Shareholders advised to vote against new performance fee at Northern Venture Trust

PRESS RELEASE 48 (26/06/2013)

Venture Capital Trusts (VCTs) are one of the stock market oddities but are beloved by many private investors because of the tax reliefs available to investors. Northern Venture Trust was one of the first to be launched back in 1995. It was issued without a fund management performance fee in place but they are now proposing to introduce one. ShareSoc advises shareholders in this company to vote against the resolution to approve the change in the management fee at the forthcoming General Meeting. 

The existing management fee is a fixed 2.06% of the net assets. The board of directors is proposing to add an incentive fee of 15% of the total return (net assets growth plus dividends) subject to a “hurdle”. The hurdle is defined in a rather complex way but in essence is 7% on investments except for cash, with the latter being 3%.  There is no proposed cut in the fixed fee to compensate shareholders for the reduction in the returns they will receive in future.

What will those reductions be? The company gives the figures for what the fee would have been in two prior years if such performance fees applied, and they would have added 0.88% and 0.31% to the charges payable. It is likely therefore that it might imply on average a figure of 0.5% in additional fees.

Shareholders in VCTs are probably already aware that they pay very high total charges in comparison with most investment trusts. For example, last year the total expenses (administration and fund management fees) of Northern were 2.6% of net assets at the year end. So this might rise to 3.1%. Indeed that is the figure charged last year by Northern 2 VCT which already has a performance fee at a somewhat lower rate. So it might be higher than 3.1% overall.

Northern Venture Trust has a very good investment performance record unlike many VCTs. The board argues that other VCTs commonly have performance fees, it will align the manager’s interests with shareholders and the need to remunerate the managers investment executives in a competitive marketplace. But why should shareholders approve a change in the terms on which they subscribed for shares in this company?

If the company has been run competently and successfully for the last 18 years with the existing fee arrangements in place, why should it be changed?

ShareSoc Chairman Roger Lawson made these comments: “Unfortunately there is no evidence that performance fees in investment trusts actually improve performance so really it’s just an excuse to raise the pay of the fund manager to the prejudice of shareholders. This is surely a symptom of the fact that VCTs are often run in the interests of the fund managers rather than of the investors. Has any VCT fund manager ever resigned his mandate because they considered they were not paid enough? Not to my knowledgeShareholders should ignore the sweetener of the special dividend and vote against this proposal.”

Note: An investor who invested £100,000 in this VCT in 1995 (ignoring tax reliefs) would have seen their investment grow to £253,344 by 2013 based on the total return of 5.3% per annum reported by independent VCT performance adviser Allenbridge. But if that return had been reduced to 4.8% per annum due to an additional 0.5% performance fee payable to the manager, then the investment would only have grown to £232,543 by 2013. In other words, the investor would have lost £20,801 by this apparently minor change to the management fee.  This shows the large impact that small additional management charges can make to the returns from long term investment in collective investment funds.

For further information, please contact:

Roger W. Lawson,
Chairman, ShareSoc
Telephone: 020-8467-2686 

Or; Stan Grierson, ShareSoc
Telephone 01628-522514

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