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An update on the Octopus AIM Inheritance Tax Service and ISA: July

10:36pm 17 Jul 2020 - Written by Richard Power, Head of Smaller Companies
The portfolios have been more resilient than the wider market

Below is the latest update from the Octopus AIM Inheritance Tax Service and ISA.

Since our last update the majority of lockdown restrictions in the UK have been lifted and even those most impacted portfolio companies are back up and trading again. As the months have passed, our confidence in the resilience of the portfolio companies has grown and we remain increasingly confident about the long term prospects for the portfolios.

The portfolios have been more resilient than the wider market

The portfolios are invested into established and profitable companies and are not exposed to more cyclical sectors such as Property, Mining or Oil & Gas. 

In selecting investments for the portfolio, we have favoured companies which have certain characteristics. These include high levels of earnings visibility and recurring revenues. We prefer companies that are global leaders in their field of expertise, providing critical products or services. We favour companies with strong balance sheets and high levels of cash generation. 

We also focus on each company’s ability to double profits over the next five years, because demonstrating this level of progress will ultimately make the business more valuable to a range of potential buyers. 

As a result, we have limited exposure to Leisure and Retail and no exposure to the Travel sector. This also means that several portfolio companies have had minimal interruption to their business, with some still expected to grow profits during the current year in line with initial expectations. Even those companies exposed to discretionary business spend have proved incredibly resilient, and many have since confirmed they still expect to grow profits despite the interruption caused by the lockdown restrictions. 

The stock market continues to operate very effectively

The stock market continues to operate very effectively 

One of the benefits of being quoted on a stock exchange is access to additional capital should it be required. Dozens of quoted companies across the size spectrum are currently raising money from shareholders, with well over £16 billion¹ of new capital raised by quoted companies over the last few months, £2 billion² of which has been raised by companies listed on AIM.  

Some of these fund raisings will be for precautionary reasons, to provide a safety net should trading conditions deteriorate beyond the worst-case scenario, whilst we are experiencing many companies raising additional capital to either accelerate growth or to complete earnings enhancing acquisitions, as M&A activity has started to pick up. This will ensure these companies emerge from the current crisis in a stronger position. 

Management teams are doing an excellent job keeping us informed

Management teams are doing an excellent job keeping us informed

As we have discussed in previous updates, a few of the portfolio companies had to adhere to Government advice and temporarily shut down operations. We have been impressed with the response of the management teams to protect all stakeholders, including employees, customers, suppliers, as well as long term shareholders. 

The level of communication from the management teams has been excellent, with companies sharing the stress testing and scenario analyses they have undertaken in order to reassure investors that they remain in a robust financial position. This has enabled us to remain disciplined and avoid reacting to short term uncertainty. We have every confidence in the financial position of the companies in the portfolio and that they remain on track to return to the growth trajectory they were on prior to the recent crisis, restoring any short term impact to shareholder value. 

We will remain in close contact with the management teams of your companies and will continue to update you.

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Reminder of the key risks

Reminder of the key risks

  • The value of investments discussed, and any income from them, can fall as well as rise. Investors may not get back the full amount they invest.
  • Tax treatment depends on an investor’s personal circumstances and may change in the future.
  • Tax reliefs depend on the portfolio companies maintaining their qualifying status.
  • The shares of smaller companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

 ¹ London Stock Exchange, June 2020

 ² AIM 25, Celebrating 25 years, London Stock Exchange, June 2020