Approaching growth assumptions for Tax Advantaged Investments (VCT/EIS/BR/AIM)
I'm interested to hear how people are approaching the selection of assumptions for when you model these in cashflow. I don't want them to have a huge impact on the model other than taxation. I think there is more than one 'right' answer here so just wanting to get a sense of what others are doing.
1) One valid approach would be to assume 0% real return either delivered as capital (EIS/BR/AIM) or as dividends (VCT) based on the desired outcomes from the taxation. This would drag returns slightly assuming your other portfolio/equity returns were greater than 0% real. However it would acknowledge that some of the underlying assets fail completely. That said these managers (as in venture capital first priority) are looking for a much higher overall return in many cases.
2) Another might be to assume that they will behave in line with your small cap/micro cap assumptions or using data from an AIM index. However they don't really match these sectors and are not as diversified as an index.
3) Another might be to take assumptions in line with your general equity growth assumptions and adjust the mix as per 1)
I'm sure that there are others. Do please share what you are doing.
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Head of Technical at Paradigm Norton