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Novelty value

With the end of the tax year approaching, some investors are looking at novel schemes which seem to offer big returns but are they worth the risk?

Development Capital Management’s Black Sea property fund predicts a return of 41.2 per cent a year investing in the Bulgarian property market while Keydata’s Polish privatisation service is offering investors a range of privatisations from vodka distilleries to conglomerates.

There are also the venture capital trusts. Since last year’s 40 per cent income tax breaks were announced, over 40 new VCTs have been launched. VCTs are seen as offering investors access to young, fast-moving companies with the prospect of big returns. Isis Equity Partners chairman David Thorp is predicting that the market could top 400m by April compared with just 60m last year.

Chelsea Financial Serv-ices managing director Darius McDermott says VCTs are attractive as a long-term investment but they carry risk that can only be accommodated by using them to diversify a very big portfolio. He says: “Research shows that private equity is actually in negative correlation to the FTSE 100, which makes investing in some VCTs attractive. The great tax breaks also potentially bring VCTs into the general retail environment but we do not think that people should buy them just for that reason.”

McDermott has been recommending Keydata’s Polish Privatisation service but only to his richest clients. It takes advantage of Poland joining the EU last year, which means that anyone in the EU can buy shares in Polish companies. The maximum investment is 10,000 and the service invests in every privatisation that comes to the market.

The service offers two options – buy to sell, which sells shares as soon as companies are privatised, and buy to hold, which keeps shares in the companies after privatisation.

The buy-to-sell option has returned 8.6 per cent since launch in September while in the buy-to-hold option, one manufacturing firm, Zelmer, has gone up by 31 per cent since privatisation, with Ciech,a chemical firm, rising by 20 per cent.

Keydata head of corporate communications Roddi Vaughan-Thomas says the service has seen considerable investor communication as each privatisation occurs.

He is confident that at least one privatisation per month will take place over this year, with low allocations and a blanket investment policy reassuring investors that they will benefit from the Polish market as a whole and not suffer losses if individual privatisations go badly.

He says: “The thing with Eastern Europe is that you have to be prepared to take a punt. It is a very exciting opportunity but it is not necessarily for grannies to invest in. It is too weird.”

Vaughan-Thomas says it is important to look at the level of fiduciary control in a country and he says that Poland has been aggressive in restructuring capital markets.

He says: “You have just got to look at Russia, to see what has happened with privatisation, to see that Poland is the better option. Are members of the Polish public benefiting from privatisation? Yes, they are.”

But Michael Philips proprietor Michael Both can remember some interesting investment opportunities which failed to pay off. In the late 1990s, ostrich farming was promising returns of around 40 per cent, which did not materialise.

Philips points out, however, that sometimes seemingly safe investments can be risky. He refers to the Maxwell pension scandal, and to Barlow Clowes. He says: “Barlow Clowes offered little more than 2 per cent over competing funds and it seemed plausible enough to lure Mr and Mrs Average. The trouble was that the people behind the fund were using the money to fund their lavish lifestyles.”

Matrix Group sales manager Richard Jones warns of the dangers of investing for headline returns. He says: “We tell investors to look at a company’s track record in venture capital and whether they have relevant venture capital experience. A large, established team is important.”

Bestinvest business development manager Justin Modray thinks that capital guarantees are a good way to safeguard riskier investments but warns that it is important to look at who is underwriting the guarantees. He says: “F&C are putting their name to the Black Sea property fund but other guarantees have not been so solid.”

Modray says IFAs do not always have the inclination or resource to research a wide range of investment opportunities. He says: “This is a good thing because they do not invest in things that they have not researched but it can mean that investors are not being given access to a fuller range of funds. The bottom line is that IFAs should be very careful of novelty investment unless they have conducted thorough research.”

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