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Burford Capital, AIM’s largest company, underlines its support for AIM

The interim results statement from Burford Capital (LON: BUR), currently AIM’s largest company, provided an interesting commentary on its reasons for remaining on AIM, rather than consider a move to London’s Main Market. With a market capitalisation approaching £4 billion, Burford would be close to gaining entry to the FTSE100 Index should it be on the Main Market, which would see index tracker funds be obliged to acquire shares, thereby offering a boost to the share price.

So why doesn’t Burford Capital move to the Main Market?

Burford Capital’s interim results statement comments that it hardly ever encounters potential investors who baulk at buying larger AIM stocks like Burford and companies with market capitalisation above £500 million make up around half of AIM’s total value.
Burford has broadened its shareholder registry over time to include some of the world’s largest and most sophisticated investors who are unperturbed by their choice of market.

Burford sees no evidence that it would see increases in liquidity or other trading benefits from a move to the Main Market and they already have liquidity comparable to or better than Main Market companies with similar market capitalisations to theirs.

As they concluded, the reality is that both AIM and the Main Market see corporate and governance failures at companies of all sizes – for every Patisserie Holdings on AIM there is a Carillion on the Main Market, although in the case of the latter at least investors were forewarned! Listing rules and governance codes are not the primary defences against such failures; rather, sound management, an experienced, attentive and involved Board and high-quality external advisers (and especially auditors – Grant Thornton take note) are key.

Therefore, despite its size and evident appeal to large institutional investors, Burford is unlikely to pursue a Main Market listing in the near term as they do not see the benefits exceeding the costs and disadvantages.

Fundamental does not hold shares in Burford Capital. In addition to concerns surrounding its qualification for Inheritance Tax planning purposes (Investor’s Champion AIMsearch gives a detailed explanation of this) , we remain wary of its business model where reported profits are far removed from the operating cash flow. We are also uncomfortable with the opaque nature of its accounting, where the details of litigation investments remain hidden.

For the 6 months ending 30 June 2019 pre-tax profit of $226m resulted in an operating cash inflow of only £6.7m. Add loan interest of $19m and that derisory inflow turned into an operating cash outflow of $12m. It has always been this way at Burford, which brings in substantial unrealised gains as income, something it regularly addresses in its results statement.

Other than snippets of information relating to very substantial cases such as the giant Petersen claim, in respect of which Burford has banked huge sums, we are left in the dark on the identity of its ongoing investments.

We are not alone in being concerned that, by including unrealised gains in income, there is a risk that Burford is recognising income associated with ongoing investments that may one day become losses. Furthermore, the immediate re-investment of cash generated into new claims means very little internally generated cash is ever reinvested into anything shareholders have a clue about.

We acknowledge that both IFRS and US GAAP require a wide swathe of businesses to fair value Level 3 assets (the most illiquid and hardest to value) and flow unrealised gains through their income statements, including not just Burford but firms like Blackstone and KKR.

We also appreciate that Burford is not unique in holding a significant number of Level 3 assets, however, it’s the contentious nature of these so-called ‘assets’ which are very different to the equity holdings of private equity groups. Furthermore, Burford’s contentious assets are now supported by a growing debt pile, a highly unusual scenario.

Nevertheless, up to now Burford has been a roaring success on AIM, where it seems set to remain for the foreseeable future.


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Office of Tax Simplification Inheritance Tax Review – second report: what does it really mean for AIM?

The Office of Tax Simplification (‘OTS’) published its long-awaited review on reforming Inheritance Tax. A first report released in November 2018 dealt with the administration of estates while the latest report focuses on how Inheritance Tax could be made “easier to understand and more intuitive and simpler to operate”.

The stand-out headlines in the latest report were recommendations to reduce the seven year rule for gifting assets to five years and to increase the lifetime gift allowance from the current £3,000 to something more meaningful.

The press has also been keen to jump on a mention in the report of Business Property Relief (‘BPR’) and whether the treatment of AIM shares is within the policy intent of BPR.

Paragraph 5.19 of the report states:
…in relation to third party investors in AIM traded shares, BPR is not necessary to prevent the business from being broken up or sold in order to fund the payment of Inheritance Tax. This raises a question about whether it is within the policy intent of BPR to extend the relief to such shares, in particular where they are no longer held by the family or individuals originally owning the business.

Firstly, it should be emphasised that this was only an ‘observation’ and no further reference was made to AIM in the report in the conclusions or recommendations. However, in our opinion the report makes a reasonable observation regarding AIM.

