The Association of Investment Companies (AIC) have just published a guide to Venture Capital Trusts entitled “Going for Growth”. It provides a good overview of this specialist sector of the market. It can be found here: http://www.theaic.co.uk/sites/default/files/uploads/files/AICVCTConsumerguide.pdf
It includes a number of examples of successful investments made by VCT managers including that made by Foresight in Procam. However, the dangers of VCT investment were highlighted recently by the events at Foresight 2 VCT who recently held their Annual General Meeting. In their Annual Report it was noted that the ordinary shares had declined in net asset value from 75p to 59p during the year (i.e. down 21%). The largest reduction was caused by a substantial write-down in Closed Loop Recycling which was their largest single investment.
As a long-standing investor in Foresight 1 VCT, I recall a visit to the company that the VCT manager organised. Closed Loop Recycling process waste plastic bottles into food grade packaging material. It was clearly a business that was operationally geared (i.e. very dependent on volumes) and also very sensitive to the price obtainable in the market for the finished product. It looked questionable to me at the time and has since required several fund raisings while they try to achieve profitability. Like many worthy “environmental” businesses, the financial return has been dubious in the extreme. It was surely doubtful whether this should have been allowed to become the largest investment in the Foresight 2 fund (and it was also held by some of the other Foresight VCTs).
The AIC publish financial data on all investment trusts and these are some of the figures for Foresight 2 VCT:
– Discount to net asset value: -47%
– On-going management charge (including performance fee): 3.01%
– Net asset value total return over 10 years: 73.1 (i.e. a reduction of 30%)
– Share price total return over 10 years: 31.3 (i.e. a reduction of 69%)
– Distribution yield nil.
The company is also running out of cash and hence was unable to support the latest fund raising by Closed Loop Recycling apparently. The fact that they would consider doing so is surprising.
Needless to say some investors in Foresight 2 are not happy and a number of ShareSoc Members have approached us about this company and some of the other Foresight VCTs. In general they seem to be underperforming the sector while having high management charges. If you have an interest in Foresight 2, or any of the other Foresight VCTs, and have concerns about the performance of these companies perhaps you would like to contact ShareSoc.
It surely emphasises the point that one has to be selective about which VCTs you invest in and as with any investment trust you need to keep an eye on what they are investing in and how they are managed. Although they may have diversified portfolios of small companies, and some VCTs have performed very well after taking into account the tax reliefs they provide, it is not a sector for ill-informed investors to get involved in without some care. Reading the AIC Guide is a good starting point.
Roger Lawson
Postscript: the two directors who were up for re-election at the AGM, Peter Dicks and David Quysner, got more than 21% of shareholders voting against them. That’s no doubt symptomatic of the concerns of investor. The details are in an RNS announcement by the company.
I have quite a lot invested across Foresight VCTs, and (since disposing of Downing Disaster) they’re in a class of their own as worst performer. So not happy.
On the other hand, if I’m going to lose money, then I’d rather lose it in environmental endeavours than in many other kinds of investment. Given that VCTs are explicitly high-risk investments, I think the main complaint against them that really has legs is those charges. As with other VCTs, if there’s a bonus for outperforming[1] there should be corresponding penalties for this kind of losses.
[1] Performance bonuses, where applicable, should be payable entirely in shares and with a five-year lock-in. But that’s a whole different argument.