The Lemon Fool

Hi everyone, about to review my portfolio with a view to invest in VCTs again this year. My spreadsheet has in the past used some incorrect assumptions such as divs been calculated on the net cost after tax ( perhaps ). So I will show my review of BVT. Please feel free to tear it to shreds.

Purchased 30/03/14.

Return.

30% tax saving
63% div return on gross investment after 5yrs
-25% reduction in capita gross

Tot Return. 65%

At this point 30/03/19 on reflection selling and re-investing would have been the best move ( I think! ). Obviously I may have not found a VCT to switch to.

30/03/19-30/03/22

19% div return on gross investment after 3yrs
5%. increase. in capital gross

Tot Return. 24%



Grand total. 89% or 119% if I had flipped at 5yrs. VWRL in ISA over the same period. 113%

Questions :

In the past I have kept a spread sheet of divs @ nett. Looks good but is the return based on the gross investment more accurate?

Could you point out any flaws in my accounting.

Cheers,

SB

Your total return calculations are a bit flawed as they take no account of the timings of the various cashflows. Look up how to calculate an Internal Rate of Return (IRR) in an Excel spreadsheet. This will allow you to make like for like comparison between different investments that have different cashflow structures.

Thanks for your response Smoggy. Not sure how that helps as I have very basic excel skills.

Surely cash flow is purchase get 30% return add up annual divs for five years. Sell repeat the process.

Hence a nice and simple 30% tax rebate + 5yrs divs + or minus capital after 5yrs =. total return.

I have to be honest I am a lazy investor and more of a rule of thumb than lazer sharp calc man.

I also think a simple way of calculating returns like this is helpful when we discuss our experience of investing in VCTs ie we all sing from the same song sheet.

Due to changes in financial circumstances I will be much more active in the VCT market over the coming years.

I have seven other VCTs to review to see which one will have to leave the big badger house this year. Quite happy to post my findings, just didn't want to waste my time if my method of evalustion is seriously flawed.

Cheers Smoggy


SB.

I have pondered on the "right" way to calculate returns in the past, and written a bit in these pages. I have produced IRR and XIRR versions, which are undoubtedly better than the "quick and dirty", but are *far* more laborious in my opinion, and produce very similar results to the "quick and dirty" once you get past the first couple of years. I have no particular problem with a simple record of cost, dividends received and value/sale price. Though, with regard to the figures you quote, personally I would annualise the returns rather than quote them in absolute terms over a varying number of years.

The question of producing return numbers (yield and/or total return) based on the Net Cost is perhaps a more nuanced one. It may depend on the individual's tax position and ability to reclaim tax paid in other ways. Personally, I have no alternative method to reclaim tax that I find desirable, so I have no doubts about using the Net Cost as a basis for reporting. The tax was paid (or was due to be paid), the VCT allowed it to be reclaimed, so I discounted the cost of the VCT - that works for me, it might not for you.

So, to come back to your original questions:
- We probably won't be able to come up with a standardised reporting methodology that works for everyone,
but perhaps if we quote if the basis is Net or Gross Cost, that might suffice.
- My VCT investments have historically been running at around 5% p.a. yield and 9% p.a. total return (both based on Net Cost).
However both yield and total return are drifting up over the past few years (hopefully as a result of more active management) to around
9% p.a. yield and 12% p.a. total return.

I hope that helps

I have always been very dismissive of using the cost net of initial tax relief and I dislike asset managers doing that, Baronsmead being one.

I like to know the return that I have got which resulted from the skill of the manager.

The 30% tax relief is a matter between HMRC and me and depends on my individual circumstances.

Thanks for your input Boots.
"


[b] have pondered on the "right" way to calculate returns in the past, and written a bit in these pages. I have produced IRR and XIRR versions, which are undoubtedly better than the "quick and dirty", but are *far* more laborious in my opinion, and produce very similar results to the "quick and dirty" once you get past the first couple of years. I have no particular problem with a simple record of cost, dividends received and value/sale price. Though, with regard to the figures you quote, personally I would annualise the returns rather than quote them in absolute terms over a varying number of years.
[quote][/quote][/color][/b]

I do annualise them, but I think due to their lumpy nature that the 5yr return is probably of more interest as I am intending to " rinse and repeat" going forwards.

The question of producing return numbers (yield and/or total return) based on the Net Cost is perhaps a more nuanced one. It may depend on the individual's tax position and ability to reclaim tax paid in other ways. Personally, I have no alternative method to reclaim tax that I find desirable, so I have no doubts about using the Net Cost as a basis for reporting. The tax was paid (or was due to be paid), the VCT allowed it to be reclaimed, so I discounted the cost of the VCT - that works for me, it might not for you.

Personally I think using the gross investment and throwing the 30% into the total return pot simplifies making comparisons to other investments for me but as you say personal tax situations vary. However I would be surprised if there are very many VCT investors on the board who are not using the upfront 30% tax incentive although I agree some may be baisc rate and some higher.[b][/b]

So, to come back to your original questions:
- We probably won't be able to come up with a standardised reporting methodology that works for everyone,
but perhaps if we quote if the basis is Net or Gross Cost, that might suffice.

Agree.

My VCT investments have historically been running at around 5% p.a. yield and 9% p.a. total return (both based on Net Cost).
However both yield and total return are drifting up over the past few years (hopefully as a result of more active management) to around
9% p.a. yield and 12% p.a. total return.

