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Inheritance Tax Service
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Octopus Inheritance Tax Service – The latest from Fern Trading: June

5:22pm 12 Jun 2020 - Written by Rob Skinner, Head of Octopus Inheritance Tax Service

This update focuses on the latest valuation for Fern Trading Limited, the company that most investors in the Octopus Inheritance Tax Service own shares in and how it has performed over the past month.

As an unlisted company, Fern’s share price is not directly affected by short term market sentiment. Fern targets growth for investors that is predictable throughout the market cycle. It is a large and diversified trading group comprised of over 200 companies.

Every month, we undertake a valuation of Fern and recommend a share price to the Fern Board at which Fern is happy to issue new shares and Octopus, as discretionary manager of the Octopus Inheritance Tax Service, is happy to buy and sell shares on behalf of investors. We have done that again as usual to set the share price for the month of June (see appendix 1).

June share price

Fern has a diversified strategy, with just over half of its business comprising owning and operating renewable energy sites. The other half comprises a large scale secured lending business, fibre broadband businesses and operational healthcare infrastructure businesses. A prime reason for Fern selecting these sectors is that even in difficult market conditions they continue to operate and generate revenue, as has been the case over the last month. Overall, Fern’s operations performed in line with expectations and as a result Fern’s share price increased by 0.5p to 154p.

12 month performance and impact on investors

Fern’s share price for the last 12 months has been below target, and has increased by 0.3% vs. a year ago. Operationally Fern’s businesses performed broadly in line with our expectations in the period, but the share price in the month of April dropped 2.5%, which offset the majority of the gains in the share price during the rest of the period. This was due to long-term energy price forecasts decreasing at the end of March. Long-term energy prices are provided to us, and the rest of the energy sector, from external consultants, and are a key component in determining the value of Fern’s energy assets which are expected to operate for the next 20-30 years. 

However, the vast majority of investors in Fern who have been invested for more than 12 months will still have positive annualised growth, after the Octopus Inheritance Tax Service Annual Management Charge (AMC), of 3% or more on average over the lifetime of their investment.  

This is because the Octopus Inheritance Tax Service AMC of 1% per year (plus VAT) accrues within a portfolio and is only collected when an investor sells shares, and then only to the extent possible to leave the investor with 3% growth per year in their shareholding. This means that any short-term periods of underperformance (like Fern experienced in April) will reduce the AMC first before impacting the value of an investor’s portfolio. It means that Octopus is very aligned with the interests of Fern’s investors, and also acts as a buffer against price volatility that should increase in value over time.

Property lending update

Despite the very unusual times we find ourselves in, operations continue relatively unaffected across the Fern group. The only area of the Group which has experienced a marked change since the pandemic began is Fern’s property lending business, which has seen a slowdown in new loans being issued. This isn’t giving us major cause for concern as one of the reasons Fern is active in a range of sectors is that Fern can and will choose to divert its capital towards sectors that are most attractive at any time. 

Fern’s existing loan book is well positioned with a conservative loan to value of around 62% across the loan book. However, we have seen a small increase in payment holiday requests from borrowers, which we consider on a case by case basis. These aren’t waivers; just short deferrals during which Fern’s interest continues to accrue. Offering these occasionally to borrowers we know and trust is a reasonable step to help the wider economy in what are trying times.

To find the latest upcoming and on-demand webinars explaining more about the Octopus Inheritance Tax Service go to this page and filter by ‘inheritance tax solutions’ in the product type. If you have any questions, please call us.

A reminder of the key risks

  • The value of an investment in the Octopus Inheritance Tax Service, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
  • The benefit of tax relief depends on individual circumstances. Tax treatment is assumed as per current legislation, which may change in the future.
  • Qualification for BPR depends on portfolio companies maintaining their qualifying status, which is assessed at the point a claim for the relief is made.
  • The shares of smaller and unlisted companies may be more volatile than shares of companies listed on the main market of the London Stock Exchange.
  • The shares of these companies may also be harder to sell.

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Appendix 1

Past performance is not a reliable indicator of future performance.

Source: Octopus Investments, 1 June 2020. The performance data table on the left of this page shows the discrete annual growth of Fern’s share price only. It does not take account of initial fees, dealing fees or annual management charges associated with investing in the Octopus Inheritance Tax Service and should not be viewed as performance information for the Octopus Inheritance Tax Service. Performance is calculated based on the sale price for Fern’s shares at 1 June each year. The performance table on the right of this page shows the average annualised growth in Fern’s share price as at 1 June 2020. For example, if you bought shares in Fern on 1 June 2016 and still held them on the 1 June 2020, then they would have grown at an average of 3.25% a year for four years. It is important to remember that the annual growth rate could have been higher or lower than the 3.25% average at certain points.