ShareSoc VCT Webinar Report

I attended a webinar organised by the VCT Investors Group of ShareSoc last night, and spoke on the panel. This is a very brief report on what was certainly a useful event for anyone invested in Venture Capital Trusts. There should be a recording of the event available from the ShareSoc web site to Members in due course.

There were good presentations on some problematic VCTs – the Edge Performance VCTs and the Ventus VCTs. ShareSoc was involved in campaigns on those companies. The former, which have multiple share classes, showed poor performance on all but one share class, and poor corporate governance resulting in shareholders demanding some changes. There are two Ventus VCTs that specialise in renewable energy which no longer qualifies for VCT investment. The directors are now proposing to wind up the companies.

Another “problem” case I spoke about was Chrysalis VCT which was another company that got into a difficult situation. Assets declining making it look unviable with high fixed costs and the portfolio consisting of dubious holdings such as Coolabi (also a holding in the Edge VCTs). Shareholders decided to wind up the company on the recommendation of the directors in October 2020 even though there were some investors who claimed capital gains deferral on their investment way back in time, which will now mean they get a big tax bill.  I sold my holding in Chrysalis VCT in 2018 as I could see the way the wind was blowing and had been through a similar experience with Rensburg AIM VCT in 2015/16. In that case they did manage to merge with another VCT who took over management of the portfolio.

Both the Edge and Ventus VCTs were not likely to be attractive to merger partners or acquirers though. But an administration process is going to be long-winded, costly and in essence painful.

As I said in the webinar, if you are holding shares in a VCT that is getting into difficulties, or is unlikely to be able to raise new funds from investors, best to get out sooner rather than later. Regrettably the directors and fund managers of such companies seem keen to keep the companies alive, and postpone tough decisions for too long.

Or if you think the VCT is revivable, or can survive, then pursue a revolution such as changing the directors and/or fund manager.

The seminar included a good analysis of the performance of VCTs by Mark Lauber. He suggests they can give a good return if you take into account the tax relief you get from investing in them, and the tax-free dividends. They do provide an alternative asset class to most FTSE shares, being effectively private equity investment trusts investing in smaller companies.

Are they good investments at this point in time? This is uncertain given that the type of companies they can invest in has changed recently. No more asset backed companies for example. They can hold diversified portfolios, but the fund performance depends a great deal on the competence of the fund manager.

There are few alternatives on which you can obtain tax relief. EIS companies are even more risky. With stock markets being buoyant of late, my view is that there are fewer reasons to invest in VCTs at present where management costs are high and corporate governance often leaves a lot to be desired. You also have to keep a close eye on them and understand the complex tax rules. It might be best to wait and see how the new VCT rules work out in terms of investment returns.

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

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Mello Trust and Funds Event and ShareSoc AGM

I managed to attend part of the Mello Trust and Funds Event in West London yesterday and although I had other commitments today, I may manage to attend the second day of the main Mello 2019 event tomorrow. If you have not attended one of these events before, it is definitely worth doing so. The only slight criticism I would have is that getting to Chiswick from South East London where I live via the slow District Line is not great. The wonders of the London transport network meant it almost took me two hours to get there. I’ll give a brief report on the sessions I attended, and what particularly interested me:

There was a good presentation by the young and enthusiastic George Cooke on the Montanaro European Smaller Companies Trust (MTE). This is a company I had not come across before and it looks to have a good performance record. It’s a stock pickers fund in essence but Mr Cooke’s approach to small cap company research seems similar to mine. However he covers the whole of Europe whereas my focus on direct investments is the UK. I will take a more in-depth look at this company.

I attended a panel session on investing in small cap funds and one member of the audience questioned why one would do so when you can invest in the companies directly. Here are two possible reasons: It can give you exposure to geographic or sector areas that you cannot adequately research oneself (as in MTE), and for UK funds it is always interesting to see what the high-performing fund managers are buying and selling even if you only get a limited view. That’s why I invest both directly in companies and in funds.

I also attended a presentation by Carl Harald Janson on International Biotechnology Trust (IBT) a company I already hold so I did not learn a great deal new. This is a sector specialist with a good track record and it is now paying dividends out of capital which has help to close the discount to NAV when it used to be quite high. The discount is now negligible.

Several stand staffers in the exhibit area tried to sell me “income” funds but that proved difficult as I had to tell them I never buy income funds. For long-term returns, growth funds usually provide better performance and you can always sell a few shares to produce cash income – and you may be better off tax-wise also as a result. But many people buy funds for retirement income so they are attracted by the “income” name. This is where more financial education might be beneficial.

The last presentation I saw was by Nick Britton of the AIC (Association of Investment Companies who represent investment companies). Their web site is always useful for researching investment trusts and their past performance, which I tend to prefer as against open-ended funds although I do own a few of the latter.

Nick covered the differences between the two types of funds (open versus closed). His presentation suggested that closed-end funds consistently performed better for several reasons and he compared some funds of both types run by the same manager as evidence. There are a number of reasons why closed-end funds perform better in the long term and I was convinced by the statistics on this a long time ago. But Nick gave some more data on the subject.

