How to turn 9.5% into 2.4% – British Smaller Companies VCT

British Smaller Companies VCT (BSV) have recently circulated their Annual Report  prior to the AGM on the 29th July. They had a good year according to the Chairman’s report with the value of the investment portfolio increasing by 9.5% over the year.  But the total return (net asset value plus dividends increased by only 2.4% (a rise of 4.8p to 197.5p since launch). How can that be?

The reason is simply that costs went up 56%. That includes investment advisors fees up from £886k to £1,272k, not counting their incentive fee up from £221k to £564k, trail commissions up from £83k to £101k, and directors remuneration total up from £83k to £101k. So the total costs last year were £2.3 million as against profits before expenses and taxes of £6.3 million, i.e. 36% of the returns get lost in expenses.

The Chairman (Helen Sinclair) got paid £35,000 last year and the other two directors £20,000. They are increasing those fees to £40,000 and £25,000 for the current year which are quite high for a Venture Capital Trust and are obviously substantial increases.

But the main concern at this company is the incentive arrangement which is primarily dividend based. The fund manager gets 20% of the amount by which dividends paid in the relevant accounting period exceed 4p per ordinary share (with some conditions – see Note 3 to the accounts in the Annual Report). They paid 8p in dividends this year, and in fact paid out dividends of £5.5m when profits were only £4.0m.

I have voted against the re-election of the Chairman ever since the board adopted the new incentive arrangement which seemed to me to me grossly favourable to the fund manager (YFM Private Equity Ltd). Performance fees are generally to be deplored but dividend based ones are particularly to be abhorred. I shall be voting against her this year again and other shareholders may wish to consider doing the same. Likewise against the other two directors  for similar reasons. In addition Mr Cammerman has been on the board for more than 9 years and was formerly Chairman of YFM so cannot be considered independent.

On the same day I was reading the Annual Report of this company, I also read the latest edition of the Investors Chronicle which contained an article on investment trusts under the headline “Trust boards need to up their game”. Here is one quotation from the article: “Some boards seem to have forgotten that they are supposed to be acting on behalf of shareholders and not managers” – Alan Brierley of Cannacord Genuity.

It is undoubtedly the case that Venture Capital Trusts often demonstrate this problem in extremis, being creations and poodles of the fund manager. So I could not agree more with those comments. You can judge for yourselves whether British Smaller Cos VCT is an example.

Roger Lawson