In addition to my recent comments on Foresight 4, it’s worth covering the latest news from the original Foresight VCT (FTV). They have announced a General Meeting on the 8th March to consider two matters:
- An offer to investors to raise up to £20 million by an issue of new shares (an offer document was enclosed with the notice to existing investors).
- The introduction of a new performance fee for the Manager (Foresight Group) and co-investment scheme.
As regards the former, the covering letter from the Chairman suggests that the VCT is “regarded as one of the best performing VCTs” and has “20 years of market leading performance”. That’s not my experience having held this VCT for almost 20 years. Just looking at the latest AIC figures for the company it shows an NAV Total Return of minus 4.9% over 5 years and minus 7.1% over 10 years. That compares with a comparative sector performance of generalist VCTs of plus 50% over 5 years and plus 73.6% over 10 years at the time of writing.
Foresight VCT did achieve one very good realisation in its early years which had a major influence on their reported performance subsequently. This was Yoomedia – it later transpired that they floated on AIM on the basis of fraudulent accounts.
In respect of the new performance fee arrangements (there is no existing one following the merger in 2015), this looks a particularly egregious one. I am not in favour of management performance fees (on top of the normal fixed percentage base fee), for any investment trust. But this one looks both easy to achieve and can result in perverse payments.
The proposed performance fee has two hurdles that both have to be achieved for a payout to be made. The first (Hurdle A) requires an NAV Total Return of 100p over 3 years, from a base of 88p. In other words a total return (capital plus dividends paid) of 13.6% over 3 years which is roughly equivalent to 4.5% per year. Hardly a great return is it?
In addition as it is partly based on dividends paid out it is open to manipulation as we have seen with other VCTs who paid performance fees based on dividends in the past.
The second hurdle (Hurdle B) pays out on individual investments which achieve a return of 4% plus RPI per annum (say 6% at present). Any companies exceeding that on a full or partial realisation cause a payment to be made of 20% of profits to the Manager.
Now the returns on individual investments within VCTs vary widely. Some will show losses, while others can produce returns of 5 times, ten times or even more from the initial cost. But this formula ignores the losses (so long as Hurdle A is met) so in practice large fees can be paid out on a few successful investments when the overall return on all investments is very pedestrian. It also means losses in one year can be ignored, while large profits are paid out in good years if there are just a few successful investments.
Paying out based on individual investments is not right – it encourages a search for lottery tickets. Shareholders only get a return based on the whole portfolio, so the manager shouldn’t be able to cherry pick returns out of that.
This is not a wise performance incentive arrangement even if the principle of even having one was accepted.
Shareholders are recommended to vote against the proposed performance fee arrangement.