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Investing in AIM to mitigate against the death tax
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Judith MacKenzie
Partner and Head of Downing Fund Managers
Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.
The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.
The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.
The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.
Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.
Systematic Liquid Derivatives: Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions.
Strong security: The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.
Key benefits
Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t. We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team isseeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”
How the Fund is expected to perform in different markets
In bullish markets: UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
In neutral markets and normal market corrections: UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
In a sustained sell-off: if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
The average Cover to Capital Loss is targeted at 35%: the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.
Fund key risks
Performance: Capital is at risk. Investors may not get back the full amount invested.
Liquidity: Access to capital is always subject to liquidity.
Counterparty risk: Other parties could default on the contractual obligations.
Fund Structure
UK regulated OEIC fund structure, fully UCITS compliant
Daily dealing, at published NAV
Minimum investment: £100,000
SRRI: 6 out of 7
Depositary: Bank of New York
Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
I share-class: SEDOL: BM8J604 / ISIN: GB00BM8J6044
F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term.
Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6AF.
Any personal opinions expressed are subject to change and should not be interpreted as advice or a recommendation.
Inheritance Tax (IHT) solutions are becoming ever more popular with clients keen to shield as much of their wealth as possible from HMRC when they die. Judith MacKenzie explains some of the pros and cons for considering AIM IHT to mitigate against the ‘death tax’
For some people, investing in qualifying shares traded on AIM can provide an attractive solution. Some, but not all, companies listed on AIM qualify for Business Relief (BR) and as long as they have been held for two years or more, shares in qualifying AIM companies can be passed on free of IHT.
Private investors can create their own portfolio of AIM stocks. However, a practical difficulty is that not all AIM companies qualify for BR so monitoring the market can prove challenging. There is no definitive list of the qualifying status of companies, which can change over time, and there is no guarantee that companies currently qualifying for BR will do so in the future. Finally, investing in AIM is not for the faint-hearted – the market tends to be relatively volatile due to the inherent risk related to smaller companies.
An alternative to self-selecting stocks is to invest via a specialist AIM estate planning service to build a diversified portfolio of AIM stocks to be held over the long-term under a discretionary management contract with an asset manager. In addition to IHT relief, an AIM portfolio can provide investors with the potential for capital growth and dividend income. Advisers can play an important role in this: giving expert advice to ensure that clients understand the risks involved and are clear on the suitability of different products, before deciding on the products to best meet their individual requirements.
AIM companies have seen a significant injection of cash in recent years and some stocks popular with IHT investors have valuations that we do think are wholly justified by the outlook for the company’s revenues and earnings. At Downing, we follow a value-orientated investment strategy and focus on companies at the small end of the market cap level where we believe there is better value and companies are trading on much lower multiples. Essentially, we are not prepared to pay a premium for qualifying AIM stocks and prefer to invest at a discount to what we perceive a company’s intrinsic value to be. We believe that this is one of the best ways to mitigate risk, particularly in this space where legislation surrounding property relief and qualifying status may change.
We do not hold any of the high profile ‘AIM darlings’ such as Asos, Fevertree and Boohoo – all now multi-billion market cap companies that are trading on PE ratios ranging from 41x to 66x (ASOS, Boohoo, Fevertree Drinks). To help spread risk, we aim to invest funds across at least 20 businesses from a number of different sectors. Companies within the Downing AIM IHT and AIM ISA portfolios trade on much lower multiples (Volex, Adept, Lok'n, Latham) and are we aim to invest in companies which have a market cap of less than £150 million at the time of investment – right down at the small end of the market. Current holdings include AdEPT, one of the UK’s leading independent providers of managed services for IT, unified communications, connectivity and voice solutions; James Latham, a UK importer and distributor of wood-based panel products; Lok’nStore, a provider of self-storage and serviced document storage and management services, and Volex, a manufacturer of power cords and cable assemblies for use in electronics and electrical devices.
The latest figures from HMRC show that while IHT receipts decreased by £64 million in April 2019 compared to March, they were still significantly higher than in the same period last year. Despite this decline, the amount that the tax man takes per month continues to hover in the upper range of where it has been in previous years. This should serve as a reminder that many unsuspecting people are still leaving more of their wealth to the government that they might wish.
There are many ways of mitigating against this unwelcome tax – investing in AIM IHT solutions is only one. Downing’s service also includes downside protection cover designed to reduce the impact of loss (up to 20% of initial net investment) during a minimum of the first two years before the investment qualifies for IHT relief.
We believe Downing’s private equity and VC heritage gives us a competitive advantage over other providers in this space – a private equity approach, decades of experience in micro-cap companies, and an exhaustive due diligence process. Inevitably, each asset manager has developed their own investment style and process. Downing’s approach may appeal to clients who have a keen eye on company valuations and who share our value philosophy. AIM returns may not go up or down in a straight line, there will likely be many bumps in the road. However, we believe that this market can provide a great hunting ground, full of opportunities, where attractive returns can be made over the long term.
Judith MacKensie Partner and Head of Public Equity
This article is for information purposes only and does not form an offer or invitation to purchase, subscribe for or dispose of securities in any of Downing’s products and no reliance should be placed upon it. The value of investments and any income derived from them may go down as well as up and investors may not get back the full amount invested. Smaller company shares are likely to have higher volatility and liquidity risks than other types of main market listed instruments. Any statements may involve known or unknown risks, uncertainties and other important factors, which could cause actual performance to differ from those expected. Past performance is not a reliable indicator of future results. Downing does not offer investment or tax advice or make recommendations regarding investments. Tax treatment depends on the individual circumstances of each investor. Please see the relevant Product Literature for details of charges; your attention is drawn to the risk factors contained therein.
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