BPR has never been wholly relevant to AIM in terms of preventing a business from being broken up or sold in order to fund the payment of Inheritance Tax. The relief in respect of smaller listed growth companies, is surely in place to attract third party investment and there are indications that the Treasury has always considered it thus. This is backed up by paragraph 5.18 of the report which states:

The OTS notes that the government’s response to the Patient Capital Review consultation published in November 2017 stated the government’s commitment to protecting the important role that BPR plays in supporting family owned businesses and growth investment in AIM and other growth markets. In correspondence and meetings, the OTS has heard evidence of its importance in meeting that objective.

To reiterate, contrary to what has been suggested by some of the more sensationalist headlines in the mainstream press, the OTS report has not recommended the removal of BPR on AIM. 

However, the OTS report has recommended that estates should not benefit from Capital Gains Tax dying with the deceased if the same assets in the estate are also benefitting from an IHT relief or exemption. In this regard Recommendation 5 on page 44 states:

Where a relief or exemption from Inheritance Tax applies, the government should consider removing the capital gains uplift and instead provide that the recipient is treated as acquiring the assets at the historic base cost of the person who has died.

The Treasury has said it will respond to the report in due course and consider its recommendations.

Last year’s Patient Capital Review highlighted a huge gap in funding in the UK for smaller growth companies and the removal of BPR on AIM will only exacerbate this, therefore we remain cautiously optimistic that radical changes are unlikely.

I think it’s worth reflecting that AIM as a viable Inheritance Tax planning option would not exist at all if the investment credentials didn’t stack-up in the first place.

Our AIM for Inheritance Tax portfolios have materially outperformed leading stock market indices for many years due to the compelling growth characteristics of the companies in which we invest, which just so happen to be accompanied by an attractive tax benefit for UK shareholders.

Successful AIM companies like RWS Holdings, AB Dynamics and many others have not seen their share prices rise due to the weight of demand from those investing for IHT planning purposes, they have risen based on the performance of the underlying businesses.

The great benefit of AIM is that it is market where share registers are dominated by family, founders and senior management.

Studies from Credit Suisse, Boston Consulting Group and Bain & Company have highlighted how superior growth and returns have been a feature of family and insider-controlled companies.

The great risk with a tax change of the type feared is if it pushes executive founders to sell early and exit the business, thereby depriving it of a valuable asset. For example, both RWS Holdings and AB Dynamics have benefited from the ongoing involvement of founder shareholders; Andrew Brode, Exec Chairman of RWS, has not sold a share since the business listed on AIM in 2003.

You can find out more about our high performing AIM portfolio service from the link here


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Eight small cap stocks to watch

Eight small cap stocks to watch

In this latest video with IG markets, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, sits down with Graham Neary from Stockopedia and Cube Investments and IG’s Jeremy Naylor, to discuss eight small caps stocks which could be worthwhile following.

Companies covered include:

Adept Technology Group (LON:ADT) – provider of managed IT services and unified communications
Duke Royalty (LON:DUKE) – provider of alternative financing solutions to corporates
H&T Group (LON:HAT) – pawnbroking, financial services and jewellery retail
PCF Group (PCF) – established lender
Park Group (LON:PARK) – multi-retailer redemption product provider
Pressure Technologies (LON:PRES) – specialist engineer
Quartix Holdings (LON:QTX) – subscription-based vehicle tracking systems, software and services
Rosenblatt Group (LON:RBGP) – legal services with a specialism in dispute resolution

You can find out more about Fundamental AIM portfolios, including the latest fact sheets, from the link here.

Fundamental Asset Management has delivered exceptional investment returns investing in AIM for Inheritance Tax planning services for more thasn 15 years.

 


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Jeremy Corbyn’s ‘Land for the Many’ and Inheritance Tax relief on AIM shares

An independent report commissioned by the Labour party entitled ‘Land for the Many’ proposes, among other interesting suggestions, to replace the current system of Inheritance Tax with a “lifetime gifts tax” levied on the recipient of the gifts. The proposals give rise to obvious fears that children will be taxed for financial assistance given to them during their lifetimes, including assistance to buy a home, as well as facing higher levies on inheritances.

Under the proposed system, a Corbyn led government would levy a tax on the gifts received above a lifetime allowance of £125,000. When this lifetime limit is reached, any income from gifts would be taxed annually at the same rate as income derived from labour under the income tax schedule.

The Resolution Foundation estimate that taxing gifts through the income tax system would raise £15 billion in 2020/21, £9.2 billion more than the current inheritance tax system, and would do so more progressively.

