BR Report 2019

46 47 ADVISER ROUNDTABLE BR AND TODAY’S CONTEXT How has the uncertainty of Brexit and its potential impact on investment performance affected your use of BR, if at all? KG: I think it will have far more impact on AIM portfolios, where there is much more volatility than private company investments in BR. If we entered an economic slow-down, clearly some sectors could be affected, but there are some such as renewables that I don’t see being significantly affected. Energy generation is non-stock market correlated and I think it should remain a strong sector. CP: Brexit hasn’t made it harder for me to recommend BR, it is just part of the overall risk profile. But it is essential that advisers identify those risks and communicate them clearly to clients and, crucially, to their beneficiaries. It’s impossible for us to identify the real impact of Brexit on assets, taking into account currency, different indices, political instability and the possibility of a change of government and whether or not that changes the rules relating to BR. This doesn’t stop us from doing BR business, as there have always been inherent risks. Our goal is to try to mitigate those risks as much as possible, by looking at the amount we’re comfortable to invest in AIM or private equity, the integrity of NAVs, whether there is an active secondary market, how linked (or preferably not linked) it is to government activity and the remainder of the due diligence suite. MM: I think Brexit is having more of an impact on AIM BR portfolios as the AIM market has suffered quite badly over the last twelve months or so. Although, if you managed to buy into AIM recently, you’ll have done very well as there has been quite an attractive bounce in values since the beginning of the year. The private company, asset-backed BR products are likely to be impacted less as they are not directly correlated to general market conditions. In terms of long term planning, BR certainly still has a place, but our BR strategy at the moment is skewed in portfolio terms with 25% AIM and 75% private company, asset- backed just to reduce the current risk. How do you feel about AIM-based BR solutions at the moment, given the volatility that geopolitical uncertainty, including Brexit, has brought? ATTENDEES CHRIS PEARCE PEARCE WEALTH MANAGEMENT KEVIN GILLIBRAND FRASER WEALTH MANAGEMENT MARCUS MAISEY KDW FINANCIAL PLANNING Moderator: Lisa Best, Intelligent Partnership MM: As I mentioned, we are still investing in AIM BR solutions, but obviously we look at everything on a case by case basis. So for clients in their 50s - 60s, we might have a preference for AIM equities if we are looking for greater growth along with IHT planning capabilities, whereas, for older clients, if we are simply using BR as an IHT planning tool, we might look at asset-backed private company BR investments with more capital preservation elements. CP: From my perspective, whether or not I put AIM forward as a solution would very much depend on whether the client already had something of a similar risk profile in their portfolio. If not, it would be very unlikely I’d put that in a BR solution for them. And because the assets on AIM don’t trade as dynamically as they do in blue chips, for example, the way their volatility is measured can understate the true level of risk. Having said that, risk can be a good thing, as long as you badge it correctly, but you do need to take into account manager experience and I think that only a few of the current AIM BR managers have experience of the last financial crisis. KG: AIM is more of a judgement call for us than private company BR investments at the moment. It’s at the volatile end of the UK stock market, so is far more sensitive to market timing. But if it was a £20,000 ISA in a large portfolio, I probably wouldn’t be unduly worried. If it was a significant investment, I’d be looking for a timing play. I’d be saying to a client that I’m happy this is a good long-term strategy, but I’d want to be careful about the timing of the implementation and probably not invest right now. But for clients that are already invested in AIM who seem healthy, I don’t have any major concerns because of the medium to long-term performance record we’ve seen. Do you think there is an unfair focus on AIM-based performance/valuation issues as private company valuations simply aren’t freely available? KG: The transparency of valuations for private company BR investing is certainly challenging and so is due diligence in this sector which doesn’t benefit from the same level of information as is available in more mainstream sectors. But, because private company valuations are usually quarterly or six monthly, it feels like valuations are more stable. The situation at Oxford Capital, where they’ve suspended trading in their private BR companies has been a shock. I’ve been in BR for a number of years and in that time BR investments have always done what they said they would, so it’s important that they resolve whatever the issues are so that advisers and investors don’t lose confidence. MM: There are clearly differences between AIM and private company, asset-backed BR portfolios. AIM portfolios are higher risk than more blue chip, standard equity portfolios, but there are some big, well-established AIM companies that BR managers focus on. One advantage of an AIM portfolio is that you can put it in an ISA. But clients remember downsides more than upsides and we are obviously in a volatile period. That said, as Chris says, as long as you explain the risks to the client and the fact that it is a long term investment and the right blend is achieved for the client in terms of risk profile, I think there is a place for both AIM and private company, asset-backed BR portfolios. CP: I think with private company BR investments, you must take a very proactive stance in how you speak to the managers, collecting as much information as you can to get the clarity you need. It’s not just about net asset values, but the manager’s particular approach to net asset values, and how conservative they are. Will they also allow you to see all of the investee companies underneath the holding company? My approach is to get down to the highest level of detail on the investee companies and then to monitor them closely. That takes a lot of time and work. Sometimes managers won’t provide that detail and if that’s the case, I won’t use them for a solution. “Brexit hasn’t made it harder for me to recommend BR, it is just part of the overall risk profile. But it is essential that advisers identify those risks and communicate them clearly to clients and, crucially, to their beneficiaries.” — CHRIS PEARCE, PEARCE WEALTH MANAGEMENT