The Secondary Market in VCT’s

Market Making

Personal History

• 1974 Joined Akroyd and Smithers as a stock jobber.• 1991 Joined UBS Investment Funds Team• 1995 Started trading first VCT’s (Advent VCT)• 1998 Set up Teathers Investment Funds department• 2000 Created specialist VCT business within funds team.• 2009 Currently Head of Trading at Teathers

What is a stockjobber/market maker

• stock jobbers (Grose 1811 Dictionary)

• Persons who gamble in Exchange Alley, by pretending to buy and sell the public funds, but in reality only betting that they will be at a certain price, at a particular time; possessing neither the stock pretended to be sold, nor money sufficient to make good the payments for which they contract: these gentlemen are known under the different appellations of bulls, bears, and lame ducks.

• Definition taken from The 1811 Dictionary of the Vulgar Tongue, originally by Francis Grose.

Alternative definition for stock jobber/market maker

• A market maker is a dealer on the London Stock Exchange, who acts as a wholesaler (i.e. quotes buy and sell prices to brokers) for the shares in which he is registered to trade as a principal. Market makers fulfil buy and sell orders from brokers, and create a marketplace for the buying and selling of shares to match supply and demand.

Current Trading Platforms • SETS• SETS is the London Stock Exchange's premier electronic trading service

that combines electronic order-driven trading with integrated market maker liquidity provision, delivering guaranteed 2-way prices. 

• SETSqx• SETSqx (Stock Exchange Electronic Trading Service – quotes and crosses)

supports 4 electronic auctions a day along with continuous stand alone quote driven Market Making.

• SEAQ• Quote driven platform for Fixed Interest market and AIM securities not

traded on either SETS or SETSqx.

SETS

SETS

SETSqx

VCT Issues I

• Size• 124 VCT’s• Combined FUM (funds under management) £2.267bn• Average VCT FUM just £18m• Average Market Cap -20% £1.814bn = Alliance Trust

VCT Issues II

• Client Base• All private clients, no institutional interest• Investment decision based on tax not value.• Virtually no buying by clients other than at wide

discounts

VCT Issues III

• New issuance• Marketed via IFA network• Client base quite often has never owned shares. • Physical certificates (T+10 settlement)• Some IFA’s do not have share trading accounts• Shareholders have to set up new dealing accounts.

VCT Issues IV

• Market Makers• Very little opportunity for trading profit• Creates very wide bid/offer spreads deterring investors• No incentive to commit capital.• Can produce huge discounts to NAV.• Monopolistic position

Answers I

• Retained market makers• Market maker works with client to achieve aims• Makes narrower spreads• Accurately prices shares to any discount policy• Prepared to provide some capital• Compensated for cost of carry • Manages buyback facilities, Dividend reinvestment

plans, • Market maker can introduce client to agent

Answers II

• Buyback policies• Provide demand for secondary shares• Help stabilise the discount• Enhance NAV.• However policies need to be reviewed so that they don’t

harm the funds viability• Some managers have withdrawn/suspended policies• Widened discount levels.

Answer III

• High Yield Funds• VCT’s developing streamed dividend policies• Produce high yields• Current low interest rate environment should shift

attention to secondary VCT’s.• e.g British Smaller 6.45%*• e.g British Smaller Tech 7.69%, (12.09% including

special dividend)*

• *source Bloomberg

Answers IV

• Dividend Reinvestment Plan DRIP, not to be confused with a DRIS

• Provides demand for secondary shares• Helps support the discount• Physical shares must be acquired for delivery• Not widely used as yet, but if tax incentives are reduced

could become more popular• Should be used for high yield funds on wide discounts,

where new shares are not attractive

Shareholder has certificate

Contact Registrar for Indemnity

GiveStockbroker instruction

to sell

Calls Market Maker

Sell Shares to Market Maker

Shareholder receives proceeds

T + 3 or T + 10

Sell shares to company via Market Maker

Put on waiting list with Market Maker

Market Maker arranges buy/back with VCT Manager and agrees price

Offers Broker to purchase shares at

agreed priceT + 10

Shareholder receives proceeds

T + 10

No

Yes

Yes

OPTION 1

OPTION 2

Order Execution

Order Execution (Do’s & Don’ts)

• Specialised market requires specialised execution• You will need an LSE member to handle transaction.• DO NOT USE ON LINE BROKERS• A phone call is essential.• Do not trade unless you have your certificate

The Future

• We need to enhance the secondary market• Alter peoples perceptions..VCT’s are not just about tax

efficiency.• More managers and market makers working together.• Boards introducing positive policies, eg DRIPS,

progressive dividend income.• Consolidation, Mergers and Acquisitions to create larger

companies.• Reduce reliance on buyback policies.

Questions?

Disclaimer

This presentation and the information (Information) herein represents the views and opinions of Michael Bellamy (the Author). This presentation was not made in connection with the Author’s employment as Managing Director and Head of Trading & Execution at Teathers and the Information does not constitute Teathers’ views or research.

The Information is based on publicly available sources gathered at the time of writing. The Information and views presented may change without notice. The Author has given due care and attention to the preparation of the presentation and the Information, but cannot guarantee its accuracy or completeness and accepts no responsibility for the accuracy of his sources. No steps have been taken to independently verify the Information. The Author is not obliged to make amendments or changes to this publication should errors be discovered or opinions or information change. Special attention should be given to the fact that projections can vary in both positive and negative ways and are subject to uncertainty and contingencies, many of which are outside of the control of the Author.

The Information shall not be interpreted as advice on the purchase or sale of specific financial instruments. The Author and Teathers bear no responsibility in any instance for loss which may result from reliance on the Information.

The Author holds copyright to the Information, unless expressly indicated otherwise or this is self-evident from its nature. Express permission from the Author is required to republish the Information or to distribute or copy such information. This shall apply regardless of the purpose for which it is to be republished, copied or distributed.

Transactions with financial instruments by their very nature involve high risk. Historical price changes are not necessarily an indication of future price trends. Investors are encouraged to acquire general information from the Author, Teathers or other expert advisors on the nature of securities trading, investment issues, taxation, etc. in connection with securities transactions.

Teathers is a trading name of Straumur-Burdaras Investment Bank hf. (Straumur), which is a public limited company, listed in Iceland and is authorised and regulated by the Fjármálaeftirlitið (The Financial Supervisory Authority, Iceland) and subject to limited regulation by the Financial Services Authority in the UK. Details about the extent of our regulation by the Financial Services Authority are available on request. Straumur’s registered address is at Borgartun 25, 105 Reykjavik, Iceland and its London Branch is located at Berkeley Square House, 3rd Floor, Berkeley Square, London, W1J 6BU. Straumur is a member of the London Stock Exchange.