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New to VCTs

Sophisticated and complex high-risk tax-sensitive investments in small companies: handle with care
Peter1B1
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New to VCTs

#277821

Postby Peter1B1 » January 16th, 2020, 11:37 am

Hi, I have followed and invested in Investment Trusts (ITs) for some years now (following on the Lemon Fool board), appreciating their role in SIPP building and, more recently, as constituents of an income pf. I have avoided VCTs largely because I didn't need higher risk levels to (hopefully), reach goals; and also because I didn't understand them.

I recently came across ARK Big Ideas 2020 which is changing my point of view, highlighting future shapers: Deep Learning; Streaming Media; Electric Vehicles; Automation; 3D Printing; Autonomous Ridehailing; Aerial Drones; Next Generation DNA Sequencing; Biotech; R&D Efficiency; Digital Wallets; Bitcoin/Blockchain.

Medium/longer-term thematic investment appeals to me: we can all see the profound changes technology is making to the world around us. Many of the above are today's versions of the 'machine tools', which powered the industrial revolution. Whilst I don't understand them in any depth, surely it makes sense to get exposure, more particularly for long term SIPPs which could have an investment life (growth>income) of fifty years. Many of the above development topics seem too 'early' and too small to feature in more widely-held ITs.

With ITs, I pursue diversity looking for clear focus and pedigree to select about fifteen core holdings which I manage/refine over time. There is room for VCT representation but I don't know how to go about selecting amongst what appear to be many strands of VCT investment and management. Perhaps there are 'VCT Fund of Funds' managers who profess to do this for you.

As one Fool to others, I will welcome guidance please on how I might approach the VCT opportunity. Thank you. Peter1B1

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Re: New to VCTs

#277892

Postby BusyBumbleBee » January 16th, 2020, 4:30 pm

Peter1B1 wrote:Hi, I have followed and invested in Investment Trusts (ITs) for some years now (following on the Lemon Fool board), appreciating their role in SIPP building and, more recently, as constituents of an income pf. I have avoided VCTs largely because I didn't need higher risk levels to (hopefully), reach goals; and also because I didn't understand them.

I recently came across ARK Big Ideas 2020 which is changing my point of view, highlighting future shapers: Deep Learning; Streaming Media; Electric Vehicles; Automation; 3D Printing; Autonomous Ridehailing; Aerial Drones; Next Generation DNA Sequencing; Biotech; R&D Efficiency; Digital Wallets; Bitcoin/Blockchain.

Medium/longer-term thematic investment appeals to me: we can all see the profound changes technology is making to the world around us. Many of the above are today's versions of the 'machine tools', which powered the industrial revolution. Whilst I don't understand them in any depth, surely it makes sense to get exposure, more particularly for long term SIPPs which could have an investment life (growth>income) of fifty years. Many of the above development topics seem too 'early' and too small to feature in more widely-held ITs.

With ITs, I pursue diversity looking for clear focus and pedigree to select about fifteen core holdings which I manage/refine over time. There is room for VCT representation but I don't know how to go about selecting amongst what appear to be many strands of VCT investment and management. Perhaps there are 'VCT Fund of Funds' managers who profess to do this for you.

As one Fool to others, I will welcome guidance please on how I might approach the VCT opportunity. Thank you. Peter1B1

I think, Peter, you need to do a little more research of your own because VCTs are very different to any other quoted asset class.

First and foremost they are aimed at individual tax payers who have to buy new shares to get the full benefit of a 30% income tax relief on the purchase price. Very few if any are held by institutions and they cannot be purchased within an ISA or SIPP wrapper to get the income tax relief. You have to hold them for five years before you can sell them or move them into such a wrapper cos effectively you have to sell them and then buy them back within the wrapper.

I have been investing in VCTs for nigh on 25 years and have seen many changes in the rules but the changes made over the past 2/3 years have been extreme and have effectively put us all into a new game. By "us" I mean private investors.the VCT managers and the VCT directors. Nobody really knows what the effect of these changes will be. They do seem to have increased the riskiness of VCTs and in the jargon; everyone is expecting greater volatility.

I suspect that over the 25 years this asset class has existed there have been more investors losing money than making it but I know that these investments are sold not bought cos there is money no matter what happens, for the managers. Governance can go wrong sometimes and when it does it can be horrible because there is no institution to call the managers and/or board to account - just separate, and small, private investors who often don't even bother to vote their shares.

You could do worse than read some of the threads here and get a feel for what we think. I am probably the gloomiest among us so it won't be a surprise to you that my advice to you is to avoid them like the plague until you have a much better understanding. But do read more in the hope of getting a more balanced view.

Sorry to be so off putting but when I first invested I received 40% CGT relief and 20% income tax relief so each £1 share only cost me 40 pence - but still I lost money on one in five investments. Hope this is useful - kind regards - BBB

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Re: New to VCTs

#277901

Postby Peter1B1 » January 16th, 2020, 5:22 pm

BBB, well that was a most helpful VCTs 1.01! Thank you.

