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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.


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Brexit effect on AIM stocks

In this video interview, IGTV’s Jeremy Naylor sat down with Chris Boxall, co-founder of specialist investment manager Fundamental Asset Management, to discuss the impact that Brexit is having on AIM stocks and AIM in general.

Companies mentioned include AIM newcomer Diaceutics (DXRX), energy services provider Fulcrum Utility Services (FCRM), timber distributor James Latham (LTHM), provider of accident management services Redde (REDD), franchised lettings agency Property Franchise Group (TPFG), corporate broker WH Ireland Group (WHI) and foreign exchange experts Alpha FX Group (AFX) and Fairfx Group (FFX).

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


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Looking for ISA bargains ?

With the end of the tax year fast approaching, many investors will be looking to use their ISA allowance. Here is our brief introduction to some potentially interesting ISA bargains.

AIM shares have only been permissible investments in ISAs since August 2013, but since then they have proved a very popular choice, notably for those investing with an eye on potential inheritance tax savings.

AIM had a difficult 2018 and despite a strong opening to 2019, many excellent smaller companies are trading at modest valuations, offering compelling dividend yields and decent growth prospects.

Chris Boxall and Stephen Drabwell, co-founders of Fundamental Asset Management, would be delighted to discuss the investment opportunities on AIM through our bespoke AIM portfolio service. Please email [email protected] or call 01923 713890.

Our recent Blog commented on Redde (LON:REDD), a substantial business where the dividend yield had risen to more than 11%. While the shares have rallied marginally since our original Blog, the forecast yield is still over 10%.

The share price of Fulcrum Utility Services (LON:FCRM), an independent energy and multi-utility infrastructure and services provider, has been extremely weak over the past few months. Fulcrum’s primary business is the design and installation of utility services from single site properties to large complex multi-site projects. It also owns and operates gas and electrical assets that connect properties to the main UK gas and electricity networks.

Fulcrum has delivered consistent earnings growth over the past 4 years and in 2018 acquired the Dunamis Group, an electrical infrastructure services company. Unfortunately, the Dunamis business has experienced some Brexit induced contracts delays which has accelerated the share price decline. While the Dunamis business is made up of larger, lower margin projects, it’s operating in a very dynamic market with a notable opportunity in the area of electrical vehicle charging.

This week’s trading update provided some reassurance that bsuiness was not as bad as many believed it to be. The modest earnings multiple of 9x current year earnings falling to 8x for the year ending March 2020 and a forecast dividend yield of 6.3% means Fulcrum warrants a closer look for ISA investors.

The Property Franchise Group (LON:TPFG), one of the UK’s largest property franchises, has seen its share price pulled down principally due to fears surrounding the impact of the tenant fee ban on its business. The ban is due to be introduced on 1st June 2019 with the impact on group revenue less than originally anticipated.

TPFG was founded in 1986 and encompasses a diverse portfolio of longstanding high-street brands and a hybrid, no sale no fee agency, called EweMove.

The lion’s share of group revenue is made up of service fees (royalties) charged to franchisees, principally relating to lettings business. Therefore, this is a business which generates relatively stable revenues, high operating margins and returns on equity and excellent cash flow. With modest capital expenditure requirements, the attractive cash flow is able to support a generous dividend, with the yield just over 6.5 per cent at the current share price.

Fundamental AIM for Inheritance Tax planning portfolios may hold shares in the companies mentioned in this article.

Our associates Investor’s Champion publish in-depth research reports on many exciting AIM companies.


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Inheritance tax planning AIM favourite yielding 11% – what’s the catch?

The share price of AIM quoted Redde (LON:REDD), the provider of accident management services and an inheritance tax planning AIM favourite, has been in the doldrums ever since the announcement of its interim results at the end of February 2019. Recent news of its failure to secure the renewal of a sizeable contract has also pulled the shares down further to 4 year lows, this has also seen the forecast dividend yield rise to 11 per cent, but is this compelling return sustainable?

At first glance the interim results for the 6 months ending 31 December 2018 were actually pretty good with revenue up 14% to £291m and pre-tax profit up 7.2% to £21.3m. An interim dividend of 5.50p, equivalent to a yield of 5.5 per cent, highlighted the inheritance tax planning appeal of this AIM company.  However, cash flow wasn’t quite as rosy as usual, with claims taking longer to settle and debtor days rising to 109 from 105 previously. Reported net debt at 31 December 2018 had also risen to £41.2m from £8.5m at 30 June 2018, however in mitigation, this relates to asset backed finance leases, rather than bank debt, so is fairly low risk. The Group increased its car fleet 27% to meet increased hire days which meant finance leases rose.

