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DIFFERENT APPROACHES
Despite having the investable universe
narrowed by the BPR qualification
criteria and despite all of these products
having the same overarching objectives
(capital preservation and IHT mitigation)
there is a surprising amount of
differentiation in the marketplace.
The clearest distinction can be drawn
between managers who focus their
products on AIM listed shares and those
who invest exclusively in unquoted
assets.
UNLISTED ASSETS
The greatest portion of funds invested
in BPR products are invested in unlisted
assets (i.e. not in AIM portfolios). The
large wealth managers we spoke to
estimated that as much as 95% of their
BPR investments went into these kinds
of products.
Logically, this makes sense and fits in
with the primary objective of capital
preservation. As it is a traded market,
AIM share prices can be volatile and
investing on there can be risky. BPR
managers who are investing off AIM
can seek out lower risk underlying
trades that provide predictable return
streams. There’s a lot of scope here -
many of the products are only looking
to generate returns of 3-4% per annum,
so the investments do not have to be
aggressive and the investment horizons
are long - we’re a long way from the
short-termism much of the investment
industry is a slave to.
When you take these points and
consider them in the context of the
investment criteria we mentioned
earlier, it gives an indication of the kinds
of trades that will fit the bill: renewable
energy (underpinned by FiTs), secondary
PFI projects, infrastructure projects,
secured lending, property development
finance, agriculture finance, asset backed
trading enterprises and forestry are all
trades that are currently included in the
portfolios of BPR product providers.
The downside of the non-AIM products
is that they (or at least the underlying
trades) are less transparent. It is harder
to evidence and measure performance
and volatility, and to assess the risks.
The ability to invest in longer term,
lower risk trades with predictable
revenues is only a reality if that is what
the manager is doing!
Of course this downside can be
overcome with thorough due diligence
and careful product selection, focusing
in on key areas we’ve mentioned here
and elsewhere in the report, such as
levels of gearing, the risk return profile
and any conflicts of interest.
Finally, we can speculate that it is easier
for managers to have influence on
unlisted investee companies and ensure
investor’s interests are looked after (for
example, ensuring there is no surprise
secondary listing or sudden expansion
into non-BPR qualifying activity).
AIM
The advantages of investing on AIM are
ISA acceptance and the higher levels
of liquidity, scrutiny and corporate
governance that would normally be
associated with a listing. These are
genuine benefits, but they must not be
overstated - AIM is the junior market
and listing there is by no means as
onerous as listing on the main market,
and does not confer the same status.
Another issue is that AIM can be
infected when the mainstream markets
panic - increased levels of liquidity can
mean increased levels of volatility - and
AIM has not exactly been a brilliant
performer over the last few years.
From inception in 1995 until the end of
2013, the average stock on AIM has lost
investors nearly 1 percent a year, even
after the inclusion of dividends. In the
same period the FTSE 100 has a total
return of 118%.
This is not a reason to shy away from
AIM though; it just means it must
be approached sensibly. There are
some household names listed on
AIM, such as ASOS, Majestic Wine and
Mulberry. The underperformance at
the market level can be attributed to
the high number of IPOs on AIM and
the inevitable exposure to investment
fads. BPR managers will look behind the
headline performance and identify well
established firms that have no intention
of seeking a listing on the Main Market
(and thus lose BPR status) have
good valuations based on economic
fundamentals, and steady revenues.
In short, although at the top level AIM
can be volatile, the BPR managers want
to invest in the steady performers that
make up the backbone of the market.
Of about 1,000 companies listed on
AIM, it is estimated that just over 600
of those qualify for BPR (Fundamental
Asset Management).
AIM shares became ISA eligible in
August 2013, and being able to place
BPR qualifying investments within the
nations’ most popular and accessible
tax efficient wrapper is clearly very
attractive – the assets are essentially
income, capital gains and inheritance.
AIM INDEX
(1995-2014)
3000
2500
2000
1500
1000
500
0
Volatile overall market performance masks the fact that there are some steady performers listed on AIM.
