Although investment strategies focused on smaller companies have sometimes provided long-term investors with strong returns, they can often make for riskier investments.
While many UK-focused smaller companies funds concentrate on stocks at the lower end of the market cap scale such as those listed on the FTSE SmallCap index, venture capital trusts (VCTs) hunt among the unlisted and micro-cap space.
VCTs typically invest in unquoted shares of small, private businesses and may be higher risk than other small cap-focused trusts or funds.
There are 71 VCTs with total assets of £3.9bn, according to data from the Association of Investment Companies (AIC).
They carry no income tax on dividends from VCT shares and no capital gains tax on growth of shares. Indeed, shares bought when a VCT launches or raises new money can bring income tax relief, but the AIC warns against holding them purely for tax purposes.
Investors must hold the trusts for five years to become eligible for income tax relief, so FE Trustnet has decided to look at the five-year performance of these vehicles.
FE Trustnet considered trusts from the VCT Generalist sector – which aim to invest in a range of qualifying investments from different sectors – and the VCT AIM Quoted – which invest in companies listed on or about to be listed on the Alternative Investment Market (AIM).
Over five years to 23 May, the average IT UK Smaller Companies sector trust has returned 148.51 per cent, compared with an 81.95 per cent return for the average IT VCT AIM Quoted and 34.33 per cent for the average IT VCT Generalist trust.
Performance of VCT sectors vs UK smaller companies sectors over 5yrs
Source: FE Analytics
The IT UK Smaller Companies sector average return was the higher of the two conventional fund sectors focused on small-caps, which also included the open-ended IA UK Smaller Companies sector.
However, three VCTs have outperformed the IT UK Smaller companies sector over five years: Kings Arms Yard VCT, Artemis VCT and Unicorn AIM VCT.
Artemis VCT
The best five-year performer was the Artemis VCT, which has returned 217.57 per cent over the period. The trust is managed by Andy Gray, who also works alongside FE Alpha Manager Derek Stuart on the £1.1bn Artemis UK Special Situations fund.
Performance of trust vs sector over 5 yrs
Source: FE Analytics
The trust has also performed strongly over the past year, delivering a 40.25 per cent return, the highest of the three VCTs.
Its largest sector weighting is to industrials, which represented 22.5 per cent of the portfolio (as of 30 April), and technology where 20.3 per cent of the trust was invested.
Its largest holding is AIM-listed ULS Technology, a service provider of technology comparison solutions to the legal and financial services sectors and the property sector.
The trust was launched in March 2005 and has delivered a 139.1 per cent NAV return to 30 April 2017.
The IT VCT AIM Quoted trust has a yield of 16.33 per cent and an ongoing charge figure of 2.2 per cent, according to data from FE Analytics.
Unicorn AIM VCT
Another strong performer over five years was the Unicorn AIM VCT, which is managed by FE Alpha Manager Chris Hutchinson who also oversees the Unicorn Outstanding British Companies fund.
The £172.2m trust has returned 180.16 per cent over five years and is the best performer over 10 years, having delivered a 304.02 per cent gain.
Another IT VCT AIM Quoted sector trust, the manager aims to provide shareholders with an attractive return from a diversified portfolio.
The trust’s largest position is a 7.7 per cent holding in Cambridge-headquartered, global life sciences company Abcam, the AIM-listed firm provides antibodies to the life science industry.
Performance of trust vs sector over 5yrs
Source: FE Analytics
Its largest sector weighting is to the pharmaceuticals & biotechnology sector, which represent 20.8 per cent of the portfolio. Software & computer services companies represent a further 16.3 per cent of holdings.
The majority of companies held in the portfolio have a market capitalisation of less than £100m, making up 53.3 per cent of holdings.
Launched in 2001, the fund later merged with Unicorn AIM VCT II in 2010. The trust has a yield of 4.31 per cent and an OCF of around 2.2 per cent.
Kings Arms Yard VCT
The £56.8m Kings Arms Yard VCT, managed by Albion Ventures, aims to produce a regular and predictable income stream with appreciation in capital value.
Over five years the IT VCT Generalist trust has returned 149.3 per cent. The trust delivered a 5 per cent dividend last year and had an OCF of 2.5 per cent.
Performance of trust vs sector over 5yrs
Source: FE Analytics
The trust’s strategy involves investing in companies that will position the portfolio so that 50 per cent of holdings are composed of asset-backed, stable and ungeared businesses operating in the healthcare, environmental and leisure sectors.
The other half of the portfolio is positioned in higher growth businesses across a variety of sectors including stable, income generating businesses and higher risk technology companies.
As of 30 September 2016 (the most recently available information), the VCT’s largest holding was technology firm Elateral Group, which represented 11.1 per cent of the portfolio.
Another significant position for the trust is healthcare company Active Lives Care, an elderly care home in Oxford, which made up 10.4 per cent of the portfolio.
Albion Ventures, a VCT specialist, has managed the trust since January 2011; in September 2011 it was merged with King Arms Yard VCT 2.