VCT income & growth over a decade
Recent research from the Association of Investment Companies (AIC) has demonstrated continued strong appetite for VCTs. In the current low interest rate environment, not to mention the pension rule changes and reduction in the lifetime allowance, it is easy to see why demand is strong.
But figures published today by the AIC demonstrate that, more significantly, the VCT sector has now ‘earned its stripes’ as it has built up an impressive track record. The VCT sector as a whole is up 82% by share price total return over the last decade to 31 December 2016, with the added benefit of tax free dividends and capital gains.
At the same time, the sector has supported fledgling UK businesses and, in 2015 alone, last year’s AIC survey showed VCTs provided £225m of funds to 115 SMEs. VCT backed businesses averaged an increase of 60 employees per company since VCT investment. Where investment had been present for over five years the average increase in jobs was 103 per company.
The top 20 performing VCTs on a share price total return basis over the last decade have paid out an average total tax free dividend of 87 pence per share.
Looking at share price total return, the top 20 VCTs are up an average of 141% over the last 10 years. Seventeen out of twenty of the top performing VCTs were in the VCT Generalist sector, with one VCT AIM Quoted, one VCT Specialist: Technology and one VCT Specialist: Environmental completing the twenty.
The top performing VCT of the last decade, Northern Venture Trust, is up 226% over the last decade and Maven Income and Growth VCT is in second place, up 187% and the Income and Growth VCT (managed by Mobeus Equity Partners) was also up 187%. Next was British Smaller Companies VCT, up 185% over the decade.
Northern Venture Trust, the best performer, has paid out total tax free dividends of 98.50 pence per share over the period. Maven Income and Growth VCT, in second place, has paid out total tax free dividends of 60.10 pence per share over the decade and the third best performing, Income and Growth VCT (managed by Mobeus Equity Partners) paid out total tax free dividends of 99.75 pence per share. Next was British Smaller Companies VCT which paid out total tax free dividends of 83.25 pence per share over the decade. See table at end of release for a list of the top 20 performing VCTs, with dividend information.
Commenting on the data, Ben Yearsley, Co-Founder and Investment Director, Wealth Club, said: “Tax free dividends remain the most attractive feature of VCTs and the last decade has shown both excellent total dividends and more importantly consistency in those dividend payments. With the rule changes of 2015 now starting to be felt, in my view investors may have to get used to a slightly different picture going forwards. The emphasis on earlier stage, higher growth potential companies should lead to equal if not higher returns over long term.
“However whilst the last decade has been characterised by consistency I think the next decade will see the return profile being bumpier as dividends will have to be funded more from sales of businesses rather than maturing loan stock for example. Overall the VCT sector is in excellent shape, and I'm still a long-term investor with the best managers.”
Bill Nixon, Managing Partner at Maven, said: “There continues to be a healthy investor appetite for established private equity focused VCTs, which are now firmly positioned as a mainstream investment product. With persistent low interest rates for savers, and continued pressure on the scope for pension contributions, VCTs offer an attractive, tax-efficient alternative for investment and retirement planning. The VCT sector has consolidated in recent years into a number of highly capable management groups who have established a reliable and long-term track record of growth in shareholder returns, including an attractive level of tax free dividends. Investors in VCTs are also helping directly to create quality jobs and economic value and are supporting the development of some of the brightest emerging companies in the UK at an important time for British industry as we prepare to leave the EU.
“Notwithstanding the recent changes in the VCT rules, which have limited the types of company and transaction in which a VCT can invest, the sector is adapting to this new environment and we expect to see a significant pick up in investment activity in 2017. The VCT industry continues to offer a unique bridge between SME funding and retail investors, who can tax-efficiently gain access to an asset class and portfolio developed by a specialist manager, which ordinarily would not be available to them. And we should recognise and celebrate VCTs for what they are – the most important and reliable source of equity capital for small growing companies in the UK, and a product which has surpassed all expectations since it was first conceived in 1995”
David Hall, Managing Director, YFM Equity Partners, said: “The financial performance across a range of the trusts demonstrates that investing in the UK’s small businesses delivers strong growth in those businesses from which investors directly benefit by way of dividend, but also through the positive economic impact of employment growth and increased tax take from those businesses.
“VCTs have been a vital part of scale up capital to Britain’s smaller companies and this year will again be raising over £400 million and investment over the years topping £3 billion. Now VCTs have the key to the door, plenty of experience and considerable cash to invest they have emerged as a significant force in supporting the growth of UK businesses.”
Mark Wignall, manager of the Mobeus VCTs, said: “It’s pleasing that Mobeus feature strongly in the top 20. The Mobeus VCT objective has always been to build shareholder value and pay it out in tax free dividends; that’s why each has Income & Growth in the name and each has done exactly what it says on the tin. And there continues to be no shortage of ambitious, young companies that need VCT backing to grow. Over the past 12 months, Mobeus has completed six exciting new investments in great companies that are expanding fast by innovating or disrupting markets and our pipeline of further investment opportunities is strong.”
Tim Levett Chairman, NVM (Fund Manager, Northern VCTs) said: “The performance of the leading VCTs over the last ten years not only reflects on the depth of talent that has been built up in VCT teams but also the resilience of the UK SME sector. Post the Brexit referendum the economy has continued to grow and we are confident of seeing a strong flow of exciting companies to back.”
Annabel Brodie-Smith Communications Director, Association of Investment Companies (AIC) said: “As the VCT sector has matured, so too have returns, with good long-term performance together with a strong tax-free income. It is telling that, during the financial crisis, 19 out of the top 20 performing VCTs were still able to pay a dividend. Recently the pension changes and the reduction in the lifetime allowance has boosted investor demand, with fund raising higher to the end of January 2017 than in the previous year.
“The performance figures do not take into account the tax benefits VCT investors receive, to offset some of the higher risk which comes with supporting small and growing UK companies at the coalface of the economy. These figures demonstrate that as well as being higher risk, VCTs can also be high reward however, the old adage ‘don’t let the tax tail wag the investment dog’ is as true as ever. If you have any doubts about VCTs, it’s well worth consulting an independent financial adviser.”
Top 20 performing VCTs of decade: % share price total return and dividends (share price pence)