The performance of a VCT can be assessed by considering the dividends it has previously paid.
But there is more to it than simply looking at the past dividends: if the VCT’s Net Asset Value (NAV) per share or traded share price has fallen more than the amount paid in dividends, then the investor may have made an unrealised loss over that period.
It is also vital to remember that past performance is not a guide to the future and while many VCTs have a ‘target dividend’, dividends are variable and are not guaranteed.
When it comes to comparing the performance of different VCTs, there are two main measures used: the share price total return; and the NAV total return.
The share price total return is the value of any dividends paid plus the difference between the current share price and the price at which the shares were issued, expressed as a percentage of the original investment amount.
The NAV total return is the value of any dividends paid plus the difference between the current NAV per share and the NAV per share when the shares were issued, expressed as a percentage of the original investment amount.
Although it is usually assumed in both cases that dividends are reinvested, advisers need to bear in mind that some VCT managers may publish their NAV returns as a cumulative return, in which dividends are added but not reinvested.
The main difference between these two ways of assessing a VCT’s performance is that the share price can fluctuate with market sentiment, whereas the NAV per share is based on the value of the VCT’s net assets.
For this reason the NAV total return is generally considered to be a more reliable indicator for assessing the performance of a VCT’s investment strategy.
When looking at the NAV, however, it’s important for advisers to be aware that, when investment company shares are traded on a stock market, the share price may be higher or lower than the NAV.
Paying less than the NAV means you buy shares at a discount, while paying more than the NAV means buying shares at a premium.
These different approaches to tracking performance (share price total return versus NAV total return) are important for an adviser to note, because when making assessments of different VCTs’ performances, comparisons need to be made on a like-for-like basis.
Covering all bases
To provide comprehensive research and due diligence on VCT investments, there are a number of other areas that an adviser can consider.
Among these are: VCT prospectus, factsheets and annual reports.
