British Smaller Companies VCT AGM

I “attended” the British Smaller Companies VCT Annual General Meeting today via Zoom. This was yet another variant on the practice of virtual AGMs. But there were apparently about 30 people connected which is more than they normally get of shareholders at their AGMs.

It was well managed with no significant technical problems, unlike others recently I have attended. Shareholders could vote for or against the resolutions on the day by using a Zoom Vote facility to give an instant poll result (rather like a “show of hands” vote which is technically what I assume it was although that was not made totally clear). The poll votes were given after each resolution was voted upon. The proxy counts were also displayed at the end. All proxy counts were in favour with the highest opposition being 11% against share buy-backs (probably by ill-informed investors as these are quite essential in my view in VCTs).

The poll figures showed only one or two people voting against a few of the resolutions. I voted against the remuneration resolutions and against the re-election of Chairperson Helen Sinclair – partly because she was first appointed in 2008, and for historic reasons.

Shareholders could submit questions previously or at the meeting by typing them in (but no follow-up possibilities). Not as good as a verbal question/answer model.

David Hall gave a short presentation on the results before questions. They achieved a total IRR of 5.4% last year, depressed by the Covid epidemic as their year end is March. The epidemic had a varied impact on their portfolio holdings, but there has been a bounce back since the year end.

There was a question on dividend policy and the answer was that the current policy will remain in the short term.

The meeting was relatively short with most of it taken up by the voting procedure. But it was certainly better than not allowing any shareholder attendance as other companies have been doing.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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British Smaller Companies VCT Offer

It’s that time of year when share subscription offers for Venture Capital Trusts (VCTs) tend to be launched. One of the first is that for the British Smaller Companies VCT (BSV). This one that has shown a relatively good performance for a generalist VCT – share price total return of 225 over ten years according to the AIC compared with a sector performance of 136. It also has a high dividend yield and a narrow discount to NAV. However I have never liked their manager’s performance incentive fee arrangement and consistently vote against the Chairman, Helen Sinclair, who introduced it. But they are proposing to change it.

Currently the incentive fee is based simply on dividends paid – at the rate of 20% of those paid – so long as a dividend hurdle is met. There is also a hurdle for Net Asset Value (NAV) which has to be met, which presumably was intended to ensure that the NAV did not fall to too low a level. However, very high dividends can be paid by the company even though the company has lost money on many of its investments. In effect, dividends can be paid out and incentive fee based on them paid to the manager even though the company’s earnings do not cover the dividends. Incentive fees based on dividends paid out in VCTs are simply wrong.

What can happen is that dividends are paid out based on realisations, while ignoring the unrealised losses in the portfolio. This arrangement resulted in a very large incentive fee being paid to the manager in 2017 – dividends of 22.0p paid out when reported earnings were only 4.6p. The result was total management fees of £5.5 million paid when assets at the start of the year were only £96 million.

What is the new management fee arrangement? In essence it will remain dividend based with the same 20% figure. The only change is to introduce a Total Return hurdle to replace the Net Asset hurdle. There are other changes and complications to the incentive agreement which are very difficult to understand, including an overall cap, for which you need a spreadsheet to understand the effect. But the company says “Note that the historic incentive payments would have been significantly lower if the proposed incentive arrangements had been in place since 2009 due to this cap”. I’ll take their word on it, but it’s still a bad arrangement and should be simplified.

There is also going to be a reduction in the fixed “investment advisor fee” of 2% of assets so that only 1% is paid on cash balances held.

Shareholders may wish to vote for these changes as they may be better than the past arrangements but I suggest shareholders write to the Chairman as I shall be doing and complain that the board needs to try harder. This looks like an agreement that has been written by the fund manager. Incentive schemes for fund managers should be simple to understand by shareholders and the board, and not based on dividends paid out but on total return.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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