Collective Investment Schemes are commonplace in UK investment management and are the overwhelming choice for UK retail investors for use within their ISA and SIPP tax-wrappers when looking for exposure to UK smaller companies. But are they all that they seem and are they the only choice? Models of directly held equities are often overlooked but investors could be missing out on the added value models bring over collective investment schemes.
UK smaller companies prove themselves to be big outperformers on the global stage
Texas based fund manager Alta Fox, published an analysis of the best performing small-listed companies in the developed world. This was over the five years from 2015-20 and companies were required to have positive revenue growth and earnings before taxation, interest and depreciation for the previous 12 months. This included companies in North America, western Europe and Australia valued at $150m- $10bn, and that had generated a total shareholder return of at least 350% over the five-year period (35% a year compounded). It excluded all companies in the energy, materials and financials sectors.
Of the 104 companies to make the final cut, 55.7% were from Western Europe vs 32.7% from North America. 13.46% of the top performing companies were found on AIM while only 2.88% were on the UK Main Market. 21.15% were on the Nasdaq, with technology overall making up only 34% of the total.
US companies made up 28.8% of the total, with the UK in second place with 15.4%.
You can hear more about the outperformance of AIM from our CPD adviser webinar session: Is AIM heading for a fall… or is its outperformance set to continue?
Model portfolios give you full visibility and knowledge of all holdings, not simply the ‘Top 10’. This means you can see exactly what you are investing in.
Portfolios of shares are priced at the market price of the underlying holdings and most closed ended small/micro-cap funds trade at a discount to net assets (discounts typically widen during market sell-off), some as high as 19%.
The nature of segregated portfolios of shares means individual investors interests are not bundled with those of others. They therefore benefit from greater liquidity, an ability to sell when needed. Open ended funds holding small-cap shares are very hard to manage given the fluid nature of subscriptions and redemptions. During market sell-offs fund managers will be struggling to manage redemptions which will require them to sell holdings, thereby exacerbating share price declines.
Liquidity is an important investment fundamental not to be over looked. The illiquid nature of small cap holdings worsened the return for holders of Woodford’s fund and ultimately enforced its closure.
Direct equity portfolios standard management fee is around 1%, often less for larger accounts. On top of this, portfolios do not charge often sizable performance fees and trading costs, notably on adviser wrap platforms, are extremely low.
The cost of running closed ended funds with a focus on small caps is very high, with the Total Expense Ratio (‘TER’) of those we have seen ranging from 1.34% to as much as 7.50% where a performance fee has been charged.
Stated fund TERs also ignore the impact of trading costs. Venture Capital Trusts with a focus on AIM quoted companies also trade at discount with high TERs and performance fees.
Direct equity portfolios managed on behalf of individual clients can easily acquire positions in smaller companies. Closed-ended small cap funds struggle to pick up positions of size in their target investments.
Direct equity investment via portfolios encourages efficient portfolio structure and the avoidance of over-diversification. Open-ended small cap funds are often over-diversified, holding hundreds of positions. This is often due to the less liquid nature of smaller quoted companies
One popular Investment Trust we have come across has 360 different company holdings, with the top 10 only accounting for 17% of net assets.
UK investors in collective investment schemes (funds/investment trusts/VCTs) holding AIM shares don’t benefit from the tax advantages available to those UK investors having direct holdings in the companies.
You can find out more about the benefits of investing in AIM for IHT planning purposes in our free report available from the link here.
- The management of capital gains is harder via a segregated portfolio.
- It’s much harder to judge performance
- Segregated portfolios can be prohibitively costly for smaller accounts of less than £40k
The Fundamental AIM IHT Portfolio is a discretionary investment management service where clients can obtain 100% mitigation from Inheritance Tax, benefit from the capital growth afforded by the AIM market and retain control of their assets.
You can find out more about Fundamental Asset Management’s high performing AIM IHT ISA and AIM Inheritance Tax portfolio service, which has been delivering exceptional investment returns for more than 17 years, from the link here.