What is our VCTs’ div­i­dend out­look – and how are they cop­ing with Covid?

Our two ven­ture cap­i­tal trusts seem to of­fer very at­trac­tive in­comes but we need to es­tab­lish whether they are sus­tain­able

The Daily Telegraph - Business - - Business - RICHARD EVANS

HOW do funds whose pur­pose is to get new busi­nesses off the ground man­age to be be­hind some of the high­est yields you will find any­where on the stock mar­ket?

Th­ese spe­cialised port­fo­lios, called ven­ture cap­i­tal trusts or VCTS, have ev­ery rea­son to pay good div­i­dends – their spe­cial sta­tus makes their di­vis tax free – but how can they fund div­i­dends when they in­vest in fledg­ling firms that are too im­ma­ture to pay di­vis them­selves?

There are two an­swers: first, they can use the pro­ceeds of any sales of th­ese busi­nesses; sec­ond, they of­ten lend money to the firms in which they in­vest as well as own shares in them. Th­ese loans pro­duce in­ter­est. It’s fair to say that, in re­la­tion to the first of th­ese sources, the money rep­re­sents cap­i­tal

rather than in­come.

But th­ese twin sources have en­abled the two VCTs in our In­come Port­fo­lio, Baron­s­mead and North­ern, to pro­duce a stream of div­i­dends since we bought them. We paid 83p and 70p re­spec­tively in Oc­to­ber 2016 and the two trusts have, coin­ci­den­tally, each paid (or de­clared) di­vis of 23.5p since then.

The cur­rent share prices of 68.5p and 55.75p hint at the fact that some of the div­i­dends have in ef­fect been paid from cap­i­tal. At cur­rent share prices they yield 9.5pc and 7.2pc re­spec­tively; rel­a­tive to our pur­chase prices they yield 7.8pc and 5.7pc.

As you would ex­pect from the un­pre­dictabil­ity of the sales of VCTs’ hold­ings and hence of the in­flow of funds avail­able to pay div­i­dends, pay­ments have var­ied. Baron­s­mead paid 18.5p in the full year be­fore we bought it, then 6.5p in 2017, 7.5p the fol­low­ing year and back down to 6.5p last year. So far this year it has de­clared an un­changed in­terim pay­ment of 3p. North­ern paid 13p in 2016, then 11p, and then 4p in 2018 and 2019. Its de­clared in­terim of 1.5p this year com­pares with 2p at the same stage last year.

Baron­s­mead’s an­nual div­i­dend tar­get is to pay 7pc of the net as­set value at the start of the fi­nan­cial year, which would mean a tar­get of 5p this year, while North­ern’s is 5pc of start­ing NAV, equiv­a­lent to about 3.5p.

The trend down­wards re­flects changes in the VCT rules that have pushed them towards in­vest­ing in riskier early-stage com­pa­nies. This prolongs the pe­riod for which VCTs are likely to have to stick with their hold­ings be­fore a suc­cess­ful sale can be made. The trusts’ ear­lier abil­ity to in­vest in steady in­come-pro­duc­ing as­sets such as green en­ergy sources has dis­ap­peared.

What can we ex­pect by way of div­i­dends from VCTs gen­er­ally, and our two hold­ings in par­tic­u­lar, in fu­ture, es­pe­cially now that coron­avirus has wrought such havoc?

We put th­ese ques­tions to Alan Shee­han of Mi­cap, an in­vest­ment re­search firm that spe­cialises in VCTs and other niche ve­hi­cles such as the En­ter­prise In­vest­ment Scheme.

He said: “The ef­fect of Covid-19 on a VCT will de­pend heav­ily on how it in­vests. Some spe­cialise, for ex­am­ple, in back­ing re­tail­ers and we can ex­pect some of those com­pa­nies to suf­fer. Oth­ers con­cen­trate on tech­nol­o­gy­based start-ups that spend a lot on re­search and de­vel­op­ment. That kind of busi­ness can be less af­fected by the pan­demic or may even be able to ben­e­fit from it – as long as it is able to meet any con­tin­u­ing fund­ing needs.”

Where do our two VCTs stand on that spec­trum? Baron­s­mead has al­most half of its money in tech­nol­ogy busi­nesses, 19pc in health and ed­u­ca­tion and 23pc in busi­ness ser­vices. Ten per cent is in “con­sumer mar­kets”, which in­clude hard-hit re­tail and travel. This mix strikes Questor as well suited to th­ese ex­cep­tional cir­cum­stances.

North­ern did not give such a break­down in its most re­cent up­date but a glance at its top 15 hold­ings shows sev­eral in soft­ware and e-com­merce, along with oth­ers in en­ter­tain­ment. Again we can feel rea­son­ably con­fi­dent about its po­si­tion­ing in light of the pan­demic.

We will hold on to both trusts.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.