So why do open-ended funds dominate the fund industry (£1.2 trillion versus £189 billion funds under management)? I rather expected that after the Retail Distribution Review (RDR) that platforms would no longer have a strong financial incentive to promote open-ended funds but it seems there are other reasons remaining which are not exactly clear. But it’s the investors who are suckered into buying open-ended funds who should know better. Like in most markets, folks buy what they are sold rather than do their own research and buy the best option. That’s particularly problematic on property funds which Nick was particularly scathing about.

I hope ShareSoc members are better informed. Which brings me on to the subject of their AGM which was held at the Mello meeting. This was a relatively straightforward event as there were no controversies of significance, although I did suggest that with more funds in the bank they might want to hire more staff and spend more on marketing. As one of the two newly appointed directors pointed out, few investors have heard of ShareSoc although they do enormously good work in promoting the interest of private investors and in educating them. In my experience, sales of anything often relate simply to how much money is spent on marketing even if some attention has to be paid to the most cost-effective channels. But if you don’t know what works best, you just have to experiment until you find the most productive approaches.

However ShareSoc membership is growing and it’s now twice the size of UKSA with whom merger discussions are now taking place – which I wholeheartedly support incidentally. There are also discussions taking place about supporting Signet activities, who run investor discussion groups, following the recent death of John Lander who led Signet for many years.

ShareSoc is spending money though on improving their back-end membership system which will help to improve the services provided to members.

In summary this was a useful event, and like all such meetings, as useful for networking and picking up gossip as much as from learning from the formal sessions.

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

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AIM Rules Review

The London Stock Exchange have published a document entitled “AIM Rules Review”. ShareSoc, including me personally, have criticised the LSE in the past for poor regulation of the AIM market. Many investors view it as a casino because of the numerous problems of fraud, poor disclosures, many delistings or simple bankruptcies in AIM companies. See the ShareSoc campaign page here for more information: https://www.sharesoc.org/campaigns/campaign-improve-aim-market/

As you can see we made a number of recommendations on how to improve the AIM market, and had meetings with AIM management where we put these proposals forward. The LSE regulates the AIM market but their responsibility lies primarily in ensuring the AIM Rulebook is adhered to and that Nomads meet their responsibilities. Other aspects of the market such as market abuse or false accounting are covered by other regulatory bodies, which many private investors do not understand.

So have any of the ShareSoc proposals been covered in the latest document? In summary, yes they have been. Here’s a quick review:

The AIM Rules Review does emphasise the improved recent performance of the AIM market and the fact that the average size of companies listed on it is growing. That has helped to improve the quality of the market.

Vetting new listings. One proposal we made was that new listings should be vetted by an independent panel because many investors considered some of the new listings in the past to be very dubious businesses. They have not taken this up directly but are proposing to formalise the “early notification process”. In addition, they propose to give more guidance to Nomads (whose role it is to perform due diligence on prospective listings) on what they need to take into account. For example, the “good” character of directors or managers, the corporate structure and business model, risky contractual arrangements and “related party” interests. This looks to be one way to tackle past problems, but one suggestion I would make is to add to that list the “regulatory structure and upholding of the rule of law in the countries where the candidate is listed or operates”. For example, it has proved very difficult to pursue fraud in China, and even Greece creates difficulties in that regard.

Free float. One concern they cover is the issue of low free floats which is a concern of some investors. For example, many of the companies that have turned out to be problem ones are those where there is an executive Chairman who holds a majority of the stock (or their close relations or associates do). This gives that person enormous power to prejudice minority shareholders, ignore the views of other board members and ultimately commit major frauds. The LSE’s response on this issue though is simply that the LSE would like to understand the position on new applications and the Nomad’s consideration of it. That surely is open to abuse, but the LSE does ask whether more specific free float rules should be brought in (the LSE document is a public consultation one so you can submit your own comments).

Minimum Fundraising. They also propose the introduction of a minimum fundraising rule and pose some questions on that. This would help to ensure institutional involvement in a company.

Composition of Boards. They mention this, but give no specific suggestions. That is surely an omission when ShareSoc made some specific suggestions in that regard.

Disclosure and Corporate Governance Codes. The document covers the issue that AIM companies can avoid any adherence to a specific corporate governance code. ShareSoc suggested a specific code should be available and applied by all AIM companies. The LSE asks a question on this at least.

Education and Breaches of the AIM Rulebook. The LSE asks how the market, particularly individual investors, can be further educated as to what the LSE can and cannot do. A good question indeed, which I will ponder.

Breaches of the AIM Rules. But one issue we raised with AIM management was the failure to enforce the existing Rules, or penalise and publicise those who break them. Indeed the document spells out how poor this has been by giving some statistics. There were 93 recorded breaches or where “education” was required, but only 16 warning notices or private censures/fines issued on average over the last three years. There were zero public censures apparently. They do ask a question about possibly imposing automatic fines on breaches of the AIM Rules, and invite suggestions for other changes. I will have some, but the basic problem is “self-regulation” and the resulting unwillingness to take tough action. Both firmer rules on penalties and a cultural change is required.

In summary, this Discussion Paper on the AIM Rules is a useful step in the right direction and does appear to tackle some of the issues about AIM that I and ShareSoc raised. It is though only a discussion paper and hence that does not mean necessarily that action will be taken. In some regards it is still quite weak but regrettably AIM management have an uphill battle to get change adopted when many market participants consider everything in the garden is rosy. However, it is surely necessary to improve the reputation of AIM if the market is to attract more listings and reduce the number of complaints from investors.

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

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