I'm interested in the wider technology thematic investment idea. So far I have invested into Scottish Mortgage Trust, Polar Capital Technology, International Biotechnology and Pictet Robotic - which I feel gives some coverage to these matters from within the IT stable. It's taking those investment ideas a bit earlier in their development cycle that interests me but as you say, a matter to be very cautious upon.

I will follow the VCT board for a while and pick up the lingo, if I may. And further comment on this post, of course. Peter1B1

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Re: New to VCTs

#277917

Postby sinterklaas » January 16th, 2020, 6:37 pm

BusyBumbleBee wrote:… and they cannot be purchased within an ISA or SIPP wrapper to get the income tax relief …


… With one exception. If you are doing Octopus Titan, this can be done within ISA. You get new shares and the associated tax relief. How it works, you can either subscribe afresh or if you've already used your allowance you don't have to put new money in, you can transfer an existing ISA.

BusyBumbleBee wrote:… I am probably the gloomiest among us …


You can say that again!

Some of us are more upbeat :)

VCTs are riskier now but that is not hidden, in fact it is vividly spotlighted in most VCT marketing – provided you are paying attention and not buying based on past performance tables (which of course you never should).

Like you, OP, I believe in the potential of some of these kinds of technologies, and think that these kind of higher risk investments are pretty much what VCTs are there for, and VCTs are a decent way to access them. (So is EIS – but unlike with EIS, with VCTs you get access to an existing portfolio, and can receive returns in sooner, steadier and less lumpy/unpredictable fashion).

Many of the VCTs that lost money in the past either seem to have been unable to pick good AIM companies or had fruitless forays into solar or renewable energy projects.

The likes of ProVen and Octopus Titan have demonstrated that a good manager picking the kinds of unquoted early stage companies that are allowed under current rules could, or should with the right investor support, lead to decent investor returns (across a diverse portfolio).

Likewise, it should be noted that many of yesteryear's strong performers were ones that invested in businesses with solid asset backing (eg. Albion and their schools and nursing homes) or 'safer' MBO type opportunities. They managers of some historically high performing VCTs in some cases had to change their approach, including recruit new personnel, and there has not been enough time for track records to be established under the current rules of the game. You could look at Tim Levett's (Northern VCTs) or Bill Nixon (Maven)’s recent video interviews with Wealth Club for a concise summary of how they see the differences between their old and new parts of their own portfolios, and what effect this might have on returns in years to come.

I completely echo BBB's points on governance. The managers and boards seem in some cases to have quite dysfunctionally close relationships and shareholders can end up being treated quite disdainfully. coughalbioncough.

Last thing I'd add is, think about how long you can tie up your 'in' capital for. There is very little liquidity in secondary shares. I see my own VCT investments as 'hold forever'. Fortunately most VCTs try to keep a steady NAV and pay out returns as dividends (which as you may have already discovered, are tax free – phew.)

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Re: New to VCTs

#278078

Postby BusyBumbleBee » January 17th, 2020, 11:52 am

You seem to have have your rose tinted spectacles on, sinterklaas. I'm still wearing dark glasses

Without going into too much detail consider these issues:

1. NVM have cut the dividends they intend to pay (Northern from 5 p per annum to 4 p) and Albion have also done this for most of their VCTS.)
2. 'Access to an existing portfolio' means that the current shareholders are giving up some of their income to subsidise newcomers. I resent this as an existing shareholder who has paid for the lemons and is now going to see further dilution of my assets with riskier new ones. The Manager of course gets a %age of the total NAV each year and it is certainly in their interests to have a larger VCT.

You are of course right that there are mechanisms to buy new VCT shares within an ISA wrapper but not in a SIPP : Foresight first did this in February last year see https://www.ftadviser.com/investments/2 ... nvestment/. And you can hold VCT shares bought in the market within a SIPP or an ISA without a problem. But it is worth reading this article to see the pros and cons of buying new shares in an ISA https://www.moneymarketing.co.uk/analys ... usts-isas/. I fail to see the benefit to any PI of holding VCT shares in an ISA especially as there seems to be no certainty that HMRC will accept this long term - according to that article.

You say
Many of the VCTs that lost money in the past either seem to have been unable to pick good AIM companies or had fruitless forays into solar or renewable energy projects.
Paradoxically, the remaining Renewable Energy VCTs are quite good buys in the second hand market with good and increasing tax free dividend yields, inflation linked government subsidies and a management which is totally constrained and unable to make new investments. The best one yields nearly 8% tax free at the moment.

