How to add EIS to a portfolio without adding risk
A Hardman & Co’s TES White Paper investigated the effect of adding venture capital to a typical equity and bond investment portfolio. The paper also shows that venture capital makes a compelling addition, significantly improving investors’ risk/return profiles.
The United Kingdom is lucky to have venture capital schemes that offer significant tax relief to investors: Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
The Hardman & Co TES White Paper shows that these tax reliefs hugely improve the expected internal rate of returns, almost doubling them in the case of SEIS.
Brian Moretta, Head of Tax Enhanced Research at Hardman & Co, commented:
“The paper makes a compelling case for venture capital to be a normal part of most investors’ portfolios. Perhaps the VCT & EIS industry can move from ‘tax-efficient’ to venture capital with benefits!”
The TES White Paper also shows that a holistic approach to asset allocation is required. If venture capital is introduced, then the weightings of other assets need to be adjusted to keep the overall risk constant, reducing equity weights and increasing bond exposure.
While discussing product areas, listing the few exceptions and debating the fallacy of filling up pension allocation before looking at venture capital.
Andrew Aldridge, Partner and Chief Marketing Officer at Deepbridge Capital, commented:
“Those of us in the venture capital sector have long-known the significant potential returns available with Enterprise Investment Scheme investments, but to have a highly-regarded analyst and actuary articulate the potential impact of exposing investors to such products is substantial. Of course, EIS investments may not be suitable for everyone. Still, this report suggests that advisers should explain why they do not include EIS or VCT within a portfolio rather than justifying their inclusion. For many advisers, this consideration will put the inclusion of such products at the forefront.
“Financial advisers often ask us about the risk ratings of EIS funds, with the simple answer being that they are high risk. However, advisers should consider the risk profile of their client’s portfolio rather than on a fund-by-fund basis. The IFAs we work with, who use EIS routinely, certainly understand this and will not be surprised by the outcomes of this paper. With EIS investing increasingly common amongst IFAs, this report is a welcome statement to reinforce their appeal.
“This report shows the compound impact of growth and the tax advantages available via EIS, highlighting the need for EIS investments to deploy capital expeditiously. Deepbridge’s EIS funds typically fully deploy capital within a month of subscription.”
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