Type: Venture capital trust
Aim: Growth and income by investing in unquoted UK companies and a portfolio of FTSE 100-linked structured products
Minimum investment: Lump sum £5,000
Closing date: April 30, 2010
Charges: Initial 5%, annual 1%, performance fee 10%
Commission: Initial 3.25% or initial 2% plus renewal 0.5%
This venture capital trust is a joint offering from Investec Structured Products and venture capital specialist Calculus Capital. It aims for income and growth by investing in a portfolio of FTSE 100 linked structured products managed by Investec and a portfolio of VCT qualifying unquoted companies managed by Calculus.
At least 75 per cent of portfolio will initially be invested in structured products with terms of between six months and five and a half years. Over time, the weighting in structured products will be reduced while the amount in unquoted companies will increase to maintain the 70 per cent minimum threshold required under VCT rules.
Considering how this VCT could be useful for advisers and their clients, Michael Philips Michael Both says: “As all readers of this publication will already know, the principal attraction of VCTs lies in the 30 per cent income tax relief, courtesy of HM Revenue & Customs.
“This generosity is compensation for the not insubstantial risks of not getting back all of the original capital. VCT managers are nothing if not creative in trying to find ways of making that risk and reward ratio appealing to potential investors.”
He adds that to qualify for the VCT tax break, there has to be a real risk of loss and so it is necessary to see how the manager plans to manage it.
“A few succeed admirably, but many fail miserably and looking at the track record of previous funds they have managed rarely gives the potential investor much of an indication because most VCTs are so small that there was limited ability for true diversification.” In Both’s view, this means timing and luck often overwhelm all other factors.
He notes that Calculus Capital will manage the venture capital investments while Investec Structured Products with manage the balance.
“The purpose of this twin strategy is to try to improve the odds of not making a loss by significantly gearing up the potential returns of the non-venture capital portion with a relatively strong safety net. Provided the FTSE 100 index does not at any point in the anticipated five and a half year life of the plan fall by 50 per cent or more, there will be a return on that portion of at least 100 per cent. “
Both points out that if the FTSE 100 closes 1 per cent or more above its starting level, the return will instead be 185 per cent.
“If both of those conditions are not met, a loss will result. Bear in mind that after three years no more than 30 per cent of the portfolio can be in the structured product portfolio if VCT qualification is to be maintained, so the potential gearing will only apply to that part. Calculus has a middling track record in enterprise investment schemes and VCTs, so there are some grounds for optimism within the parameters above,” says Both.
Discussing the potential drawbacks of the VCT, Both is critical of the performance fee. “The hurdle for the manager to receive a 20 per cent out-performance incentive, over and above their annul management fees, is simply for the return after five years to exceed 105p on a gross investment of 100p.
“The manager dresses this up as being “50 per cent growth because the net investment was only 70p after 30 per cent income tax relief, but many people would consider that being a touch economical with the facts,” he says.
Both says that the 30p discount on the 100p issue price is not due to the vulpine cunning of an astute and diligent investment strategy, but handed to anyone who asks HMRC for it, having completed the requisite paperwork.
He says: “In order to ratchet up 50 per cent on 70p to total 105p over five and a half years equates to a net return of 1 per cent simple interest over five and a half years on the starting gross 100p subscription price. Sadly, far too many VCT managers have failed to attain even that pathetic total. But that is hardly a justification for giving them 20 per cent of anything over that when the investor has already paid between 2.35 per cent and 3 per cent a year for their management services.”
He adds that this type of performance fee may be the norm, but it does not make it right in his view. “Make the hurdle higher and the investor would be delighted to make out the fattest cheque,” he says.
Both expects the main competition to come from the Acuity environmental VCT and Triple Point TP70 Trading, among others.
Summing up, he says: “The minimum subscription is £5,000, so for investors to get any sort of a spread in this asset class they really need to invest at least £20,000 in VCTs. The loss of tax relief on pensions for highest rate taxpayers might just be the spur.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average