Hello and thank you for listening to the Invested Wealth & Investment UK quarter two 2024 AIM IHT update. I'm Adam Greaves, Senior Investment Director and AIM team leader.
By way of an agenda, I will start with an overview of the IW& I UK AIM HT plan, including our investment philosophy and how our selection in high quality companies translates into superior operating and investment ratios. I will then discuss performance and the main drivers for performance in the quarter.
I'll then spend some time talking about the macro environment and discuss some of the main items raised when we talk to the executive teams of our investment companies today.
As always, we'll start with the plan highlights. Starting on the left, on average, our net 12 month return on a rolling quarter by quarter basis is 5.1% over the last 10 years. We achieved this by taking on average just shy of 75% risk or annualised standard deviation compared to the FTSE AIM All Share Index.
As at the end of June 2024, we managed just under 750 million of assets for clients purely in AIM IHT accounts. Including our colleagues in Rathbones, this now means we manage over 1 billion.
Many of you who have attended our presentations or listened to our updates before, have seen and heard us reiterate those seven bullet points on the right hand side. Every single one of our companies must have each box ticked before we invest, but also during our tenure upholding the investment. Our emphasis is proving financial track record of growth.
Going through a number of business cycles, preferably, but also the strength of balance sheet and low financial risk in the current environment where cost of service and finance is significantly higher than it was just a few years ago. We want to make sure that interest cover remains high and therefore the percentage of interest requires to be paid on their profits remains low.
Ultimately, a lower interest payment means higher net profit for shareholders. The ratios on the left are a product or investment in quality. Our plan has superior gross margins, i.e. sales less cost of sales, a strong return on capital employed, and then the bottom three are a focus on cash. A strong balance sheet is key with good cash generation and conversion, and net cash is admirable currently.
Our companies produce on average, just over 6% free cashflow yield. A much higher free cash flow conversion of 78 pence in every 1 of earnings, free cash flow being after working capital and CapEx. On a service and a finance point of view, our average company pays only 6% of earnings as interest compared to the index of 11%, meaning much more of the company's earnings ultimately fall to shareholders and not to financial institutions.
As our companies are highly cash generative, we are spending more and more time with executive teams to discuss or to ensure the cash is being used for the best purposes for the business. We have seen over the last few years; cash being used for share buybacks. We believe this is a poor use of cash.
Whilst in earning, whilst enhancing earnings per share in the short term, this cash should be used for growth, such as targeted CapEx or M&A, or growth through product service development.
This slide shows an xray of the portfolio as of the 30th of June 2024. The left pie chart shows the revenue split of the underlying companies. You can see the UK has a 44% revenue exposure. This was reduced from near 50% as we introduced more global companies into the portfolio. Whilst the revenue in the UK has decreased, we still have a healthy inclusion of what we would call UK domestic companies, with 10 having over 80% of revenues in the UK.
On a market capitalisation point of view, the bar chart at the top right shows our split. We have nearly 50% of our companies above 500 million, with the average weighted market cap of just over 500. This gives back to our investment philosophy of quality, where many companies that meet our investment criteria are well established and have grown to be a sizable company.
We do however see lots of growth potential in and around the 200 to 250 million market cap. A few companies we've introduced recently around this level, and we believe these could easily be a billion-pound companies of tomorrow on a sector split where we are underweight, the sectors that are generally don't qualify for IHD, namely financials and mining.
We have an overweight in technology, namely software with recurring revenues to dampen market volatility.
This slide shows our cumulative performance over discrete periods against the FTSE AIM All Share and the FTSE All Share. And again, just to remind you that all the numbers we produce are real life client portfolios for performance and a net of internal fees. So after our bargain charges and AMC, but not including any external IFA charges, we do remind viewers that comparing performance against our peer group can be misleading as other providers do use model or sample performances and gross fees.
We had another strong quarter up 4.6% against the AML share of three and a half and the FTSE will share at 3.7%. It's nice to see the smallest index outperform the larger index long may it continue. As can be seen, our AIM IHT plan is firmly ahead of the AIM All Share over all periods, and this is just an outcome of our philosophy of investing in quality, which outperforms over most periods.
The dividend yield at the end of the quarter was 1.7%. As a reminder, income doesn't receive IHT relief until it has been invested for two years, post its receipt. Whilst the plan doesn't target a specific yield, the natural yield generated from the portfolio generally covers fees and capital continues to be invested for IHT relief.
This slide shows our main drivers, both positive and negative. The top table shows our top performers in the plan. The top three, Keywords, Alpha Financial Markets and Lock and Store were our absolute and relative top performers, each being involved in their own respective bid speculations. Keywords has been by far the largest mover, who is up 80% on the bid from EQT.
Keywords is a fantastic business, an outsourcer for the development and production of video games, that's seen as share price suppressed on the back of AI speculation, we own the stock well, and as we can see the fundamental strength of the company and their use of AI as a support, rather than as a competitor, GB group and restore complete the top five.
