Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Ben Yearsley, investment director at Wealth Club.
Investors are finding it ever harder to find income and a new dividend tax (for anyone in receipt of more than £25,270 in dividends) is about to make it harder still. But there is a useful source of income that isn’t subject to the new tax: venture capital trusts (VCTs). In addition, there is a generous 30% upfront tax rebate and dividends paid are tax-free.
VCTs invest in small and growing firms – not the obvious place to seek a reliable income stream. However, VCT managers are a canny bunch and after much cajoling many years ago suddenly realised that a reliable, consistent dividend stream was what investors actually wanted. Many deals to buy into these small companies have been structured to pay a healthy yield but without compromising growth prospects. Successful investing in VCTs is as ever about spreading risk by diversifying your assets.
Three to consider are Downing One VCT, ProVen, and Maven Income & Growth 3. The first two I would buy as a new issue to get the upfront tax breaks; the third I would buy on the secondary market, as I explain below.
Downing One VCT (LSE: DDV1), with a targeted dividend yield of 4%, is a long-standing, £86m trust and is well diversified, with more than 80 holdings. Its mix of investments is fairly unique for its sector – it has a combination of Aim-listed companies and unquoted ones. The Aim companies account for about 40% of the portfolio and are managed by the highly talented Judith Mackenzie; they are there to provide a growth kicker.The balance is invested in asset-backed businesses, bought via deals that are often structured to provide steady, modest growth and regular income.
ProVen VCT (LSE: PVN), with a targeted dividend of 5% of net asset value, is badged a “generalist” fund. The trust’s manager, Beringea, however, is well known for investing in digital media. Its focus has always been on earlier- stage growth opportunities and as such the recent VCT rule changes – which rule out using VCT money for management buyouts – should have little impact on its approach. A strong team, led by chief investment officer Karen McCormick, has proven adept at managing such exciting earlier-stage investments. This VCT has a market capitalisation of £65m and has more than 30 holdings. It recently sold its stake in boutique jeweller Monica Vinader for a 12x multiple.
I would buy Maven Income and Growth 3 (LSE: MIG3) on the secondary market, without the upfront tax breaks, as the discount to net asset value is currently an attractive 10% and the shares offer a yield of 6.7%. Investors still receive tax-free dividends. Bill Nixon is lead manager and has spent the last 15 years building an excellent reputation in VCT management.
The trust is based in Glasgow, but has a nationwide presence, and has specialisms in many areas. One thing the trust doesn’t like doing is overpaying! Many of its deals are structured to prioritise income, although not at the expense of capital growth, as evidenced by a long line of profitable exits. It has 47 firms in its £38m portfolio today, with a wide range of companies from insurance to scientific instruments to energy services.