Why investors should venture into VCTs – and three to buy now
Each week, a professional investor tells us where he’d put his cash. This week: Alex Davies, founder of high net-worth investment service Wealth Club, picks his top VCTs
This year marks the 25th anniversary of the introduction of venture capital trusts (VCTs). The idea was to encourage investors to support young and innovative businesses in exchange for generous tax concessions. Since 1996, VCTs have raised £8.4bn and helped thousands of private companies grow – from GO Outdoors, Secret Escapes, Everyman Cinemas and Five Guys to Zoopla, the first VCT-backed £1bn company. When you invest in a VCT you receive up to 30% tax relief. So on a £10,000 investment you could get back £3,000. All returns, typically paid through dividends, are tax-free. The annual allowance of £200,000 is both generous and straightforward.
There is a catch, though. VCTs are not open all year round. Demand for the popular ones far outstrips supply and they sell out quickly. So if any of the below whet your appetite, to avoid missing out invest now rather than waiting for the new tax year.
Northern VCT: the best of both worlds
The Northern VCT was one of the first to launch 25 years ago. If you had invested £10,000 at launch and reinvested dividends you could now be sitting on a tax-free pot of £47,837. If you factor in the initial tax relief and the relief on the dividend reinvestments, that figure would be £63,797.
This helps explain why last year’s offer was sold out in just 11 days. There are now three VCTs offering access to “the best of both worlds”: old-style investments (mainly management buyouts), which should provide some stability, as well as new younger and riskier plays with greater growth potential. Holdings range from AVID Technology Group – a manufacturer of electric vehicle components – to The Climbing Hangar, a chain of indoor rock-climbing venues.
Mobeus VCTs: a strong record
Another manager with a great record and loyal following is Mobeus. To date the Mobeus VCTs (there are now four altogether) have handsomely rewarded investors. If you had staked £10,000 on the combined 2010/2011 offer, by June 2019 you could have received around £9,800 in dividends alone before tax relief. If you invest now you get access to a diversified portfolio equally split between larger, established businesses such as Virgin Wines and Access IS (which makes boarding-pass scanners for airports) and younger rising stars such as MPB, a marketplace for second-hand photographic equipment. The former provide considerable income to support dividend payments; the latter offer growth. Nearly half of the portfolio companies are profitable.
Octopus: a tentacle in every pie
Octopus Titan VCT (LSE: OTV2) looks for pioneering companies with the potential to go global. It has had a string of high-profile exits, most notably Zoopla. Others include SwiftKey (sold to Microsoft), and Graze. At £825m of net assets, Octopus Titan is the largest VCT and with over 75 investee companies it is highly diversified.
There is a good mix of established businesses such as travel members’ club Secret Escapes and Calastone, the fund trading platform, and new businesses with the potential for high growth. New investments include Depop, an online marketplace for vintage clothing with 13 million users worldwide.