It’s worth noting that the business doesn’t have any bank borrowings, reflected in the finance costs which only encompass interest on finance leases and bank facility fees; the latter for a facility which isn’t even used.

Management cautioned that growth for the remainder of the second half would not have the beneficial effect experienced last year from the “Beast from the East” – Redde was a beneficiary of the terrible weather.

While the interim results tempered investors’ enthusiasm for the shares, it was the contract renewal announcement which really accelerated the selling.

The failure to secure the renewal of a hire and repair contract with a large insurer won’t have any immediate effect for the current financial year ending June 2019 but will impact 2020. Management now expects a net reduction in sales of approximately £111.9m (representing 18.2 per cent. of consensus expectations) and a reduction in adjusted operating profits of approximately £4.7m (representing 8.7 per cent. of consensus expectations).

Thankfully the pipeline of new business remains encouraging with a number of live prospects, and management remains hopeful it can fill the void.

The stated £4.7m reduction in operating profits on sales of £111.9m suggests the lost contract was at lower margins than the majority of the Group’s business.

At the current share price of 105p the shares trade at an estimated 8.2x revised earnings estimates of 12.8p for the financial year ending June 2020. This looks a very modest rating for a business which will remain highly cash generative and should therefore be able to support the dividend.

Having consistently raised its dividend every year for the past 6 years, the dividend is now forecast to remain flat at 11.7p, moving the forecast dividend yield to approximately 11% at the current share price. That looks appealing to patient, long term inheritance tax planning investors, looking out for some extra income.

There will be concerns that the failure to renew the contract could be the start of other problems, however Redde is well diversified across contracts large and small, regularly winning and losing contracts with insurers. As at 30 June 2018, the most significant five customers represented 23% (2017: 25%) of receivables. That implies an acceptable level of customer concentration.

While the car fleet has grown materially, they have the flexibility to trim this back at short notice.

Hargreaves Lansdown’s reporting of a claimed JPMorgan target price of 11p (rather than 111p!) wasn’t terribly helpful for the share price either – we suggest HL should pay closer attention to their reporting!

Directors have shown their confidence in the business by snapping up £185,000 of shares in aggregate.

Fundamental AIM for Inheritance Tax planning portfolios hold shares in Redde


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AIM needs more newcomers

A recent update from our associates Investor’s Champion highlighted how February 2019 was yet another poor month for new arrivals on AIM, with only 1 proper new arrival and 7 more departures. AIM certainly needs to be re-energised!

While the quality of companies on AIM has improved considerably over the 15 years we have been investing in AIM for Inheritance Tax planning purposes, we are becoming concerned by the shortage of suitably attractive new arrivals.

AIM’s reduced appeal to many high growth businesses is countered by its evident attraction to the legal and professional services sector. Of the 7 new arrivals in December 2018, which was AIM’s best month for IPOs in a long time, one of the newcomers (finnCap Group) was a corporate broker and two (Manolete Partners and Litigation Capital Management) were providers of litigation funding solutions. While profitable businesses, they are unlikely to set investor’s pulses racing in the same way a fast growing technology company might, although we quite like the look of Manolete! The litigation funders join several legal services groups already enjoying life on AIM.

Investor’s Champion pointed out that, as AIM has struggled, its rival Nasdaq First North, which encompasses junior markets across the Nordic region, has started to attract a growing number of small technology companies. Many companies on First North also carry similar attractions for Inheritance Tax planning purposes to those on AIM. First North welcomed 2 newcomers in February, one a video game development studio, the other a cloud-based software group, just the sort of innovative high growth businesses needed on AIM. Should the flow of attractive newcomers to First North continue, it could become a viable market for those with an eye on mitigating potential inheritance tax.

AIM may soon have another rival to contend with in the rejuvenated Nex Exchange, where Oliver Hemsley, the founder of UK stockbroker Numis Securities, is looking to take control and inject new capital into Nex, which will also be given a new name. Nex could find some willing supporters in those investing for Inheritance Tax planning purposes.

Thankfully there remains a large pool of attractive AIM companies in which to invest, it would simply be nice for this pool to grow, rather than shrink, as has been the case for the past few months.