AIM Report 2019

Industry analysis / Fees and charges 58 59 INITIAL CHARGES The number of managers applying total initial charges continues to fall. While overall 62% of products include this fee, only 39% of current offers apply one and that figure is down from the 48% of open offers that applied the fee in 2017. The initial charge to the investee company appears to have gone out of fashion entirely, with none charged over the 12 months to June 2019, and none charged on any of the open offers. However, there is an increased initial charge to the investor, with the average charge now hitting 3% for new offers, up from 1.5% in the 2016/17 tax year. Of the currently open offers, the average total initial fee is only 0.55%. This would appear to be related to the fact that all new offers are VCT products, where there are higher initial fees than for BR offers, which make up the majority of currently open offers. AMC The Annual Management Charge (AMC) remains by far the most popular of the fees applied by managers. Among the open offers available in June 2019, the AMC ranged from 0.75% to 2%, with an average of 1.31%. This is in line with the historical figures for the AMC, with the majority of offers being in the 1.41% range. Advisers are reminded that when an offer states an AMC, it is charged every year on the investment’s NAV regardless of performance, therefore it is important to choose a fee level that they and their clients are both comfortable with. PERFORMANCE FEES Similar to the general BR market, performance fees are relatively rare in the AIM space. Just one of the 33 open offers charges an annual performance fee, and the same is true for new offers. Overall, including historical offers, 18% include an annual performance fee. Of those offers to include a performance fee, one is a BR offer, while the remaining 10 are VCT offers. All the VCT offers that charged a performance fee set it at 20%, while the BR offer set it at 15% of earnings above the relevant hurdle rate. An exit performance fee is charged when an investment is liquidated. The fee is also percentage- based so the total amount payable depends on how much growth the investment has delivered over the lifetime of the investment. MINIMUM SUBSCRIPTION The glut of VCT products in the market from 2017 has had a significant impact on the average minimum subscription amounts for tax efficient AIM-based products, with VCTs typically having much lower minimum subscriptions than other types of investment wrapper. All new offers between June 2018 and June 2019 were VCTs, hence the average minimum subscription for this period being just £4,000. The fact that the lowest minimum subscriptions quoted for new offers are £2,000 with the highest at £5,000 highlights the continued opening up of tax efficient AIM-based products to a wider market. An investor no longer needs to be a high net worth (HNW) individual to benefit from the tax reliefs and other features of investing in VCTs. Having said that, consideration needs to be given to whether it is appropriate and whether the risks can be justified with such a small amount of investment and the subsequent diversification that is possible. The vast majority of historical offers are BR products, so here the average minimum subscription is considerably higher, at £61,061. Many BR offers are ‘evergreen’, meaning they are open-ended so that capital can be invested on an ongoing basis with no termination date. None of the BR and VCT AIM-focused offers that have ever been launched charged an exit performance fee, however, four of the five EIS offers charged this fee - all at 20%. This shows that fees and charges on AIM tax-advantaged offers tend to follow the norms for that particular investment product type. This has remained unchanged since our last report in 2018. Given that so few offers include either a performance fee or exit performance fee, it’s important that advisers pay attention to offers with these charges as they can be substantial when applied. The question is, can the investment strategy and portfolio justify the fees? Another consideration for advisers here is that those managers that do charge a performance fee will also state an annual performance hurdle: the minimum level of return an investment must deliver before the performance fee is applied. All the VCT offers with an annual performance fee set their performance hurdle at 6%, while the one BR offer with a performance fee set it at 5%. For the EIS offers with an exit performance fee, all of them set the hurdle at 100%. It is important to think about whether an offer’s hurdle rate is reasonable in relation to its performance. More fees than are reasonable may be levied if the hurdle rate is too low, and high hurdle rates can incentivise managers to take unnecessary risks. DEALING FEES There are two types of dealing charge – initial deal fee and exit deal fee – which are applied when shares are purchased and sold respectively. It is interesting to note that dealing charges are generally only charged by AIM BR offers. Of all offers currently open, 36% charge an initial deal fee, with the same percentage also charging an exit deal fee. While most products that charge one type of deal fee also charge the other, that is not always the case. None of the offers launched since 2017 have included any dealing fees. All of the currently open products that charge dealing fees are BR offers and of them, all but two charge 1% exit deal fees (the others being 0.35% and no exit deal fee). It is worth highlighting that some managers charge a fixed amount for each transaction; this means the larger the order, the cheaper the dealing fee on a percentage basis, so for such a fee structure it is better to trade in large amounts. OTHER KEY INVESTMENT METRICS WHAT ELSE NEEDS TO BE TAKEN INTO ACCOUNT? TARGET RETURNS Five companies in our register of open and historic products explicitly offer target returns. While they remain in the considerable minority, this is an increase of three compared to our 2017 figures. Two of the open offers explicitly include target returns. The average annual target returns for open offers is 9.35%, considerably higher than the 1.5% quoted for historical offers. Although company earnings can be modelled and forecasted, their share prices are solely determined by buying and selling activities in the market. Thus, most managers don’t specify a numerical return target, instead, a number of managers set outperforming the FTSE AIM Index as their return target. DIVERSIFICATION We use the target number of investee companies stated by the managers as a measure of diversification. We consider an offer with a larger number of investee companies as more diversified than an offer that holds fewer portfolio companies. MINIMUM SUBSCRIPTION OPEN HISTORICAL NEW AVG MODE MIN MED MAX £20,000 £0 £40,000 £60,000 £80,000 £100,000 £120,000 £140,000 £160,000 £180,000 £200,000 DIVERSIFICATION OPEN HISTORICAL NEW AVG MIN MED MAX 100 60 90 50 80 40 20 70 30 10 0 Target no of investee companies