Both recovering and driving growth through self-help. Our absolute worst performer is YouGov, the panel and market research business. This cost us 230 basis points of performance in the quarter due to our overweight compared to the index. Late June, You go have announced a profit warning, which led to a harsh downgrades, a 4% revenue decline translated to a 30% operating profit decline.
This negative operational leverage was a result of heavy investment in H1 for growth, which hadn't come through. The main contributor to the decline was the highest margin data products business. That's seen a surge in competition under pricing you go. Whilst we believe fundamentally you go is a fantastic high quality business.
There are definitely short to medium term headwinds.
The chart on this slide shows the Investment Association review of fund flows. And shows investment fund sales to both UK retail savers and to institutional investors such as pension funds and insurance companies. We have now seen 33 consecutive months of outflows, with an average of 100 million in redemptions a month.
Beneficiaries of these funds have been global equities, mainly US, and other asset classes such as government bonds and cash, where returns have increased with central bank rates. While this is a down in chart, due to the marginal seller keeping valuation and share prices down, the outflows are slowing.
We expect the net flows to recover as new government has taken away some uncertainty, which could mean central bank rates start to get cut, which is positive environment for smaller companies. The valuation differential between large and small cap is significant. There really is a strong and compelling valuation argument for high quality, smaller companies.
We've continued to see M&A in the AIM space. Over the last 12 months, there have been a significant number of bids from trade and PE by the equity buyers. The bars on the chart show the valuation of the bid, shown by the left-hand axis, and the line shows the premium to the undisturbed share price on the right-hand axis.
As can be seen, the largest premium was for Hotel Chocolate, that was bought last year by Mars. The highest value bid is for keyword studios valued in the business at just over 2 billion pounds. The red dots on the bars for some companies show the companies that are or were owned by the IW&I AIM plan.
As per the previous slide, where we have seen a slew of state takeovers and hence companies leaving the public market, we have still had a muted IPO market in the UK. The largest recent IPO was Raspberry Pi, the technology and computing business, which unfortunately for us was on the main market, not AIM.
IPOs have been sluggish since the pent-up demand post Covid in 2021, but this is a direct consequence of cost of capital, interest rates, and hence lower valuations that would otherwise could have achieved in a macro healthy environment for smaller companies. On the right-hand side, chart shows secondary raises, i.e. placings to raise further capital. We again saw a pickup in 2020 during COVID to strengthen balance sheets, but have seen declines in 22, 23 and so far in 2024.
This slide links to the active IPO market in AIM, but also covers some comments around Brand reasons for the muted raises in secondary capital. We have been very active in discussions with management post bids or during the bidding process where we've been involved. The general responses are on the screen.
Realisation of value for shareholders. We have continued to express our dissatisfaction on this comment. We invest in a high-quality business for medium to long term growth, as we believe the company is attractively valued with growth drivers to achieve their medium-term strategies. Where this product or service development or moving this new geographies where the proper foundations are in place.
Lengthening of the sales cycle. A generally short-term comment to suggest that sales or pipeline has been pushed out into a following financial year. Customers have generally taken longer to sign and hence the recognition of revenue has taken longer. This happens in cycles, but the market has been and continues to be very short sighted.
A slight miss could see the share price fall over 10% currently, but the business fundamentally is in fantastic health. This moves into the next point of the share price not reflecting the growth potential. As mentioned on the previous slide, the raising of secondary capital in the market is sluggish and this is due to capital raised being too diluted when their share price is lowly valued and hence the return on investment is too low and their cost of raising the capital is too high.
Main comments from the acquirers, trade buyers such as SureGuard. Who bought, lock and store, efficiencies in economies of scale. It's easier to slot in a well-established business that than it is to organically grow from a PE buyers point of view. The general theme is that we've been beating the drum on for some time, high quality and growing businesses on too cheap evaluation, even cheaper when PE continues to raise funds at high multiples to deploy at much lower multiples.
In conclusion to this presentation, it's always good to look at the macro. We've highlighted the micro and as a reminder, high quality companies grow and well, trading at cheap valuations due to the marginal seller or net outflow of capital from our market. The macro is turning much more positive for us.
The chart shows the red line, the index performance of AIM index since the start of 2020. The dark blue line, the inflation rate, and I've used CPIH here, and the light blue line, the UK central bank rate. As you can see, there's a distinct correlation between the Yen market falling and the central bank rate increasing.
The market generally moves first, so price is in, the rumour. What we can see more recently is the inflation back down to the 2% target. Central bank rate cuts being increased pricing into markets. And in reaction, the Yen market has started to move more positively over recent months. Despite the small increase since the low in late 2023, the AIM market still trades 15% below the level it was pre COVID.
Many thanks for taking the time to listen to this Q2 2024 update. The AIM team and I thank you for your continued support. If you do have any questions or anything in this presentation or in AIM generally, please do get in contact with your local business development contact or investment manager, and we will be very happy to help.
Thank you.
