BR Guide FINAL 20 Feb

25 24 BR INVESTMENT OPTIONS BR INVESTMENT OPTIONS Providers of AIM IHT services will typically look for companies with sensible valuations that are self-sustaining and can generate cash, with the potential for further growth to generate shareholder value. They will also apply their usual filters such as whether the firm has a strong management team, a defensible position in its chosen market and a strong balance sheet. In short, although at the top level AIM can be volatile, BR managers want to invest in the steady performers that make up the backbone of the market. Managers look to construct a solid overall portfolio using conventional portfolio management strategies. The goal is to create sufficient diversification, to apply strong selling discipline, exit investments when they reach their estimate of fair value, or cut losses swiftly when they make mistakes. This means that providers of AIM IHT services must continually monitor their portfolio and react to any changes, including the potential listing of AIM shares on a recognised exchange: it is not unusual for some companies on AIM to take a dual listing on an overseas market to raise more capital and this would result in an otherwise BR qualifying share losing its qualification. The three-year assets replacement window helps here, reducing the need to panic if the manager has to exit a particular holding. Approximately 50%-70% of the firms listed on AIM are BR qualifying and fund managers running AIM IHT portfolios often employ the services of external specialist consultancies to audit their portfolio and verify that it is BR qualifying – there is no official HMRC list of BR qualifying companies. Other managers use their own expertise. There are two types of AIM BR service: ACTIVE – run by an active fund manager who meets with companies prior to and during investment, with a view to generating superior performance. SMART PASSIVE – run by sophisticated algorithms which conduct advanced market screening techniques, seeking to create a lower risk/volatility model at a potentially lower cost than active services. AIM based services generally require a lower initial investment than the other types of BR investments, suggesting that the flexibility of purchasing shares allows market entry and diversification at a lower cost. In fact, AIM based services on average are over three times more diversified than the other BR investment types, typically investing in portfolios of 20 or more companies. In addition, the liquidity on AIM means that the product providers target the sale of shares within a month if investors wish to exit, although there is the caveat that this is dependent on market conditions. Diversification AIM based estate planning services are typically far more diversified than services which invest in unlisted trading companies. However, this is one area where lower levels of diversification are not necessarily a bad thing: these opportunities might be asset backed or have secure revenue streams, for example (think renewable energy or infrastructure), and often the investment manager can exercise a high degree of influence over the underlying asset (they may well own it in fact). Therefore, as a rule of thumb advisers should look for sensible levels of diversification in an AIM product (20-30 companies, much more than this might actually mean higher transaction costs and more effort monitoring the underlying portfolio for little additional diversification benefit). In private company BR products, if the policy is not to diversify, advisers should look for predictable revenue streams, high value underlying assets that can be sold to return cash to investors if needed and tight controls over the investees. Market conditions are very important as there is a risk that AIM can be affected when the mainstream markets panic. Increased levels of liquidity must be considered in the context of potentially increased levels of volatility. Finally, AIM has not been the most reliable performer over the last few years. However, as with any market, the volatility of the headline index measure can mask the performance of some of the underlying constituents. Therefore, AIM’s performance is not a reason to shy away from AIM based estate planning services; 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 and resource companies on AIM, and the inevitable exposure to investment fads. AIM offerings can broadly be divided into AIM based portfolio services and services investing in individual trading companies that themselves invest in a range of qualifying businesses and/or activities. FIVE-YEAR PERFORMANCE - TOTAL RETURN (GBP) JUL 2013 JUL 2012 100 120 140 160 180 200 220 JUL 2014 JUL 2015 JUL 2016 JUL 2017 FTSE AIM UK 50 FTSE AIM 100 FTSE AIM ALL-SHARE SOURCE: I FTSE RUSSELL FACTSHEET, 31 JULY 2017 BR qualification of AIM firms 50% - 70% of AIM listed firms qualify for BR