What should advisers look out for this year in the investment company sector?
For venture capital trusts the changes to the rules brought about by the European Commission’s reapproval of the VCT scheme have been finalised.
The main UK rule changes are that VCTs can no longer invest in management buyouts. In addition, investee companies are subject to a £12m investment lifetime limit or a £20m lifetime limit for knowledge intensive companies.
There is an ‘age of investment’ rule, so investee companies cannot receive their first investment more than seven years after making their first commercial sale, again unless the company is knowledge intensive, in which case the age limit is 10 years.
This age of company rule does not apply where the VCT’s investment is more than 50 per cent of the average turnover of the company over the last five years.
There has been much speculation on the impact of these rule changes and clearly they will have more impact on some VCT strategies than others.
Ian Sayers, chief executive of the AIC, said: “Though not all of these changes are welcome, adaptability is one of the key strengths of the sector, which has faced such challenges in the past and has coped well.
“We are confident VCTs and their managers will do the same again.”
This view was echoed by Paul Latham, the managing director at Octopus Investments who said: “Changes to VCT rules, such as those outlined by this year’s Finance Bill, are nothing new – almost every year there has been some change – and the industry has learned to adapt.”
With interest rate rises looking less likely in the UK for at least the immediate future, if not the whole of 2016, it’s likely that demand for income will continue to dominate.
Launches for the last couple of years have been dominated by high yielding specialist assets, like infrastructure, illiquid debt and property.
The closed ended structure of the investment company sector is particularly suited to these types of illiquid assets and it looks likely that there will be further demand for these in 2016.
The low level of dividend cover for FTSE stocks has been a concern.
Mark Barnett has warned investors: “The outlook for dividend growth is going to be much more closely aligned to earnings growth. The best we can hope for is earnings and dividends to rise in line.
“It will be a slower rate of growth than we have seen in recent years.”
It’s likely that the equity income investment companies will remain popular due to the benefits of their structure, namely the ability to retain up to 15 per cent of income each year, building up a revenue reserve, whereas open-ended funds have to pay out all their income to investors.
Investment companies use these reserves to boost dividends when times are tough and this has allowed 19 investment companies to raise dividends every year for 20 years or more.
Finally, Fidelity FundsNetwork are the first of the big three adviser platforms to introduce investment companies.
Approximately 50 investment companies went up in early December and their long-term plans are to allow further access to investment companies.
The reaction of the other platforms, has been interesting, with Old Mutual Wealth expecting to deliver access to investment companies as part of a project to update their platform technology.
Cofunds has also said it would look at developing a service for investment companies but currently has higher priority projects.
Ultimately, time will tell what this year brings to the investment company industry.
Annabel Brodie-Smith is communications director at the Association of Investment Companies
