The AIM index is up 30% since 1st April i.e. Q2 2020. Maybe this is not surprising when you consider that it fell by 29% in Q1 and, as has been widely reported in the mainstream press, markets have rebounded.

However, when you compare to the UK main markets, AIM has massively outperformed in Q2 with the FTSE 100 and FTSE All-Share up c10% and 11% respectively. And, it’s not if the main markets didn’t fall as much in the first quarter. The 100 was down 25% and the All-Share 26%.

So what is driving AIM?

Well, it is probably a number of factors.

Firstly, it has been well documented for some time that the FTSE 100 is full of pretty dull and uninspiring companies and that can partly explain why it has also underperformed the S&P500. The UK blue-chips did benefit last year from a weakening pound as overseas investors bought cheaper assets and yield. With Sterling still relatively weak, it appears that no longer remains an attraction.

However, that aside it is more likely that the dominance of a few underlying companies is distorting the index and this has always been the problem of using AIM as a comparative index.

There were 831 companies listed on AIM at the end of May 2020, with the combined market capitalisation of the market c£95.3bn. There were 17 companies individually valued at more than £1bn, which between them represented 34% of the total market capitalisation.

With AIM being a weighted index, i.e. the return of the index is based on a weighted return by market capitalisation, rather than each company being weighted equally as the US Dow Jones is for example, it is fair to say that those 18 companies will really move the needle.

And if we look into some of those companies, you will see the influence they have.

Probably two of the most well known companies listed on AIM are online clothing retailers Boohoo and ASOS. Boohoo, with a market cap of c£5bn is comfortably the largest company on AIM by value, being £1.5bn more than the next on the list, Abcam.

Combined, these companies represent over 8% of the index. When you consider that ASOS is up 177% in this quarter alone and Boohoo 115%, returning to pre -lockdown levels, you can see the influence they are having on the index as a whole. ITM Power, another £1bn+ company is also up over 100% quarter to date.

Unless you are holding these companies in your portfolio, it is very likely that your AIM portfolio is going to be significantly underperforming the AIM index.

So although the AIM index has been a better indicator for AIM portfolios in recent years, it goes to show that it can be misleading in extraordinary times.

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.

On the day AIM celebrates its 25th birthday, Chris Boxall, co-founder of AIM investment specialist Fundamental Asset Management, covers recent news from AIM companies, AIM’s growth attractions for investors and the issue of Inheritance Tax reliefs. Companies mentioned include Best of the Best, boohoo, Idox, Team17, Blue Prism and many of AIM’s pharma biotech groups involved in developing Covid-19 tests.

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A recent article in the popular press has alluded to the potential withdrawal of Inheritance Tax/Business Relief on AIM shares.

As a well-established investor in AIM for Inheritance Tax (‘IHT’) planning purposes, we have become used to regular press mutterings over the 16 years we have been managing our AIM for IHT portfolios. The introduction of an Autumn statement gave the press another opportunity to cover this topic, whether they had anything worthwhile to say or not.

It is also somewhat ironic that the latest press report comes at a time when AIM is probably enjoying the most positive period in its 25 year history, with numerous small AIM pharma and biotech groups at the forefront of developing tests and vaccines in the battle against Covid-19. This has not been possible without the support of their shareholders, many of whom have been encouraged to invest with the added attraction of IHT relief.

While there has always been the risk that tax relief might be removed or restricted in some form, if anything the tax reliefs for investing in AIM have been enhanced over the years. The availability of AIM shares in ISAs from 2013 resulted in a wave of new money finding its way to London’s growth market and the majority of new investment in our AIM for IHT portfolios (and no doubt those of other providers) is now via ISA transfers. The withdrawal of stamp duty on AIM shares in 2014 provided further encouragement.

Business Relief rules in brief
Investments that qualify for Business Relief (formerly Business Property Relief) can be passed on free from Inheritance Tax upon the death of the investor, provided the shares have been owned for at least two years at that time.

The shares of qualifying AIM companies benefit from the Business Relief rules, which were introduced in the 1976 Finance Act by Labour Chancellor Denis Healey. The primary objective at that time was to ensure that, after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold or split up to pay an IHT liability. For the purposes of the Business Relief rules, AIM does not meet the HMRC definition of ‘listed’, accordingly shares in qualifying companies on AIM carry the same Business Relief benefits as private trading companies.

Not all AIM companies qualify for Business Relief and, for a modest outlay, our associated Investor’s Champion’s AIMsearch tool can tell you which do, which don’t, and which are doubtful.

The evolution and maturity of AIM now means that many substantial companies and their shareholders benefit from Business Relief, causing some to question the appropriateness of this attractive tax incentive – AIM quoted boohoo Group, the UK’s fourth largest listed retailer with a market capitalisation of £5.3bn, which would gain it entry to the FTSE100 Index, qualifies for Business Relief purposes.

