AIM Industry Report 2017/18

44 45 meet all of the companies that they consider investing in, or do invest in, and it does raise a big question mark. Sometimes they do quote a very high number of investees, and so it is natural to question how much due diligence have they actually done? How thorough have they been? Therefore, given that the regulations are not as strict on AIM as some of the other markets, transparency is a bit of a concern. I would prefer a manager who has a more concentrated portfolio because it is likely they are able to monitor their companies more closely and conduct the necessary due diligence. MSn: We look very closely at what’s under the bonnet of a particular product. In our general business, we would diversify a client’s portfolio to spread the risk and the same applies to the AIM market as well. And our view is, if you don’t understand the underlying asset or stock selection process that’s being used within the plan, then you could be splitting the investment across two different plans but if they’re actually investing in exactly the same thing, there’s no diversification being achieved at all so you might as well invest in one. We look at how different strategies can complement each other, so if a plan or investee is not transparent or not willing to provide adequate information for us to be able to make that assessment then, effectively, we would not recommend it. CG: I think again one of the fortunate things about our role within St James’s Place is that a lot of that is taken care of for us at ground level, when our experts are doing their general assessment of whether a company is going to come on board with regard to their offering. They will have done their due diligence and their research and they will be looking at the investee companies which is, without question, an important part of the process. The transparency, or lack of it, is taken into account before the products get to us for recommendation and that means that, from a personal point of view, I don’t have to worry about that too much. NF: I think the key thing is the due diligence process. At the point of due diligence, you need to know what granularity the AIM fund manager is looking at. Several of the issues for AIM companies in recent years have been in terms of things like revenue recognition and earnings that have appeared not to be real earnings. If the managers have a process that looks at and monitors companies on a cash level and in sufficient detail, then we’ll be happy to leave them to it. MS: I am comfortable with the transparency and disclosure undertaken in those funds that I recommend my clients invest in. I believe those firms that target portfolios designed to provide Business Relief for Inheritance Tax mitigation are actually quite well regulated in the defensive and capital preservation Business Relief products available. As far as the actual investment risks that the managers themselves are taking, does the risk always represent the returns that the underlying investor is getting? I’m not quite so sure about that, and that’s probably my only concern, if there are potentially uncapped returns there for the manager but not for the investor, then how much risk is really being taken? Is the manager taking extra risk that the investor isn’t getting the benefit from? DO YOU HAVE ANY CONCERNS ABOUT A BUBBLE FORMING IN SOME STOCKS? MS: Yes. There is certainly the potential for particular demand in specific stocks. As I would only use an AIM portfolio for the IHT advantage it brings, the question is whether this market in isolation is so great that it would directly influence those individual companies. Based upon portfolio selection by the managers I have used, they all utilise quite specific criteria to refine their portfolios. The initial perception from quite a lot of people is often that AIM is far too risky, and they wouldn’t ever want to go there. There are however some very substantial and stable companies on there that are very attractive to the investor. MB: We’ve done a little bit of work for a few people who had existing AIM ISA portfolios, and they were from different providers, actually. When you looked down the stock list, there was an incredible amount of overlap between the two. At this stage, I am not that concerned with this because the market for these products is not particularly large. But, further down the line, that could become a problem, due to liquidity reasons and because the number of companies on AIM is falling, exacerbating the concentration risk. CG: I think that this is up to us to look at. From our panel of managers, I will look at which one or ones to recommend, I will be looking at where the company has and will invest, because in this market, that has to be very specific. If my clients are holding 60-70% of their funds in one fairly narrow range, that turns a high risk investment into a super-high risk investment, whether there’s a bubble or not. Diversification is still important, even within what might be a slightly more limited market. We only have to look at the constituent parts of the AIM market to see that there are lots of different asset areas represented and it would make me feel uncomfortable if, just because a particular sector had had a good year or a good couple of years, a fund manager was holding too much in the one sector. Because automatically you just expose yourself to the risk of a bubble. But, I’m a big fan of the market trying to grow itself. The more providers I think we get into the market the better, because even though you may well get some duplication of stocks held by managers with similar mandates, hopefully you’ll also get your providers that come at things from a different angle. I think duplication is an issue that probably advisers haven’t really needed to worry too much about when they’ve been using managed funds, equity funds, specialist equity funds, because if you’re on a platform and you’re using 15 different providers – apart from the really big names like Microsoft, Apple, for example – duplication doesn’t really bring too much of a problem. But when you’re looking at AIM, potentially it could be. I think as the adviser you need to be better informed when it comes to AIM as opposed to a managed fund, for example, so that you can inform the client in a much more detailed sense of the risks. MSn: I agree with Chris to some extent. I don’t really see an issue here, because we look at a manager’s investment process and their stock picking process, so, for example, some managers will look at the larger stocks that are available and the bigger market share or cap, whereas other ones might look at it from a bottom- up perspective and they’re looking at companies that have got good growth potential and potential to provide good dividends in the future. So, they are looking at the market from slightly different angles. We just need to understand what’s under the bonnet for each product and the transparency of that particular contract. NF: Yes, there are always going to be fashions. I’ve been in the investment industry for nearly 30 years now, and there are always areas that are favoured by investors. So, when we look at the numbers, yes, we see some quite rich valuations. On the other hand, I can point to any stock market, whether it’s the main market in the UK or Nasdaq or S&P in the US, and equally point to areas where there’s pretty rich valuations. For example, there is a decent array of tech stocks in AIM, and we recently invested in one called Keyway Studios, which doubled in a matter of about six months, but so did the earnings. Clearly a rich valuation is deserved if the earnings correspondingly go up. We had questions from a number of clients recently saying, what if the government withdrew the Business Relief for these stocks? And we ran the numbers, and we think that yes, there would be a knee-jerk reaction by the market. But when we looked deeper at the numbers, the majority of stocks that we hold for our clients in these areas are good quality stocks anyway. If you took away the Business Relief, it doesn’t mean that the quality of the company goes away. So, we believe that after the initial knee- jerk, the share prices would probably recover and show their colours again because the underlying earnings will still be there. WHAT DEVELOPMENT, CHANGE OR INNOVATION WOULD YOU LIKE TO SEE IN THE AIM MARKET? CG: The only thing I’d like to see is more involvement in it. The more providers we get in, the more this market will be brought to the minds of the investors. “I think that greater acceptance that some companies on AIM have a lower risk profile than the general perception that all must be high risk would be good.” — MALCOLM SNOOK, MPL WEALTH MANAGEMENT LISA BEST MIKE SEAGROVE MOHSIN BUKHARI CHRISTOPHER GREEN MALCOLM SNOOK NEAL FOUNDLY “Diversification is still important, even within what might be a slightly more limited market. We only have to look at the constituent parts of the AIM market to see that there are lots of different asset areas represented and it would make me feel uncomfortable if, just because a particular sector had had a good year or a good couple of years, a fund manager was holding too much in the one sector.” — CHRISTOPHER GREEN, ST JAMES’S PLACE “At this stage, I am not that concerned with this because the market for these products is not particularly large. But, further down the line, that could become a problem, due to liquidity reasons and because the number of companies on AIM is falling, exacerbating the concentration risk.” — MOHSIN BUKHARI, CARRINGTON INVESTMENTS