This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

Top performing VCTs and performance fees.

Yesterday the AIC published a note on the “dividend stars” and “strongest performers” among Venture Capital Trusts (VCTs) now that such companies have been in existence for 18 years. In terms of total dividends paid out since launch ProVen Growth & Income came top with Baronsmead VCT in second place. But investors should bear in mind that some VCTs pay dividends out of the capital of the trust which sometimes just means that investors are simply having the money they invested returned to them as tax free dividends – whether they understand this is not always clear. This has been a particularly problem in the ProVen VCTs, compounded by the fact that the managers have been getting a performance fee based on dividends paid out.

A better measure is of course the total return (share price change plus dividends, or net asset value change plus dividends). The AIC did give the top performing ones in terms of share price total return and the strongest performers were British Smaller Companies VCT (up 359% over ten years whereas the average VCT is up only 88%), Northern Venture Trust, ProVen Income and Growth VCT, ProVen VCT and Maven Income and Growth VCT.

Coincidentally on the day the AIC published their note ShareSoc Directors and one of our members had a meeting with the directors and managers of ProVen VCT to discuss (and try and get some understanding) of the revised management incentive arrangements that were adopted, plus the latest “adjustments” thereto made at the last General Meeting. The company has had three different incentive schemes during its life, despite the fact that the Chairman has remained the same during that period. The latest one is as usual complex but is at least based not solely on dividends paid out.

As was said at the meeting, the complexity of management incentive agreements in VCTs means that few shareholders understand them or look at the impact that they may have some years hence. But shareholders should look at them very carefully because sometimes they result in very large amounts being paid to the managers. For example in Rensburg AIM VCT, on which ShareSoc ran a campaign to get some changes, 6.4% and 6.5% total expenses (driven by high management performance fees) for two years. ProVen VCT managed to get to 10.9% in one year because of the dividend based bonus scheme!

Now the directors of VCTs, and their fund managers, argue that if great performance is being achieved then shareholders will be happy and hence won’t mind paying large fees to the managers. But often these anomalous figures are not simply as a result of good fund management performance but because of aspects of the fee structure. As always the devil in the detail and often the fund managers understand the detail better than the part-time directors of these companies, with the inevitable result.

It was suggested by ShareSoc in the meeting that it would be helpful to have some projected figures for management fees based on various performance outcomes so that shareholders could get a better understanding of what they were likely to be paying in future.

On a personal note, the author feels that performance fees are unnecessary anyway but it is unfortunately a fact of life that private equity investment managers are focussed on achieving high income from such bonus arrangements. In reality an investment trust that performs well grows in size (so the managers get higher fees), and also the successful ones can raise more capital (as ProVen VCT is about to do) also increasing the fees paid to the managers. This should surely be incentive enough.

But there is one general point that is worth making. The successful VCTs (and some are mentioned above) have generated very good returns to shareholders, particularly after taking account of the tax reliefs available). But others have not. So VCTs are worth looking at for private investors but you need to be very selective about which ones you invest in. Some have managers who do perform, but others don’t. Whether they have incentive fee arrangements in place (and not all do) does not necessarily affect their performance.

Roger Lawson

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