Under the proposal outlined by the Institute of Public Policy Research (‘IPPR’) there would be conditional exemptions for business and agricultural property, under which tax could be deferred until the asset is sold or until the business ceases to be a trading entity and becomes an investment entity. This would allow families to maintain the integrity of agricultural land or business assets.

There are clear grounds for the proposed tax system to continue supporting Business Relief, which underpins the long-term investment in small trading businesses, the lifeblood of the UK economy.

Many shares listed on AIM, the London Stock Exchange’s market for smaller growing companies, qualify for Business Relief purposes. UK individuals have reaped the rewards of patient long term investment in smaller innovative companies on AIM, many of which have grown into sizeable businesses. Fundamental Asset Management’s  Blog has highlighted AIM success stories and also draw attention to the occasional failure.

While the short 2-year qualifying period encourages investment in AIM as a tax planning tool, we would urge investors to consider the longer-term investment benefits.

Our patient, long-term approach has seen our AIM for inheritance-tax planning portfolios materially outperform leading stock market indices over the 15 years we have been investing in AIM.

Performance of Fundamental AIM portfolios (blue line) vs leading stock market indices

 

AIM remains a market for smaller investors, not large institutions, and a place where the individual can enjoy material investment outperformance and continue to support the UK economy.

Fundamental AIM portfolios can be accessed directly or via many leading wrap platforms, including Standard Life, Transact and Elevate.


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Unpicking Woodford’s woes and the undressing of Majestic Wine

In this podcast with Investors Champion, Chris Boxall, co-founder of Fundamental Asset Management, discusses how the problems at the Woodford Equity Income Fund have come about and how regulators, market commentators, financial supermarkets and individual investors can ensure it doesn’t happen again.

As a small cap specialist, Chris and the team at Fundamental, know all too well the difficulty of investing in smaller companies and managing client expectations at certain times.

Chris also considers the change of strategy at Majestic Wine (LON:WINE), one of AIM’s oldest constituents, which is trying to sell its Majestic Wine business to focus on the newer, faster growing, Naked Wines. It certainly looks a bold move for a company that used to be a prime pick for many Inheritance Tax planning portfolios but which has fallen out of favour in recent years.

For more information on Fundamental’s high performing AIM portfolios you can download fact sheets and quarterly reports from the link here.


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Enhanced investment growth, substantial tax savings and supporting UK business growth

According to the Office for Budget Responsibility’s ‘Economic and Fiscal Outlook’ report released in March 2019, the Government is forecast to collect £6.3billion from inheritance tax by the 2023-24 tax year.

This is a £1billion increase from the last tax year ending 5 April 2019, when HMRC collected £5.3billion from inheritance tax.

To put things in plainer language, analysis by insurer NFU Mutual determined that the average inheritance tax bill reached almost £200,000 in the last tax year, up £60,000 in five years. HMRC statistics also revealed that around 5,000 individuals paid Inheritance Tax last year while they were still alive, due “in many cases” to gifts into certain types of trust, which can trigger an Inheritance Tax bill.

– Scandalous to pay tax on assets which have already been taxed!

These are big amounts being paid by estates on money that has already been subjected to prior taxes. Trusts also complicate things further, adding another layer of fees, largely for the benefit of lawyers.

– Super rich pay less Inheritance Tax

According to research undertaken by Canada Life, the UK’s super-rich are paying just half the effective Inheritance Tax rate of many smaller estates.

The data from HMRC Inheritance Tax forms for the 2015/16 tax year showed that estates worth £10m or more paid 10 per cent Inheritance Tax on average, compared to 20 per cent paid by estates worth between £2m and £3m.

According to analysis by Canada Life, this gap in tax was due to the different asset composition for estates of different sizes. Larger estates typically had a smaller percentage of their value in UK residential property (10 per cent), which doesn’t have high levels of tax efficient exemptions, and a much higher amount in securities (40 per cent), such as shares in AIM companies qualifying for Business Relief, which can attract 100 per cent tax relief.

Smaller estates should be benefiting more from the available reliefs to reduce Inheritancxe Tax.

– Enhanced investment returns

Business Relief has proved a simple way of avoiding Inheritance Tax while at the same time greatly enhancing investment returns and supporting UK business growth. However, despite its simplicity and growing popularity, it remains little used.

According to accountants UHY Hacker Young, HMRC forecasts showed how UK taxpayers were expected to reduce their Inheritance Tax bills by 12%, or a record £710m in 2017/18, through investments made in unlisted companies and other business assets. With an overall inheritance Tax take of £5.3billion and rising, there is therefore clearly scope to use Business Relief to further lessen tax bills.

