VCTs awash with cash despite boost for EIS Investors have been pouring money into venture capital trusts (VCTs) this year despite predictions that the enhanced tax relief for Enterprise Investment Schemes (EIS) would divert attention away from these products. Changes introduced in the 2012 Budget mean that EISs now allow investors to invest more, confer more tax benefits, and allow more carry-backs of prior years" reliefs than through VCTs. But instead of investment into this sector being curtailed, the latest figures released from the Association of Investment Companies show that total funds under management have reached £2.896bn, the highest level since VCTs were established in 1995. IN Investments Jason Hollands of broker Bestinvest explains that the VCT market in 2011/12 was hit by a couple of renewable energy VCTs launches being pulled due to the cut in feed-in tariffs and adds that this was a more likely cause of the dip in sales than a general shift to another scheme. "VCTs appeal to a different category of investor than EIS companies," he says. They are going to be considerably more attractive to investors seeking income, as unlike EIS they offer the prospect of tax-free yields. He points out that in the current economic climate, income-generating investments are in scarce supply thanks to ultra-low rates and yield compression in mainstream asset classes. "The tax-free yields on mature VCT portfolios are very attractive, with some offering in effect double-digit gross equivalent yields once the upfront tax credit is factored in," he says. Others attribute investor appetite to the continued strong performance in the VCT sector. Matthew Woodbridge, vice-president of wealth and investment management at Barclays Wealth points to the ProVen VCTs, which exited Fjord, a design consultancy business, earlier this year, for four times its original investment. That windfall will lead to tax-free dividends being paid out to shareholders. Established generalist VCTs often offer top-up issues to investors, meaning investors can gain exposure to an existing portfolio of companies at varying stages of maturity together with access to any future dividends. This is extremely attractive," says Mr Woodbridge. He adds that some managers have a record stretching back to the late 1990s so investors can also have a clear view of who the successful managers are. This is borne out by the fact that the largest 10 VCT managers in terms of AUM manage around three quarters of total VCT funds under management. Adrian Lowcock, senior investment manager at Hargreaves Lansdown, also likes top-up VCTs where investors gain access to mature portfolios with the potential for early dividends as opposed to brand new VCTs which can take a number of years to become fully invested and mature. The other compelling reason for investing in VCTs, say experts, is the distinct lack of other HMRC supported tax-efficient products and the restrictions around pension allowances, such as the allowance for pension contributions which has come down from £255,000 to £50,000, while the lifetime allowance has been reduced from £1.8m to £1.25m. This means there are a group of investors with extra income for which they are looking for an investment home. VCTs are the natural next step for investors once they have used up their annual Isa and pension allowance," said Mr Lowcock. VCTs offer tax breaks and a chance of a good return