Why is a diversified portfolio so important when investing in seeds?
Many investors and professional advisers are tempted to place all of their Seed EIS investments with a single investment manager who they believe has a good track record. By doing this, however, they may increase their risk – it is important to have a diversified portfolio when investing in seeds.
Many investment managers invest in Seed EIS and subsequent EIS investments in the broad technology sector, also because technology is a large sector that has grown in popularity since the outbreak of the pandemic.
Two Seed EIS investment managers, Nova and Worth Capital, argue that diversification is imperative as an investor would not make all of their investments in a single publicly traded company or mainstream mutual fund, i.e. a single SEIS investment fund. Manager is not advisable.
Andy Davidson, a Liverpool-based partner at Nova, says academic research consistently shows that diversification is achieved with a portfolio of around 30 companies, while most Seed EIS funds have between 5 and 10 portfolio investments. Simple calculations suggest that an investor should spread their Seed EIS investments among three to five fund managers.
Matthew Cushen, one of the founders of Worth Capital, said: ‘In addition to the number of underlying companies, it is important to achieve a breakdown of business areas and investment managers with different levels of expertise. We believe our branding and marketing expertise is perfect for the companies we invest in. However, this can differ significantly from the needs of the tech companies Nova invests in. ‘
Mr. Davidson believes that investors and their advisors should look at both Worth and Nova, as well as other experienced investment managers such as Deepbridge or Jensen, as all four groups invest in different areas, and discusses these issues with Mr. Cushen in a short video.
In our second part of our #SEIS series, we asked why #diversification is so important in this part of the market. #seedfunding #seis #eis #entrepreneurs #startups #startup #startupgrowth #startupfunding #equityfunding #investment https://t.co/rjcTayt8ec
– Small Business (@smallbusinessuk) January 13, 2021
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