Hargreave bullish on small companies via AIM VCTs

Giles Hargreave, chief executive of asset manager Hargreave Hale, says the strong bull market for UK small-cap shares is set continue and investors should look to venture capital trusts (VCTs) that focus on the Alternative Investment Market (AIM) for exposure.

Hargreave, who co-manages Hargreave Hale AIM VCT 1 and Hargreave Hale AIM VCT 2, has a long history of investing in smaller companies. Along with other funds, he is also the lead manager of the Marlborough UK Micro Cap Growth fund, which is also exposed to AIM-listed shares. He says the main difference between small and large company shares is that "elephants don't gallop" - you have to find the smaller and nimble companies which will eventually deliver superior growth.

VCT schemes were first established in 1995 and Hargreave Hale group has been managing VCTs for nine years. They offer significant tax breaks, including a 30% income tax break on initial subscriptions (if held for a minimum of five years) and tax-free capital gains and dividends. Hargreave adds a recent positive contributor has been the ability for VCTs to buy back their shares. The government has also announced the 0.5% stamp duty on AIM-listed share purchases will be scrapped from April 2014.

As the UK economic recovery gathers momentum, find out whether UK small and medium-sized companies can keep pace with larger firms in:UK small and mid caps back in favour.

Recent statistics released by the Association of Investment Companies (AIC) show that the VCT sector has total funds under management of £2.896 billion at 5 October 2013, the highest level since VCTs were launched. The AIC reports funds under management increased by £19 million in the first six months of 2013, after accounting for £94 million in newly issued shares, and returns of £161 million to shareholders in dividends and share buy backs.

Ian Sayers, director general of the AIC, says: "VCTs continue to play a vital role in supporting SMEs facing a finance gap. We are seeing solid dividends amongst the established VCTs which, together with more consistent performance, reflect the sector's increased maturity."

Why invest in VCTs?

Hargreave says: "There are more tax incentives to buy AIM shares, for example you don't have to pay capital gains tax or inheritance tax and in due course you won't have to pay stamp duty. I believe more companies will move to AIM rather than move off it."

Both Hargreave Hale VCTs hold a diversified portfolio of equity investments in small, UK-based qualifying companies, most of which are traded on AIM.

Hargreave Hale AIM VCT 1 was launched in October 2004 and raised £14.3 million from 858 investors. The top ten investments in VCT 1 include Advanced Computer, Idox, EKF Diagnostics, Mycelx Technology, LSE:PRES:Pressure Technologies, Animalcare, Intercede, Cohort, WANdisco and Abcam.

Oliver Bedford, co-manager of the two VCTs, says: "Here you are not buying a brand new VCT, you are buying into a fund where companies have been through the economic and market grinder a couple of times over the past few years. The quality of the companies has been revealed, you have an established portfolio of smaller companies within a very attractive tax-efficient wrapper."

Bedford says that key to the group's VCT strategy is to reduce volatility by investing in a core of solid, profitable, well-financed companies. "If you do that than clearly in any difficult market conditions you will better placed to weather that volatility."

He adds he looks to maximise tax-free dividend distributions to shareholders, currently the VCTs aim to pay a 5% dividend yield, based on the five-year net asset value.