Nicholas Hyett, Investment Manager at Wealth Club, reviews the performance of Unicorn AIM VCT and explains how it has outperformed both the wider AIM market and rival AIM-focused VCTs despite challenging conditions.
Nicholas Hyett, Investment Manager at Wealth Club commented:
“Unicorn is a specialist UK small and mid-cap investor, and the VCT looks to make the most of this expertise by backing companies raising money on AIM. That’s been a tough ask in recent times.
Over five years Unicorn AIM has achieved a total return of -2.8%. That may not sound impressive, but it is far better than the average AIM VCT’s -31.9%, and a good deal better than the -28.2% achieved by the AIM market as a whole. In short Unicorn has a track record other AIM VCT managers would kill for.
Ironically performance has largely been driven by a small number of non-AIM investments in the portfolio – a couple of which have been wildly successful and led to large special dividends. Most recently the VCT’s holding in corporate intranet provider Hasgrove, previously the trust’s largest holding, was sold for £88 million resulting in a 23p per share special dividend for investors.
The sale of large unquoted holdings means the VCT is now more heavily exposed to the future fortunes of AIM. That may be no bad thing. The trust has so far weathered the downturn in AIM remarkably well, if AIM turns a corner in the next couple of years it would be well placed to ride the recovery too.”
About Venture Capital Trusts (VCTs)
Why VCTs are worth investing in
Most investors are initially attracted to VCTs for the tax breaks, and they are generous. Investors can get up to 30% back in income tax relief up front, falling to 20% next tax year, any dividends paid by the VCT are tax free and growth is free of capital gains tax too.
However, VCTs are more than just a tax planning tool. They’re probably the best way for UK investors to access fast growing smaller companies. Revenue growth from VCT investees far outstrips what you see in main market listed companies, and the result has been some attractive returns for investors over the longer term.
Exposure to high growth, smaller companies also has the potential to diversify a conventional portfolio. Long-term performance is often only loosely correlated with the wider economy. Highly disruptive businesses grow by taking market share from incumbents rather than relying on market growth.
The rules governing VCTs mean they’re also an excellent way to back smaller businesses. It’s their role providing support to the next generation of UK start-ups, driving innovation and creating jobs, that earns them the tax relief from the government – and many investors feel that this is something they wish to support too.
Who should consider them?
VCTs are higher risk, and while they’re listed on the stock market, in order to qualify for tax relief investors must hold the shares for at least five years before selling – making them inherently long-term investments. Unlike most conventional funds and shares the minimum amount you can invest is comparatively high – often £3,000 or more. All of this means they are best suited to wealthier or more sophisticated investors.
VCTs are popular with two groups in particular.
The first is higher earners or wealthier investors who are limited in what they can put into more mainstream tax wrappers. Those who already use full £20,000 ISA allowance or whose pension contributions are tapered due to the amount they earn. The £200,000 a year annual VCT allowance is generous and can save higher earners up to £60,000 in upfront income tax (£40,000 next tax year).
The second group is those in, or near, retirement who use VCTs’ tax free dividends to supplement income from other sources. Because they’re higher risk, VCTs shouldn’t be considered a replacement for a pension, but they can help to top-up income from more conventional sources.
Some other tips?
- Seek diversification – VCTs are high risk so spread your investments over multiple managers. Fortunately there’s lots of choice in the market, from trusts with expertise in particular sectors, like Pembroke VCT, to broad generalist funds like the Albion VCTs.
- Reinvest and recycle – Get an additional 30% initial income tax relief by reinvesting those tax-free dividends (20% next tax year). You can also recycle the proceeds from selling the shares, once they’ve been held for five years, into a new VCT.
- Be aware of discounts – VCT shares trade on the stock market, but often at a discount to the underlying value of the fund’s investments. That shouldn’t be a problem for long term investors, who will receive the majority of their return through tax free dividends as well as underlying growth. However, it’s something to be aware of and is another reason these should be treated as long term investments.
- Capacity limits – If you see something you like, it can pay to act quickly. VCTs have limited capacity each year and popular offers can quickly reach capacity and close to new investors. Some VCT managers also offer lower fees to investors who invest soon after an offer opens.
