Sam Barton, Managing Director of our Close Inheritance Tax Service, answers 6 important questions about the Alternative Investment Market (AIM) following the waves of Covid-19 and the Spring budget.
Q: Have you seen any changes in client behaviour as a result of the pandemic?
A: Coronavirus and the subsequent lockdowns have affected everyone over the last year or so – adviser’s clients have been no exception. I would observe that the usual scarring of a long bear market did not happen last year and the speedy recovery in share prices has left investors surprisingly optimistic about prospects.
Q: Do you think the Spring budget will affect the appeal of AIM and the investment offers that can include AIM quoted shares?
A: There was little specifically relevant to AIM, but three key trends were notable: higher taxes to pay for the pandemic; a drive for an investment-led recovery, and; support for the housing market. With AIM’s proven success at attracting capital for smaller companies, the potential tax benefits of investing on AIM and a tangible wealth effect from higher house prices, the investment backdrop is supportive.
Q: Why do you think AIM recovered so much more quickly than the main FTSE market last year?
A: AIM’s heavy weighting of high growth companies drove performance last year. These benefitted from accelerated technology adoption during the pandemic, record low interest rates (helpful for long duration assets including growth stocks) and a glut of capital. Many AIM companies were left behind in the rush. We have, however, seen a significant reversal of fortunes following vaccine approvals and the return of inflation.
Q: Have you had to change your interpretation of what qualified as a good AIM investment during the various waves of Covid-19?
A: No, our investment philosophy has remained broadly unchanged as we think it is clear, conservative and logical. Following the Federal Reserves’ decision to move to average interest rate targeting and the likelihood of an extended low interest rate environment in the UK, we lowered the discount rate in our models.
Q: With AIM shares currently trading at such high levels, does this make finding value challenging?
A: As we have seen such a divergent market, we are still finding new opportunities that meet our quality criteria at reasonable valuations, although they are getting a little scarcer. What has been evident is the pickup in companies looking to float on AIM and businesses raising cash for expansion – giving us the chance to deploy capital at more attractive valuations.
Q: What are your hopes and expectations for AIM for the rest of the year?
A: We have had a great start to the year, and looking across the portfolio holdings we still see a good amount of upside. I would not be surprised to see a temporary sell off as the inflation debate rumbles on, but expect that upward pressure on earnings estimates will herald a long overdue return to favour for UK equities.
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Important information
This article is only intended for use by UK investment professionals and should not be distributed to or relied upon by retail clients. Please note there is no guarantee that the CITS investment objective will be achieved. The value of investments will go up and down and clients may get back less money than they invested. Past performance is not a reliable indicator of future returns. The information contained in this document is believed to be correct but cannot be guaranteed. Opinions constitute our judgment as at the date shown and are subject to change without notice. This document is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation.
Specific information
CITS is a tailored discretionary investment portfolio management service that invests in both the Alternative Investment Market (AIM) and the Aquis Stock Exchange Growth Market (AQSE), with the benefit of major tax advantages introduced by the Chancellor of the Exchequer in his budget of March 2000. CITS is an Inheritance Tax mitigation service based on current tax law and practice. The tax treatment depends on the individual circumstances of each client and may be subject to change in the future. CITS invests in ‘qualifying shares’ in smaller companies which may be more volatile than investments in more established companies. Such companies can be subject to certain specific risks not associated with larger, more mature companies. Consequently this can make the CITS portfolios more volatile as the value of an investment may fall suddenly and substantially. CITS is considered suitable only for informed and experienced investors.