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The first half of 2023 saw a continuance of the tough market conditions that impacted the AIM market in 2022. Towards the end of the year however, there were some green shoots starting to emerge with inflation falling from stubbornly high levels and interest rates are looking to have peaked with potential cuts coming in 2024. Adam Greaves, Senior Investment Director discusses the drivers for the strong performance in Q4 2023 which meant the AIM IHT plan finished the year with a net return of -0.99%* against the market at -6.4%**.

We're pleased to be able to offer this update to you to watch, listen to or read. You can also access more information about the Plan and its latest factsheet further below

*net average performance for our clients in the AIM IHT plan
** FTSE AIM Allshare index performance for 2023









  • Expand to read a transcript of the update

    Hello and thank you for dialling into the Q4 2023 AIM IHT update from Investec Wealth & Investment (UK) Ltd, part of the Rathbones Group. I’m Adam Greaves, a senior investment director for the AIM plan. The target audience for this update is for professional advisers.

    On average our net 12 month return on a rolling quarter-by-quarter basis over the last 10 years is 6.4%. We achieve this by taking on average just shy of 80% risk compared to the FTSE AIM All Share index.

    As at the end of December 2023, we managed £705m for clients in our AIM IHT plan, including our friends at Rathbones which aren't included in these figures, we are very well placed as the second largest AIM IHT provider in the market.

    Many of you who have attended a presentation or listened to our updates have seen and heard us reiterate the seven bullet points that all our companies need to box tick before we invest. In this environment more than ever I would draw your attention to proven financial track record. But also, the strength of balance sheet and low financial risk. In the current environment where cost of servicing finance is significantly higher than it was just a few years ago, we want to make sure that the interest cover remains high and therefore the percentage of interest required to be paid on their profits remains low. Ultimately a higher interest payment means lower profits for shareholders.

    The ratios emphasise our quality. Our plan has a superior gross margin, i.e., sales less cost of sales. More than double the 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 hence net cash is admirable currently. Our companies produce on average just shy of 6% free cash flow yield, a much higher free cash flow conversion of 68p in every £1 of earnings. On a servicing of finance point of view, our average company pays only 4% of earnings as interest compared to the index of 8% meaning more of the company’s earnings ultimately fall to shareholders and not to banks.

    Our cumulative performance over discrete periods against the FTSE AIM Allshare and the FTSE All share.

    And again, just to remind you that all the numbers we produce for performance are net of internal fees. So, after any bargain charges and AMC but not including any external IFA charges.

    So, we had a very strong quarter up 13.4% for the average client against the index at just under 6% and now also this time favourably against the FTSE all share at just over 3%. When you now look at that performance over the longer term, you can see over the year of 2023 we were slightly just below the water at minus 1% against the FTSE AIM Allshare at -6.4%.
    We are comfortably ahead of the index over all time periods and reiterates our investment thesis that the alpha we generate through our quality companies we invest in significantly outperforms that of the index.
    The average dividend yield is now 1.8% it did raise to about 2.1% in Q3 23, but I will discuss the dividend more towards the end of the presentation.

    We have performed very well in Q4 23. The top table shows the overall top contributors for us and there's really no surprise here, the companies listed are our overweight’s compared to the index that have done very, very well. Nice to see YouGov back on top which was a complete reversal from the previous quarter where it was our largest laggard. As you can see in the quarter, YouGov’s share price increased 57% adding a nice 194 basis points Smart metering systems, had a bid from a US PE company, KKR which drove the share price higher. Renew, Cerillion and Fonix complete our top 5 outperformers all increasing over 20% in the quarter. So those five companies have added c660bps of performance to the plan in the quarter.
    And when you look at the active alpha, so I compare that to the index that’s nearly 500bps.

    Notable others include Ashtead Technology, a subsea rental equipment to the offshore energy market and Lok n Store a self-storage offering in the UK.

    We added Ashtead Tech at the start of 2023 following our site visit and are very pleased with its performance.

    I think now it's doubled in price since we initiated or initially put in a position and that was up to 40% in the quarter following an acquisition.

    On the top 5 contributors to the index, the notable performer was Hotel Chocolat the confectionary brand which had a flattering bid from Mars in the quarter and prompted a significant re-rating in the share price, prior to the bid it had been a poor performer in the consumer discretionary space.

    So now reviewing 2023, the three tables here show the IW&I AIM plan on the top left, our sector weighting and contribution, the FTSE AIM Allshare, as well as our internally generated Smart AIM benchmark. Smart AIM takes the FTSE AIM Allshare index but removes any company that we believe wouldn’t get business relief and then reweighted accordingly, this gives us a much better view on our ‘investable universe’ to see how well we have done picking the winners. Generally, you can see that much of the mining and minerals sector has been removed and some of the financials including investment trusts.

    Looking at both Smart AIM and the FTSE AIM Allshare you can see both had very poor performances in 2023, attributable to a poor tech and comms performance of -3.1% and -2.5% respectively. This compared to the IW&I plan where our contribution for the year was up 1.1% giving an active alpha of 365bps over the benchmark.

    The other sector that was particularly poor for the index was mining and minerals which after a very strong 2021 and 2022 gave back lots of its gains, both sectors hurt the index which gave us a relative outperformance. As can be seen we held on average 4% cash, and this is just simply due to timing, we normally hold closer to 2% cash but with the SMS acquisition and some other portfolio moves we were a little overweight as at the year end. This has started to be deployed this month.

    Comparing the smart aim, down 5.5% and the AIM all share of -6.4% this generally indicates that non business relief companies cost the index approximately 90 bps of performance in 2023.

