inheritance question

jamesd

I also have a lot of non-VCT and non-P2P small cap equity investments. Returns is the reason, since long term they tend to return more than large or mid cap equity.

For this specific VCT it was for the risk-weighted returns including tax effects and so far it's delivered lower than UK equity market volatility with expected returns higher than that market's long term average. Delivering pretty much what I expected and wanted when I bought it.

Returns in a bear market for this VCT don't depend primarily on the assets but instead on the income streams from either the operating businesses or the loans. The asset values are part of the NAV for the owned businesses, though, so NAV would drop if the value of those assets did.

The largest ten holdings are currently: 3 new care homes at the high end of that market, 3 hotels, 3 renewable energy (two hydro, one waste to energy) and a private school firm with two schools. The main asset backing is the buildings, plant and land.

grey_gym_sock

about 20% out out 30% ... so that's most.

ok, the "asset backing" is basically some operating businesses which also own the land they operate on. presumably the manager has gone for that because you can't hold property investment companies in a VCT, so they're getting as near to that as they can.

and you could argue that some of those businesses are in defensive areas.

but i think you'd be lucky if this VCT held up better than bigger, quoted companies, in a downturn.

most, if not all, of the supposed lower volatility of private equity is an illusion. caused by not revising the value of holdings every day. but exits - both their values, and whether they happen at all - depend on how buoyant the stock market is. the fortunes of the trading businesses depend on the same broad economic factors as quoted businesses. and any land held will probably be worth less if the business is doing worse.

the price of the VCT itself is probably just stable because it's thinly traded. (as it should be, because who - other than the VCT itself, buying back its own shares - would buy without the 30% bung?)

but it would fall dramatically if markets turned south, and so prospects for exits from the VCT's holdings deteriorated. without enough cash from exits, they'd either have to abandon their 5% target for the discount, or maintain it by writing down the NAV a lot.

so i'm not really seeing the downside protection with this. it just looks relatively low return, and illiquid in bad times. (the best thing in bad times might be to hold on.)

i don't know what is a good comparative investment to this, actually. but i'm not really liking it as an investment, anyway, now, so i'm not looking for one ...

you're surely being unfair to p2p in saying it costs more. you can't fairly treat the difference between what borrowers pay and p2p lenders receive as a cost of investment. it's the cost of running the business, not a cost of fund management or investment. that's like counting the costs of running the care homes (which the VCT holds shares in) as part of the costs of the VCT. or for a fund investing in quoted trading companies, counting the internal running costs of those companies.

and p2p lending is subordinated debt, not equity. so not really comparable at all.

well, "asset-backed" VCT and secured p2p lending are comparable, in that they are both attempts to equity-type returns, without less volatility, and with little correlation to equities. and in that both could easily go wrong - i.e. the correlations and volatility could come back, precisely at the worst moment.

jamesd

grey_gym_sock wrote: »

about 20% out out 30% ... so that's most.

Only if you assume there's something comparable that has no costs at all, and that's not the real world.

jamesd

grey_gym_sock wrote: »

ok, the "asset backing" is basically some operating businesses which also own the land they operate on. presumably the manager has gone for that because you can't hold property investment companies in a VCT, so they're getting as near to that as they can.

The buildings as well, those care home, hotel and school buildings. The manager's brief was 100% asset backed investing, 0% without assets behind it.

grey_gym_sock wrote: »

but i think you'd be lucky if this VCT held up better than bigger, quoted companies, in a downturn.

Maybe, I'd certainly expect some NAV drop.

grey_gym_sock wrote: »

the price of the VCT itself is probably just stable because it's thinly traded. (as it should be, because who - other than the VCT itself, buying back its own shares - would buy without the 30% bung?)

Those who want the tax exempt 7.6% of NAV income with no CGT liability either.

grey_gym_sock wrote: »

without enough cash from exits, they'd either have to abandon their 5% target for the discount, or maintain it by writing down the NAV a lot.

The net asset value is what it is. If it falls, buybacks become more attractive, as does the yield.

grey_gym_sock wrote: »

so i'm not really seeing the downside protection with this. it just looks relatively low return, and illiquid in bad times. (the best thing in bad times might be to hold on.)

The assets are supposed to limit the downside if one of the businesses fails. In really bad overall times I'd be looking to avoid selling any equities.

grey_gym_sock wrote: »

you're surely being unfair to p2p in saying it costs more. you can't fairly treat the difference between what borrowers pay and p2p lenders receive as a cost of investment. it's the cost of running the business, not a cost of fund management or investment. that's like counting the costs of running the care homes (which the VCT holds shares in) as part of the costs of the VCT. or for a fund investing in quoted trading companies, counting the internal running costs of those companies.

Both have costs and the difference between what the underlyijng investments generate and what gets paid to investors is those costs. Whether it's the cut of the care home profit or the school loan fees and interest or the cut of the interest and fees paid by the P2P rather than VCT borrower.

grey_gym_sock wrote: »

and p2p lending is subordinated debt, not equity. so not really comparable at all.

