The inability to purchase VCTs on the primary market via a platform has proved a headache for advisers but, says Daniel Kiernan, research director at Intelligent Partnership, the situation has begun to change
Investment platforms now boast an estimated £350bn in assets under administration while some four-fifths of new retail investments are now made via a platform. Today, almost all advisers use at least one platform and, in surveys, both advisers and consumers cite the functionality, ease of use and ability to build a consolidated picture of their total portfolio as key benefits of this approach.
To date, however, it has not been practical to hold venture capital trusts (VCTs) on platforms. It is possible to transact in VCTs in the secondary market via a platform, or to purchase a VCT off-platform and then transfer it onto a platform, but it has not been possible to purchase VCT shares in the primary market – which of course is what most VCT investors want to do in order to obtain the upfront tax relief. This is major headache for advisers and resolving this issue would remove a significant source of friction in the investment process and pave the way for increased inflows.
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The situation has begun to change. Changes announced in the 2014 Finance Bill allowed shares in VCTs to be bought by a nominee and still qualify for the tax reliefs. Nominee ownership is a key requirement in enabling financial advisers to manage their clients’ investments on platforms and, in April 2015, Octopus announced it had completed a development with Transact to enable shares in its VCTs to be bought and held on the platform.
This was a relatively big project for Transact and Octopus, but it may be that, now they have undertaken much of the heavy lifting, it will be easier for other platforms and providers to follow suit. Intelligent Partnership held a round-table discussion between Transact, Octopus and small group of VCT providers in September 2015 to discuss the issue. Transact was of course keen to bring more providers on board as, perhaps counter-intuitively, were Octopus – they both want to see this become a genuine route to market for VCTs.
The other VCT providers were also very keen to get onto platforms, recognising the benefits that being able to transact in this way would bring. As Brendan Llewellyn of Adviser Home put it in a short presentation on the topic, when it comes to winning over new advisers “business process empathy is crucial”.
The providers see acceptance on a platform as not only a way to make life easier for existing adviser clients, but also as an opportunity to engage new ones. If the market grew, the platforms would presumably invest in developments such as publishing net asset values as well as share prices and reminders that five year minimum holding periods are coming to an end. It is easy to see how this could be a positive evolution for the VCT industry.
There are some logistics to iron out as well. Providers and platforms need to work closely together to manage their pipelines to ensure that offers are not oversubscribed (an issue for all closed funds on platforms); the distribution lists for ongoing communications to investors will be impacted now the central share register cannot be relied upon; the process for selling shares in the secondary market has to be closely monitored to ensure investors are obtaining the best possible price; and Dividend Reinvestment Schemes are harder to administer. These are all issues that should be overcome as we see more take-up on VCTs on platforms.
Inertia must be overcome
Often the process will hinge upon the interactions between the platform, receiving agents and registrars, rather than between the platform and the VCT provider. With little commercial interest in this development, there may be some inertia on their part that also needs to be overcome.
Perhaps the biggest potential stumbling block, however, is the time and effort involved. As the market leader, Octopus can afford to put resource into these projects – and kudos to the company for doing what a market-leader should do and leading the way. Many other VCT providers do not have big teams with the spare capacity to attack these projects in the same way although, of course, some of the other big VCTs are distracted by the recent rule changes as well.
Nevertheless, we are confident that, as more platforms and VCT providers work together, any friction in the onboarding process will be minimised and it will be easy enough for the small guys to follow suit. We think there could be a handful on Transact in the 2015/16 tax year and a lot more VCTs across a couple of the most flexible platforms – not the old fund supermarkets – the following season.
Now, most of these issues are for the industry to work out. From advisers’ point of view, however, they simply want the convenience of being able to access VCTs in the same way as the majority of other retail investment products – although there are two deeper issues advisers would do well to bear in mind.
The first is the issue of suitability. This was a fear expressed by some providers – and some advisers we spoke with. They see platforms as a mass-market tool and VCTs as a niche-market product and therefore feel uncomfortable with VCTs listing on platforms. Ultimately of course, suitability is something that will sit with the adviser and not the platform or provider – so it must be hoped that, if VCTs do become commonplace on platforms, it does not lead to complacency or mis-perceptions about what these products are on the part of some advisers.
There will also be a responsibility on providers to market themselves honestly although, with a new audience of advisers – and potential investors – to try and reach, some of the providers may well be tempted to position their product as close to mass-market as they dare.