My calcs to follow.

Cheers,

SB

Thanks Kidman,

I have always been very dismissive of using the cost net of initial tax relief and I dislike asset managers doing that, Baronsmead being one.

I like to know the return that I have got which resulted from the skill of the manager.

The 30% tax relief is a matter between HMRC and me and depends on my individual circumstances.


Again completely agree,

Cheers,

SB

OK. Time for the main event,

I will base my figures on the total return of the gross investment before tax relief. The return is 30% tax relief + total divs + cap gain or loss. BSV, BSC, BVT,BMD have been held for 7yrs, the rest for 5yrs.

BSC 73% 9.1% pa
BSCV 89%. 11.1%pa
BVT 52%. 6.5%pa
BMD 50% 6.25%pa
OOA 39% 7.8%pa
OSEC 38%. 7.6%pa
MVCT 40% 8.4%pa

Again using VWRL in an ISA as a comparison over 7yrs it has doubled and over 5yrs it is up 40%.

Looks like it"s goodbye to Baronsmeade.

Cheers all,

SB

It’s interesting to compare it to a broad tracker like VWRL, in a tax free ISA wrapper. Note VWRL distributes dividends, so its total return over 5 and 7 years is even higher.

But how many VCT investors are choosing between either VCTs or trackers in ISAs? I would have thought most VCT investors would be filling their ISA allowances each year first and then going into VCTs after that. When I think about my VCT performance, I try to compare it to what else I could have done with the money; investments outside of tax free wrappers, EIS, property etc. Compared to all of those, I feel VCTs have done very well over the last few years. But equities in an ISA wrapper (especially any exposed to the booming US tech sector) have also done very well.

Agree whatafool.

ISAs first for me, then pension, then VCTs.

Having said that, I am starting to question the pension before VCTs on the ability to access VCTs before 57 and not paying tax on the way out...

deltrotter wrote:Having said that, I am starting to question the pension before VCTs on the ability to access VCTs before 57 and not paying tax on the way out...

At age 60 I'm now rapidly reducing the pension pot before I reach state pension age.

That means topping up the ISA pot (which should surpass the pension pot in a few years), and offsetting immediate tax with new VCT and EIS investments.

In tax terms, it's all about optimising over a (remaining) lifetime.

I've just calculated my XIRR from 9 years of holding VCTs and my return has been 13.7% including tax relief.
More importantly, I'm almost at the point where I've taken out in tax relief, dividend and sales all of my initial investments which from a cash flow perspective means the investments have paid for themselves and are still paying me!

In terms of my portfolio, I have nothing special and no star performers. Some have done well and some lost me.money (of course the firms all take credit for the tax relief that is mine and not theirs).

I'm looking to invest more before the end of the tax year - just need to recycle some money and it'll.be done.

Thanks for your response Whatafool.

t’s interesting to compare it to a broad tracker like VWRL, in a tax free ISA wrapper. Note VWRL distributes dividends, so its total return over 5 and 7 years is even higher.


I realised using VWRL as a yardstick was more than a bit contentious and I'm surprised I didn't attract more flack. The Lemon is a less bitter fool than I remember the Motley one. However as VWRL is one of the mainstays of my SIPP ISA and dealing account and has served me well over the years I was interested in seeing how it compares with my VCTs as let's not forget they are supposed to be risky investments. Yes I know VWRL pays a smallish 1.4% div so I shall add a generous 10% to my " down and dirty" calcs. So, if you invested 20k in VWRL 5yrs ago it would now be worth approx 34k. My worst performing VCT OSEC ( 20k goss investment ) would be worth £27,600 ( it was doing so well last year but the share price has dropped 21% in twelve months). The VWRL ISA option would have paid 6k more in tax so a measly £400 between the stock market giant and my worst performing VCT.

But how many VCT investors are choosing between either VCTs or trackers in ISAs? I would have thought most VCT investors would be filling their ISA allowances each year first and then going into VCTs after that. When I think about my VCT performance, I try to compare it to what else I could have done with the money; investments outside of tax free wrappers, EIS, property etc. Compared to all of those, I feel VCTs have done very well over the last few years. But equities in an ISA wrapper (especially any exposed to the booming US tech sector) have also done very well.

Completely agree with the first part of the paragraph, not so sure about the second.

Regards,

SB

Having said that, I am starting to question the pension before VCTs on the ability to access VCTs before 57 and not paying tax on the way out...

I think pension then ISA then VCTs, in that order. Although I would assume many people who are investing in VCTs are subject to the tapering of the annual pension allowance. In that instance, putting money into your pension is not such an exciting prospect.

I would be interested to hear what other people consider investing in, as an alternative to VCTs. Or for those lucky few (and the stats suggest it is a small minority of VCT investors) who are able to fill their full VCT allowance, what comes next?

British Smaller 2 report out today. https://www.investegate.co.uk/article.a ... 315034700F

There's a table Fools may find interesting under the heading "Shareholder Returns". It shows IRR (excluding tax relief) for investments made in fundraising years from 2001 to 2019, based on returns at the date of the report. Particularly interesting is that those IRR figures rise almost monotonically from a distinctly lacklustre 2.1% for a 2001 investment to a much happier 12.5% for a 2019 investment.