As a result, the Ucis market has been on the receiving end of a lot of bad, and in our view not necessarily fair, press.
TLAs of EIS, VCT and FSA combine
In August, the FSA announced it planned to ban the sale of Ucis funds to retail investors – something we broadly agree with. However, much to the surprise of the industry in general, it decided to include Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments within this restriction.
We have argued for some time that in the right circumstance, an uncorrelated investment can be of significant benefit to the overall portfolio planning for an investor. In the Ucis abbreviation, ‘unregulated’ refers to the fact that it is the asset class that is not regulated which is why the Ucis structure is often the most suitable – if not the only – option for certain investment types, renewable energy or property investments, for example.
The regulated investment market lends itself to the much more mainstream mutual fund market, which, because of its regulated nature, has to conform to a large rule book. We believe that this can, and does, impact the potential for pure alpha, the potential for significant gain from a project or non-mainstream investment, undiluted by any other investments held within the investment vehicle.
For example, EIS and VCT schemes can offer this potential by being, in the main, single asset class focused.
There must be another way by which the FSA can protect investors, while simultaneously enabling them to diversify their portfolios in a manner encouraged by a Government who offers significant tax benefits for investing into these schemes. After all, why would a government encourage this if it was not in the interests of the economy as well as those putting their capital at risk?
Understand and explain the risks
You need only look at the tax incentives to appreciate how the government is trying to encourage certain investments.
For example, an investor receives 50% tax relief on an investment into a seed EIS, irrespective of their own personal tax rate. Similarly, while pension contributions are now restricted to £50,000, an investor can make an investment of £1m into an EIS and receive 30% via the tax treatment.
The FSA needs to reconsider their stance on the categorisation of EIS and VCT investments. If it does not, it will stifle government initiative into the economy and restrict choice for investors.
On a broader note, tarring all alternative investments with the same dodgy brush is not the answer. Instead, we as an industry should ensure suitability and understanding of all the risks involved prior to recommending an investment.
We believe Ucis investments have a place in certain portfolios and with RDR just around the corner, it is now more important than ever to clarify their role within the investment arena.