AIM VCT management seems to be split at the moment into two. Those who see no future and are winding down and those who are carrying on regardless. Only time will tell which is right

I am not buying new at the moment but will wait until VCT shares become available at distressed prices and then buy. This strategy has served me well over the years - but I hope for the new investors that I am wrong this time around. Kind regards - BBB

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Re: New to VCTs

#278113

Postby Gostevie » January 17th, 2020, 1:35 pm

Apologies for asking what I realise is almost certainly a stupid question, but on the basis of "If you ask a stupid question once, you'll only sound stupid once, if you don't ask it you'll remain stupid"... :oops:

Why would one want to put their VCTs into a tax wrapper like an ISA or SIPP, even if it were permitted, given that any dividends and (unlikely) capital gains on VCTs are tax-free anyway?

Gostevie

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Re: New to VCTs

#278120

Postby londoninvestor » January 17th, 2020, 1:55 pm

Gostevie wrote:Apologies for asking what I realise is almost certainly a stupid question, but on the basis of "If you ask a stupid question once, you'll only sound stupid once, if you don't ask it you'll remain stupid"... :oops:

Why would one want to put their VCTs into a tax wrapper like an ISA or SIPP, even if it were permitted, given that any dividends and (unlikely) capital gains on VCTs are tax-free anyway?

Gostevie


For ISAs, I guess it would be if your allowance for the year would otherwise go unused? Though if your assets are at the level where VCTs come into consideration as an investment option, you could probably find £20k of cash to park in an ISA...

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Re: New to VCTs

#278121

Postby barchid » January 17th, 2020, 1:57 pm

Gostevie
I am so glad you asked that question because I was also puzzling over it.
The only thing I could think of was IHT, as I believe ISA's can be passed on (no pun meant) under certain circumstances without IHT. But it seems a pretty poor reason, nonetheless.

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Re: New to VCTs

#278186

Postby sinterklaas » January 17th, 2020, 5:06 pm

Re: VCTs and ISAs (Gostevie, londoninvestor, barchid)

I think it's quite simple…

You have plenty in your ISA but not much cash to invest this year for whatever reason, or already invested your VCT cash in (an)other offer(s)?

You can transfer some of your existing ISA to Titan VCT ISA and get 30% off your tax bill.

This assumes you are interested in Titan VCT shares in the first place.

It's niche but some people do it.

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Re: New to VCTs

#278197

Postby BusyBumbleBee » January 17th, 2020, 5:32 pm

Gostevie wrote:Why would one want to put their VCTs into a tax wrapper like an ISA or SIPP, even if it were permitted, given that any dividends and (unlikely) capital gains on VCTs are tax-free anyway? ... Gostevie

Hi Steve - good question : but it's actually two questions.

Q1 why would anyone want to buy NEW VCT shares within an ISA or SIPP.
A1 : I, like you, struggle to find a reason. Even Barry's answer doesn't help cos it's only the SIPP that has the IHT benefit and you cannot buy new VCT shares within a SIPP cos it's not actually yours but belongs to the trustee.

Q2 why would anyone want to buy second hand VCT shares within an ISA or SIPP.
A2 I can think of several reasons all of which I have used to justify purchases within family SIPPs and/or ISAs. They are

A1 (a) if the SIPP is managed for income then a VCT share is exactly the same as any other share and has a place on merit (or not) in the SIPP. If renewable energy shares are your thing, for example, then you will get a higher yield from the Renewable VCTs than the mainstream offerings.
A1 (b) there may be a short term opportunity to make a capital gain when news is released and you can react quicker than the market as a whole so you can use any spare cash in the SIPP or ISA to take the opportunity.
A1 (c) if a VCT is in wind down mode there may be an opportunity to take advantage of that with spare cash in the SIPP or ISA
A1 (d) You may wish to hold more shares to vote at an EGM or AGM to change the governance of the VCT and you just use cash from anywhere to buy as many as you can.

Over the years I have held the following in SIPPs and ISAs for one or more of the reasons above:

Albion, Brit Smaller Companies, Chrysalis, CORE, Crown, some of the Foresight VCTs, Guinness Flight and the Ventus Twins, nearly all were distressed when I bought them and all made money for me - often lots of money as you know.

Most users of this (the Lemon Fool) and its predecessor (the Motley Fool) ask questions. Very few read the wealth of information that is already here - I do and lots of other sources too - and rather nerdishly read the RNS's and the annual and interim reports. Only rarely do I read the marketing material which arrives by the ream. Google is great friend too as it finds things that are on the edge of your memory.

What worries me though, are the good folks who come here, all bright eyed and bushy tailed, because they have just seen the wonders of VCTs (usually through the eyes of a journalist who has just heard of them as well and has pages to fill or through the marketing materials of the so called Financial Service Industry). Some of them allow the tax tail to wag the dog.