Intelligent Partnership, the UK’s leading provider of education and insights on alternative investments, has commented how, prior to the last Budget there was speculation that Chancellor Rishi Sunak might alter IHT – from something as radical as replacing it with a lifetime gifting allowance through to reducing or removing some of the Inheritance Tax reliefs, including Business Relief.

The removal of Business Relief would clearly have negative effect on the AIM market. According to Investor’s Champion’s AIMsearch, 65% of AIM companies qualify for the relief and a further 10% offer some qualification, subject to exclusion for excepted assets on their balance sheets. We consider that any impact from the withdrawals of relief may be less significant for larger more liquid AIM companies (Mkt cap £250m+), the share registers of which are now dominated by mainstream institutional investors, rather than AIM for IHT managers. For example, the share register of Fevertree Drinks, one of AIM’s largest and most successful companies with a market capitalisation of £2.4bn and a Fundamental AIM portfolio holding, is dominated by mainstream institutional funds, which hold 39% of the equity. The founders still retain a combined 11.76% but institutions have proved to be keen buyers of their shares in the past. The same applies to many other large, rapidly growing AIM companies, with institutions eager buyers of large parcels of shares if the opportunity arises. This has been notable over the pandemic where numerous AIM fund raisings have been supported by large mainstream institutional investors, as opposed to IHT money.

Furthermore, the premium rating of many AIM companies is less about IHT investor buying and more to do with the attractive growth prospects of many substantial AIM companies compared to the low-growth opportunities available on the main UK stock market.

Sunak ultimately left IHT and Business Relief alone with some speculating that planned tax rises and relief cuts have now been pushed back until after the coronavirus threat has subsided. However, the government re-iterated its support of mechanisms through which growth can be generated, stating: “The government places a high priority on expanding the supply of finance through the cycle to support long-term investment to increase the productive capacity of the economy, across all regions and nations of the UK. This includes, but is not limited to, areas such as infrastructure, SME finance, venture and growth capital”

The UK government will have a need for new sources of revenue in view of the huge cost of supporting the pandemic and, a so-called tax expert quoted in the recent article, commented how the removal of Business Relief could be much more attractive than raising VAT or income tax. However, this seems questionable if one considers the irrelevance of IHT relative to the total UK tax collection, the current corporate funding demands and need to stimulate growth.

The HMRC Annual and Report and Accounts 2018/19 (a must read!) reveals that IHT receipts, which are lumped together with Other taxes, were a meagre £5.3bn, or 0.854% of total tax revenues of £628bn in 2018/19. Wealthy individuals paid £54bn of tax, small businesses £115bn and large businesses £135bn. VAT, which is included in the business numbers, contributed £135.6bn to the overall tax. Inheritance Tax doesn’t even get a specific mention in the HMRC report.

HMRC Statistics indicate the value of Business Relief claimed on unquoted shares was £828m in 2016/17 across 1,480 estates, an average of £559k per estate. Other Business Reliefs were £417m on 848 estates. This implies total tax saved of £498m through the combined Business Reliefs (40% x £828m+£417m) or 0.08% of total tax receipts, if applied to the 2018/19 numbers.

These numbers highlight the irrelevance of IHT relative to the bigger tax take, suggesting the government will need to address the main sources of tax to boost its coffers, rather than tinker with IHT.

Furthermore, it would surely make better economic sense to enhance, rather than diminish, tax incentives for individuals in smaller companies. This would help stimulate growth and ultimately do more to boost overall tax collections by boosting the major tax collection points of PAYE, VAT and corporation taxes.

To avoid the potential pitfalls of a change in the Business Relief rules, the legal profession would like investors to embrace the apparent benefits of using a trust. When the two-year minimum holding period for AIM shares had been reached, solicitors suggest the shares could be put in trust to cement the tax exemption. This could conceivably protect investors from any retrospective change to the rules, although the estate will then be saddled with a costly and unwieldy trust structure which comes with its own set of tax rules and places the investor’s assets in the control of others.

We have experienced on numerous occasions at first hand the added complexity and cost, including outrageous legal fees, imposed on relatively small estates with trust structures in place and would urge investors to think carefully before going down this route.

Since launch on 19 June 1995, AIM has supported nearly four-thousand growth companies in raising over £117bn, 61% of which has been through follow-on fundraisings. The equity fund raisings over the pandemic have seen investors plough £billions into UK companies to help keep them going, removing a further burden from the government and 158 AIM companies have raised £1.9 billion of follow-on capital in the first five months of 2020. Research from Grant Thornton shows that AIM companies directly contributed £33.5bn to UK GDP and supported more than 430,000 jobs in 2019.

