35 / 92
35
of inflows - perhaps another reason to
favour closed-ended funds over OEICs,
as inflows drive the share price up, but
a good manager can still keep control
of the amount of funds they raise for
investment.)
The ideal is for managers to match their
fundraising to their anticipated deal
flow, and we think that the majority
do this quite well. There are rarely
unusually big spikes in funds raised,
and managers are generally happy to
explain them when they occur.
CASH MANAGEMENT, CASH
DRAG (AND MORE ON THE
DISCOUNT)
Unlike open-ended funds, VCTs are
not obliged to pay all of their profits
out to investors. This is actually a very
big advantage, as cash can be retained
and then used to smooth out dividend
payments, even in a falling market. So
VCTs can pay out dividends tax-free and
(if they manage their cash position well)
continue to pay those same dividends
even in times of market distress - many
established VCTs maintained their
dividend throughout the downturn
in 2008. This is a very appealing
proposition.
Holding onto cash has its downsides
though, as the low return on cash can
reduce the overall performance of the
VCT (“cash drag”). Analytics sites, such
as Morningstar, Trustnet for the AIC, can
be used to check the cash position of
individual funds (as can the funds’ own
documentation).
As of August 2015, the average net cash
position of both Generalist and AIMVCTs
was 13%, but this hides huge variations -
VCTs at different stages of their life will hold
very different amounts of cash.
MEASURING VOLATILITY
The average share price is a good heuristic for expected
return, but does not show what the variance has been. The
standard deviation of the returns gives a better indication
of the volatility of the total share price returns. On average,
the Generalist sector has had the highest returns over the
period with fairly low volatility. We can also see the standard
deviations for AIM Quoted and Technology sector has been
extremely volatile. Media, Leisure & Events Specialists VCTs
have the lowest variance in share price. Many of these
companies may have more predictable returns but the ability
to generate higher returns is likely to be more difficult with
these companies.
NAV total return is also worth examining, as NAV total
return shows performance which isn’t affected by
movements in discounts and premiums, and also takes
into account that different VCTs pay out different levels
of dividends. Volatility for all of the sectors is much lower
when looking at the NAV return, and the average return is
very similar to the share price.
The NAV total return assumes the average weighted, by the
starting shareholder funds of each company, performance
on a theoretical £100 assuming any net income was
reinvested. The chart shows that environmental VCTs offer
a similar average NAV total return than VCT generalist
but just as with the share price total return, the standard
deviation for specialists is higher. On the other hand, it
is worth noting that the AIM VCTs sector has the highest
standard deviation for the NAV total returns.
1 YEAR TOTAL SHARE PRICE RETURNS
1 YEAR NET ASSET VALUE TOTAL RETURN
Source: AIC and Morningstar
Source: AIC and Morningstar
Standard deviation
Average
Standard deviation
Average
VCT
Specialist
environ.
VCT
Specialist
media, leisure
& events
VCT
Specialist
technology
VCT
Generalist
VCT AIM
Quoted
120
100
80
60
40
20
0
20.48
9.60
11.79
7.31
103.79
105.27
100.64
94.39
103.28
32.23
Jan 07 -
Oct 15
Jan 07 -
Oct 15
Apr 10 -
Oct 15
Apr 09 -
Oct 15
Jan 07 -
Oct 15
VCT
Specialist
environ.
VCT
Specialist
media, leisure
& events
VCT
Specialist
technology
VCT
Generalist
VCT AIM
Quoted
120
100
80
60
40
20
0
103.45
17.48
6.54
7.99
4.98
11.86
104.31
104.66
97.55
100.72
Jan 07 -
Sept 15
Jan 07 -
Sept 15
Apr 10 -
Sept 15
Apr 09 -
Sept 15
Jan 05 -
Sept 15