That's also much of what this VCT has done: secured lending. The care homes are a relative novelty that started after restrictions on VCT lending.

grey_gym_sock wrote: »

well, "asset-backed" VCT and secured p2p lending are comparable, in that they are both attempts to equity-type returns, without less volatility, and with little correlation to equities. and in that both could easily go wrong - i.e. the correlations and volatility could come back, precisely at the worst moment.

I think there's lots of potential for that, particularly in say the property development or car dealer lending areas. I'm particularly not keen on property development lending.

grey_gym_sock

jamesd wrote: »

Only if you assume there's something comparable that has no costs at all, and that's not the real world.

i've decided i don't like this kind of VCT, and don't want something comparable. so IMHO, i can get something better which has virtually no costs.

e.g. £30k in a FTSE 250 tracker, with iweb, for 5 years, has total costs of about 1%.

compared to which, the VCT is only losing about 19% out of 30% in higher costs

perhaps this is getting silly. we have different views on the underlying investment.

jamesd

Not sure we've fully exhausted new angles to discuss but we're probably getting close.

If we look at other investments, some I hold of types that have been touched on:

32k Stan Life Old Mtl UK Mid Cap Pn S4
44k Stan Life SLI Global Smaller Companies Pn S4
33k Stan Life SLI UK Smaller Companies Pn S4
59k Stan Life Vanguard FTSE Developed World Hedged Pn S4

Plenty of other things to invest in and we seem to share a taste for some of them. This VCT has its place for me and so far has done its job. Whether those are better or worse depends on what was desired when buying them.

For completeness here's the rest in that pot:

21k Stan Life Fidelity Asia Pn S4
20k Stan Life JPM Emerging Markets Equity Pn Series 4

This pot as a whole is much closer to my usual preference for higher volatility equities with higher growth potential. This mixture is up about 9% since I put it in place at the start of September, diluted a bit by some new money going in, though.

Fatbritabroad

So reading up on vct you only get the tax relief if you subscribe to the vct when newly issued. If you buy later ones they don't qualify. I don't think i will at the moment but should i wish to in the future where do I find out when these are going to be launched? I use charles stanley direct as a platform atm js it something you get from them?

bowlhead99

Fatbritabroad wrote: »

So reading up on vct you only get the tax relief if you subscribe to the vct when newly issued. If you buy later ones they don't qualify. I don't think i will at the moment but should i wish to in the future where do I find out when these are going to be launched? I use charles stanley direct as a platform atm js it something you get from them?

To clarify, you get the tax relief when a VCT issues shares but this doesn't necessarily mean they are newly launching a brand new VCT - just that they are issuing more shares to get more cash in the door to have money available to invest into new or follow-on investments. That may be by creating a new class of shares (perhaps to initially participate in just the new portfolio, but may merge with another class later to share the whole portfolio), or by a "top up" offer for an existing class of shares with a ready-made portfolio.

If you buy into the VCTs shares when they are newly issuing them with a subscription document /application form and prospectus (which implies new money being put to work in the venture capital market), you get the full tax relief. Whereas if you buy the VCT's shares second-hand through the stock market or off your mate down the pub, you don't. VCT shares are free of dividend taxes and CGT whichever route you buy them but the main income tax relief is only on new issues.

Charles Stanley Direct don't offer VCTs as far as I know. Some platforms can help you get them, eg Hargreaves Lansdown have a VCT page with current offers at a point in time. In the past I've used Clubfinance which is now part of WealthClub (though I haven't bought since they merged /rebranded as I didn't buy last tax year): https://www.wealthclub.co.uk/venture-capital-trusts/venture-capital-trust-offers/

In the past I have also bought direct from the VCT manager, however they typically pay initial fee or trail commission to intermediaries, which you won't get any of if you go direct. Whereas if you go through an intermediary on an execution-only basis, the intermediary will often split it with you and rebate the trail commission they collect. Unless you picked HL as an intermediary - who keep all the commissions for themselves because they know their customers don't mind high fees.

As VCT is popular as a tax planning tool there tends to be a 'season' for new issues launching to catch people getting to the end of a tax year. Generally most of the new offers start to appear from Sept/Oct through to about Jan/Feb, and they'll stay open until they have hit their target fundraise which means there is generally a good choice by about Jan but if you leave it until mid March you will have missed out on some that already raised as much money as they needed and closed early. Some will keep on going through into the new tax year but by now (June/July/ August) the pickings are slim compared to what was available six months previously.

If you particularly want to invest in a new tax year rather than at the end of a previous one, nearly all VCT issues have a box to tick to allow you to give them the cash and catch the end of their fundraising period but only allocate your shares to you in the first couple of days of the next tax year so you deal with it in the following tax return. If you just waited to see who was still fundraising in early April you will have fewer choices.

HTH

Fatbritabroad

Thanks bowlhead really useful. As i say not at a level where i think i need vct but always like learning and hopefully one day