Questor: our VCTs continue to offer valuable diversification in a tough environment

Income investing has become increasingly challenging in recent years. Low interest rates have pushed asset prices higher, which has resulted in lower yields. 

The pandemic has disrupted payouts to shareholders across a variety of sectors – some of which are yet to recover fully. And, more recently, high inflation is threatening the real-terms value of income received from investments.

As a result, Questor’s Income Portfolio faces a difficult outlook. Balancing the opposing demands of a high and fast-rising income with at least some certainty of return means a wide range of assets are likely to be required.

In this column’s view, venture capital trusts, or VCTs, can provide welcome diversification and long-term income potential. Our two VCT holdings currently make up around 7pc of the portfolio. At first glance, their performance has been disappointing. 

Baronsmead Venture Trust’s share price is currently 25pc lower than at the time of our notional purchase in October 2016, while Northern Venture Trust has fallen by a more modest 7pc over the same period. However, their capital returns do not paint the full picture. 

Both investments have returned significant sums in the form of dividends over recent years, whether through profits made on sales of the smaller companies in which they invest or on the interest they charge on money lent to those firms.

In fact, Baronsmead has returned 33.5p per share in dividends since our original recommendation. This is equivalent to 40pc of the purchase price. Similarly, the 36p per share paid in dividends by Northern is more than 50pc of our original purchase price. The tax-free status of all these dividends, even outside an Isa or pension, is an added bonus.

In Questor’s view, both trusts continue to offer an appealing mix of income and diversification credentials. Indeed, Baronsmead’s latest annual report showed that its net asset value (NAV) per share increased by 16pc over the year to reach 78.9p.

The value of its portfolio of directly held Aim investments increased by 53pc, versus a 28pc underlying gain for its unquoted holdings. 

Notable realisations included Pho, the chain of Vietnamese restaurants, whose sale generated an investment return of two and a half times its initial cost, and online teaching specialist Wey Education, which returned the trust’s highest ever multiple of 13.6 times its initial cost.

Meanwhile, Northern’s NAV increased by just under 5pc to reach 74.1p in its latest financial year. It made realisations amounting to £31.1m during the year, which represented a £22m gain relative to the original cost of the investments. Its fruit and vegetables delivery business, Oddbox, was sold for 10.9 times its initial investment.

Of course, neither VCT offers a uniform income. Their returns to investors largely depend on when their holdings are realised and how profitable they have been.

However, in an era when unearthing a diverse range of worthwhile income-producing investments has become more challenging, they continue to offer favourable risk/reward opportunities over the long run. As a result, they remain an important part of our Income Portfolio. 

Questor says: hold

Tickers: BVT, NVT

Share prices at close: 64.5p, 66p

Update: BioPharma Credit

The capital return of another portfolio holding, BioPharma Credit, has also been somewhat disappointing. The dollar-denominated shares of this quoted fund, which lends to companies in the life sciences industry, have moved only 4pc higher since they were added to our Income Portfolio in April 2020.

However, the company has offered a relatively stable dividend in spite of various economic and geopolitical uncertainties over recent years. For example, it has paid at least 1.75 cents per share every quarter since June 2018. This amounts to a yield of around 6.7pc at the current share price.

The company’s focus on “floating-rate” debt, which accounts for around 60pc of its portfolio, should provide a degree of inflation protection over the coming months. Although the portfolio is more concentrated than this column would ideally like, its differentiated offering relative to many of our other holdings continues to earn it a place in our Income Portfolio. 

Questor says: hold

Ticker: BPCR

Share price at close: $1.03

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