    Now using the same index, we have plotted the performance of the IWI AIM plan, the dark blue line, the FTSE AIM Allshare the light blue line and the Smart AIM the grey line since March 2021. As you can see the main index has outperformed the Smart AIM meaning that much of the stocks insulating the index performance are non-qualifying companies.

    We outperform both indices, and the Smart AIM by some way giving the comfort that our stock selection has been very good, and this reiterates our quality criteria we overlay when investing as mentioned earlier.

    This slide gives our current portfolio an X-ray. The left-hand side of this chart shows the revenue split of our companies by geography, you can see that whilst we invest in UK listed smaller companies, half of the revenues generated are global in nature with roughly a quarter from the US and Canada, 15% from Europe.

    On the right-hand side of this slide at the top shows the split of the portfolio by market cap, our sweet spot is between £250 - £500 million market cap, as at the yearend our average market cap of the plan was in fact just over at £508m compared to the index at £105m.

    The bottom right which corresponds to the sector allocation against the index, as per the previous performance slide, our overweight is in the tech and comms space with our underweights generally in the sectors we can invest in, namely financials and mining. A slight cash drag at the yearend as explained earlier.

    The last few years has been the worst investment returns for 15 years, losses since the downturn started a couple of years ago are real and the factors that will bring a reversal of those losses are not ones that we can control. However, we are confident the businesses we are invested in have the resilience to trade through the current turbulence, so are well positioned for the medium and longer term, and also confident that as the interest rate cycle turns this will be reflected in the performance of our clients’ portfolios. Looking at the Investec AIM IHT plan portfolio from a valuation perspective. The price earnings ratio, i.e. how much an investor is willing to pay for each £1 of earnings a company generates has decreased from our 10-year average of 22x to the current PE today of 19.8x. An 11% discount to the 10-year average.

    We have also looked back in the history books to see the comparative PE when the base rate was the same as now, seeing as the last 10 years rates have been near zero. This takes us back to Q1 2007 when the Bank of England base rate was 5.25% and our portfolio traded on 21.1x PE, this gives us a 7% discount compared to an equivalent backdrop.

    Another familiar chart in our pack is the company earnings and dividend yield. Just touching on the dividend yield first, the average now for the plan is just over 1.8% down from the 2.1% reported at the end of Q3 24. This reflects an increase in the price of investments as performance was strong in the quarter just gone. Saying that, the absolute number for dividend paid is increasing as we are seeing more and more companies in our portfolio continue to raise dividends year on year in line with their respective progressive dividend policies, therefore whiles the yield has come down, the absolute value of dividends is higher for portfolios.

    Looking at the earnings per share and just a reminder we use the median earnings growth for companies reporting in that quarter, we have seen a strong bounced back from Q3 23 with the average EPS growth of 7%, marginally below the average but still broadly positive which is exactly what we want to see quarter on quarter. If we used the mean average however this number would be 18% growth from our companies in the quarter.

    Another chart we use regularly just to show that there hasn’t been a time since the great financial crisis where clients haven’t benefited from an AIM IHT portfolio after the tax considerations are taken into account. Whilst the last few quarters we have flirted with the 40% tax break when investing at the peak of the market in August 2021, we have now strongly bounced away from the barrier., giving us a little more daylight to add more value to our clients. And just to go back to the great financial crisis, symmetry will hopefully replay itself with us moving far quicker from the depths.

    So, why in our view do AIM/Smaller companies look attractive now?

    Valuation remains attractive, throughout this presentation we have looked at valuations from different angles and still believe we are a way away from where true valuations should be. Share prices have fallen over recent years due to the marginal seller pushing share prices down, but now it’s looking like the marginal seller has near finished it sales cycle, we might see new buyers coming back in. Pension funds who have historically (multiple decades ago) held UK companies well in pension funds have been net sellers for the last 2 decades. Positions in pensions are now very small so with the potential push from the chancellor to motivate pensions/investors back into the market, this can only be a net positive from a very low base.

    From a macro point of view, our view on cheap valuations plays out as M&A and has been prevalent in this space with PE and overseas buyers snapping up over 40 UK smaller listed companies in 2023. whilst this is good for short term performance, we want to keep as many UK companies public as possible to see the strong growth and hence share prices perform well in the months and years ahead.

    Inflation looks to be falling and hence there is more pressure on central banks to change their tact, whilst we can’t predict when central banks may start slashing rates, the direction of travel is of most importance, this should start to drive investors back into the market where the alternative asset classes become less attractive.

    In conclusion, we are starting to see markets reprice, a bounce back from the lulls that we have been sitting at.

    Trading updates from our companies in 2024 have generally been good with at or marginally above consensus numbers.

    Valuations look attractive still, there is much room for re-rating but strong earnings growth on top.

    Final comment of a promise and reiteration, we continue to scout the market for the best companies we can invest in, that meet our seven pillars of quality. We aren’t short of ideas, we have a few on the subs bench warming up potentially looking for an appearance in 2024.

Learn more about our speakers

Adam Greaves
Adam Greaves

Senior Investment Director

Andrew Hall
Andrew Hall

Investment Manager

Adam Greaves
Adam Greaves

Senior Investment Director

Andrew Hall
Andrew Hall

Investment Manager


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.

Investec Wealth & Investment (UK) is a trading name of Investec Wealth & Investment Limited which is a subsidiary of Rathbones Group Plc. Investec Wealth & Investment Limited is authorised and regulated by the Financial Conduct Authority and is registered in England. Registered No. 2122340. Registered Office: 30 Gresham Street. London. EC2V 7QN.