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Should you pick your own investments or trust others to do it for you? Should you follow the market (with its ups and downs), or try to “beat” it? These questions permeate the whole debate about whether you should pick stocks yourself, or invest in funds. Angel investors, by nature, like to gravitate towards choosing their own investments. Yet is there a place for funds in your portfolio as a startup investor? If so, what does that look like?
Below, our investment team at Bure Valley Group examines this debate in light of new studies and with a focus on angel investing. We hope you find this content useful. To find out more about our EIS and other investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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Defining funds & stock picking
Stock picking is fairly simple to define. This involves finding a specific company stock using an investment platform and buying, selling or holding it (to try and make a profit). Angel investors, however, are different in that they like to invest in early-stage businesses that are not yet listed publicly (e.g. on the London Stock Exchange). With that said, the process is very similar in that the investor finds a specific business to include in his/her portfolio.
A fund, of course, is essentially a collection of investments (e.g. different stocks) where money is “pooled” from multiple investors – who might be individual or institutional investors, or both. Different types of funds blur the landscape, however. An “active” fund employs a fund manager and admin team to pick stocks on investors’ behalf, using research and insights to try and beat the market. These funds tend to involve higher fees to cover these overheads and also because they claim to produce higher returns than just following, say, the FTSE 100.
A “tracker” fund (sometimes called a “passive” fund or “index” fund), however, simply follows a particular market index – such as the S&P 500. As such, no large team is needed to administer the fund and so fees are typically lower. However, the value of investors’ money in the fund will go up and down with the market.
Stock picking vs. funds for angel investors
Increasingly, investors – even active fund managers – find it difficult to beat the market in the public exchanges. In today’s digital world, information spreads at lightning speed and markets are more and more efficient. This makes it very hard for investors to identify “blind spots” in a stock that millions of other investors have missed.
Take interest rates as an example. Generally, when interest rates go up, downward pressure is applied to stock market prices. This is because “safer” fixed-asset securities (like government bonds) become more attractive, thus enticing “cautious” investors to pull out of stocks. Suppose you suspect that interest rates will rise in the near future (because inflation is running high). Do other investors believe this, too? If so, has this expected outcome already been priced into the stock market? Most likely, it has.
With angel investing, however, the picture changes. Far less information is available about startups compared to publicly-traded companies. Of course, this makes it harder to perform due diligence. Yet it also means that angel investors have greater potential to identify opportunities that others may have missed.
In other words, early-stage markets are far less efficient than public ones. Opportunities also abound due to different investor styles. Some individuals prefer to rely on “fundamentals” when judging the potential of a particular startup, whilst others might like to use “technical strategies”. Certain investors do well by finding “undervalued” companies to invest in, believing that other investors in the wider market will eventually recognise its value. More commonly in early-stage investing, however, is the “growth mindset” – i.e. choosing businesses primarily based on their potential to grow exponentially, not because they are trading at a discount.
Early-stage company funds
Perhaps the clearest example of a “fund” containing only/mainly early-stage companies is a venture capital trust (VCT). Managed by fund managers, a VCT is, itself, publicly-listed but will invest in early-stage companies on behalf of other investors. They can be highly tax-efficient options for investors, especially since VCT shares can now be bought via an ISA. Individual shareholders can also claim Income Tax relief at 30% up to £200,000 annual investments.
VCTs can be a good way for angel investors to diversify their portfolio. However, they can be quite limited with regards to the secondary market (second-hand shares no longer qualify for income tax relief). It can be difficult for investors to find buyers, therefore, when they eventually look to sell their shares.
Also, for many individuals, investing in funds never quite feels as rewarding as picking an individual business which goes on to thrive. At Bure Valley Group, our investor network offers a range of pre-vetted, early-stage projects which you may wish to consider.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827