Fund managers are urging investors seeking income to look at high-yielding venture capital trusts (VCTs).
Nearly two thirds of VCTs have returns of more than 5%, according to trade body the Association of Investment Companies (AIC).
Even the average VCT is running 4% up year-on-year. Over longer terms, yields are up a fifth in three years, 2% in five years and a massive 61% in 10 years.
VCTs are part of the stable of tax-incentivised investments in start-ups and companies that cannot raise cash from the banks – the other investments are the Enterprise Investment Scheme and little cousin the Seed Enterprise Investment Scheme.
AIC spokesperson Annabel Brodie-Smith said: “VCTs lead the way in bolstering enterprise by financing and supporting small businesses. When investors are hungry for income, VCTs offer attractive dividends which are tax free.”
Taking advantage of banks
The AIC has straw-polled opinions of some managers and their views on where to invest in 2013.
Chris Allner, Partner at Downing, said: “Leisure and education offer a number of opportunities, especially in buy and build for health clubs, schools and children’s play areas.
“We also invest in childcare and see this as a growth area, working with reputable operators.”
Many VCTs are also benefitting from the lack of bank investment in start-ups.
David Glick, Director of Edge Performance VCTs, said: “This is the right time to invest in VCTs. Growing companies cannot find bank borrowing. The economy will improve in the next investment cycle. The past reflects investing in a VCT at the right moment outperforms investing in other sectors at the wrong time.”
VCT managers are also spotting lots of companies ripe for investment.
Andrew Ferguson, Partner at Maven, said: “We see plenty of good companies with strong managers. We like SMEs that lead or influence their market with a straightforward strategy for continued good performance.”
VCTs and tax relief for investors are becoming important reasons to switch to the market.
Paul Latham, Managing Director at Octopus Investments, said: “This looks an important year for venture capitalists. Many investors harness a VCT for income tax relief, tax free growth and dividends, but VCTs are also complementary investment tools running alongside pensions and ISAs.
“VCTs are generally good investments and tax benefits make them even better.”
Fund managers also stress that VCTs’ contribution to financing small businesses is often underestimated – along with that of the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, which offer some of the most effective tax breaks available for investors.
Paul Latham, of Octopus Investments, said: “The support these schemes give to Britain’s small businesses is immense. While bank funding is difficult, VCTs can supply a lifeline. The schemes can also aid UK businesses to grow in to market leaders and world beaters. We know out investors want a part in the recovery of the UK economy.”