28 / 92
28
Holdings on AIM do have more liquidity
in theory, but in practice volumes in
certain shares can be thin, spreads
can be wide and disposing of a large
investment could be problematic.
However, for patient buy and hold
investors these issues do not impact
VCTs very often. AIM shares also value
daily and do not have long closed
accounting periods, so striking the NAV
and facilitating buybacks is much easier
for AIM VCTs.
In general we would suggest that AIM
should be considered more liquid, but
some VCT managers make investments
in unquoted firms with a very definite
plan for exiting them and - providing the
business can deliver on the plan - some
commentators consider that these
kinds of investment are actually more
liquid than AIM.
The point about the business delivering
on the plan is important. In unquoted
businesses it is important that the
management has a desire and drive to
sell and eventually exit. A complacent
management might sit tight, happy to
run a reasonably successful business,
and leave their investors in limbo. This
is another area where the VCT manager
should be adding value by careful
vetting of the management team and
maintaining ongoing monitoring and
involvement. Its also important that the
VCT manager strikes a good deal with
the investee that keeps them motivated,
rather than simply trying to wring as
much out of the deal as possible. It’s vital
to interrogate the manager’s investment
and due diligence process and get a feel
for the house philosophy. More on due
diligence on VCTs on page 49.
These risks won’t impact VCT investors
directly, but they will impact the
ultimate performance of the VCT, and
they would constrain the manager’s
ability to close out losing positions -
investors have to be prepared to hang
on and ride out a downturn in the
“AIM based VCTs typically have a more diversified portfolio than other types of VCT, likely to be
invested in larger more established companies, with transparent market pricing and reasonable
liquidity”
Dr Paul Jourdan, Amati Global Investors
VCT DISCOUNTS / PREMIUM: 12 MONTHS TO AUG 2015
DISCOUNT
ONE YEAR
HIGH %
DISCOUNT
ONE YEAR
LOW %
DISCOUNT
ONE YEAR
AVERAGE %
VCT AIM
QUOTED
-4.1
-12.5
-8.3
VCT
GENERALIST
0.8
-17.5
-9.1
market or the wider economy without
expecting the investment manager
to re-weight the portfolio into more
defensive assets.
LIQUIDITY OF THE VCT
As noted above, the biggest liquidity
risk to investors is really the prospect of
a discount to the NAV, and sometimes
this can be quite large. Because the
share price is driven by demand for
the shares, this can be quite severe in
times of market distress. VCT providers
attempt to address this by operating
‘buyback’ policies. These are promises
to buy the shares back at a certain level
- say a 5% discount to the NAV. On the
face of it this solves the problem (a 5%
discount after 30% Income Tax relief is
probably going to feel acceptable) but
the strength of the promise needs to
be examined - wording such as “we will
endeavour” might not be worth much
when everything is nose-diving. The
VCT board can only agree to buy shares
back for as long as they have the cash
to do so and it is not detrimental to the
remaining investors. Investors must be
clear that they probably won’t be able to
exit at anything like the NAV if there is a
panic. This shouldn’t be a showstopper
though – it’s really true of any stock
market based investment.
At the time of writing (November 2015),
the VCT Generalist sector was at an 8%
discount to the NAV and the VCT AIM
sector was at a 7.9% discount in the
secondary market (note - these figures
do not apply to buybacks where the VCT
purchases shares back from investors at
a smaller discount, as described above).
It’s also worth remembering that this
lack of liquidity can be an advantage for
the fund manager. Worried investors
who run for the exits can be absorbed
by the discount and the manager is
not forced to sell assets at low prices
to meet redemption requests. This
seems fair - why should investors
who are prepared to stay the course
be penalised by those who lose their
nerve?
Investors need to be aware of that most VCTs will trade at a discount to their NAV
Source: Morningstar (August 2015)