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07 Aug 2023

AIM Portfolio IHT plan: Q2 2023 review

 

 

The first half of 2023 has seen a continuance of the tough market conditions that impacted the AIM market in 2022. Simon Cleaver and Adam Greaves, investment directors within the AIM team at Investec Wealth, discuss 2023 so far and the catalysts driving the market.

 

They also discuss current portfolio positioning with their emphasis on quality and cash generation before looking at the longer-term returns and the effectiveness of the inheritance tax break. We conclude with reasons why AIM is looking attractive today and why advisers continue to recommend the Investec AIM IHT plan to clients.

 

The first half of 2023 has seen a continuance of the tough market conditions that impacted the AIM market in 2022. Simon Cleaver and Adam Greaves, investment directors within the AIM team at Investec Wealth, discuss 2023 so far and the catalysts driving the market.

 

They also discuss current portfolio positioning with their emphasis on quality and cash generation before looking at the longer-term returns and the effectiveness of the inheritance tax break. We conclude with reasons why AIM is looking attractive today and why advisers continue to recommend the Investec AIM IHT plan to clients.

 

Video transcript
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    Hello everybody, and welcome to the quarter two update for the Investec AIM IHT plan.

    We're going to take you through some performance statistics, as you would expect. We're going to take you through a couple of examples of what the companies in our portfolio have been doing in the quarter. And I'm going to introduce you to Adam Greeves, Senior Investment Director on the AIM team and one of my colleagues.

    But just in terms of reminding you of the strengths of the Investec AMI HT plan, we have got a consistent track record going back to 2002 when we started. So we're certainly one of the longest-established players in the AIM IHT market. And we're also one of the largest with £650 or so million under management.

    We run the client portfolios through a dedicated team of five investment professionals. And that's all we do – we solely concentrate on AMI HT portfolios. We don't have a VCT or EIS offering within Investec. So we're very much dedicated towards good client outcomes in the AIM IHT market.

    And of course, we are backed up by the resources of Investec, which is a FTSE250 PLC and one of the UK’s leading wealth managers.

    What do we try and do then, when we are looking to invest money in this high-risk market for clients?

    Well, firstly, clearly it has to be about obtaining the business relief. Which is the reason why your clients give us the money in the first place – is to obtain relief from inheritance tax. And as far as we're aware, we've never had a case turned down by the Revenue in all our history going back to 2002.

    Secondly, we look to reduce volatility in this high-risk market. So we're looking to improve the client experience compared to what you would have just by investing in the index.

    And thirdly, we are looking to generate a return which is commensurate with that high-risk mandate. And I think I'll show, well between us, we will show as we go through the slide deck that we have historically achieved that over the longer term.

    So I'm going to hand over to Adam, who is going to talk about performance.

    Thank you, Simon and good afternoon everybody.

    This slide here shows you the 2022 and 2023 thus far performance for the FTSE AIM All Share and the IW&I AIM IHT plan. As you can see, in 2022 it was a very tough year for the FTSE AIM All Share – down 30%. We fared a little bit better at minus 26%.

    Really, the focus of 2022 is the stubbornness of inflation – that sticky inflation, where central banks had to continue to raise interest rates to try and bring that inflation down under control. That theme has continued into quarter one and quarter two, and you can see the negative performance there against the FTSE AIM, All Share and the IW&I IHT plan. But again, on the relative measure, we have outperformed both over both time periods.

    So looking at the performance going back further periods over one, three years, five years and ten years, you can see on each of these periods now the IHT Planner client (which is the IW&I net performance of all clients in the plan against FTSE AIM All share) and you see over every single time period there, we have outperformed on a relative basis. The most immediate quarter of quarter two 2023, we were down just shy of 2%, 1.9% against the AIM All Share index of -6. So significant outperformance there over the shorter term.

    But when you go back 10 years, the cumulative performance of 71% is really outperforming out of the FTSE AIM All Share at 23. So it really shows the quality companies that we invest in – which I'll touch on in a few slides of time – really outperform over the longer term.

    So really then, looking at this chart here, which shows you the two-year returns stated by quarter, and the power of that 40% IHT tax break. As you can see over this chart and the rolling period, it's only since the financial crisis in 2008-09, this hasn't achieved its objectives of providing insurance against that 40% that the HMRC take on estates. So again, it has achieved its purpose even with the volatility that we've seen over recent times.

    I want to focus on the quality. And when I say quality, we really focus on the experience management teams of the companies we invest – five years trading at least and one-year post IPO on the AIM market. We look at companies with distinctive capabilities (or what we and Warren Buffet would say have ‘a wide moat’), and a strong balance sheet with good cash generation. And cash is key in these uncertain times.

    So when you look at some of the company metrics that we look at against the FTSE AIM All Share, you can see the top two there have gross margin at 43% superior to that of FTSE AIM All Share at 37, and return on capital employed at 17% against the index at 7% there. So a relative 10% of performance on the average company within the AIM IHT plan.

    The bottom three ratios that we look at – the free cash flow yield superior at 5% against the FTSE AIM All Share at 4.5, and then the free cash conversion 56% superior again. And really, when you're looking at this interest rate rising environment, the servicing and the finance – that debt that you have on the balance sheet to really service that is what we really want to understand, and how much of your profits have to go to pay that interest expense. And you can see only 4% EBITDA for our average companies (so earnings before interest, tax, depreciation and amortisation) is used to service that finance against 10% for that of FTSE AIM All Share.

    Over the next two slides, I wanted to focus on two stories that happened in the quarter – two acquisitions from some of our quality companies that we hold in the IHT plan.

