It’s also impossible to escape human nature at times like this. The fact is that most investors have a flight-to-safety instinct and cannot be persuaded to take a risk-on approach to investing. That said, we believe there are two big factors that make EIS portfolios an interesting investment to consider at times like this. Firstly, the fact that EIS ‘funds’ are not funds in the conventional sense. Investors are not buying units in an existing portfolio of companies that have already been invested in. They are subscribing to buy shares in a portfolio of companies, through a series of investments that are yet to happen.
The companies are chosen by experienced investment managers, who will only invest after completing a due diligence process. Good investment managers will take into account the risks posed by Coronavirus and other factors, before completing an investment in a start-up. So, while the investments remain risky and will face other uncertainties during the holding period, clients who subscribe to an EIS now should end up with minimal, if any, exposure to companies that stand to be hit hard by the pandemic.
And then there is the diversification argument. If there’s any lesson from the past few months, it’s that having a broadly diversified portfolio across different asset classes is vital. You can take a punt on one or possibly two particular industries – med-tech or entertainment or food delivery – but who knows what the next challenge or technological development is around the corner that imperils that sector.
In short, subscriptions made to EIS portfolios now will be invested into shares only after the investment manager has taken into account the possible implications of Coronavirus for the intended investee companies. This, combined with the government’s continued commitment to EIS, should improve a client’s confidence in deciding to invest.