friends Ivory & Sime&#39s Baronsmead VCT was oversubscribed twofold.

The overwhelming success of the first quarter led to two summer launches. Matrix Securities&#39 e-ventures VCT, launched in May, has already raised over half its £20m target, while Downing&#39s iNet VCT, launched last month, has raised £6m of its intended £10m.

With 80 per cent of VCT business brokered through IFAs, the spring frenzy must have been due in part at least to a change of heart across the IFA community. Matrix Securities director Bridget Clev-erly says: “The change hap-pened most shatteringly in the first quarter of this year. While we were marketing an issue for our Foresight technology trust, we raised £33m in just three months.

“Gradually, people have begun to see they are like any other investment. They are just investing in another specialist part of the market.”

Matrix&#39s Foresight technology trust is a good example of the potential returns that can be made from VCTs. Since its original launch in January 1998, it has paid dividends of 3.9p with a capital profit of £1 – a total return of 103.9p per share. Its current share price stands 90p higher than its £1 launch price although during the tech rally in March it reached a high of £9.12.

IFAs who remain sceptical about VCTs claim there is a lack of information available about the products. Although websites such as Allenbridge&#39s Tax Shelter Report provide performance figures and news of availability, VCTs lack the kind of scrutiny provided by Standard & Poor&#39s for unit trusts.

Chase de Vere is one major UK IFA that has still not entered the market in any capacity Investment marketing manager Ian Millward says he cannot encourage clients to invest in VCTs until he feels he is able to assess the risk properly.

He says: “It is an area we would like to move into but we feel we have to take a cautious approach for our clients. The tax breaks are certainly compelling and, if we can find some kind of assurance that they are a good quality investment, we would be happy to recommend them.”

But the conservatism of certain IFAs does not appear to be worrying the VCT industry. The overwhelming feeling appears to be that IFAs are slowly coming round. Cleverly points out that there is as much information available on VCTs as investment trusts – and most IFAs have been promoting those for many years.

Several launches are scheduled for the coming mon-ths, with further announcements expected to come in the build-up to the end of the tax year.

Friends Ivory & Sime is launching its Aim VCT in November, with further plans to create a new Baronsmead VCT in the first two months of next year. The Matrix-promoted Triven VCT is due for an October launch, with another version of the Downing-promoted Classic and a second Northern Ventures VCT also scheduled for the autumn.

Yearsley says: “There is no reason why everything should be launched in February and March. We have seen two very successful launches this summer. People can get capital gains at all times of the year.”


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