AIM Industry Report 2017/18

42 43 LISA BEST MIKE SEAGROVE MOHSIN BUKHARI RI CHRISTOPHER GREEN MALCOLM SNOOK NEAL FOUNDLY has improved dramatically and it’s much more widely understood and accepted now by the wider community. WHAT SORT OF RISK PROFILE AND TOLERANCE FOR LOSS DO INVESTORS NEED TO COMFORTABLY INVEST IN AIM? MB: I think it’s probably in line with others, which is that they’ve got to have a high risk tolerance and capacity for loss, because clearly there is a higher chance of loss in this part of the market. AIM shares are also less liquid, so the likely experience is going to be more volatile. Any funds that we have purchased have tended to be in higher- risk strategies for clients. I think it can be a very binary outcome. I think a lot of people attribute it to playing the lottery because of the small chances of finding winners. Clearly that’s not ideal for a cautious investor. MSn: We class any AIM investment as a high risk investment and therefore the clients need to have the appetite for that level of risk; however, as with all financial planning it’s not generally just as simple as that. They would also need to have liquid assets available for the short to medium term held in much lower risk assets to provide a good balance between the higher and lower risk investments overall, thereby trying to help us protect against the higher volatility that might be experienced within the AIM portfolios. CG: A client’s risk tolerance has got to be significant, and it needs to be a reasonably small part of the portfolio if it’s for investment purposes, i.e. trying to make a gain or trying to generate income. Even if someone professes to be a high-risk investor, they need to look at the AIM market as something that’s going to tack onto more traditional collectives and equities. Even if they are of a slightly higher risk than just a normal managed fund, for example, I see the AIM market as sitting on top of that and therefore it needs to form a fairly small part of an overall portfolio. 10% to 20% on a larger portfolio would be okay. The exception I make to that is where we’re looking at last chance saloon inheritance tax planning. And obviously there we can access products that offer a lower degree of risk, although that has to be kept in context – it’s lower compared to the norm on AIM but wouldn’t necessarily qualify as low in the wider sense. For these investors, we would be prepared to go to a higher proportion. MS: They must have both the ability to accept a higher degree of risk and be able to absorb the AIM element of the portfolio within the Private Equity element that forms their asset allocation. I’ll look to use that as a relatively small percentage of a portfolio, managing risk overall on that basis. This provides the potential for significant gains but also substantial losses; I’d always look to use an investment manager to do the stock picking and to get under the bonnet and make sure that the stocks themselves actually qualify for Business Relief, because there’s actually a relatively small number of the AIM Shares in comparison to the Listing as a whole that do. More recently, I’ve decided to look at the likes of Time, Puma, Unicorn, that have a Business Relief portfolio which is directly invested in AIM stock. I will generally only look at including a direct AIM element within a portfolio established for the younger client who has an Inheritance Tax liability. NF: The way we look at it is, it’s not the market or the index’s fault if a company goes bust. So, you know, when Carillion plunged recently, or when Provident Financial went down, nobody went, ′oh, that’s the main market for you′. And so when you inevitably get the big falls on AIM, I think the index unfairly gets the rap. So, let’s be realistic. It is a market that is higher risk in nature overall. But – and this is where we’ve done a lot of work looking into this – that doesn’t mean that you can’t extract out of that broad range of companies some pretty good quality, stable stocks. If you want to take the high-risk strategy, fine. There are some great stocks out there that have done very well. But for our clients in terms of when they’re looking for the tax advantages, they don’t necessarily want that risk side of the equation. The market breadth does give you a chance to select the stocks which are more stable in nature, so I think it’s a market for all flavours in terms of risk preferences, but it’s all in the selection process and portfolio construction. HOW DO YOU SELECT AIM FUND MANAGERS TO WORK WITH? NF: There are two elements to it, really. Firstly, what are the criteria they’re looking for in the selection process? And any AIM manager that we would select for our clients needs to know and understand the underlying companies and particularly the risks associated with them. This is even more important for AIM probably than the main markets, where investment bank and general research coverage is far greater than the AIM market. That needs to be done thoroughly in house, because you can’t rely on a whole raft of investment bank analysts to produce