Conviction investing

[Kidman]

Somewhat related to R@51's question about Pembroke but hopefully worth a new thread.

When I invest in investment trusts, I prefer high-conviction investing. Low-conviction, large portfolios, generally only track an index whether they mean to or not. High-conviction, concentrated portfolios, are far more likely to deliver performance with a significant deviation from trend either way. I am willing to take higher-risk with a manager who has high-conviction as I hope for higher returns.
VCTs are only a variation on investment trusts so all the above is true except they may not use an index as a comparator. However, the risk/reward pattern is the same.

We have seen many mergers in recent years. Some are of like portfolios such as the Baronsmead pairs so the risk/reward position shouldn't have changed. On the other hand some of the Octopus mergers have merged style and therefore increased the number of underlying investments so I suggest reducing conviction thus leading to steadier but unexciting returns. When one has a £200m VCT, a write-off or a doubling in value of a £2m investment only makes 1% difference, not much of a change.

As the big VCTs get bigger they must tend to have larger and larger numbers of holdings as there are limits to holding size at time of investment. Hence I feel the trend is for the big VCTs to all become steadier. On the other hand those managers who have resisted the merger craze, or epidemic, may have the chance for one VCT to outshine, or not, their others. A write-off or doubling as above in a £20m VCT is a high-impact event.
Classic example of high-impact write-offs being Acuity/Foresight4 and the gains are those that have provided special dividends to the likes of BSC, Titan etc.

In the end it is 'horses for courses', pick which risk-reward ratio scenario suits you at the time of investment. How do you pick the right one? It should always be based on your knowledge of the future!

[Retiringat51]

Interesting observation re concentration and conviction inter-relationship.

The £300M+ (soon to be £400M++) Titan portfolio holds 50 investments.

The £60M Proven portfolio holds 40 investments.

The £25M Pembroke portfolio holds 25 investments.

Titan would appear to win the round?

[Kidman]

I saw a Titan investment list in their recent prospectus and thought it rather short but didn't look further or think about it any more.
Impressive to have so few companies for such a large VCT. I wonder how much of that £300m+ is cash, how much has come from NAV growth and how much is initial plus follow-on investments.

One slight correction, Pembroke portfolio is now £35m but that merely makes ProVen and Pembroke look even more similar in ratio to one another. That intrigues me as I expect their dividends to be similar by being lumpy after exits. Pembroke also has the disadvantage of not having had time to build up distributable reserves so they can't smooth their dividends yet.

[Retiringat51]

I note that Pembroke/Proven/Titan shares a common London-centric focus in the composition of its portfolios. Quite different to the profile of the old favourites where there is significant provincial content.

[Karellan]

I dont really recall any VCTs that really shot away in price. The few that made large distributions I feel were just luck in small VCTs. I doubt whether many VCT holders actually benefited from them although all would have been told about them! It would be fantastic to own a small VCT run by clever people who double it every few years but lining up all the regulatory requirements and that nobody wanted it seems a bit improbable.

For me VCTs are an important part of my wealth planning and I like steady and predictable into which I can put a lot of money and still sleep at night. The increase in size and numbers is inevitable with the regulatory changes and current environment. Earlier startup situations are more volatile and need larger numbers to help normalise a steady return. I like the idea of larger more liquid VCTs that get the attention of the mainstream and thus have outside money helping with the discount and liquidity. The tax implications and time that you must hold them would make it difficult to sell if one concluded that the conviction had gone wrong.

I do recall that some of the share price movements of some early VCTs nearly 20 years ago were alarming but I cannot really think of many VCTs that were high conviction although some did well for a while. My heroes in the VCT market are the ones that can produce steady pleasant returns for long periods.

[Kidman]

The £300M+ (soon to be £400M++) Titan portfolio holds 50 investments.

I just happened to be looking at the TER review of Titan as at 31 August 2016 (review dated September 2016 page 15) and it lists 49 investments but they only account for £152.6m. That includes Zenith at £14.7m so I think we are looking at a £138m portfolio of 48 investments as figures for comparison.

Titan has had a good run and long may it continue, not only for their shareholders but also to provide competition for the others!

[Retiringat51]

Interesting. I'm a Titan novice but the prospectus for the current offer states at p 28 (Octopus Titan VCT in numbers)

•£309 million - The size of Octopus Titan VCT, making it the UK’s largest Venture Capital Trust (source: Octopus, 30 April 2016).
• 50 - The typical number of companies in Octopus Titan VCT’s current portfolio.

If TER is right about this, there's a mighty lot of cash in search of a home even before the current fundraising has run its course.

[Kidman]

To have another view on Titan's cash, I found naflod's very helpful post of 24 August 2016 (so may have missed a more recent one).

That quotes Titan as having cash of £113,465,000.

I think they had plenty of cash before their last major fund-raise. My guess is that they have been able to quickly deploy some of the new funds by investing extra money in existing investee companies. I believe this is still possible after the November 2015 rule changes but I assume subject to overall limits per company. One hopes they have a fairly good idea where the money will be placed but if it doesn't work quite to plan they do have three years to invest new money. In the early days of VCTs that meant cash earning reasonable amounts of interest but those days seem very far away now.

[scotia]

That quotes Titan as having cash of £113,465,000.
In the early days of VCTs that meant cash earning reasonable amounts of interest but those days seem very far away now.
And do the managers charge a percentage fee on that unused pile of money - i.e. is it effectively held at negative interest?

[Kidman]

And do the managers charge a percentage fee on that unused pile of money - i.e. is it effectively held at negative interest?

Yes.
I recall this was aired on the Fool boards a year or two ago and I think all, or nearly all, managers charge on cash as well as investments.
One argument for this is so that managers don't make hasty investments in poorer companies so they can start earning fees. I don't agree with this as the managers would lose on fees if it was a poor investment and the NAV subsequently declined. I think it is just a hangover from the days of proper interest rates.

[ali1947fish]

with reference to Titan the current fund raise has the churchill tax shelter report attached by clubfinance and it compares their performance unfavourable to generalists- implying the risk of start ups does not compensate- has anybody read it?

[UncleEbenezer]

with reference to Titan the current fund raise has the churchill tax shelter report attached by clubfinance and it compares their performance unfavourable to generalists- implying the risk of start ups does not compensate- has anybody read it?

Interesting. No, I haven't read it: didn't know it was there until you said!

However, I think I would take issue with that. The rule changes make Titan look a safer bet compared to those whose comfort zone has just been closed off. I took a very quick glance at yesterday's reports from the Northern stable, and while I was pleased to see a decent level of new investment, I was more uneasy about their quality. My concerns about Titan lie elsewhere, and have been expressed on TMF in the past.