Avoiding Investment Torpedoes

Another day, another dollar …or should that read another day, another investment fraud exposed. On Tuesday the United States SEC froze the assets of Allen Stanford and three companies in his Stanford Financial Group. You can read the SEC press release here. Significant and sustained bear markets always expose the fraudsters and charlatans of the investment world. What is surprising in this current recessionary environment is the scale of the frauds perpetrated by such high profile public figures such as Bernard Madoff and Allen Stanford. Madoff was a former Chairman of the NASDAQ and Stanford courted the media with his cricket ‘benevolence’.

The details of these massive frauds will be picked over with a fine tooth comb over the coming months. What is immediately clear is that investors and particularly their professional advisers, should have heard the warning bells long before the frauds were finally exposed.

The regulators will never be able to prevent a determined fraudster from concealing their actions for a while, and investors should always understand that the best defence is to follow the well know maxim…caveat emptor, buyer beware. There is a simple test which I advise all investors to consider before following any investment advice or making an investment.

• Is there a sound theoretical basis for why an investment strategy will be successful going forward?


• Is there clear empirical evidence of how the investment strategy has performed historically?


• Can the concept be practically implemented to generate the theoretical returns available?

Surprisingly enough, few investment strategies pass all three tests. Making investment decisions within such a framework will also help investors filter out potential fraudsters and steer clear of schemes such as Stanford’s, which according to the SEC offered:

“…improbable and unsubstantiated high interest rates, supposedly earned through its unique investment strategy…”

Schemes that sound too good to be true invariably are.

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This is for information purposes only and you should always seek professional advice

Venture Capital Trusts - A lower risk investment opportunity

Tax advantaged investments such as Venture Capital Trusts (VCTs) are inevitably marketed in the run-up to the end of the tax year. Marketing material often focuses on the attractive tax incentives whilst playing down the high costs and high investment risks. Traditional venture capital investing is a very hit and miss affair, with the majority of good investment performance often coming from one or two incredibly successful start-up investments. Unfortunately these stars are often dragged down by the failure of the average venture capital investment. For this reason it is very hard to capture the average returns from the venture capture asset class as a whole. Most clients who want to access the higher expected returns from small companies, when compared to equity returns overall, would be better off gaining broad exposure to this market sector in a low cost diversified collective fund. You can view historical VCT performance here - VCT performance figures.

However, the VCT tax breaks can provide a good risk-adjusted investment opportunity when structured appropriately. VCT tax advantages for qualifying shares held for five years are as follows:

• 30% income tax relief on annual investments of up to £200,000 per person.



• Tax-free dividends.



• No capital gains tax within the VCT or on eventual disposal of VCT shares.

In the past I have not felt that many VCTs offered a compelling proposition. This year however, I think that the Triple Point TP5 VCT offers an excellent investment as it is geared to harvest the VCT tax breaks with the minimum amount of investment risk.

Triple Point TP5 will initially hold 100% of the trust assets in low risk fixed income investments, with this exposure reducing to approximately 30% within three years to meet the VCT qualifying rules. The reducing non-qualifying investments will be replaced by investments in companies whose revenues are guaranteed by contracts with financially sound counterparties, such as NHS and Local Government Authorities. The overall proposition is not one which will provide high returns, as it is structured to keep the risk of capital losses to a minimum. Most of the net returns available to investors will come through the tax relief gained at outset. You can read more about the structure of Triple Point TP5 and the potential returns here.

Triple Point themselves are unique in the marketplace and focus solely on this type of investment across various tax advantaged holding structures. They have an impressive line-up of tax and investment specialists who offer a far more compelling proposition than many of the ‘marketing’ driven investment companies.

The current economic climate does not really impact on the underlying investments, but low interest rates will reduce the headline returns as with other types of investment. Triple Point are aiming to raise £50 million, and this low risk structure will I think, prove very popular as investors search out any source of increasing their returns whilst avoiding equity market risk.

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This is for information purposes only and you should always seek professional advice