    So the first one I want to talk about is Volex. Volex is the global manufacturer of power cords, cable assemblies and wire harnessing and is the sole charging provider to Tesla. During the quarter, it acquired a company called Murat Ticaret – a second deal in Turkey for them. Murat is a leading manufacturer of complex wire harnesses, specialising in agricultural and construction vehicles. So a lot of similarities to what Volex do. And the analysts and ourselves believe the acquisition will drive growth, margin expansion and geographical diversification for the group.

    The second company I want to touch on is YouGov. YouGov is the public opinion and data company focused on market research, data analytics and consulting services. During the quarter it acquired GfK’s European Consumer Panel business. This European Consumer Panel business produces data to represent over 50% of European GDP and over 145 million households in the fast-moving consumer goods sector. This acquisition should enhance YouGov's global offering. The transaction came about from a four cell, following the merger of two data powerhouses in Nielsen IQ and GfK.

    And now I'll pass back to Simon to talk about performance and volatility and to summarise.

    Thanks Adam. As I said before, you know, our historic track record is one of producing good returns for clients compared to the market as a whole, and this slide just demonstrates that and also brings in the issue of volatility.

    So you can see that where we've highlighted the 10-year returns there. The average of our 10-year returns taken quarter by quarter over the last 10 years is 8.3% against the AIM All Share index at 4.8%. So significant outperformance. And that's been achieved with less volatility. So we are 20% less volatile over that time period than the AIM index has been.

    So the investment strategy, which Adam has talked about, of investing in high-quality businesses, very much makes sense over the longer term and has been very successful for us.

    Nevertheless, clearly AIM has had a hard time recently, and there are significant losses on client portfolios at the moment. So why would you look at AIM IHT planning as an IHT planning tool now?

    Well, fundamentally, of course, it is all about the IHT benefit and the fact that the 40% inheritance tax charge can be sheltered by investing in AIM stocks. Why else? Well, we currently see valuations in our portfolios at 20% below the average where of where they've been for the last 10 years – at 18 times price to earnings. And we see the dividend yield on our portfolio the highest it's been since 2013 at 2%. And that's in an environment where our companies continue to grow earnings per share. So they’re continuing to improve their profits, and of the companies of ours which reported in the quarter, they showed median earnings growth of around 11%. So still very encouraging on the corporate front.

    Nevertheless, you will have seen some comment in the press over the last month or so about inheritance tax, and particularly there was some speculation that the Conservative Party might be considering a pledge to scrap inheritance tax altogether in their manifesto ahead of the next election.

    We don't think it's a huge surprise that this came out in the press just before the three by-elections, which were held in in July. And in terms of a vote-winning strategy, currently, only 7% of UK households pay inheritance tax due to the existing exemptions.

    So we don't believe this is a great vote winner for the Conservative Party, particularly in the Northern constituencies where they have to maintain their lead over Labour. So we think that's probably some way off. And even if it does happen, there will be lots of planning opportunities ahead of it.

    On a more positive note, you may also have seen some reporting of the Mansion House speech by Jeremy Hunt in the middle of July. This was very much focused on improving investment into high-growth UK companies. And it wasn't widely reported, but actually, the AIM market is included in that characterisation.

    So, the announcement was that nine pension funds have signed up to commit 5% of their assets into the UK unlisted and illiquid space by 2030, which is potentially £50 billion of investment. And some of that then potentially flows also into AIM. We think that could be quite significant, particularly as we've seen significant outflows from AIM over the last 18 months or so, and not just AIM but small caps in general over the last 18 months or so, as interest rates have increased and investor risk appetite has decreased. So we think potentially that’s quite interesting looking forward.

    So just to summarise, going back to effectively the strengths of the Investec offering. Firstly, we have a long history of achieving the inheritance tax break for clients and producing positive investment outcomes after the tax break is taken into account, even when markets are down. And we do that by continuing to invest in the highest quality businesses we can find on AIM and over the medium to longer term, we believe that's the investment strategy that works best for our clients.

    At the moment, valuations are undoubtedly low relative to where they have been on AIM. So if you have clients which are thinking about perhaps inheritance tax planning, and potentially using AIM, then this could be an interesting time to be looking at it for them.

    That's all we've got to say, so thank you very much once again for your time and we hope to be speaking to you again before too much longer in a similar presentation.

    If you do have any questions, then please don't hesitate to get in touch with your local Investec representative. As I said, thank you for listening and we hope to be speaking to you again before too much longer. Thank you.

Learn more about our speakers

Simon Cleaver
Simon Cleaver

Divisional Director

Adam Greaves
Adam Greaves

Senior Investment Director

Simon Cleaver
Simon Cleaver

Divisional Director

Adam Greaves
Adam Greaves

Senior Investment Director

Disclaimer

The information in this presentation is for private circulation and is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. The Company and its related Companies, directors, employees and clients may have positions or engage in transactions in any of the securities mentioned. Past performance is not necessarily a guide to future performance. The value of shares, and the income derived from them, may fall as well as rise. The information contained in this presentation does not constitute a personal recommendation and the investment or investment services referred to may not be suitable for all investors; therefore we strongly recommend you consult your Professional Adviser before taking any action. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change AIM company shares tend to be relatively illiquid. It may be difficult to sell them or obtain reliable information as to their value and the risks to which they are exposed. The tax relief available may change at any time. IW&I does not guarantee that all investments made will qualify, or continue to qualify for tax relief. Copyright Investec Wealth & Investment Limited. Reproduction prohibited without permission.