– Invest in growth

The main UK stock market has woefully underperformed the US stock market over recent years, with the former dominated by many low growth companies of a bygone era, saddled with huge amounts of debt and large pension legacies.

Smaller, more nimble companies, on London’s growth market AIM have delivered material outperformance over a number of years and many of these growth stocks come with the added attraction of Business Relief.

Mark Giddens, Partner at UHY Hacker Young, commented: “Encouraging investment in AIM shares and other unlisted companies is good for the broader economy as they create growth and jobs.”

– 15 year track record of investment growth and tax saving

Fundamental Asset Management has been successfully investing in AIM for over 15 years and while many of our clients are initially drawn by the potential Inheritance Tax benefits, the investment attractions soon become apparent – our recent Blog on AIM portfolio holding AB Dynamics illustrates the potential returns.

Since inception in September 2004, Fundamental Asset Management’s AIM for Inheritance Tax planning portfolios rose 320% on average to the end of 2018. By comparison, over the same period, the leading index of UK listed companies had only risen 120%. Even the better performing US S&P 500 index only managed 201% growth over that period.

Performance of Fundamental AIM portfolios vs leading stock market indices

The 15 years may have featured periods of weakness from AIM (and some occasional company failures) yet the patient, diversified portfolio approach has been highly rewarding over the long term.

Furthermore, unlike investments in unlisted companies, AIM shares can also be sold, with cash returned to investors at short notice if required.

There are some fantastic growth companies on AIM, many of which are covered by our associates at Investor’s Champion. We would urge investors to look at AIM for its investment attractions and not simply the tax benefits, although letting the tax tail wag the investment dog, has ironically proved highly beneficial for our clients!


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Fundamental IG High Yield AIM Portfolio – April 2019 update

It’s been a positive start to 2019 for the High Yield AIM portfolio created for IG Markets, which currently offers a forecast average dividend yield of just over 6%.

In this latest video update, Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, discusses the performance with IG’s Jeremy Naylor, including a new high yielding position for the portfolio.

Companies discussed include: K3 Capital Group (K3C), Manx Telecom (MANX), Property Franchise Group (TPFG), Redde (REDD), NAHL (NAH) and Warpaint (W7L).

In addition to a compelling dividend yield, the portfolio has the attraction of potential 100% relief from Inheritance Tax.

You can find out more about Fundamental AIM portfolios, including the latest fact sheets, from the link here.


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With yet another set of fantastic results AB Dynamics has become a poster child for AIM and small cap investing in general

AB Dynamics (LON:ABDP), the manufacturer of advanced testing systems to the global automotive sector, has issued yet another set of fantastic interim results.

Our earlier Blog from April 2016 commented how this terrific little business had delivered consistent excellence since arriving on AIM in 2013, highlighting the potential to uncover some brilliant businesses on the junior market if one undertakes the desired research and is prepared to display a bit of patience.

Founded in 1982 as a vehicle engineering consultancy, AB Dynamics is now engaged in the design, manufacture and supply to the global automotive industry of advanced testing and measurement products for vehicle suspension, brakes and steering, both in the laboratory and on the test track. The Group’s customers include the research and development divisions of some of the world’s leading vehicle manufacturers and it is a prime beneficiary of the automotive sector’s evolution to hybrid, electric, Advanced Driver Assistance Systems (“ADAS”) and autonomous vehicle technologies.

The Group arrived on AIM on 22nd May 2013 at a share price of 86p and market capitalisation of only £14m. Since then the share price has since climbed over 2000% with the current market capitalisation touching £400m.

Fundamental started acquiring shares for its AIM for IHT portfolios not long after listing, having visited AB Dynamic’s headquarters in Bradford-on-Avon in 2014.

While the Group has raised some additional capital to support the construction of a new facility, growth otherwise has been entirely organic.

The latest interim results for the six months to 28 February 2019 saw sales climb 69% to £25.8m (98% exports) and profit before tax rise 95% to £6.4m.

AB Dynamics delivered its 1,000th driving robot system in the period and a new product for testing ADAS systems with vulnerable road users continues to gain market traction with additional orders.

A second order was received for a newer advanced Vehicle Driving Simulator (“aVDS”) from Germany following successful delivery of a first aVDS to a customer in China. aVDS is a versatile and innovative driving simulator, capable of accurately representing the smallest changes to a vehicle’s configuration. The potential here looks considerable as the motor industry explores the best route to autonomous driving.