The London Stock Exchange’s collaboration with Primary Bid has also broadened retail investors’ access to follow-on equity raisings during this challenging period. Many of these same fund raises have also been supported by founders whose continuing equity interest in their companies is underpinned by Business Relief attractions.

It would be strange timing for the government to remove incentives for investment in companies, large and small, at the time they most need it. In a recessionary climate the greater focus surely needs to be on supporting growth, which will ultimately lead to enhancing the bigger tax collections.

For a limited period, we think the government should actually consider enhancing the tax incentives for investing in the newly issued shares of UK listed companies, whatever their size, whether on the main market or AIM. Now that’s a radical thought!

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.

 

Shares in high flying ITM Power (LON: ITM), the energy storage and clean fuel company, had an interesting week after announcing a distinctly underwhelming year end trading update.  It is quite staggering how a business with real annual sales revenue of only £3m can now be valued at over £1bn. There is clearly a huge opportunity ahead, but the valuation appears to be well ahead of itself and ITM is yet to demonstrate an ability to actually make any money from its technology. The market is  clearly unfazed by such trivial concerns.

Later in the week senior management of ITM exercised options over 3.9m shares, netting themselves over £13m. Shareholders probably won’t begrudge CEO Graham Cooley his seemingly outrageous £6m options bonus, with the shares up over 700% over the last 12 months. However, there does seem to be something inherently wrong with a system which richly rewards management based on a temporary share price growth, yet modest real commercial achievement.

RWS Holdings (LON:RWS), the world’s leading provider of intellectual property support services issued full year results which were broadly as anticipated and news of two acquisitions. Fundamental AIM portfolios hold shares in RWS, whose group businesses carry out patent translations, international patent filing and searches and life sciences translations. It is also a leading provider of localization services supporting blue-chip clients around the world. Overall, RWS is currently seeing limited impact on customer demand from Covid-19, with increased activity from large technology and life sciences clients who are working on vaccines and antibody testing. RWS also announced two fascinating acquisitions, one of them being a company developing best-in-class neural machine translation solutions.

Another Fundamental AIM portfolio company, Advanced Medical Solutions Group (LON: AMS), the surgical and advanced wound care specialist, issued a reassuring trading update. AMS has been experiencing a slowdown in demand for its products caused by the cancellation or postponement of elective surgeries, dental procedures and a reduction in the volume of accident & emergency treatments. However, with plenty of money in the bank and cash continuing to flow in, management reconfirmed its intention to recommend the payment of a final dividend for 2019.

There was a great story from Hornby (LON:HRN), the model railway group, which has been struggling over recent times. The fundraising efforts of Captain Tom Moore inspired Hornby to produce a model of the GB Railfreight Class 66 diesel locomotive which has been named after him, with the profits going straight to the NHS. The model sold out within hours of release, raising approximately £140,000 for NHS Charities Together, which will be donated on the launch of the model, later this year.

Portmeirion Group (LON:PMP), the designer and manufacturer of high quality homewares, raised £10m to fund its growth aspirations. The new money being raised will be used to accelerate its online efforts, extend its Wax Lyrical line and invest in its UK manufacturing operations. With more of us set to avoid restaurants, Portmeirion could do well as we refresh our cupboards, although perhaps they could do with some more youthful designs.

We struggle to understand the stock market suitability of OnTheMarket (AIM: OTMP), the majority agent-owned company which operates the OnTheMarket.com property portal. Its full year results were predictably terrible and another fund raise will surely be required to keep it afloat. The listed Group is 65% owned by over 3,000 agent shareholders which operate 6,000 branches which are offered preferential deals and shares in the listed group. The non-agent shareholders providing the real equity capital are therefore continuously being diluted through the issuance of incentive shares to agents.

Healthcare diagnostics has become a very hot area over the pandemic and Diaceutics (LON: DXRX), the diagnostic commercialisation company, raised £20.5m in the week to help support its ambitions.  Our associated research site Investor’s Champion recently published an in-depth commentary on Diaceutics.

Another diagnostic company, Immunodiagnostic Systems Holdings (LON:IDH), announced that its new automated Covid-19 IgG assay test had achieved CE marking and is expected to be available for sale by the end of this month. Shares in IDH soared more than 50% to levels not seen since 2017 in reaction to the news. The test is highly accurate, providing results in 25 minutes, and all the steps are automated with no manual reagent preparation required, ensuring minimal hands-on time for lab staff and therefore a high daily throughput.

Provider of essential infrastructure services, utilities connections and smart energy infrastructure, Nexus Infrastructure (LON:NEXS), announced decent results for the six months to 31 March 2020 and news of a £10m fund raise, with founders and Directors contributing £528,000. Fundamental AIM portfolios hold shares in Nexus.

