Mitigating inheritance tax (IHT) with an AIM IHT portfolio is a tried and tested estate planning solution. The range of companies that providers invest in is somewhat limited, however, creating diversification issues if portfolios are not carefully selected.
There are 913 companies listed on AIM, and not all qualify for IHT relief. This already cuts down the options for portfolio managers. Jeremy Goodman, director at Oculus Wealth Management, says: ‘The filtering process is quite similar among providers, and that filtering process leaves quite a small pool of shares to invest in.’
AIM IHT portfolios are a more flexible solution compared with trusts and gifting, albeit with greater risk associated with the index. AIM suffered a 22% dip in Q4 2018, which shows how volatile this market can be.
According to Micap, a tax-efficient investments comparison site, there are 31 providers offering Business Relief (BR) qualifying AIM portfolios.
BR qualification, paired with the filtering criteria of providers, leaves a limited pool of companies included within AIM IHT portfolios.
Sean O’Flanagan, senior portfolio manager at Charles Stanley, says: ‘We don’t invest in companies with a market cap of less than £50 million. Ideally we’re looking for companies
with a market cap of £100 million plus. That brings the amount of companies we can invest in to 200-250.’
Justin Waine, investment director at Puma Investments, echoes Flanagan, suggesting that Puma will only invest above the £50 million mark.
Judith MacKenzie, head of public equity at Downing, says: ‘We sit further down the market cap level, where we believe there is better value. We mostly look at companies between £60-70 million market cap. Instinctively, two thirds of AIM shares qualify for BR. We’d look at around 150 companies, then based on the quality of earnings, we’d look at half that. Due to pricing that would be cut down again to around 30 companies.’
AIM IHT providers tend to avoid the larger cap incumbents of the market, further narrowing their selection. The likes of Asos or Fever-Tree rarely appear in the portfolios of these providers.
Waine, says: ‘Valuation is a key metric. At the larger end of AIM, the multiples are far too high.’
With the restricted pool of companies suitable for an AIM IHT portfolio, there is some potential for overlap.
Flanagan says: ‘There are six to eight core stocks that are commonly owned among AIM IHT portfolios. However, if we all had the same stocks, the performance would be very similar.’
Mackenzie adds: ‘We don’t want to be chasing the same stocks as other providers, which is one reason why we opt for smaller market cap companies.’
The primary objective of these portfolios is to mitigate an IHT bill, and providers will want to achieve less volatility than the index presents.
Flanagan says: ‘We’re as conservative as we can be within the constraints of AIM. We avoid micro caps and loss making businesses. We didn’t invest in, for example, Patisserie Valerie or Conviviality.’
MacKenzie adds: ‘We have slightly bigger stakes in fewer companies. This gives us a greater degree of influence with those companies, especially when things don’t go to plan. She adds that this can also act as a break on growth.
‘We’re keen to not have too many funds under management in this area. We currently have £70 million invested in our AIM IHT portfolio, and that could have easily been 10 times more. This market is quite difficult to manage, as the amount invested can heavily influence the underlying companies.’
Performance in a storm
ARC’s AIP index suggests that AIM IHT portfolios were down over 15% in 2018, suffering an 18% fall in Q4. This is less of a dip than the whole AIM index.
MacKenzie says: ‘Our portfolio was down 13% in Q4. Growth focused portfolios in this area will capture more of the upside, but we’ve suffered less of the downside. We’re consistent and we don’t capture the outperformance of a bull market.’