AB Dynamic’s valuation may look rich (current year PER 40x) but it is growing strongly and has a fantastic position in a booming market going through huge change. With planning permission having been received for another new facility due to be completed by 2020, the future looks bright for this delightful business.


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Results season offers plenty of encouragement for our AIM portfolios

Results and trading updates over the past few weeks from our AIM universe of companies have been generally encouraging, with growing profits and cash generation supporting investment in the business and raised dividends. Here is a brief summary of the highlights from some.

Tristel (LON: TSTL), the manufacturer of infection prevention and contamination control products, announced the regulatory approval of its Duo High-Level disinfectant product in China. Duo is a hand-held dispenser which applies Tristel’s powerful chlorine dioxide chemistry as a foam to the surface of medical devices.

Frustrated by the length of time it is taking to gain regulatory approvals in the United States, Tristel is placing greater emphasis on China where it proposes to sell Duo through its own sales force. Our associates Investor’s Champion provide in-depth coverage of Tristel here.

Remaining in the medical sector, AIM portfolio company EMIS Group (LON:EMIS) announced decent results for the year ended 31 December 2018, growing revenues across all key segments and raising its dividend 10%. Having had a good look at the business we sense that new Chief Exec Andy Thorburn is looking to make more of the group’s fantastic position in the market and deploy the excellent cash flow to greater effect. Post results it announced the sale of its non-core Specialist & Care segment for £14.0m.

Adept Technology Group (LON: ADT), formerly Adept Telecom, has grown into of the UK’s leading providers of managed IT services. The trading update for the year ending 31 March 2019 confirmed a 13% rise in revenues and underlying EBITDA, in line with expectations. The full year dividend was lifted 12% to 9.80p. We like the recurring revenue attributes of this business from its sticky customer base, which results in lots of delightful cash being generated.

The share price of Smart Metering Systems (LON: SMS), the leading installer and manager of electric and gas meters, has been on a bit of a roller-coaster ride over the past few months. The UK government’s mandated smart meter programme requires all UK households and small businesses to be offered a smart meter by the end of 2020 and SMS will be a prime beneficiary of this huge change. Needles  to say this substantial government initiative has had a few problems.

There are approximately 53 million gas and electricity meters in the UK and, as of the end of December 2018, there were 14.9 million smart and advanced meters installed in homes and businesses across the country. SMS now has agreements with twelve of the independent energy suppliers, equivalent to a potential 8 million meter points highlighting the potential for its business.

While the domestic smart meter exchange may be extended into 2023, SMS will still be a long-term winner, thereafter generating reliable, index-linked returns from its vast portfolio of meter assets. The financial statements and high level of debt taken on to support the acquisition of meter assets take some understanding, however, the operating cash flow hints at the future potential.

Anexo Group (LON: ANX), which only arrived on AIM in June 2018, issued a promising set of results for the year ended 31 December 2018. Anexo is a specialist integrated credit hire and legal services business targeting the impecunious not at fault motorist, who does not have the financial means or access to a replacement vehicle, notably motorbike riders and motorbike couriers. Anexo provides customers with an end-to-end service including the provision of Credit Hire vehicles, assistance with repair and recovery, and claims management services.

This could be a fascinating business to follow as it endeavours to settle the large number of outstanding cases on its books and increase the cash recoveries. With a growing number of in-house litigators it’s looking promising, if little understood by the investment community. You can read an in-depth commentary on Anexo Group here from our associates Investor’s Champion here.

Away from AIM and returning to the main UK market, general portfolio holding Games Workshop (LON:GAW), the creator of fantasy miniatures, including Warhammer, confirmed that sales and profits have continued to climb, with pre-tax profit for the year ending 2 June 2019 rising 7% to £80m. Shareholders are rewarded with both a rising share price and lifted dividend – what more can one ask for!

As usual, there is plenty of variety from the stock market and some great companies to invest in. Please contact Chris or Stephen to find out more about our specialist investment services, including the high performing AIM for Inheritance Tax planning service, which has now been running for more than 15 years.


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AIM stocks on the move: the good, the bad and the ugly

In this video interview, Chris Boxall, co-founder of Fundamental Asset Management, discusses changes to the IG AIM portfolio originally put together for IG Markets back in 2016.

Chris discusses his reasons for selling out of XLMedia (XLM) earlier in the quarter and outlines the attractions of new portfolio holdings dotDigital Group (DOTD) and Quartix Holdings (QTX). He also considers the lacklustre share price performance of Fulcrum Utility Services (FCRM) and whether the latest trading update may now offer some suppport for the share price.

You can find out more about Fundamental AIM portfolios, including the latest fact sheets, from the link here.