Morningstar's "Perspectives" series features investment insights from selected third-party contributors. Here, Annabel Brodie-Smith, Communications Director of the Association of Investment Companies, rounds up the market outlook for VCTs.
VCTs had a good year in 2014. In terms of share price performance, the VCT Generalist sector was up 10% over one year, outperforming the investment company sector average by two percentage points. The Generalist sector was also up 33% over three years, 64% over five years and 97% over ten years. In the VCT AIM Quoted sector, the average VCT was up 2% over one year, an impressive 58% over three years, up 73% over five years, and 19% over ten years.
The VCT sector has a strong story to tell when it comes to income, too, as demand for yield continues. 58% of VCTs are yielding over 5%, with the VCT sector average yield being 7.4%. The average VCT Generalist company offers a yield of 8.1%, and the average VCT AIM Quoted offers 5.6%. But with markets off to a shaky start this year, and global growth slowing, what is the outlook for investing in small and unquoted businesses? Will the strong performance of 2014 continue?
Outperformance
David Hughes, Chief Investment Officer of Foresight VCTs, said that the outperformance in 2014 stemmed from strong profits and sales growth.
“The relatively benign economic conditions and the stable low interest rate environment have been a helpful backdrop for high growth companies to deliver exceptional performance,” he said. When combined with high stock market ratings, this has led to particularly attractive offers from potential acquirers.”
In an environment in which interest rates are very low, Tim Levett, of Northern VCTs, says VCTs have naturally become very attractive to investors and that recently all the leading generalist VCTs have enjoyed a number of quite high profile exits, with the investee companies often being sold to mid-market private equity firms, as well as corporate buyers.
Bill Nixon, of the Maven VCTs added that good VCT managers have established a track record of nurturing smaller companies to the point where they are attractive to larger houses – which should be looking at VCT portfolios as a source of new deals off market, especially as many intermediated transactions are now extensively auctioned.
Opportunities for VCTs in 2015
Patrick Reeve, manager of Albion VCTs, predicted 2015 would be a strong year for VCTs, explaining that the economic fundamentals support investment in growth companies, while private investors struggle to find homes for their cash which can deliver satisfactory returns.
“VCTs are an important part of portfolio diversification for those either seeking a pension supplement or a source of tax free income,” he said.
Foresight VCTs David Hughes said that the recent changes in the caps to pension contributions meant that VCTs were an increasingly mainstream option for generating income through a tax efficient shelter.
“The volume and quality of investment opportunities has substantially improved over the past 18 months, and we are seeing good opportunities to deploy these funds in various sectors including business services and especially companies leveraging new technologies,” he adds.
This article is part of Morningstar’s Guide to Investment Trusts, highlighting the benefits of these unique investment vehicles – busting the investment trust jargon, revealing potential pitfalls and celebrating those experienced managers who have earned the top ranking from Morningstar fund analysts.
