Call it what you like, permanent capital – or patient capital – is a compelling reason to favour closed-end funds, such as investment trusts, over their more popular rivals, unit trusts and other open-ended investment companies or Oeics. That distinction may sound like a mere technicality but this structural difference provides a powerful incentive for long-term investment over short-term speculation.
As pointed out here from time to time, investment trusts’ stock market listing means long-term shareholders are never required to subsidise short-term speculators who flee to cash when fashion changes. Instead, the share price or discount to net asset value can take the strain, unlike unit trusts where managers must sell assets, perhaps at fire sale prices, to meet redemptions. Put another way, investment trusts’ structure encourages us to buy on the dips rather than bail out on the blips.
Now it appears the penny has dropped at the Treasury, of all places, which has issued a consultation paper about how best to funnel more sticky money into commercialising technology and other innovations. Everyone who cares about Britain’s economic development in general and investment trusts in particular should respond to the central question posed by ‘Financing Growth in Innovative Firms’ before the consultation closes on 24 September.
Chancellor Phillip Hammond explains in his foreword: ‘One main barrier holding back the continued development of young innovative firms, such as those commercialising research from our universities, continues to be access to long-term investment. This slows these firms’ growth, dampens their ambition and means that some firms are sold to trade buyers rather than growing to maturity in the UK.’
Worryingly, the paper muses about putting more public cash into ‘a new national investment fund’. But history provides bleak warnings about the persistent failure of politicians and bureaucrats who tried to pick winners when playing with our money. Instead, the chancellor – formerly a successful businessman in his own right – clearly favours more encouragement for private sector funds with an established record in this specialist area.
The Treasury document poses the question – how to support greater retail investment in patient capital? – and points out: ‘This includes asking about the merits of supporting greater investment in listed vehicles that in turn invest in firms requiring patient capital. One of the levers available to support greater investment is tax and the consultation asks whether specific proposals would be effective.
‘These measures would help both new and existing investors to increase their investment in patient capital. For example, they could support new University Investment Funds (university linked or independent funds that specialise in spinout investment) to set up and existing ones to raise new funding, thereby supporting the commercialisation of intellectual property from UK universities.’
That sounds like good news for Woodford Patient Capital Trust (WPCT), where this shareholder is pleased to report both the share price and net asset value have picked up since last tipped here, when both had slipped below par. More widely, it may also augur well for venture capital trusts, where a five-year minimum holding period is the price for generous tax-breaks.
As a shareholder in Northern Venture Capital Trusts 2 (NTV) and 3 (NTN), this is also welcome news, although annual dividends equal to tax-free yields of 17% and 14% of the net investment are an even more substantial encouragement to retain some exposure to high-risk start-ups and tiddlers. The downside is that both shares continue to trade at hefty discounts to net asset value; 23% and 14% respectively.
No wonder seasoned observers such as John Newlands, late of Brewin Dolphin, say VCTs are ‘like lobster pots – easy to get into but more difficult to get out of’. Even so, double-digit yields pay us to be patient and there are suggestions in the Treasury consultation paper that, depending on responses received, there may be more good news for investment trusts in the Autumn Statement.
Full disclosure: here is a complete list of Ian Cowie’s stock market investments. It is not financial advice nor is any recommendation implied.