There has been discussion for over a decade about the potential for a bubble to form in some sectors of the AIM market. Investor’s Champion, which has a service that screens for stocks qualifying for IHT relief, estimates that around a third of all the money invested in AIM is from IHT planning services.
In what is already a relatively small investment universe, the BR eligibility criteria further cut the number of possible options for IHT planning services focused on the market. Additionally, while AIM is focused on trading in firms which are traditionally riskier than those found on the primary markets, IHT portfolio managers are obviously concerned with capital preservation. As a result, they tend to target the stocks with greater liquidity and size with a record of stability, and dividends.
It seems that this equates to a fairly small and predictable sub-set; we looked at a selection of the top ten AIM portfolio services listed on MICAP (by size) (all of which are IHT services) and found a high instance of duplication of their top ten stock holdings, with a core of 4 or 5 investee companies featuring in virtually all of the portfolios.
The logical implication is that the high demand for the modest amount of ‘safe’ Aim stocks has driven valuations higher. But the question is, does that make them over-valued, particularly in the context of stability, rather than outstanding growth? The reality is, of course, that managers are aware of this dynamic and in the arena of BR qualifying AIM shares, they are aided by the long-term nature of IHT mitigation portfolios – they are not required to buy and sell regularly and
seldom trade, although they do have the capacity to do so, should a stock become unsuitable.
Nevertheless, some commentators, even those in the BR sector, say that it is largely impossible for a manager to force up the stock price by simply continuing to buy, buy, buy. This is because there just isn’t the volume available to coerce the seller into pushing the price back up. They would be more likely to move onto another company.
The goal is to spot firms that are not brand new and have experienced a steady trajectory into profitability, but they are unlikely to be incredible star, high-growth performers at that stage. In fact, it’s been said that the most popular Aim stocks for IHT purposes are those that fit the “boring” mould rather than disruptors. But the strong backing of IHT portfolios may well turn the ‘boring’ firms into much higher profile players in the growth space.
The other consideration is the reality of diversification across IHT AIM managers when they are holding a number of the same stocks. Here, it is useful to consider that AIM managers generally hold between 20 and 30 different AIM shares at any one time, so their wider allocation is likely to provide a greater degree of diversification. Advisers may still find it useful though, to take a look at underlying shareholdings.
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