08 April 2016

Blog: Cameron finds a socially useful way to avoid tax

by Bruce Packard | 8 April 2016

Passive fund managers seem to be winning the argument versus higher charging active fund managers. ETFs took in a record $372bn of net new assets last year, and the industry now controls nearly $3tn of assets, according to the Financial Times.

As more money flows into passive funds, it is worth thinking about some of the possible negative consequences. Perhaps few are likely to feel sympathy for well healed Mayfair types who can no longer charge 2 and 20% performance fee.

But there is a more serious problem with the current popularity of passive funds. By their nature, index funds can’t supply smaller, early stage companies with the equity capital that they need to grow. And without risk capital being provided to such companies, society will be starved of innovation. Would an index tracker have bought ASOS when it first listed on AIM?

Early this week I listened to a talk by Lord John Lee, the former Conservative cabinet minister. Lord Lee is also famous as a small cap equity investor, who used the tax advantages of his self-selected ISA to invest in companies to become the country’s first ISA millionaire. He still takes an active interest in the stock market and mentioned a recent IPO that he had invested in: Cerillion.

The tech company is a leading provider of Customer Relationship Management (CRM) and billing solutions for mobile companies. It is profitable and expanding overseas. Though it is still too early to call Cerillion a UK technology success story, it is a great example of a beneficiary of the Venture Capital Trust tax break.

6 months ahead of the IPO, Baronsmead VCT funds subscribed to just over 5 million shares at 76p a share. Currently the price of the shares post IPO is over 100p.

Inevitably there will be some failures in VCT funds, and that is why there are generous tax breaks. Over the last 3 years £1.3bn has flowed into VCTs and the AIC has just announced that the 2015/16 inflow of £458m was the third highest on record. At a time when risk averse Government bonds and passive index funds are attracting the bulk of money, it is encouraging to see the VCT tax breaks for more socially useful areas of financing are working.