Oh - and yes - to keep up the cynicism - 'Financial Service Industry' is an oxymoron. It is not a service and is not an industry but it does help its practitioners to buy large BMWs. VCTs in ISAs will certainly improve the sales of BMWs

with kind regards - John

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Re: New to VCTs

#278216

Postby londoninvestor » January 17th, 2020, 6:07 pm

sinterklaas wrote:The likes of ProVen and Octopus Titan have demonstrated that a good manager picking the kinds of unquoted early stage companies that are allowed under current rules could, or should with the right investor support, lead to decent investor returns (across a diverse portfolio).


I have money in both, and I've been pleased especially with ProVen.

In the light of Peter1B1's investment goals, it's worth noting what the VCTs generally mean when they talk about "early-stage". It's not really complete blue-sky technology businesses with major but uncertain potential; it's businesses that are a little further along, and either have revenue-generating customer business in place or are demonstrably very close to this.

(I went to the ProVen investor day a couple of months ago and they were explicit about this.)

This makes sense given that VCT investors are generally looking for a good stream of tax-free dividends, but it might not be quite the right option for an investor who wants to get into new technologies on the first rung of the ladder. EIS might fit better there - of course, as you say, a lack of dividends goes with that territory.

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Re: New to VCTs

#278231

Postby Peter1B1 » January 17th, 2020, 7:00 pm

All very interesting and informative to a VCT newbee. Thank you.

The idea of using SIPP and ISA is driven through my lack of VCT knowledge: I like SIPPs for the long-term perspective they encourage, ease of use (on an established funds platform), and inalienability where I am seeking to secure daughters' long term pension provision. ISAs perhaps in time if I bump up against lifetime allowance.

My understanding from the above is that a SIPP or ISA will not add any tax shelter in the primary VCT market; but has a role to play in the secondary market. Surely the price mechanism comes in when primary shares are resold - presumably equilibrating for the loss of tax incentive that accrued to the primary market buyer?

EIS I confess is an even darker art for me than VCT! My assumption is that EIS requires specific selection of new commercialisations, in propositions which I would neither understand nor be able to assess against peer opportunities: hence the need for managers with connections, knowledge and skill, skin in the game, track record etc.

Diversification is a key aspect for me from ITs and is part of what I would be looking for in VCTs - does the concept even exist for EIS investments? I will look at 'managers' gleaned from the posts above and consider my approach further.

The ARK report that triggered this thread came via Eoin Treacy of Fuller Treacy Money, who I greatly respect for his sagacious oversight of global markets and trends.

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Re: New to VCTs

#278238

Postby londoninvestor » January 17th, 2020, 7:30 pm

Peter1B1 wrote:EIS I confess is an even darker art for me than VCT! My assumption is that EIS requires specific selection of new commercialisations, in propositions which I would neither understand nor be able to assess against peer opportunities: hence the need for managers with connections, knowledge and skill, skin in the game, track record etc.

Diversification is a key aspect for me from ITs and is part of what I would be looking for in VCTs - does the concept even exist for EIS investments? I will look at 'managers' gleaned from the posts above and consider my approach further.


There are various EIS "funds" - although they're not structured literally as funds, it's just an arrangement where you give the manager a lump sum to invest, and they direct it into multiple individual investments.

You can see some of the options here (look for "Fund" in the Type column):

https://www.wealthclub.co.uk/eis-investments/?type=fund

Please don't take this as a recommendation of any of them: "Do Your Own Research" applies even more than ever here!

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Re: New to VCTs

#278242

Postby Gostevie » January 17th, 2020, 7:50 pm

Peter1B1 wrote:
EIS I confess is an even darker art for me than VCT! My assumption is that EIS requires specific selection of new commercialisations, in propositions which I would neither understand nor be able to assess against peer opportunities: hence the need for managers with connections, knowledge and skill, skin in the game, track record etc.


For anybody wanting a really good introduction to EIS investing, I'd highly recommend this video interview with our very own timbo003:

https://www.piworld.co.uk/2020/01/10/ei ... j-grattan/

Gostevie

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Re: New to VCTs

#278245

Postby UncleEbenezer » January 17th, 2020, 8:03 pm

londoninvestor wrote:For ISAs, I guess it would be if your allowance for the year would otherwise go unused?

As may very well be my case this year.
Though if your assets are at the level where VCTs come into consideration as an investment option, you could probably find £20k of cash to park in an ISA...

Why? My assets include VCTS, bought when I had more money and more tax liability than I do today. It's not the VCTs, but buying a house, that means I no longer have £20k cash - but rather £20k urgent repairs/improvements instead.

I can use my ISA allowance if I raise money selling VCTs, or if I transfer VCTs in. Both are options.

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Re: New to VCTs

#278260

Postby Gostevie » January 17th, 2020, 9:06 pm

Many thanks to sinterklaas, BusyBumbleBee and Uncle Ebenezer for answering my question re VCTs and ISAs & SIPPs. Very helpful and much appreciated.


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