This brings us onto the second consideration – if platform acceptance does potentially open up a new cohort of advisers to market to, the providers with the biggest marketing budgets will be the most successful. They will bring in more customers, but one hopes this is not at the expense of the smaller VCTs who have some of the most interesting – and best-performing – offers. Advisers who are coming to VCTs for the first time should keep this in mind when they are being bombarded with marketing messages in the near future.
Lend an ear
Daniel Kiernan, research director at Intelligent Partnership, considers whether the time is right for advisers to start using peer-to-peer lending as part of their investment proposition
Most of you will be aware of the rise of peer-to-peer (P2P) lending and will have seen the Government is currently consulting on including it within Isas. Perhaps some of you have even noted the size of the industry here in the UK – a cumulative total of £3.8bn has now been lent via P2P lenders, with £1.2bn of that lent in the first six months of this year alone. The big question is – is P2P lending now mainstream enough for advisers to consider for their clients?
The problem all investors face today is the low yields on conventional assets. The base rate is 0.5%, a 30-day notice saving account might pay just over 1% and a five-year savings bond will pay about 3%. The yield on a basket of income stocks might be around 4% today and, while this option also offers the prospect of a capital gain, it comes with the risk of more volatility.
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So the appeal of P2P lending is a higher yield than is available elsewhere, for very low volatility. According to research we have carried out for our forthcoming Alternative Finance Report, we think a yield of 6% to 7% is achievable. And the Liberium AltFi Data Returns Index (LARI), which measures the returns available by lending to the big three lending platforms in the UK – Funding Circle, RateSetter and Zopa – currently quotes a yield of 5.15%.
How do the platforms do this? Well, unlike mainstream banks, P2P lenders do not have a regulatory obligation to hold lots of capital and they do not have the same expenses as banks, such as branch networks. This means they can squeeze margins at both ends – and both borrowers and lenders benefit.
Furthermore, the lending activity is varied – a wide range of opportunities do exist. The broad split is between lending to consumers or lending to businesses but, even beyond that distinction, the platforms have very different business models.
Some only offer unsecured lending; others take some form of security from borrowers – such as a first charge on property, luxury goods or business assets. Some platforms run provision funds that are used to make lenders whole again in the event of default; others use insurance. Some are generalists; others specialise in sectors such as property, biotech or student finance. This is not a homogenous asset class.
Other signs of growing maturity include regulation – the industry has been regulated by the FCA since April 2014 – Sipp and (imminent) Isa acceptance and the deployment of more than £200m by the UK government (via the British Business Bank) and the influx of institutional investment into the sector.
So why hesitate? Well, P2P lending is still very young and the industry has not proven itself through the whole business cycle – although Zopa, the longest-standing platform, did live through the 2008 financial crisis. It is not certain how the asset class will fare when interest rates rise, liquidity is likely to evaporate in a crisis – at the moment it depends upon a flow of new investors – and there are concerns that, as the platforms race to grab market share, the quality of the borrowers could be compromised.
It is possible to mitigate these issues by diversifying across a number of platforms (and of course diversifying at the individual loan level), diversifying across both business and consumer lending and only making short-term loans to guard against the risk of interest rate rises. This is nit as much work as it sounds – most platforms have ‘autobid’ functions that allow you to set your investment criteria and then they take care of the rest.
Of course, all of that is still going to be tricky for an adviser to implement and be properly remunerated for. However, many of the platforms have built adviser portals to help you run your clients’ lending portfolios, so they are clearly anticipating that some advisers will become involved.
Is there an easier route? Well, a small number of funds focused on this sector have launched over the last 12 months or so. Take a look at GLI Finance, Victory Park Capital, the Ranger Direct Lending Fund and P2P Global Investments. These are investment trusts that are already ISA accepted and will run a diversified P2P lending portfolio that aims to provide investors with the sorts of yields mentioned above.
Intelligent Partnership has since 2008 provided education and information on alternative investments to a community of more than 3,000 financial advisers and investment professionals. As the UK’s only CPD-accredited provider in this space, the firm provide advisers with access to a range of events, training programmes, research papers, reports and portfolio analysis tools. It has created an educational environment not only to raise awareness of the industry but also to highlight best and poor practice, positive and negative trends and key market developments – all of which helps promote greater transparency and professionalism in the sector. Find out more about the firm here