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1. Worst Case
All ten investments return -90% annually
This scenario shows us that even
if all ten investments perform
catastrophically, the tax and loss
reliefs limit losses to 42% of the initial
investment, far better than a comparable
investment in traditional shares.
2. Barely Breaking Even
5 investments return -90% annually
4 investment return 0% annually
1 investment returns 7.5% annually
This scenario shows us that even if five
investments perform catastrophically,
and four under-perform, it only needs one
investment to achieve respectable annual
returns to offset the losses on the others.
3. Evidence Based
5 investments return -90% annually
4 investment return 12% annually
1 investment returns 61% annually
This scenario is based upon the figures
for returns from Angel Investing. Loss
relief limits losses on the poor performers
but has no impact on gains from average
performers or the stellar performer. Loss
relief limits the downside risk of losses to
investors. It suggests that a portfolio based
approach means four to five catastrophic
investments can be absorbed provided
these losses are offset with gains from
elsewhere. A portfolio containing less than
ten investments increases the chances of
only picking the losers and missing the
offsetting benefit of a stellar performer.
4. Boring and Mediocre
All 10 investments return 3% annually
This scenario is unlikely considering the
volatile and unpredictable nature of small
company investing, however renewable
energy investments with predictable
revenue streams may fit this profile. It
is worth noting that if all ten companies
only achieved less than market rates of
return (under-perform the FTSE 100 for
example), the tax relief means EIS investors
are still likely to receive higher returns
than from mainstream opportunities.
5. Imagine Wild Success!
All 10 investments return 10% annually
Again, this scenario is unlikely considering
the volatile and unpredictable nature of
small company investing. However, were
you able to consistently pick winners that
achieved market levels returns of 10% a
year, the overall portfolio would perform
even more strongly than that thanks to the
tax reliefs. It is worth noting, though, that
the returns in this scenario are lower than
the returns in the Evidence Based scenario
where there was only one stellar performer.
Total Return
£145,927.41
Gain
£45,927.41
Return
45.93%
Total Return
£191,051.00
Gain
£91,051.00
Return
91.05%
Worst Case Barely
Breaking Even
Evidence
Based
Boring and
Mediocre
Imagine Wild
Success!
Total Return (£) £58,000.60 £98,356.59 £222,669.58 £145,927.41 £191,051.00
Gain (Loss)
-£41,999.40 -£1,643.41
£122,669.58 £45,972.41 £91,051.00
Return (%)
-42.00% -1.64%
122.67% 45.93% 91.05%
“EIS funds allow the investor to build a portfolio of investments through an
experienced fund manager”
Total Return
£222,669.58
Gain
£122,669.58
Return
122.67%
CONCLUSIONS TO A
PORTFOLIO APPROACH
The generous tax benefits and loss
reliefs reduce some of the risk associated
with investing in smaller companies.
The power of the tax and loss reliefs can be
exploited further when they are combined
with a portfolio approach to investing: the
loss relief reduces the impact of losses
from under-performing investments,
the Income Tax relief provides a huge
immediate benefit and the CGT relief
maximises gains from out-performers – so
even a portfolio that has fewer winners than
losers will still provide positive returns.
“The EIS allows individuals
to invest in potential world
beating companies at very low
after-tax cost, and without any
obligation to make a multi-
year investment commitment.
Contrast that with the several
million dollar minimums
and ten year limited partner
structures that are providing
the subsequent growth equity
funding as these businesses
expand across the world”
Bruce Macfarlane, MMC Ventures
Total Return
£98,356.59
Loss
-£1,643.41
Return
-1.64%
Total Return
£58,000.60
Loss
-£41,999.40
Return
-42.00%
RESULTS OF A PORTFOLIO APPROACH