Two of our general portfolio companies Games Workshop (LON:GAW) and Moneysupermarket (LON:MONY) issued updates, with the former the pick of the bunch.

Games Workshop confirmed that 306 of its 532 stores are now open in 20 countries, with the recovery in business since re-opening better than it had expected. For the year ending May 2020 they now anticipate sales of c£270m, which is ahead of consensus forecasts of £261m, and pre-tax profit no less than £85m which is marginally below. This includes royalties from licensing of £16m, up 40% on 2019 – the royalty opportunity for this business looks significant! With plenty of cash in the bank, management is already talking about repaying the government subsidies received to date.

While some of Moneysupermarket’s markets have been quieter, notably money and insurance, it has seen growth in energy switching searches and broadband. With cash continuing to flow into its coffers, net debt was a modest £0.8m, even after paying a final dividend of £46m, making MONY one of the few companies with the resources and cash flow to be able to commit to a final dividend.

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.

Please visit our YouTube channel from the link here for a video covering news from the week.

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.

Wizz Air Holdings (LON:WIZZ), the largest low-cost airline in Central and Eastern Europe, announced fantastic results for the year to 31 March 2020. Despite the challenging environment WIZZ is committing to the purchase of plenty of new aircraft over the next few years and has also announced its first ever flights from London Luton to Moscow and St. Petersburg. The shares of WIZZ and other airlines, including Fundamental AIM portfolio holding Dart Group (LON:DTG), operator of Jet2.com had another strong week, despite the UK government’s quarantine travel rules, which are coming into force on June 8. With the UK suffering the second-highest Covid-19 death rate after Spain, according to excess mortality figures, we find it somewhat ironic that the UK wants to restrict the movement of evidently more healthy visitors to these shores.

The latest AIM statistics from the London Stock Exchange highlight a strong bounce from London’s growth market which will celebrate its Silver Anniversary on 19 June.  At the end of May 2020 there were 832 companies on AIM, with the total market value £98.6bn compared with £88.5bn at the end of April. Our associates Investor’s Champion cover all the monthly updates from AIM.

AIM, which was originally called the Alternative Investment Market, was launched on 19 June 1995 as a replacement to the previous Unlisted Securities Market that had been in operation since 1980. At launch, AIM comprised only 10 companies valued collectively at £82.2m, with only one survivor, remaining from the original 10. May closed with 18 AIM companies valued at more than £1bn, several of which are Fundamental AIM portfolio constituents.

Fevertree Dinks (LON:FEVR), the world’s leading supplier of premium carbonated mixers, and another Fundamental AIM portfolio holding reassured with its AGM statement. While their On-Trade market remains fully or partially closed across many of their regions, Fevertree has been doing nicely from the increased consumption at home during lock-down. At home (Off-Trade) sales in the first full month of lockdown were up 24% year-on-year in the UK and they have seen continued positive momentum since, with its core tonic range performing particularly well. Off-Trade sales in the US nearly doubled in April and May.

XP Power (LON:XPP), one of the world’s leading developers and manufacturers of critical power control components to the electronics industry, and a long-term holding in Fundamental General Portfolios continues to impress. XP has been experiencing exceptional levels of demand from its Healthcare customers which includes critical applications used to treat Covid-19 patients (including ventilators). As usual this fabulous business looks in great shape.

IG Group (LON:IGG), the online trading platform and another Fundamental General Portfolio holding reported 119% growth in trading revenue in the fourth quarter of its financial year, with full year revenue 36% higher at £649m. The shares were flat on the news, implying that the good news was already priced into the current share price.

Gamma Communications (LON:GAMA), the provider of cloud communication services and one of AIM’s largest companies, continues to impress reporting strong growth and heightened demand for its Cloud based products. However, even Gamma’s robust business model has not fully escaped the impact of Covid-19 and some staff have taken temporary “leave of absence” while continuing to receive their full pay. Although the Group has met the criteria to make a claim under the UK Government’s Covid-19 Job Retention Scheme, management decided not to make such a claim on the grounds that that scheme was designed to protect jobs rather than to boost profits for companies who have been able to continue to trade.  With cash continuing to flow in and the balance sheet in great shape with plenty of cash, Gamma is one of the few companies confident enough to commit to the payment of a final dividend of 7.0 pence per share, up 13% on the prior year, which will cost £6.5m. Fundamental AIM portfolios hold shares in Gamma.

 

You can find out more about Fundamental’s high performing AIM portfolio service, including the latest fact sheet for May, from the link here.

Fundamental Asset Management has delivered exceptional investment returns for more than 16 years.