BR Report 2019

24 25 There are some major drivers for tax efficient IHT planning with an ageing population looking not only to retain access to their funds, but also to leave more to their larger families which could now comprise three or even four generations in addition to their own. This is brought sharply into focus not only by the demographic statistics, but also by the amount of money at stake: £5.5 trillion will pass between generations in the UK within the next 30 years 7 . When it comes to BR one of the big considerations is whether to invest in AIM listed companies. The market is fairly evenly split between AIM and non-AIM offers. AIM VOLATILITY AND VALUE There are certainly pros and cons and in this section we take a look at AIM focused BR offers in the context of the last year and the immediate future. Key metrics Two thirds of AIM focused BR offers have a pure growth strategy and there is virtually no capital preservation. Nine out of ten non-AIM BR offers involve an element of capital preservation. This points to greater risk within AIM focused BR offers, hence the higher levels of diversification by investee companies, although managers of these offers rarely nail their colours to the mast by stating target returns. What AIM can offer Wrapping AIM shares within the tax-free environment of an ISA is an attractive option. But an ISA is not IHT- free, unless the shares in it qualify for BR. AIM is a diverse index. It consists of around 900 companies with values ranging from less than £300,000 to over £4 billion. Around two thirds of the stocks listed on AIM typically qualify for BR, but the list constantly changes. This gives BR managers a broad range of potential investees, although, in the search for resilience and growth, there is a tendency to focus on established, larger, mature businesses with good levels of liquidity. Most AIM IHT managers are looking for companies that have low P/E ratios, which is why they tend to avoid the AIM companies with high market caps and newer entrants. Since AIM is under-researched, BR managers in this space also have the opportunity to analyse AIM stocks and discover less well-known stocks trading on discounts to their larger peers. While volatility is a watch word in this growth market, those with a medium to long-term outlook could find AIM lucrative. Over the five year period to December 2018, the AIM 100 registered an overall increase of 11.7% compared to 2.2% for the FTSE All Share 8 . STOCK MARKET INDICES - 5 YEARS (REBASED) SOURCE: BDO AIM INSIGHTS H2, 2018 Recent market conditions The steeper drop of the AIM 100 versus the FTSE All Share at the end of 2018 shows the greater sensitivity of AIM to volatility. In fact the sell off in the last quarter of 2018 saw the index lose over 20%. Dave Hughes, senior business development manager at TIME Investments, recently said that AIM IHT portfolios are “not suitable for people in their 80s”. He said that investors need to be able to ride the peaks and troughs of AIM, and that this wouldn’t be a suitable route if the investor was of a certain age. Perhaps one reason is that the market drops in the last quarter of 2018 were dangerous for those with a weak heart! Market performance was impacted by geopolitical concerns, including fears over the US - China trade war, rising US interest rates and increasing uncertainty around Brexit. Anxiety about potential changes to inheritance tax and BR in the budget of October 2018 also heightened the reaction 9 . UK stock picker James Baker, manager of the Chelverton UK Equity Growth fund said in October 2018, “so far, the sell-off has been fairly indiscriminate with AIM stocks in general being perceived as high risk even if they have strong balance sheets and high levels of revenue visibility and whatever their sector, with economically less correlated stocks being under the cosh just as much as more economically sensitive ones.” But there are still positive signs: “Although AIM clearly had a difficult second half of the year in 2018, it has not performed as badly as the cocktail of risks it faced might have suggested. Market values are still relatively high compared to historical levels and 2018 as a whole still saw a steady stream of new joiners. In our view, AIM is still a very viable market for well run companies with good business models and strong investment stories in the right sectors 10 .” BDO, January 2019 And there has been recovery: ”Markets have now risen in almost a straight line for two months; the snapback has been almost as vicious as the sell-off.” Jacob de Tusch-Lec, Artemis, March 2019 11 . But there is still clearly reason to be cautious, with uncertainty continuing. Ian Heslop, head of global equities at Merian expects volatility to continue to rise, and for there to be bouts of extreme volatility in the short term and said: “It may simply be that the sell-off in December was overdone and the rally is strong because of that. But the big driver of equity valuations is monetary conditions and they have not changed that much 12 .” Considerations for investment / AIM SOURCE: MICAP, MARCH 2019 OPEN OFFERS BY INVESTEE COMPANY TYPE ASSET-BACKED AIM LISTED 52% 48% 150 140 130 120 110 100 90 80 70 60 Jan 14 Jan 16 Jan 15 Jan 17 Jul 14 Jul 16 Jul 15 Jul 17 Mar 14 Mar 16 Mar 15 Mar 17 Sep 14 Sep 16 Sep 15 Sep 17 Sep 18 May 14 May 16 May 15 May 17 Nov 14 Nov 16 Nov 15 Nov 17 Nov 18 Jan 18 Mar 18 May 18 Jul 18 FTSE AIM 100 FTSE ALL SHARE