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Lessons for investors: Something Ventured, Nothing Gained

If I took ten thousand pennies and put them in a box under the bed for nine years and every year I took out £3.46 at the end of the term I’d have £68.86. Most of us appreciate that we need to invest in order to, if nothing else, combat the effect of real inflation so obviously I’d at least consider putting my pennies in a bank. Assuming I didn’t and after nine years someone offered to buy my box for £55 I obviously wouldn’t take it. If however there was a tax break that meant that I would pay £40 less tax just for putting the money in the box, my loss would be turned into a profit thanks to the tax man’s gift. In truth, to get the tax break I had to use a special type of box, a Venture Capital Trust (VCT), and keep it in that box for at least five years to retain the tax relief. For this, I was charged fees by a manager in return for which, they delivered no profit.

That’s the reality of Core VCT which is about to be wound up and it’s far from the worst example in the history of Venture Capital Trusts. Hopefully the winding up process will see me realise more than £55 (given that the alleged net asset value is something closer to £82 than the current share price equivalent of £55), but I’m not expecting that much more, as more experts will be charging more fees to release the capital. With benefit of hindsight would you buy it? Do you think it reasonable that a fund manager’s inability to turn a profit should be underwritten by the tax payer? Is it reasonable that the VCT manager should take credit for the tax relief in order to express a profit that he had no hand in?

There’s a strange irony in the fact that this particular VCT is highlighted in Investment Trust performance tables as being one of the top performing investments over the last twelve months and this could surely help convince some that VCTs are a good investment. The reality is that the ‘stellar’ performance was simply a case of the share price rising from 20p to 55p – still a long way short of the £1 per share invested nine years ago.

VCT’s, which are designed as investment vehicles that provide private equity to smaller expanding companies attracted £352 million pounds of new capital in the last tax year alone. They are promoted as acceptable despite the continuous real loss achieved by a large number of managers. Yet another sector often seems to get constantly dismissed, even castigated by these same individuals, publications or firms despite mounting evidence of a history of success. I am referring to Structured Products, which are products with pre-defined outcomes, based on the movement of an underlying asset, usually an index such as the FTSE 100.

I accept that there are, and have been, some good VCTs, but not sufficient to suggest that the sector is worthy of investing in simply because of a tax benefit. My experience and the experience of those around me has been one of almost constant disappointment with the VCT sector. The only thing that is certain is the tax relief, after that the investor ventures into the unknown. With Structured Products the client knows exactly what the return will be, based upon known criteria. I have a proven history going back twelve years of over 2000 Independent Financial Adviser distributed contracts that have matured, out of which, more than 80% have been profitable, with less than 4% having lost capital.

Two Lowes clients, one invested into a Core VCT, the other invested in a Barclays Bank backed Structured Product. Being a commodities based trade this, like the VCT was not a mainstream investment but unlike the VCT it didn’t qualify for any tax breaks. However, unlike the VCT the Structured Product was designed to return at least 90% of the original capital unless Barclays went bust. The Structured Product matured in December 2010 returning an 80% gain and the proceeds were reinvested into a FTSE 100 linked structured product that matured two years later, returning another 17% gain and then into a range of further FTSE linked Structured Products, backed by a variety of banks which to date have risen in value by 15.85%. This gives a total gain of 144% net of charges from the Structured Products, versus no gain other than my tax relief from the VCT.

So are we at Lowes just bad at selecting VCTs and good at selecting structured products? I don’t think so. There are very few Structured Products that have matured returning anything less than the investor’s original capital but there have been a substantial number of VCTs that have lost money, some almost all of it.

So why do so many publications and pundits dismiss Structured Products yet consistently favour VCT’s? Answers on a postcard please.

This was posted in Bdaily's Members' News section by Lowes Financial Management .