research on these firms because there is poor coverage on these smaller companies. MiFID II isn’t going to help this situation and the economics of less coverage means potentially wider spread in the market, and possibly a higher cost of capital for the companies, meaning that it may be in the the interests of some firms to sponsor independent research on their companies to bridge that gap. Without this, I think this does raise the bar, and it does make it more incumbent on the portfolio managers to do their own work and do it properly on the companies. There’s the selection process, and then there’s portfolio construction. Once you’ve got those stocks that have the ideal criteria, what sort of weightings do you use within the fund, and what is the strategy? Our personal preference is for a much more buy and hold process, because clearly that helps reduce transaction charges over time, but you do have to be alert to changes that are maybe happening in the company. Also within the portfolio construction, you can lower risks again by making sure that the range of investments held are well diversified in terms of their end markets, and other factors such as exposure to interest rates and make sure that there’s a mix of balance sheet risks in there as well. MS: Part of my due diligence is to consult research tools such as Allenbridge to look at the underlying fund manager, the full report and prospectus on the investment team, fund performance and history. I then look at costs and charges, historic performance, an established track record, history and experience are important indicators. Initial research would indicate that a lot of the providers coming to the market have fledgling portfolios, where in fact, some have really been managing very similar portfolios for a couple of decades in some instances, with other products that utilise the same underlying trades. Cost is important as there are a finite number of direct AIM quoted shares that can be used for a Business Relief qualifying portfolio and regardless of the manager you use, there will be a core of stocks that they will all be using. I don’t currently meet the managers. I rely on the local team to provide me with the information that I require. If I had a significant client and it was appropriate to consider the investment of a significant sum into it then I would. MB: I think the two key things for me are a fund manager′s process and track record, so it’d be extremely unlikely for us to back a new manager or fund within that space. They’ve got to have a track record of investing in that market, and the evidence of that would be via a very robust process which they’ve demonstrated they’ve stuck to through thick and thin. At the end of the day, a robust process with clearly-defined parameters on trying to find those stocks that are worth investing in is extremely important. MSn: We look at various things. If I was considering one of the BR providers, we would start off with a filter process using the MICAP platform just to see what’s available at the moment, who’s in the market, to narrow the choice down. Then, once we’ve got a shortened list of potential product providers or products that are available, we’d use various reviews available by the four independent third party reviewers, the likes of Martin Churchill, Hardeman & Co., Allenbridge and MICAP, to get a view. We then do our own due diligence and choose what we consider is the most appropriate for that particular client. Our main criteria are experience, track record of managing that type of portfolio, transparency of charges. But every client is treated individually so we start with a blank sheet of paper, effectively, for each one, thinking about what we’re trying to achieve and what’s the objective. Then go from there and try and find the right solution. CG: St James’s Place has very strict criteria. But essentially what we’re looking for is fund managers that have a track record and do genuinely have a team that specialise in this area. My view on it is that it’s the one market that really has to be led by stock pickers, in the true sense of the word. There’s lots of sectors represented in the AIM market and there’s lots of different sized companies, from the very small to actually quite significantly capitalised companies, but if you don’t really know what you’re looking at, as a fund manager, you can make a right hash of things. We, as advisers, need to be confident that we are minimising the risk by using fund managers that have at least got a record of weathering storms. HOW CLOSELY DO YOU LOOK AT AN OFFER’S UNDERLYING INVESTMENTS? ARE YOU CONCERNED ABOUT THE TRANSPARENCY OF A FUND’S INVESTEE COMPANIES? MB: Yes, some managers say that they’re able to “Many years ago, it was a bit more Wild West as an index, but there is a much broader range of companies that are quoted on it now.” — NEAL FOUNDLY, EQUILIBRIUM “I’d always look to use an investment manager to do the stock picking and to get under the bonnet and make sure that the stocks themselves actually qualify for Business Relief.” — MIKE SEAGROVE, ALBERT GOODMAN